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Cryptocurrency Tax & Accounting Due Diligence

Cryptocurrency taxes and accounting are crucial when it comes to protecting your assets and bottom-line from the IRS. Reporting your cryptocurrency transactions on your tax return is only your first step towards compliance with the IRS.

You need to ensure that you are not only properly reporting your transactions in the correct character and format to the IRS but you must also ensure that your accounting calculations are accurate and verifiable. It is also important to properly account for your cryptocurrency transaction due to the cumulative nature of cost basis tracking.

Below we go over some important due diligence steps to take when accounting and reporting your cryptocurrency transactions for taxes. It is important to work with an experienced cryptocurrency CPA like Camuso CPA when handling this process, the steps below are important to ensure the quality of your accounting and reporting when working with a professional.

Documentation

The first step to ensuring the integrity of your cryptocurrency accounting and tax filings is documenting your transactions. The first step in this process is downloading all of your transactions from all centralized exchanges and consolidating all decentralized transactions based on the addresses used. You should save these files in your records for at least 7 years.

After completing your cryptocurrency accounting your final documents should include gain/loss information that shows your detailed gain/loss for the relevant tax year. Additionally, your final documents should include that shows your detailed cost basis information for the relevant tax year. It is important that these data sets include an audit trail which shows where the source of each transaction came from based on your source records.

Wrong Accounting Methodology

After your documentation is in order the next step is ensuring you choose the correct accounting method to remain compliant with the IRS. Generally, we recommend FIFO for this. The explanation for this is outside the scope of this article but you should consult with a tax professional and understand the basis and tax implications regarding your accounting method selection.

Unmatched Transactions

After completing your calculation, you should review your gain/loss calculation in detail. To start this process, review the cost basis information for each sale, if any of your cost basis are 0 this will require further investigation. This usually indicates an issue with the calculation which could be related to missing transactions, incorrect valuations, or accounting errors. To address this you will have to review the facts and circumstances regarding the specific asset and sale that has a 0 cost basis.

Checking All Valuations

The next step in this process is to review the valuations assigned to the proceeds for each individual sale. You should review this to ensure that the fair market value you assigned to each sale to arrive at your total proceeds are accurate. If this is inaccurate it can result is an inaccurate gain/loss and cost basis.

Ending Balances Off

After completing your calculation, you should review your cost basis calculation in detail To start this process, review the ending total coin level balances of each cryptocurrency you hold against your actual holdings to ensure this balances are accurate. If this is inaccurate it can result is an inaccurate gain/loss and cost basis for future tax years. This usually indicates an issue with the calculation which could be related to missing transactions, incorrect valuations, or accounting errors. To address this you will have to review the facts and circumstances regarding the specific asset that has an inaccurate ending calculated cost basis.

Reporting Cryptocurrency

After completing your cryptocurrency accounting and due diligence you can then include your cryptocurrency transactions on your tax return. It is crucial that you report your transactions in the correct format. This is out of the scope of this article but keep in mind that investment income, staking income, mining income, business income and other sources of cryptocurrency transactions will get reported on different parts of the return, have different tax implications and informational requirements.  

Cryptocurrencies are in an unusual middle ground where the IRS is now cracking down on them, but even many licensed CPAs are struggling to understand the new tax law. So, to navigate, it’s important to not only find a professional in tax law, but one who is current on cryptocurrency tax law as well. Here at Camuso CPA, we have all the knowledge necessary to save you as much money as possible on your cryptocurrency tax returns. That puts us on the cutting edge of a brand new financial trend. When it comes to protecting your investments in the form of cryptocurrencies, Camuso CPA is one of the few CPA firms that can work with you to ensure you are compliant with tax law.

Wrapping Up:

Taxpayers should very carefully consider all the cryptocurrency tax factors while participating in any cryptocurrency transactions.  It is important to consult with an experienced cryptocurrency CPA regarding your specific portfolio and/or business.

Here at Camuso CPA, we offer cryptocurrency tax services nationwide. Our team is highly experienced in cryptocurrency as one of the first CPA firms working in the space since 2016. We were the first CPA firm to accept cryptocurrency as a form of payment during 2017. Contact our team today to discuss your portfolio in detail here.

