In October, for the first time in more than five years, the IRS released further
What does this mean for tax professionals? In short, all tax preparers will now have to ask their clients whether they have any cryptocurrency related activities during the year. This also means that tax preparers must be ready to handle cryptocurrency taxation for their clients.
How does the IRS treat cryptocurrencies for taxes?
Cryptocurrencies like bitcoin are not taxed outright. In other words, simply owning bitcoin doesn’t create a tax liability. Rather, it’s the gains and losses that you incur when buying, selling, and trading cryptocurrencies which ultimately need to be reported on your tax return.
Boiled down, the IRS treats cryptocurrency as property for tax purposes, not as currency. In this sense, buying and selling cryptocurrencies triggers capital gains and losses reporting requirements just as they would for buying and selling stocks, another form of property.
For example, if you purchased 0.1 Bitcoin for $1,000 in January of 2019 and then sold it two months later for $3,000, you have a $2,000 capital gain. You report this gain on your tax return, and depending on what tax bracket you fall under, you will pay a certain percentage of tax on the gain. Rates fluctuate based on your tax bracket as well as depending on whether it was a short term vs. a long term gain.
What does increased IRS enforcement mean for your tax practice?
It’s no secret that a large percentage of people who trade and invest in cryptocurrencies have not been reporting nor paying taxes on their gains. I see this first hand with the thousands of users who come to us here at CryptoTrader.Tax and work to amend two or three years worth of tax returns. This general lack of compliance is going to come to a screeching halt with this new Schedule 1. Crypto investors will no longer be able to claim that “they weren’t aware” of the fact that their crypto transactions were taxable. This new question is going to dramatically increase tax compliance.
This increased scrutiny creates both an opportunity and a threat for your tax prep business. The opportunity is clear: if your firm is able to effectively help cryptocurrency investors, traders, and users easily and accurately report their crypto income on their tax return, you will be able to acquire premium clients at a high rate. On the other hand, if you are unable to assist your existing clients who must check “yes” to investing in cryptocurrency on their 1040 Schedule 1, you are at risk of losing them.
How can you prepare to service crypto clients?
Before you can start assisting the millions of crypto investors out there who are going to need to file their crypto activity, you need to educate yourself on the world of cryptocurrency taxation. There is a wealth of material online that you can get started with including the
On top of this, there are a variety of software companies out there that are focused on providing
The increased IRS scrutiny towards cryptocurrency tax compliance presents a great opportunity to grow your tax business. Don’t be put off by the seemingly technical concepts that virtual currencies present. You do not need to be a technologist to grasp these concepts—a little research goes a long way.
