The 6 Things you need to know before going to a CPA for your Crypto Taxes
Crypto taxes are the ultimate Wild West right now. The IRS is cracking down on the lack of capital gains taxes being paid by traders, yet they clearly don't fully understand how difficult it is for high-volume traders to accurately report their gains and stay compliant even if they want to. This opens the door for every CPA and their brother to try to take advantage of the traders who are worried about Uncle Sam and a potential audit. Here are six things that you should be aware of before forking over thousands of dollars to a CPA for your crypto taxes.
1. Crypto Taxes are not that complicated
When it comes down to it, crypto is simply treated as a form of property in the eyes of the law. This means that you calculate your taxes for cryptocurrency transactions in the same way you would for any other piece of property, be that stocks, real-estate, gold, or your car. When it comes to how to report cryptocurrency on taxes, you need to list all of your trades on the IRS form 8949, and then transfer your total gains to your 1040 Schedule D. This is the same process you take for trading stocks.
2. They are in the dark just like you
The IRS has provided minimal guidance when it comes to crypto taxes and how to treat everything. This doesn’t just leave you in the dark wondering exactly how to do things, but it also has CPA’s unsure of how to deal with the situation. Many CPA’s are applying the 1031 exchange for like-kind goods for crypto-to-crypto trades, but as of 2018 and the new tax code, this is no longer allowed.
3. You can calculate your crypto taxes yourself
If you are new to the world of crypto taxes, you might want to start with a foundation on the topic. However if you are familiar with the basics, you know that all it takes to calculate your capital gains is to know your Cost Basis and the Fair Market Value of the crypto at the time of the trade. Once you have this information, you just subtract your cost basis from the fair market value to arrive at your capital gain. If you are a relatively low volume trader, you can probably do these calculations by hand. If you are a high-volume day-trader on the other hand, or if you haven’t been keeping track of this data for every trade, we recommend using crypto tax software to do the grunt of the capital gains calculations for you.
4. Many are not experts
Cryptocurrency exploded into the mainstream just this past year (2017). This growth spurt into the limelight caught not only the government by surprise, but also most CPA’s. The majority of CPA’s out there have no idea what a digital asset even is or why it has value. However, now that the digital asset class is growing, a lot of CPA’s are trying to play catch up and are offering services catered towards the crypto space. Be careful about which CPA you go with, and make sure they are knowledgeable about the technology before giving them your money. If you are looking, we have a directory of tax pros who are familiar with cryptocurrency.
5. Will I get audited?
The vast majority of traders out there will not be audited. The reality is, most individuals never get audited by the IRS in their lifetime. However, that does not give you an excuse not to report your crypto activity. Blatantly ignoring to file your capital gains from your trading activity is an extremely risky thing to do, and we do not recommend it. Not paying taxes can land you in a very bad situation despite the fact of you being audited or not.
6. There is Crypto Tax Software out there
Be aware of your options. It is important to note that there is crypto tax software out there that can help you with the process of filing your yearly taxes, and it is much less expensive than traditional CPA services. We recommend using a hybrid of CPA guidance and crypto tax software for your taxes. It’s not a bad thing to get a CPA’s help, but at least stay educated on the alternatives, and do what you can on your own.
Ultimately, the entire cryptocurrency space is fresh and exciting, and whenever new markets emerge, a lot of players come out and look to capitalize on the new opportunity. It’s important that you stay educated and up-to-date with IRS guidance and other relevant information when it comes to taxes. And before you pay anyone any money, make sure they are truly providing value to you.