Taxes are complicated by nature. Add cryptocurrency to the mix and it can get downright overwhelming.
If you bought and sold Bitcoin, Ethereum or any other cryptocurrency in 2021, you are expected to report any gains to the IRS during this year’s tax season, which begins next Monday. If you only bought and held crypto last year, you may not owe anything. It only gets more complicated when you get more active.
“What’s tricky is there are a lot of really crazy things with crypto that you can do, from all things DeFi to NFTs. That’s going to be the hardest thing about 2021 taxes,” said Pat White, co-founder and CEO of Bitwave, a company that helps businesses with crypto tax reporting.
If you own crypto, or were involved with it last year, you may be wondering if you can file your own taxes or if you should hire a crypto tax professional for help. For many people who buy and trade crypto within online exchanges, accounting for this in your tax return is relatively straightforward.
“If you just buy some Bitcoin, hold it, and sell it six months later, any CPA can help you do that,” White says.
Here’s how to prepare for cryptocurrency tax season, tips for finding a crypto tax professional, and important questions to ask an accountant about your cryptocurrency.
Start preparing for tax season now
If crypto is going to play a role in your taxes this year, start planning and collecting your crypto transaction reports to simplify your 2021 tax return. Tax season officially begins on Jan. 24 and runs through April 18 for most taxpayers, according to the Internal Revenue Service.
If you don’t have a complex tax situation or a complex crypto trading history, you may be able to easily report your crypto earnings yourself using tax software. Most people in the US have “easy taxes” and can file their taxes themselves, according to Shehan Chandrasekera, CPA, chief of tax strategy at CoinTracker.io, a crypto tax software company.
“There are about 155 million tax returns filed in any given year, and anywhere from 75 to 80 million are very simple and they are handled by do-it-yourself software, such as TurboTax,” Chandrasekera says.
There are several crypto-specific software programs that can make the process smoother. Programs such as CoinTracker, TokenTax and CryptoTrader Tax can generate the cost basis for your crypto trades and determine your capital gains and losses. Many of these crypto tax programs are compatible with mainstream tax programs such as TurboTax or TaxAct, so you can easily import the profits and losses they report into your tax return.
“I recommend using crypto tax software,” said Laura Walter, a certified public accountant and founder of Crypto Tax Girl. “There’s a tone out there. Some are better than others for various reasons, but the one I use is CoinTracker. It just has the most tools in my opinion.”
If you are more active in things like day-to-day trading or even crypto mining, it may make sense to sit down with a tax professional who understands crypto. To delve further into the details of reporting crypto on your taxes, check out our crypto tax guide.
What you need to know when working with a tax professional
As crypto has grown in popularity, so has the demand for accountants who specialize in the field. The IRS only offers a certain amount of crypto-tax guidance, meaning there could be some “grey areas” according to Chandrasekera.
That is why it is important to work with a tax professional who can interpret tax codes related to virtual currencies and has experience in reporting cryptocurrency gains and losses. Even if you don’t engage in complex crypto activities, a tax professional with crypto knowledge can make sure you report correctly or answer any questions you may have about your specific tax obligations.
“First make sure they understand the tax law and then make sure they understand your particular crypto tax situation,” Walter says.
It is equally important to track all of your potentially taxable activities, as well as the fair market value of your crypto throughout those activities, as it is ultimately your responsibility. Your information must be sufficient “to establish the positions taken on tax returns,” according to the IRS.
If you already have an accountant you work with, ask if they own virtual currencies themselves and note if they recognize any uncertainties in the tax code. If you are looking for a tax expert with knowledge of cryptocurrencies, first ask friends, family and colleagues who have bought or traded crypto for referrals. A quick search on Google and social media from accountants specializing in crypto can also be helpful during your search process. You can also search the IRS directory, or contact your state’s accounting boards or state tax associations.
Once you have at least two to three names, you can get in touch and ask them to meet in person or virtually to discuss your 2022 taxes. They can assess your situation and give you an idea of how much they can charge.
Questions to ask your tax professional about crypto
If you work with a tax agency to file taxes, here are 6 good questions to ask if you bought and sold crypto last year. Answers to these questions will help you assess your tax professional’s familiarity with cryptocurrency and how it factors into taxes.
1. Have you worked with crypto clients in the past and what is your process like?
By asking them this question, you can get a sense of their previous experience with crypto taxes and better understand how they plan to account for your crypto investments in your taxes this year.
2. Can you explain what are considered taxable crypto events versus non-taxable crypto events, and where my transactions fall?
Crypto is taxed in the same way as other assets such as stocks or gold. Any taxable crypto event can generate a capital gain (or loss), so you need to know the date, cost basis, sale value, and any fees for each transaction. A tax professional should be able to review your transaction history and tell you which events are taxable or non-taxable.
3. What tax do I have to pay on my cryptocurrency?
The taxable value of Crypto is based on capital gains or losses – basically how much value your holdings have gained or lost in a given period of time. If you’re not sure or have questions, your CPA can help you better understand your tax situation.
4. How do I get accurate data about my crypto transactions?
You need data on each time you receive, sell or exchange virtual currencies, as well as the fair market value of your virtual currencies. An expert CPA can explain how and where to obtain these records.
5. If I haven’t reported my crypto investment in my tax return for several years, what can I do about it now?
The IRS is looking harder at cryptocurrency transactions this year, Walter says. If you’ve avoided reporting your crypto to your taxes in the past, this year “may not be the year you get away with it,” she says. According to the IRS, you have three years from the date you filed your return to file an amended return. For traders who have completed hundreds or thousands of trades over the years, this can quickly become a difficult task.
6. Will any of my crypto transactions result in income tax?
Certain crypto transactions may generate income tax. If you have received virtual currency as payment for services, you must declare it as income on your tax return. Examples include receiving crypto as income instead of cash, earning Bitcoin by mining new coins, or receiving coins or tokens as a reward for certain activities.
IRS Virtual Currency Guidelines
Here are the guidelines the IRS has issued so far regarding virtual currencies and tax filing: