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Whether you’re a first-time crypto buyer or a crypto whale, it’s critical that you understand your tax obligations. 

In addition to keeping up with the various types of cryptocurrency and virtual wallets, users of digital currencies also need to keep up with IRS rules and tax obligations—and those regulations are rapidly evolving to keep up with developments in blockchain finance technology. 

Improper tax reporting can result in harsh tax penalties, but turning to an experienced cryptocurrency tax advisor can ensure you’re protecting yourself and your investments. 

Why Do You Need An Accountant for Cryptocurrency and Taxes?

Whether you use cryptocurrency for business or you’re a crypto mining hobbyist (or if you’re not sure which category you fall into), it’s important to consult with a tax professional. 

A cryptocurrency accounting firm can help you keep track of and report your investments and transactions so you can make sure you're meeting IRS requirements. They can verify that your transactions were recorded and reported properly, and provide guidance on how to keep track of your cryptocurrency transactions.  

Moreover, cryptocurrency accountants play an important strategic role by helping you identify and mitigate risks with your cryptocurrency assets. They can also help you build an appropriate tax plan for your cryptocurrency investments.

Turn to Smolin’s knowledgeable team of tax professionals for assistance with: 

Reporting Crypto Activity

Our team can help you differentiate between short-term and long-term gains and losses for the purposes of filing the necessary tax forms. 

  • Schedule D and Form 8949: Schedule D of Form 1040 is used to report most capital gains and losses. If you have capital asset transactions to report, you’ll also need to prepare Form 8949 and include it with your Schedule D.
  • NFT Reporting: Non-fungible tokens (NFTs) should also be included in your gains and losses from capital assets. If you trade NFTs that are considered to be collectibles, it’s recommended that you report them and all other collectibles on a separate Form 8949 from your other capital assets. 

Calculating Crypto Cost Basis

When calculating your cryptocurrency cost basis—the original price of crypto plus any relevant costs—the IRS allows you to choose which accounting method to use each year. Keep in mind that your accounting method must be consistent in each tax year (though you can choose to change your method in a different year). 

The CPAs at Smolin can assist with various methods including: 

  • FIFO: With the first-in-first-out (FIFO) method, assets acquired first are sold first. This is one of the most common and straightforward cost basis accounting methods.
  • LIFO: With the last-in-first-out (LIFO) method, assets acquired last are sold first. This method is only permitted in a few countries, the United States included.
  • HIFO: With the highest-in-first-out (HIFO) method, assets with the highest price value are sold first. With this method, when you bought the asset is significantly less important than how much you paid for it.
  • Average cost: Some countries, such as Canada and the United Kingdom, require taxpayers to use the average cost method. This means that the cost basis is determined by the average price paid for all tokens of a particular cryptocurrency, regardless of when you bought them or how much you paid for them. 

Business Accounting

Business accounting can be complex—and even more so when cryptocurrency is involved. Fortunately, Smolin’s tax advisors speak the language of business accounting and cryptocurrency accounting alike, and can help business owners account for all of their crypto transactions. 

We offer tax accounting services for businesses that use cryptocurrency, including crypto-focused start-ups. 

Crypto Tax Planning

Some cryptocurrency platforms will automatically generate a Form 1099. Those who use a decentralized virtual wallet, however, will need to use third-party software to aggregate their data. With all of the transfers, payments, and more, it’s not always a clear-cut process—but our CPAs are well-versed in the leading crypto software and can ensure proper reporting and accurate calculations.

Whether you currently hold cryptocurrency, have held cryptocurrency in the past, or plan to hold cryptocurrency in the future, our tax advisors can make aggregating, accounting for, and reporting transactions on crypto blockchains as stress-free as possible. 

What You Need to Know About Cryptocurrency and Taxes

Cryptocurrency Tax Laws

In 2014, the IRS issued a notice stating that Bitcoin and other convertible virtual currencies are to be treated as property, rather than currency. This means that there are both capital gains tax and income tax consequences whenever cryptocurrency is purchased, mined, sold, or traded. 

General tax principles for digital assets include (but are not limited to): 

  • Any payment made using virtual currency is subject to the same information reporting as any other payment made in property.
  • Payments made to independent contractors and service providers using virtual currency are taxable and subject to self-employment tax rules (i.e., payers must issue a Form 1099-MISC).
  • Wages paid to employees using virtual currency are subject to federal income tax withholding and payroll taxes, and those wages must be reported on a Form W-2.
  • Third parties who settle virtual currency payments on behalf of merchants must report those payments on Form 1099-K, Payment Card, and Third Party Network Transactions.

Because virtual currency transactions can be difficult to trace, some taxpayers may be tempted to hide them from the IRS. But it’s essential to ensure that that data is accurately aggregated. Taxpayers who do not accurately report their virtual currency taxes can be audited and face harsh penalties and interest, including charges such as tax evasion and filing a false tax return. 

