When Congress urges IRS to issue guidance on something, you know it is real. Crypto investors have been feeling the pain of not having clarity around tax frameworks. In response to Congress’s appeal, the IRS said it would issue the guidance sometime this year.
If you are one of those savvy taxpayers, who are comfortable with using crypto tax software to report your own crypto tax transactions, you can head straight to our article on Comparison of Best Crypto Software.
If you received the IRS tax notice, letter 6174, 6174-A or 6173, then read our article on what these letters mean and what you should do here: What to do if you receive the IRS Notice Letter 6173 or 6174
Whether you have received the IRS Tax Notice Letters or you want to avoid them in the future, and if you don’t want to face the IRS alone, you should consider hiring a good crypto tax advisor.
How can anyone be an expert without guidance?
Many believe that the IRS has not yet issued any definitive guidance (as of the writing of this article) on virtual currency transactions. How can any tax advisor be a crypto tax expert without such guidance?
IRS Notice 2014-21 talks about virtual currencies to be treated as property and that all of the property tax rules apply to virtual currency transactions.
That means the excuse of inadequate guidance will not help you in the tax court.
The recently issued IRS Letter 6173 specifically challenges taxpayers who have not reported their crypto transactions from 2013 through 2017. The logic behind those specific years (even though bitcoin has been in existence since 2009) may be that the IRS Notice 2014-21 is considered valid guidance to report virtual currency transaction, and this was made available in 2014 (which means guidance for filing 2013 returns with crypto tax transactions was available in 2014).
Few taxpayers have taken the position to use the Like-Kind exchange treatment on their virtual currency transactions. This was thrown out of the door with The Tax Cuts and Jobs Act, which limited Like-Kind Exchange treatment to real estate transactions.
As you can see, things can get complicated quickly.
It makes logical sense that one would seek expert advice to deal with such complicated tax matters. The question is, how do you pick the right crypto tax expert who knows what he/she is doing when it comes to helping you with crypto tax reporting or dealing with IRS Crypto Notices?
Do not despair.
We have put together a list of things you should look in a crypto tax advisor:
Experience & Expertise
This one sounds quite lame. Of course, you want an experienced crypto tax expert. Yes, but a lot of tax accountants have avoided clients with crypto tax transactions until a few years ago. For this specific reason, you want to ask your advisor how long they have been serving clients with crypto tax transactions. In our opinion, anything less than three years does not confer enough experience for them to be called an expert.
Size of their crypto clientele
How many taxpayers do they help with crypto tax transactions in a year? You cannot call yourself an expert if you help a few taxpayers, who all had transactions in a single Coinbase account. In fact, Coinbase itself provides tax reports to taxpayers trading on their platform, so any tax accountant, even the one with no experience, can report those transactions without breaking a sweat.
That’s why finding out the size of their crypto client base is important. If they have dealt with numerous taxpayers, there is a greater chance that they have seen the variety and complexity.
Have they helped their clients with FinCEN requirements?
Even if you have never opened an account outside the U.S., it is always a good idea to check to see if the crypto tax advisor you are considering has a general awareness and experience about the crypto FinCEN requirements.
This gives you an additional level of comfort that you will not have to look for a new crypto tax advisor if you deal with foreign crypto exchanges in the future.
You want to pick the crypto tax advisor who’s not only suited for your immediate needs but probable future diversification.
Do they have insight into the State legality of crypto transactions?
While the IRS may have issued some guidance on crypto taxes, not all States have accepted the legality of crypto transactions. Some states may have imposed limitations on its residents to take part in crypto transactions.
While you have to disclose all of your transactions for both Federal and State purposes, you also have to make sure you are not tripping any legality issues in your State of residence.
Does your crypto tax advisor know the specific issues concerning your State?
Do they have their own crypto tax transaction tool?
How do they report the crypto tax transactions? Do they rely on Excel spreadsheets, or do they have their own software that enables you to connect your transactions from the exchanges?
While having their own crypto tax transaction tool is not required, find someone who has the knowledge of how APIs work and how to pull information from different exchanges.
If you are among the U.S. individuals with transactions with Coinbase only, then you may not need to check this ability of your crypto tax advisor as coinbase provides easy to use Form 8949 format reports.
However, if you have dealt with more than one exchange, find a crypto tax advisor who can pull the information through APIs from various exchanges. This will ensure that you are not scratching your head to pull the data from various sources.
Some commercial crypto tax software allows for a tax accountant module where the individual taxpayers can connect their crypto exchange APIs without having to purchase separate logins.
How is their reputation in the market?
Do a quick search with the last name to ensure that the individual you are dealing with has appropriate credentials. You can start off with this IRS Database Search.
You want to ensure you are dealing with someone who has the credentials to represent you in front of the IRS (or tax authority in your respective jurisdiction).
Are they on any board to help the crypto space?
If you are among the taxpayers with a vast amount of crypto transactions, you might want to find the crypto tax advisors who are actively working with the authorities in building the framework for crypto taxes. The reason for this special consideration is that with 10,000s of transactions, you will have all sorts of transaction types (sale, spend, losses, bankrupt projects that you invested in, change in accounting method, amending prior year returns and so on) and some of the transactions may need special guidance.
When the tax advisor that is helping you is connected in the right places, they can get you the widely accepted methodologies to apply to your situation.
Shop around to find expertise without burning your pockets
Sometimes, you don’t have to spend big bucks to get professional help. The easiest way to avoid burning a hole in your pocket is to shop around. Perform a basic search of local accountants in your area and ask around if they have expertise in crypto tax transactions.
Use the checklist below.
We hope that this article has helped you in picking the right crypto tax advisor.
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About the author
RK Reddy holds two Masters degrees, one in Accounting and another in Business Administration with over 15 years of experience in the financial services industry.