How To Help Your Clients Understand Cryptocurrency As a Tax Professional
The buzz around cryptocurrency has not died down. Regardless of market conditions, crypto continues to grow. As an accounting professional, this poses an excellent opportunity to take advantage of.
As your clients invest in the cryptocurrency industry, you will be an essential beacon of support when navigating their taxes. Not taking advantage of the opportunity to learn how to help your clients with their cryptocurrency concerns could mean missing out on the right time to carve out a niche for yourself.
More individuals will buy and sell assets when the crypto industry enters a bull market. This is where you can step in and market your services, so your clients don’t traverse the market blindly. If you want to help your clients understand cryptocurrency as a tax professional, this blog can help.
How is cryptocurrency taxed?
According to IRS Notice 2014-21, cryptocurrencies like as Bitcoin, Etherium, Solana, Algorand, and others are considered "property." As a result, the normal tax regulations that apply to property also apply to bitcoin. Holding bitcoin is analogous to owning a stock. The cost basis is determined by the amount you pay to receive it. When it is sold, it generates sales revenue. The distinction between these two is either a gain or a loss.
For example, if your client bought 0.1 Bitcoin in 2020 for $2000 and sold it later for $4,000, they would have made a $2,000 capital gain. They declare this gain on their tax return, and depending on their tax rate, they will pay a percentage of the gain in tax. Rates vary depending on their tax band and whether the gain was short-term or long-term.
Understanding how the IRS regards cryptocurrency is only the first step for an adviser. The laws are now clear on what constitutes a taxable event; the granularities remain confusing. Cryptocurrency is still evolving, and techniques for earning rewards and income are being developed at a breakneck pace. The present market capitalization is close to $1 trillion and is expected to rise in the future.
Learning about cryptocurrency will benefit both you and your clients. As crypto is a fast-moving tidal wave of invention, scams, and financial ingenuity, there is a fire hose of information to swallow today. Educational resources such as AltMonie, The Defiant, and Decrypt are excellent places to learn.
Make sure your clients have income reports
If your client got cryptocurrencies through events such as mining, airdrops, or fork events, they will also receive an income report detailing the fair market value of the cryptocurrency at the time it was received.
The income report may be used to report on the amount of bitcoin revenue earned in a particular year. This should be included in the client's tax return.
Understand the tax rates for crypto earnings
Cryptocurrency can be taxed as long-term capital gains, short-term capital gains, or regular income, depending on your clients’ circumstances.
Ordinary income tax: If your clients earn crypto from their job, mining, staking, or airdrops, they will be taxed on it as ordinary income. Depending on their income level, this might range from 10% to 37%.
Cryptocurrency sales are subject to capital gains tax. Selling crypto, trading crypto for other cryptocurrencies, or making a transaction using crypto are all examples of sales.
Long-term capital gains tax: If your clients have owned cryptocurrencies for more than a year, they’ll have to pay long-term capital gains tax on their sales. Depending on their income level, this might range from 0% to 20%.
Short-term capital gains tax: If your clients owned their cryptocurrencies for less than a year, they’ll have to pay short-term capital gains tax on their sales. This is classified as regular income for tax reasons and can range from 10% to 37% depending on their income level.
Understand what to ask clients
As a tax preparer, you must be prepared for a few things: Obtaining the necessary information from your clients and managing that information when preparing their taxes. For that reason, when you meet with clients to discuss cryptocurrencies, you should ask them:
- Do you presently own, trade, or hold cryptocurrency?
- Have you ever purchased or traded cryptocurrencies before?
- Have you ever traded one cryptocurrency for another or used it to pay for a product or service?
- Have you ever sold cryptocurrency for cash, such as USD?
- Have you ever been given cryptocurrency as a gift?
If their answer to any of these questions, you should step in and leverage your services for filing their crypto taxes and serving as a consultant. Showing you have a proficiency in the industry could make that engagement with your client more valuable as you’ll take on the role of their industry expert.
How can Taxfyle help
Learning a new skill set, like filing cryptocurrency taxes for your clients, takes time. With Taxfyle, we can save you some. We offer a network of thousands of verified tax professionals across the United States who can help take some low-value work off your hands. By outsourcing with Taxfyle, your firm’s staff can spend more time on what matters most: your clients.
Let the constraints of the busy season be a bygone problem. When you outsource with Taxfyle, your firm’s staff can have more time to bring your firm revenue.