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IRS Summons Circle For Taxpayer Information

Cryptocurrency taxation has been a hot topic with the IRS for years. Despite popular opinion, the IRS has been monitoring cryptocurrency for quite some time. This is why the decision by the Internal Revenue Service (IRS) to seek information from Circle on all U.S. taxpayers who traded at least $20,000 worth of crypto between 2016 and 2020 should come as no surprise.

This is another step forward for the IRS is positioning itself to audit cryptocurrency taxpayers.

Most past actions by the IRS have been to provide further clarification on the tax guidance related to cryptocurrency transactions then taking actions to detect taxpayers who are not reporting their cryptocurrency activity.

The IRS has also recently announced they hired a cryptocurrency tax software company to assist in data analysis and tax calculations for audits of taxpayers with cryptocurrency.

In the past we have seen John Doe summons to collect data on taxpayers at cryptocurrency exchanges including Coinbase, Kraken and other major exchanges. Additionally, we have seen a question added to the top of the 1040 form in recent years asking if any time during the previous year, they received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency.

The best approach for crypto investors

The best approach for crypto investors is to seek professional guidance and consultation. Seeking the services of an experienced cryptocurrency CPA can help investors protect their assets and avoid criminal charges.

Wrapping Up:

Taxpayers should very carefully consider all the cryptocurrency tax factors while participating in any cryptocurrency transactions.  It is important to consult with an experienced cryptocurrency CPA regarding your specific portfolio and/or business.

Here at Camuso CPA, we offer cryptocurrency tax services nationwide. Our team is highly experienced in cryptocurrency as one of the first CPA firms working in the space since 2016. We were the first CPA firm to accept cryptocurrency as a form of payment during 2017. Contact our team today to discuss your portfolio in detail here.

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How NFTs and Cryptocurrency Are Taxed

With the significant surge in popularity of digital marketing and non-fungible tokens (NFTs) recently, people are asking more and more questions about NFTs and cryptocurrency taxes. For the past few months, NFTs have been surging in popularity. Various platforms allow thousands of creators and artists to sell their work as NFTs. The following is a guide on how tax is imposed on NFTs. 

Taxation on NFTs

NFTs are taxed just like the other cryptocurrencies. NFTs act very similarly to some other types of properties such as real estate or cryptocurrency. If you are familiar with cryptocurrency tax, you will be able to understand NFT taxation easily. When you purchase an NFT this will establish your cost basis based on the purchase price. When you sell the NFT in the future, the sale price will be subtracted from the purchase price to arrive at your capital gain or loss.

If you are a creator the taxes will work differently for you. Usually, you will be taxed on the income you receive from selling the NFTs at ordinary income tax rates.

How Taxes Work For Creators:

If you are a creator, you will be taxed when you will sell those NFTs in the marketplace. When you sell these NFTs, you will be subject to income tax. Your earnings will be taxed as ordinary income. As a creator you can deduct any business related expenses realted to your business.

How Taxes Work For Investors:

Here, the taxes work quite differently as compared to the creator.

 If you are an investor, the taxes would be similar to that of cryptocurreny trading. For example, buying NFTs using the cryptocurrency and then selling them would generate profit, and ultimately all of the profits are subject to capital gains tax rules.

 

Exchanging NFTs for Cryptocurrency

Whether you are buying or selling NFTs you are usually exchanging them for Eth or another cryptocurrency. It is important to understand the cryptocurrency tax implications in addition to the NFT tax implications.

As an investor, if you exchange Eth or another cryptocurrency for an NFT that will trigger a taxable event for the sale of your cryptocurrency. Any time your exchange cryptocurrency for a good, service or other cryptocurrency you are creating a taxable event. Based on the current price of the cryptocurrency you are exchanging and your cost basis you will recognize a gain or loss when you exchange cryptocurrency for an NFT.

As a creator, if you sell an NFT for Eth or another cryptocurrency this can trigger two potential taxable events. The first as covered above will be that you will be taxed at ordinary income rates for the Eth you receive for the NFT based on the current fair market value. If you hold this Eth after selling the NFT, when you sell the Eth you will recognize a capital gain or loss based on the current value of the Eth and your cost basis at the time of recipet.

