Calculating the Evasive Cryptocurrency Tax

If your exposure to cryptocurrency is limited to news headlines, you probably know the digital currency from many stories of fraud, scandals, and bankruptcy. Perhaps most notable is the recent 25-year prison sentence of Sam Bankman-Fried for stealing $8 billion from customers of the now-bankrupt FTX cryptocurrency exchange.?

Despite the drama, investors and traders continue to add cryptocurrencies to their portfolios at a record pace. Bitcoin, the most popular digital asset, is experiencing a resurgence in 2024, with prices soaring to new heights just last month.??

Still, cryptocurrency is in its infancy and is often called the Wild West of financial markets. There’s no playbook for how it’s regulated, and the decentralized, sometimes anonymous nature of the currency makes it difficult to track and analyze.??

This is especially challenging for tax authorities across the globe as they develop standards for how digital transactions are taxed.??

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Manually decoding millions of crypto transactions

Amid the crypto chaos, tax technology teams at global tax and audit firm RSM found themselves on the cutting edge of finance analytics. “There were no set ways, just a lot of things that were undetermined,” says Zack Szykowny, Manager of the Center for Advanced Tax Technology at RSM. ?

Cryptocurrency is stored electronically on the blockchain, a decentralized ledger of digital transactions. Tax teams at RSM must transform and analyze data from the blockchain for reports their clients use in tax filings.??

“We take data from the blockchain, which is known for being messy and unstandardized,” says Szykowny. The teams would spend an average of two weeks manually decoding just 200 transactions, a small number compared to some RSM clients with transactions reaching into the millions.??

“The manual aspect of the work usually involves people putting together Excel tables that reconcile transactions and activities,” said Alula Zeryihun, Financial Services Tax Manager at RSM. The variety of unique wallet addresses and lack of standardization among the many blockchains created additional headaches.??

Looking at the trends they were seeing in the volatile but growing crypto market, they knew the manual process of decoding complex blockchain data was unsustainable.??

?“We were seeing exponential growth in the digital asset space in terms of the number of users and the value of the transactions,” says Zeryihun. “The writing was on the wall in terms of the need within the market for better data insights.”??

Still, the team admits they were unsure where to start in a space so unchartered.??

Opportunities for automation in the digital asset marketplace

For Szykowny and Zeryihun, finding a solution began with learning about the complex blockchain technology, understanding different ways transactions are taxed, and meeting with users on the front lines to examine their challenges.

After exploring different solutions, they landed on Alteryx as the best platform to streamline the complicated and first-of-its-kind process. Working with RSM tax experts, they came up with categorizations for different types of crypto activities. From there, they formatted and flowed data into a digital tracking app (called RSM Digital Tracker) so they could generate tax forms, reports, and accompanying documents for their clients.

“What used to take someone weeks to accomplish we were able to complete within minutes,” says Zeryihun. “With a click of a button, we’re able to provide our teams with the tax calculations they need to file with the IRS. That saves an immense amount of time and other benefits.”

The results are as transformative as cryptocurrency itself. Data processing time has been reduced by 99% and error rates have been cut in half using automated analytics. ?

The breakthrough of modernizing the Wild West of tax reporting for cryptocurrency is getting attention elsewhere at RSM. “We’re talking to our audit teams, consulting teams, and other people servicing our clients and coming up with really unique ways of adding value,” says Zeryihun.

While there are still a lot of unknowns about the future of cryptocurrency, Zeryihun says the challenge of streamlining new data processes is a constant across all lines of business, providing future opportunities for innovating with automation.

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There are a lot of ways to dig more into RSM’s story:

How RSM Uses Alteryx to Decode Crypto and Blockchain Transactions

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