A comprehensive guide for accountants and bookkeepers.
9 things every US accountant should know about cryptocurrency
Sometimes, reconciling and reporting crypto transactions becomes a daunting task. Sooner or later, almost every accounting firm faces challenges regarding the same. Because there are several crypto exchanges, and they have their respective tax guidelines.
Not only this, but many other factors bother accountants while reporting and reconciling crypto transactions. It leads us to identify some of the essential things that need to be considered for smooth accounting operations.
1. Some crypto exchanges are not US based
Many popular crypto exchanges such as Bitfinex, Binance, Huobi, OKEx, Bitstamp, Kraken, and BitBay are not US based.
Also, Some of these crypto exchanges have been prohibited from trading in the United States due to legal violations or security and compliance concerns.
Many US investors use VPNs to trade internationally, attempting to create the illusion of a different location. The client who has traded internationally will not receive form 1099, essential in tax filing. They may also want to send an FBAR to FINCEN if the total of their international holdings was $10,000 or more at any point during the tax year.
2. Cryptocurrency is tax applicable
In the United States, cryptocurrency is considered property for tax purposes. It means cryptocurrency transactions are subject to capital gains and losses tax rules.
If your client trades in cryptocurrency, you must consider this and consult with the client regarding the transactions made through the different crypto exchanges.
3. Losses from fraud and technical breakdown can not be written off
The Tax Cuts and Jobs Act of 2017 limited the eligibility for individual casualty loss deductions to assets lost due to a federally declared disaster.
So as per this act, you are not liable to pay tax for the loss in theft and fraud. It was designed to reduce taxes for most Americans and promote economic growth.
However, it does not apply to cryptocurrency. Many clients hope that they can write off crypto transaction losses in fraud and technical breakdowns. Unfortuantrly, it can not be written off by individuals.
4. Guidance for cryptocurrency
Cryptocurrencies are digital assets that are not tangible. These are entirely digital and are not physical objects such as cash or gold. They are kept in digital wallets and traded on electronic exchanges.
That is why the IRS considers cryptocurrency a virtual currency and has issued guidance on reporting cryptocurrency transactions. Accountants should be familiar with this guidance and able to apply it to their client's transactions.
5. Use the HIFO method to lower the tax liability
Companies that sell products with volatile prices or products with a short shelf life, such as perishable goods, typically use the HIFO(Highest -in-first-out) method. The IRS allows the HIFO method for crypto assets.
It means you can apply cost bases to sold assets to reduce your clients' tax liabilities for the current tax year. But this method requires investors to keep a detailed record of each transaction and tax lot.
It can lead to headaches because many accountants experience difficulties due to a high prevalence of missing or incorrect cost basis.
6. Additional risk management strategy
Due to market volatility, clients holding significant amounts of cryptocurrency may require additional risk management strategies. Cryptocurrency is highly volatile, so there can be impulsive gains or losses in assets. Accountants should be able to advise clients on risk management strategies.
7. Some crypto exchanges do not issue form 1099
The new Infrastructure Bill requires US-based exchanges and brokers to send 1099s beginning with the 2023 tax year.
Suppose you work for clients who are heavily involved in cryptocurrency trading. In that case, there is a chance that they have traded on crypto exchanges that do not issue 1099s because not every cryptocurrency exchange generates 1099.
As an accountant, you know the significance of Form 1099 in tax filing; you should consult your client about it. Binance-US, the American subsidiary of the world's largest cryptocurrency exchange, will no longer issue 1099-Ks after the 2020 tax year. Instead, they will send 1099-MISC forms, which only report earnings from rewards or staking.
That means your client may be missing a significant portion of the transitions. If your client traded on an exchange that does not issue 1099s, they must obtain their trade history from the company.
8. IRS inquiries
In recent years, the IRS has increased its focus on cryptocurrency transactions. IRS may audit clients who regularly engage in crypto transactions. The client may not be aware of all the policy changes and other queries regarding crypto trading. Accountants should be prepared to help clients respond to IRS inquiries and audits involving cryptocurrency.
9. “Wash sale” rule does not apply to the crypto
The wash sale rule does not apply to crypto transactions because it has not been classified as a security. Technically speaking, crypto wash sales are allowed. But there is a legislative effort underway to close this gap.
A Committee proposal in September 2021 included applying wash sale rules to digital assets. Federal agencies are moving quickly to change the laws governing cryptocurrency wash sales. Use your best judgment when it comes to the ever-changing world of cryptocurrency, especially when it comes to the “wash sale” rule. When in doubt, take the safe route.
The bottom line:
In conclusion, accountants in the United States must be aware of the unique challenges associated with reconciling and reporting crypto transactions. As an accountant, you must be familiar with updated IRS guidance on reporting cryptocurrency transactions.
Finally, you will be effortlessly conducting the workflow if you are up to date with the crypto policy and ready to assist clients in inquiries and audits involving cryptocurrency.