Wrapping Up:

Taxpayers should very carefully consider all the cryptocurrency tax factors while participating in any cryptocurrency transaction, particularly NFTs.  It is important to consult with an experienced cryptocurrency CPA regarding your specific portfolio and/or business.

Here at Camuso CPA, we offer cryptocurrency tax services nationwide. Our team is highly experienced in cryptocurrency. We were the first CPA firm to accept cryptocurrency as a form of payment during 2017. Contact our team today to discuss your portfolio in detail here.

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IRS Hires Crypto Tax Software Company For Audits

Cryptocurrency taxation has been a hot topic with the IRS for years. The IRS has been monitoring cryptocurrency for years. This is why the decision by the Internal Revenue Service (IRS) to enforce a cryptocurrency taxes further did not come to many as a surprise. The cryptocurrency tax laws, are known to have been historically complex for cryptocurrency investors, miners and traders.

The IRS has recently announced they hired a cryptocurrency tax software company called TaxBit as a subcontractor to assist in data analysis and tax calculations for audits of taxpayers with cryptocurrency.

This is another step forward for the IRS is positioning itself to audit cryptocurrency tax payers.

Most past actions by the IRS have been to provide further clarification on the tax guidance related to cryptocurrency transactions then taking actions to detect taxpayers who are not reporting their cryptocurrency activity.

In the past we have seen John Doe summons to collect data on taxpayers at cryptocurrency exchanges including Coinbase, Kraken and other major exchanges. Additionally, we have seen a question added to the top of the 1040 form in recent years asking if any time during the previous year, they received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency.

This subcontract relationship with a cryptocurrency tax software company shows the next step that will allow the IRS to calculate and verify taxpayers capital gains calculations even if they have reported their transactions to ensure this is accurately reported.

The best approach for crypto investors

The best approach for crypto investors is to seek professional guidance and consultation. Seeking the services of an experienced cryptocurrency CPA can help investors protect their assets and avoid criminal charges.

Wrapping Up:

Taxpayers should very carefully consider all the cryptocurrency tax factors while participating in any cryptocurrency transactions.  It is important to consult with an experienced cryptocurrency CPA regarding your specific portfolio and/or business.

Here at Camuso CPA, we offer cryptocurrency tax services nationwide. Our team is highly experienced in cryptocurrency as one of the first CPA firms working in the space since 2016. We were the first CPA firm to accept cryptocurrency as a form of payment during 2017. Contact our team today to discuss your portfolio in detail here.

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Cryptocurrency Tax Return Questions on Page 1

Cryptocurrency taxation has been a hot topic with the IRS for years. The IRS has been monitoring cryptocurrency for years. This is why the decision by the Internal Revenue Service (IRS) to enforce a cryptocurrency taxes further did not come to many as a surprise.

The IRS guidelines surrounding the filing of cryptocurrency taxes have left more people confused.  The issue is the ambiguous nature of information on how to fill the crypto declaration segment on page 1 of the IRS Form 1040. This section requires taxpayers to declare if they have been involved in any crypto-related transaction within the past year.

However, the IRS issued new guidance on March 2, 2021 (by updating Question 5 of its FAQs) stating that investors need not answer ‘yes’ to the question if they purchased cryptocurrencies with real currency.

This means that if you simply bought cryptocurrency with USD and never sold or exchanged it then you do not have to check yes to this question. This is because cryptocurrency transactions are only taxable if you exchange cryptocurrency for fiat, another cryptocurrency, for a good, or for a service.

The best approach for crypto investors

The best approach for crypto investors is to seek professional guidance and consultation. Since the IRS does not currently have a formal voluntary disclosure program for cryptocurrency holders, seeking the services of an experienced cryptocurrency CPA can help investors protect their assets and avoid criminal charges.

 Wrapping Up:

Taxpayers should very carefully consider all the cryptocurrency tax factors while participating in any cryptocurrency transaction.  It is important to consult with an experienced cryptocurrency CPA regarding your specific portfolio and/or business.

Here at Camuso CPA, we offer cryptocurrency tax services nationwide. Our team is highly experienced in cryptocurrency. We were the first CPA firm to accept cryptocurrency as a form of payment during 2017. Contact our team today to discuss your portfolio in detail here.

