Cryptocurrency is a hot topic around the world, especially with the prices of Bitcoin (BTC), Ethereum (ETH) and other cryptocurrencies hitting higher thresholds resulting in another banner year for Investors. Although earnings look good on paper, there is often one factor to consider, and that is crypto taxes.
It is not uncommon for traders to take advantage of the constant swings, buy the downside, sell the uptrend and repeat it frequently. Unfortunately, every transaction is considered a taxable event, which makes the conversation about cryptocurrency taxes daunting.
The impending crackdown on cryptocurrency taxation only reinforces the need to start the conversation. This crackdown is far from recent, with 2021 headlines from an IRS chief indicating the country was losing trillions of dollars in unpaid taxes each year, with a significant portion attributed to the crypto market. For this reason, several subpoenas currently exist against Coinbase, Kraken, and Poloniex in the United States, requiring these exchanges to share information with the IRS.
Events like this have since fueled more recent announcements of the IRS seizing billions of dollars in cryptocurrency that may be linked to tax evasion. Although some of these actions to avoid paying taxes seem extreme, especially when compared to his own miscalculations, it should be noted that it is always those who intentionally avoid taxes who can be affected by the imposed repression.
The IRS and Crypto Investors
The IRS has acknowledged that more investors than ever before are participating in the digital currency market, a move that is partly hype and many parts attributed to the amount of money the government has handed out throughout the COVID-19 pandemic. With more discretionary income in the hands of investors, the number of crypto traders in the United States has reached an all-time high and continues to grow. Currently, an estimated 55% of US investors hold Bitcoin, according to Grayscale Investments.
Recognizing this, the 2021 version of IRS Form 1040 now asks recipients if at any time during the year they received, sold, exchanged, or transferred another financial interest through virtual currency. Users must then check the “Yes” or “No” box in response. The IRS further proves its repression by placing this question on the form, directly under a taxpayer’s name and address, a place not to be missed. The language has also been clarified to specify that only taxable events, including receipt of cryptocurrency as payment, airdrops, exchange of different cryptocurrencies, sale of assets, income from mining and staking, would be classified as a “yes” on the updated form.
The impacts of the great resignation
After ticking yes comes the hardest part of managing crypto taxes, determining the balance owing. The IRS has advised that cryptocurrencies/virtual currencies are considered property. Therefore, users must recognize and report any taxable gain or loss, otherwise it will result in potential audit, interest payments and rare penalties in extreme circumstances. As a result, many have turned to a professional crypto accountant for advice.
In a traditional, pre-pandemic year, 15% of staff left one of the big four accounting firms, including Ernst & Young (EY), Deloitte, KPMG and PricewaterhouseCoopers (PwC). Although there is no certainty that these statistics will remain the same this year, many companies agree that turnover rates will be higher than in previous years.
This year, after another pandemic year, the profession as a whole has been overstretched and underpaid. Due to the current economic trend called the Great Quit, approximately 40% of accountants have left the CPA industry, resulting in an overwhelming shortage of professionals. Traditionally, as the laws of supply and demand dictate, a decrease in supply leads to an increase in prices, and therefore a lower chance of an investor getting the tax relief they need.
Of course, even those with the funds to hire a CPA may still struggle to find one with the crypto tax expertise to help them.
Managing Your Cryptocurrency Taxes
With fewer resources available, the issue of paying taxes on cryptocurrencies does not necessarily mean that users have to navigate the complex tax landscape on their own. Instead, the release of new crypto tax software simplified the process for users to organize their crypto data and calculate their tax liability.
One of these offers is Accompaniementcryptocurrency tax software with over 400 integrations, including Binance, BitMex, Kraken, and Tron, allowing users to access data in one consolidated location, automatically calculate a crypto trader’s gains and losses, and classify transactions as decentralized finance (DeFi) staking, margin trading, and mining.
As one member of their team describes, “Accointing is an easy-to-use, beautifully designed platform designed to help users manage crypto taxes on their own, without the need for a CPA to process the data. users can file their annual income and taxable gains with the IRS by transmitting the result provided by the accounting crypto tax calculator to a CPA, or through the dedicated TurboTax output.
The result is that with five clicks, users can generate a personalized cryptocurrency tax report for their country of location. Investors can also use the “holding period tool” to optimize trades, recognizing which tokens have been held for a year or more.
With offerings like Accointing, users can navigate the daunting tax landscape of the cryptocurrency world and avoid the battle for dwindling accounting strength.
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