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Digital Asset, Cryptocurrency & NFT Accounting

Beating the Cryptocurrency Tax Audit: A Step-by-Step Guide

With the emergence of digital assets and cryptocurrencies, the Internal Revenue Service (IRS) has ensured that taxpayers accurately report their income, gains, and losses associated with these investments. Digital asset accounting, digital asset tax, cryptocurrency audit, and digital asset audit are essential elements of successful IRS enforcement activities. Thus it is crucial to understand the basics of these four areas to stay compliant with the IRS regulations.

A Look Back at the History of IRS Enforcement

The Internal Revenue Service (IRS) has been actively enforcing cryptocurrency tax laws since 2014. In March 2021, the IRS launched Operation Hidden Treasure, a major enforcement initiative designed to identify and prosecute taxpayers who avoid crypto taxes. This initiative is intended to increase accountability among taxpayers and promote accordance with the law.

Winning an Crypto Audit Before It Begins: Strategies and Tips

In addition to the IRS’s enforcement activities, taxpayers must be prepared for crypto tax audits. Audits are won before they start. This means understanding the implications of filing digital asset taxes and ensuring that all transactions are accurately reported. It also involves implementing strategies to reduce audit risk and protect oneself from potential liabilities. A few tips on how to win a crypto tax audit include:

The Essential Guide to Crypto  Tax Documentation

 Make sure to keep detailed records of all transactions related to cryptocurrencies, including wallets, exchanges, offline storage methods, and more. These records should be well-documented and organized in a manner that can easily be accessed during an audit.

Navigating Crypto Tax Audits: The Role of Cost Basis and Audit Trail

It is important to accurately calculate the cost basis of any digital assets. Additionally, keeping a record of all transactions and creating an audit trail that auditors can easily follow is critical. This should include records of exchange fees, commissions, and other applicable costs associated with each transaction with associate transaction hashes and wallet addresses.

Winning a Crypto Tax Audit: The Importance of Maintaining Calculation Due Diligence

When you are calculating your taxes, make sure to double-check all figures for accuracy. This includes verifying the cost basis of each asset and market value of each asset. It also important to verify your calculated ending holdings to your actual ending holdings.  Doing this diligently can help reduce any discrepancies during an audit.

Winning a Tax Audit: The Importance of Maintaining Correct Accounting and Documentation

 Whether preparing your taxes or working with a tax advisor, it is essential to ensure that your accounting methods are accurate. This includes understanding the different types of digital asset taxes, such as tax treatment of specific DeFi transactions or NFT transactions. Additionally, document your tax positions and explain why they are accurate and supporting regulations or case law related to your position.

The Average Length of a Crypto Tax Audit: What to Expect

How far back can auditors go? The audit examiner will review all the documents they’ve initially requested and go through them with more experienced crypto experts. If the audit reveals discrepancies in your tax reports, they may have more questions.

According to the IRS, a standard tax audit may include the last three financial years. If they believe there are ‘substantial errors’ – this can be extended to six years.

Crypto tax audits can be intimidating, but it is important to remain prepared and organized. By understanding the basics of digital asset accounting, taxation, auditing, and enforcement activities from the IRS, you will be able to stay compliant with all regulations. Make sure to keep detailed records of your accurate and well-documented transactions so they can easily be accessed during an audit.

Wrapping Up

The key to winning a tax audit start long before the tax audit or even filing taxes – preparation is key. Taxing digital assets is an essential consideration for anyone who holds them. You can protect your investments by tracking your basis, understanding the applicable tax rates, documenting your digital asset tax positions and accurately accounting for your gains or losses from digital asset holdings while avoiding hefty penalties. It’s important to appropriately track your cost basis, fair market value and holding period of all digital asset purchase and sales.

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About Camuso CPA

Camuso CPA saves you money, time and peace of mind.

We save digital asset investors and digital businesses thousands and cumulatively millions with effective tax planning strategies, accurate accounting and proactive advice.

At Camuso CPA, all our clients are digital asset investors and digital business owners. We’ve developed cryptocurrency specific expertise that allows us to provide tailored solutions to our clients in ways most other firm simply can’t.

Camuso CPA was one of the first CPA firms in the industry to provide their clients cryptocurrency accounting services and tax advisory. Camuso CPA was also the first CPA firms to accept cryptocurrency as a form of payment for professional services.

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