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How Is Kentucky Offering Tax Breaks For Crypto Miners IN 2021?

The cryptocurrency tax laws, are known to have been historically complex for cryptocurrency investors, miners and traders. There haven’t been many legislations that are entirely dedicated to the cryptocurrency mining businesses. Several issues regarding the earnings, investments, savings, and taxation of the cryptocurrency mining industry haven’t been addressed by lawmakers in extensive detail.

However, things are now gradually changing and US lawmakers are trying to improve the legislation associated with the cryptocurrency tax and cryptocurrency mining businesses. In this brief article, we’ll take a look at how cryptocurrency earnings have been traditionally taxed so far. We’ll also discuss the new cryptocurrency tax breaks that have been legislated by the State of Kentucky and what is the driving force behind the new law.

General Tax Laws For Crypto Mining Earners

The cryptocurrency earnings have been classified and taxed as property. While these rules are easy to understand and follow due to their common practice, they haven’t been able to address some key issues regarding cryptocurrency mining.

In general, all expenses associated with a cryptocurrency mining operation including electric, hardware, software, wages, etc. are tax deductible.

Tax Breaks Offered By The State Of Kentucky

The state of Kentucky is giving tax breaks to cryptocurrency miners. According to a recently signed bill, cryptocurrency miners can get tax exemptions by investing at least 1 million dollars into the cooling systems of their plants. These cooling systems are integral to cutting down the energy utilization of cryptocurrency mining plants. This is a great opportunity to get additional tax benefits for investments into cryptocurrency mining operations.

You can expect further changes to various other taxation laws relating to cryptocurrency taxes and cryptocurrency mining.

Wrapping Up:

Taxpayers should very carefully consider all the cryptocurrency tax factors while participating in any cryptocurrency transaction.  It is important to consult with an experienced cryptocurrency CPA regarding your specific portfolio and/or business.

Here at Camuso CPA, we offer cryptocurrency tax services nationwide. Our team is highly experienced in cryptocurrency. We were the first CPA firm to accept cryptocurrency as a form of payment during 2017. Contact our team today to discuss your portfolio in detail here.

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Cryptocurrency Taxes & Decentralized Finance, Tax Guide To Trading, Lending, Borrowing

The cryptocurrency industry, and as a result, cryptocurrency taxes are constantly evolving. Decentralized Finance (DeFi) is a rapidly growing area of cryptocurrency that provides access to financial services, including trading, borrowing, and lending, without middleman like traditional financial institutions. This has provided many financial options for traders and long-term holders.

As with any evolution of cryptocurrency transactions, it is important to understand the tax implications of Decentralized Finance activities. Cryptocurrency tax is generally a tough topic for many investors and even tax professionals. Since the IRS has not given specific guidance for DeFi, this article is based existing cryptocurrency tax guidance and our interpretation of current tax laws.

If you are not familiar with the taxation of cryptocurrency transaction, read our Cryptocurrency Tax Guide before reading this article on the tax implications of various DeFi transactions.

How To File Cryptocurrency Taxes for Your DeFi Transactions

Our team at Camuso CPA can import data from Decentralized Finance platforms to calculate your interest, lending income, capital gains and losses. All that is required to start this process to the have the ETH addresses that were used for your transactions.

Cryptocurrency Tax Advantage & Disadvantages for DeFi Transactions

There are many tax benefits to using DeFi that you will read throughout this article as we cover different facets of decentralized finance. Some of the most notable benefits include borrowing against your cryptocurrency as collateral to maintain tax holding periods, avoid triggering taxable events by borrowing, rebalancing portfolios without triggering taxable events and favorable tax treatment with some lending protocols treated as capital gains.

There can also be potential drawbacks to Defi including unexpected income generated from token distributions and taxable events triggered wihen minting tokens.

Cryptocurrency Lending: Providing Cryptocurrency In Return For Interest

If you lend cryptocurrency or contribute it to a lending platform you will be liable for income that you earn for lending the cryptocurrency. Lending your cryptocurrency does not trigger a taxable event as if you sold your cryptocurrency, but the income you generate will be taxable.

