Cryptocurrency Tax Regulation & Compliance: Part 3

This is a continuation of a recent feature interview with Jason Tyra, CPAPart 1 covered the top emerging trends in efforts to regulate crypto taxes.  Part 2 covered the biggest mistakes crypto users are making when it comes to reporting taxes.  

In this third installment, we are covering tips on record-keeping and tracking mechanisms and software.

HM: What would you recommend for clients in terms of a tracking mechanism?

JT:  We use a platform called Cointracking.info.  There are others out there, but that’s what I would recommend.  But the good thing about trading through the major exchanges is that they keep the records for you, in most cases.  The ones that didn’t want to participate in compliance have exited the US market.

Kraken, Gemini, Coinbase, and Bittrex will keep the records for you, and you can load them into the online toolsets at the end of the year to work out what your gains should have been.  What they are doing is not that complicated.  They are just comparing what you sold to what you bought, matching sales with purchases, and then doing a little arithmetic for you to determine what your gains should have been.

It’s a little more complicated with crypto because you don’t have to buy and sell in discreet lots.  For example, you can buy 1 Bitcoin and sell .1 Bitcoin, and then sell .09 Bitcoin, and then sell .7 Bitcoin, and so on, and that’s all going to be deducted from that same purchase lot.  You can’t really do that, for the most part, with stocks and bonds.  So keeping up with your crypto inventory is a little tougher.  But conceptually what those toolsets do for you is really not that complicated.

HM: What sorts of tracking issues are there with DeFi platforms?

JT: The bigger problem tends to be record-keeping, now that a lot of people are using the DeFi (decentralized finance) platform.  It’s not an exchange; it’s a way that you can trade crypto point-to-point utilizing smart contracts, without intermediaries such as exchanges, brokerages, or banks.

The problem with it being decentralized is that it doesn’t create records automatically.  When people don’t hire us until substantially after those trades have been made, there is no way for us to go back and reconstruct.  So the challenge in most cases is not how to treat use cases, it is figuring out what needs to be reported because the client didn’t keep records, and they are not available through whatever medium they were using.

 HM: So how can this best be addressed? 

JT:  We need original records from the client, but if they don’t have that, we ask them to reasonably estimate how much crypto they earned?  Then, we’ll figure out how to put a number on the return.  And if they are audited, at least they paid some tax.  And if their return needs to be adjusted, the adjustment in tax will be smaller or not at all, because they potentially overpaid.  Penalty and interest are associated with tax due.  If their return gets adjusted and they have no additional tax due, then there will not be a penalty or interest associated with that adjustment.

HM: What is the specific information that you would like to see a client come in with?

JT: We need 5 attributes for every trade.  The date, the thing you gave up (quantity and description), and the thing you gave in exchange (quantity and description).  Pricing information is helpful, but we don’t have to have it.  We can figure that out.

For example: On Sept 17, I sold 1 Bitcoin in exchange for $35,000 US dollars.

This is all that you need on a Tax Return. That’s all our software needs to determine what your gain was, assuming that your records are accurate and complete.

HM: Then clients need to do this for every transaction throughout the year?

JT:  It’s not the volume of work that it seems because the trading exchanges do this automatically.  It’s only necessary if you are trading somewhere that doesn’t create records, either because it is decentralized or because it is engineered not to.  But, for the most part, the records that we need are readily created and readily available to clients.

Next week, check in to read Part 4 of the feature interview with Jason Tyra, CPA, where we will dive into measures the IRS is using to track crypto tax evaders.

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