Cryptocurrency and Taxes: What CPAs Should Advise Their Clients?

Similar to varied investments, cryptocurrencies are also subject to taxation. However, traversing the cryptocurrency tax realm is quite daunting and complex in contrast to other asset classes.?

In fact, in most cases, investors find it difficult to ascertain as to how the taxes are calculated and filed or even reported. However, informed decisions formed through proper advice can help your client stay on top of the requisite cryptocurrency tax laws.?

But how can it be done??

Well, let us explore how you as a CPA can advise your clients about tax rules regarding cryptocurrency but first let us understand what cryptocurrency is in its entirety!

Cryptocurrency - A Glimpse?

Cryptocurrencies are treated as properties by the IRS. It is essentially a digital asset that has a value equivalent to the real currency. In other words, they are convertible virtual currencies that are subject to capital gains or losses.?

What CPAs Should Advise Their Clients??

Advising clients about crypto taxes is necessary to lessen their tax burden and prevent legal pitfalls. Here is how you can aid your clients effectively and make them traverse the crypto tax realm seamlessly: -

1. Make your Clients Understand Cryptocurrency Transactions?

People invest in crypto for a variety of reasons and unless you know their reason for investment, you won't be able to give precise suggestions to them regarding the transactions made. This also requires evaluating whether the client holds pertinent crypto tax knowledge and whether they are trading or investing in crypto.

Once you know their goals, inform them of the various intricacies of cryptocurrency taxes and how they can reduce their liabilities. Also, inform them as to when tax events are triggered which depends on whether they are trading, selling, or using the same for purchase.

2. Inform About Liabilities and Limitations?

Cryptocurrency is not devoid of risks, and this is something that should be conveyed to clients transparently. Thus, as a CPA, it is imperative that you inform your clients about the liabilities and limitations involved in trading or investing in them.?

This includes telling them about the volatility of cryptocurrency, wherein its price fluctuates frequently. Another limitation is that this digital currency is banned in some countries and therefore, your clients must understand their position in the intended nations, otherwise they might face the risk of losing their investments.?

Also, scalability is a problem when it comes to trading in crypto along with security concerns that can lead to heavy losses. All this should be conveyed to clients at the behest with utmost lucidity.?

3. Assess and Tell About Your Client's Risk Quotient?

Crypto investment requires ascertaining the client's risk profile. Here, CPAs can play a pivotal role in helping clients understand the tentative return on their investment in crypto along with the potential risks involved.?

Therefore, you must tell your clients that they should be aware of their risk capacity, meaning thereby, only the amount one can afford to lose should be invested. Discussing the risk quotient thus stands as a cornerstone of transparent advice that you'd give to your clients.? ?

4. Advise on Record-Keeping?

Advise and encourage clients to keep a detailed record of every cryptocurrency transaction, which also includes keeping a check on dates, amounts, and counterparties at the time of the transaction. Guide and help them use reliable tools and software to track transactions and generate reports, omitting manual tracking.

5. Give Tax Advises?

CPAs must tell their clients how cryptocurrencies are treated as property for varied tax purposes, wherein loss or gain is classified as capital loss or capital gain depending upon whether the holding period is short or long-term.?

Advise the clients how cryptocurrency can be reported if received as income that is often subjected to ordinary income tax rates.? ?

6. Inform About Cost Basis and Valuation?

You must guide and assist clients in determining their cost basis, which is essentially the original value of the cryptocurrency including any transaction fees. This is a crucial step towards accurately calculating losses or gains. Also, helps them understand the various methods employed to calculate cost basis as well as any identification used.?

7. Advise on Tax Forms and Reporting?

Guide clients on ways to report capital gains and losses with the aid of Form 8949 and Schedule D. Also, inform them about how each of the transactions should typically include the date of sale, and proceeds, including cost basis.

8. Keep Clients Informed About Recent Developments and Compliance?

Apart from informing clients about various intricacies of cryptocurrency, it is equally important to advise them on ways by which they can remain compliant with the latest IRS guidelines. It also involves informing them of any changes in tax laws related to cryptocurrency.? ?

Besides, advise them as to how they can remain compliant with the recent rules to avoid penalties and interests that usually occur due to misreporting or underreporting of cryptocurrency transactions.?

Final Thoughts?

Cryptocurrency taxation is a complex realm that requires attention to detail and meticulous planning where CPAs play a pivotal role. By extending advice on record-keeping, cost basis, and tax treatment, including reporting requirements, CPAs can aid their clients’ traverse through the maze of tax regulations seamlessly.?

If you also wish to alleviate your client's cryptocurrency tax burden, Infinity Globus can be the right aid for you. Our years of experience combined with expert guidance can help streamline the cryptocurrency tax process, helping you deliver the best of services built on accuracy and compliance.