The income you earn usually will be taxed as ordinary income but can also be taxed as capital gains depending on the facts and circumstances of the platform you are using.

If you are using Liquidity Pool tokens, these are scenarios where you may be liable for capital gains rather than ordinary income. This is due to the nature of liquidity pools, when you add or remove liquidity the transaction is structured like a token swap rather than income.

When transactions as taxed as capital gains this can offer potential tax benefits. The benefits include, being able to offset capital gains with losses and holding for long-term periods to receive favorable tax rates.

It is important to consult with an experienced cryptocurrency CPA regarding each individual Defi Platform and their tax treatment.

Cryptocurrency Borrowing: Receiving Loans for Cryptocurrency as collateral

Cryptocurrency loans offer great tax advantages for investors that are seeking liquidity without realizing taxable events or liquating their holdings. If you borrow using your cryptocurrency as collateral, you don’t realize tax on the cryptocurrency used as collateral since this is not a sale of cryptocurrency.

As long as your cryptocurrency is not sold or exchanged for another cryptocurrency, you will not realize a taxable event.

A risk associated with borrowing cryptocurrency is that if the value the cryptocurrency used as collateral goes down too much, or if the value of assets borrowed increases too much then you’ll trigger a margin call / liquidation. This would be treated as if you sold your cryptocurrency for dollars and will trigger a taxable event.

Cryptocurrency Taxes for Governance and Incentive Tokens

Many DeFi platforms now utilize governance and incentive tokens which are earned as income. When these types of tokens are distributed they will be taxed as ordinary income at the current market value. This value will also establish your cost basis. If you sell this token after holding it you may also realize a capital gain or less depending on the price of the token at the time of sale.

Wrapping Up

Taxpayers should very carefully consider all the cryptocurrency tax factors while participating in any cryptocurrency transaction, particularly DeFi.  It is important to consult with an experienced cryptocurrency CPA regarding your specific portfolio and/or business.

Here at Camuso CPA, we offer cryptocurrency tax services nationwide. Our team is highly experienced in cryptocurrency. We were the first CPA firm to accept cryptocurrency as a form of payment during 2017. Contact our team today to discuss your portfolio in detail here.

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United Kingdom Issues Cryptocurrency Tax Guidance

Here at Camuso CPA, we offer a wide array of tax services for cryptocurrency investors including tax preparation and tax planning. Financial service companies are transitioning from employee driven revenue models to information driven revenue models. Camuso CPA strives to deliver useful insights and offer relevant explanations about the latest tax and financial topics.

The United Kingdom’s tax agency has released an explanation of how it sees cryptocurrency assets and how individuals will be taxed on their holdings. The report focuses on how individuals possessing cryptocurrency might be taxed,but does not outline the tax structure for tokens held by businesses or for business purposes. Guidance on that will be published at a later date. Her Majesty’s Revenue and Customs (HMRC) is the government agency responsible for collecting taxes.

This does not impact US investors, but we watch all crypto tax regulation developments closely to gain insights to perspectives and circumstances that can impact future legislation here in the USA. Much like the US the UK tends to view crypto tax property for tax purposes.

The report notes a token’s treatment for tax purposes is dependent on the token’s use case, rather than its definition. Cryptocurrencies will not be taxed in the same way as gambling. The report goes into detail, explaining how and when their transactions may be classified as securities. To simplify the calculations required, taxpayers are permitted to pool different assets together.

Investors who purchase tokens specifically in the hopes that their value will increase will be required to pay capital gains tax when they sell, while individuals who receive tokens from their employers as a form of payment, from mining, transaction fees or airdrops will have to pay income tax and national insurance contributions.

Tax authorities across the world will continue to issue further guidance and focus more heavily on cryptocurrency tax compliance. We will continue to track these developments closely. Time will tell, but it will be interesting to see how things develop here in the states related to the designation of cryptocurrency as intangible property from the Private Letter Ruling in 2014.

Contact Our Team Today

If you searching for CPA firms to assist you with reporting cryptocurrency income and capital gains, contact Camuso CPA. Whether you need tax preparation services, assistance with properly reporting gains and income from virtual currencies on your taxes, cryptocurrency portfolio analysis, or any other service provided by a certified accountant, Camuso CPA can help.

