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.
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.
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.
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.
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.