The tax year for 2019 is the first time the IRS has a question about cryptocurrencies. And it is right up front at question 0. The official IRS guidance says that Bitcoin and other cryptocurrencies should be treated as property for tax purposes — not as currency. But short and long-term gains and losses need to be included, reported and accounted for.
Unfortunately, traditional tax and accounting systems as well as many firms and tax professionals currently do not have the ability to account for cryptocurrencies. Bitcoin is the biggest and most widely-used cryptocurrency and it is estimated that about 8% of the US population owns bitcoin and are required to report it. About 6.4 million people are investors or HODLers of bitcoin long-term. Both of these groups need to account for any gains or losses to the IRS in upcoming taxes due July 15.
- Just like in preparing for tax time, it is a good idea to be organized and have a list of all financial information. This includes those who purchased, earned or otherwise acquired bitcoin or other cryptocurrencies and sold, exchanged or held these coins.
- The next step for those who have or had cryptocurrency and cryptoassets is to accurately account for all transactions and exchange orders. Records need to come from all cryptocurrencies and from all wallets and exchanges.
- To safeguard the information, all documents both physical and digital, should be kept in a safe place. Many of these documents are going to be digital and it’s best to have a digital backup or hard copy. It is critical to keep good records.
- If the process of pulling all of this information together is too daunting, ask a professional for help. There are several accounting firms that understand and work in the crypto space. Ask them about their comfort level accounting for cryptocurrency transactions and associated cost basis. Additionally, there are software programs designed for crypto that can pull together the necessary details.
Bank statements are the primary source used by accounting professionals to track transactions and categorize them into accounts when dealing in USD or cash. Bank statements don’t really exist in the cryptocurrency space. But as the crypto industry offers services to bridge the gap between traditional accounting and cryptocurrency, the community is able to evolve and make it easier to adopt cryptocurrency. Make sure that any third-party software you use to track your crypto transactions is reliable and secure… look for accounting industry certifications and solutions that run their own blockchain nodes to follow transaction histories. The ability to accurately track cryptocurrency transactions and have them in an easy to understand format also provides quantitative financial information to investors, institutions and regulatory agencies.
Submitted by Kell Canty, CEO of Verady (https://verady.com/), the leading cryptocurrency tax and accounting software company.