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End to Anonymous Cryptocurrency Trading by Shapeshift, A CPA’s Perspective

Cryptocurrency exchange Shapeshift is launching a new mandatory membership program that will now require users to provide personal information. Cryptocurrency exchanges are under more regulatory pressure than ever, with governments requiring that they conduct KYC and AML procedures to prevent fraud. As a centralized exchange, Shapeshift lacks the ability to operate without a license or some form of cooperation from local governments.

KYC and AML processes are the first step for both exchanges and users to begin moving towards compliance and disclosure to regulatory authorities. As exchanges such as Shapeshift move towards user registration compliance, we noted in a separate recent article that various countries across the globe have developed in international crypto tax force to target non-compliant cryptocurrency investors.

As the topic of institutional investors and Bitcoin ETFs continue to gain more relevance, we will undoubtedly start to see more centralized exchanges conform to the same demands that traditional financial institutions comply with in order to gain access to larger customers. Our prediction is that we will see further sweeping inquiries into user data from exchanges such as we saw last year with the John Doe request from Coinbase, additionally investors should expect to receive more 1099-K forms from exchanges in future years.

The change from being an ‘exchange without accounts’ to requiring personal information was made for 3 primary reasons:

1) The requests of many of our users to have account-related features: A record of transaction history, saved/whitelisted addresses, and email notifications, etc.

2) Increasing interest in the broad phenomenon of tokenization — the ability to “financialize” and bring liquidity to various aspects of business/customer relationships. Specifically, the ability to build tokenized loyalty programs, in which the engagement between a business and its customers can itself become an asset.

3) The practice of requiring customers to hand over personal private information is one we’ve struggled with since inception. To the extent that digital asset technology remains a legal grey area, we need to be prudent and thoughtful in our approach as we navigate the regulatory environment.

Contact Us Today

If you searching for CPA firms to assist you with reporting cryptocurrency income and capital gains, contact Camuso CPA. Whether you need tax preparation services, assistance with properly reporting gains and income from virtual currencies on your taxes, cryptocurrency portfolio analysis, or any other service provided by a certified accountant, Camuso CPA can help.

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SEC STATES BITCOIN AND ETHEREUM ARE NOT SECURITIES, FAVORABLE TAX IMPLICATIONS

William Hinman, the Securities and Exchange Commission’ director of the division of corporate finance said Thursday that ether — the currency that powers the Ethereum network — shouldn’t be regulated in the same way as stocks and bonds.

“Based on my understanding of the present state of ether, the Ethereum network, and its decentralized structure, current offers and sales of ether are not securities transactions,” Hinman said at Yahoo’s All Market Summit: Crypto in San Francisco. “And, as with bitcoin, applying the disclosure regime of the federal securities laws to current transactions in ether would seem to add little value.”

His statements follow similar ones made in April by SEC chair Jay Clayton about bitcoin. Taken together, the two sets of remarks provide the clearest understanding of how the regulatory agency views the cryptocurrency market.

When a cryptocurrency becomes sufficiently decentralized, as the widely popular bitcoin and ether have, the agency no longer views it as a security. In contrast, smaller initial coin offerings, or ICOs, are almost always securities in the SEC’s eyes. That distinction matters, because securities are subject to the same regulations as normal stocks.

This indication by the SEC has implications investors may not first consider from a tax perspective. Since cryptocurrencies are generally classified as property, wash sale regulations should not currently be a concern for investors. This means investors can sell an investment to realize a tax loss, only to buy it back immediately thereafter at a bargain.

Today, wash sales only apply to stocks and securities, since Bitcoin and Ethereum have not been labeled a stock or security, the IRS can only tax traders for non-economic substance transactions under property rules. These transactions are similar to wash sales, considering the volatility of crypto markets and the potential argument that investors made late trades in response to market-moving news as opposed to tax motivations, traders have a legitimate position on the matter.

https://www.camusocpa.com/contact/#/

Are you looking for a CPA in for cryptocurrency tax help? Give Camuso CPA a call today. We also offer a host of other tax services for your benefit. For more information on how our services can help you, please do not hesitate to give us a call at your earliest convenience. One of our friendly and knowledgeable representatives will be happy to answer any questions that you may have.

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