But accurately calculating and reporting each taxable cryptocurrency transaction can be a daunting task. By hiring a CPA who’s well-versed in cryptocurrency taxes and relevant software, you can avoid harsh fines and penalties while also protecting your reputation. 

Finding an Accountant for Your Cryptocurrency Needs

Finding the right accountant is important no matter what type of currency you’re dealing with, but it’s especially important for individuals and businesses who deal with digital currency. 

Consider the following questions before securing services: 

  • What is your accountant’s background? Your accountant should have experience in cryptocurrency and blockchain finance, along with the relevant tax laws and regulations for cryptocurrency. They should also have a deep understanding of how cryptocurrency transactions should be handled in accounting and financial reports. 
  • Does your accountant have industry experience? Has your accountant worked with clients in the cryptocurrency and blockchain industry? It’s important that they are familiar with the specific challenges and opportunities, and that they stay up to date with developments as they occur.
  • Is your accountant comfortable with technology? Cryptocurrency is a highly technical field. Your accountant should have a deep understanding of how crypto technology works so they can provide high-quality accounting services. 

Finally, you should ensure your accountant possesses relevant professional qualifications. Look for an accounting firm staffed by certified public accountants (CPAs) who have undergone rigorous training and education. 

Get Started with Smolin

Cryptocurrency values may change at the drop of a dime, but our approach to our clients doesn’t. At Smolin, we help clients create long-term strategies to meet their goals. Our Tax Services team works with you so we can understand your tax situation, inside and out. 

Ready for the next steps? Contact your trusted Smolin advisor today. 

Cryptocurrency Taxation FAQs

What is Cryptocurrency?

Cryptocurrency is a digital currency that relies on encrypted algorithms for security. Cryptocurrency is built off of blockchain technology, a digital ledger that records all transactions. Because of this, cryptocurrency is a decentralized system—it isn’t controlled by a third-party institution like a bank. 

There are numerous types of cryptocurrency. Developed in 2009, Bitcoin was the first and remains one of the most popular today, but there are many other types out there, including: 

  • Ethereum
  • Litecoin
  • Ripple
  • Tether 
  • BNB 
  • USD Coin 
  • XRP 
  • Binance USD 
  • Cardano 
  • Dogecoin 
  • Solan 
  • Polygon 
  • Polkadot

Each of these cryptocurrencies has unique uses and features, but there is one important commonality: their value fluctuates significantly, even over the course of an hour. These fluctuations make cryptocurrency a highly speculative investment. As such, it comes with notable risks that are important to understand before investing (and to manage afterward). 

Although cryptocurrency is digital, it still carries value and, in fact, is regarded by the US government as property. Any gains or losses within your cryptocurrency portfolio must be reported and can impact your taxes overall. 

Why should I hire a cryptocurrency accountant?

A cryptocurrency accountant can help you manage and report cryptocurrency investments and transactions so you can maintain compliance with IRS regulations. Your accountant can make sure your transactions have been correctly recorded and reported, as well as advise you on ways to track your cryptocurrency transactions. 

Additionally, cryptocurrency accountants play an important strategic role for clients. They can help you identify and mitigate financial risks, and provide tax planning guidance as it relates to cryptocurrency investments. 

How do I know if I need to pay cryptocurrency taxes? 

Because cryptocurrency is a relatively new type of asset, many individuals and businesses aren’t fully aware of the tax requirements surrounding them. 

While each situation is different, you may need to pay taxes on your cryptocurrency transactions if you realized capital gains or losses from buying, selling, or trading cryptocurrencies. Even if you received cryptocurrency as a gift, you may still need to pay taxes. An experienced cryptocurrency accountant can help you understand how tax regulations may apply to your individual situation. 

Note that different countries have their own tax laws and regulations regarding cryptocurrency. For example, if you are a business operating in multiple countries and you accept payment via cryptocurrency, you will need to consider the tax laws of multiple jurisdictions. Consulting with a tax professional who is familiar with tax laws in the relevant jurisdictions can help make sure you maintain compliance with applicable tax laws. 

What kind of businesses and investors do you work with at Smolin?

At Smolin, we collaborate with businesses and investors across industries who buy, sell, trade, own, or receive payment in cryptocurrency. We’ve worked with clients that include:

  • Cryptocurrency investors
  • eCommerce businesses 
  • Cryptocurrency mining operations 
  • Corporations  
  • NFT artists and dealers 
  • Consultants and advisors
  • Executives compensated with cryptocurrency

Whether your business is just starting to accept cryptocurrency as payment or you’ve conducted thousands of complex transactions, we can help you meet your tax obligations.

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