The final days of tax season can often be a time of stress and confusion for many. Procrastination is one reason, with over 30 million taxpayers delaying until the final two weeks prior to file their return (approximately 20 percent of all filers). So why not get ahead of the curve and start vetting potential accountants now?
The majority of taxpayers pay a professional to prepare and file their taxes for them. I use that term professional loosely as over 60% of all so-called tax professionals have no license or professional designation like a CPA, Enrolled Agent (EA) or Tax Attorney does.
Whereas even florists and hairdressers require a license in most states, just about anyone can say they are a tax preparer. If you do opt for a true professional, though, how can you be sure they ’ll do it right? Will they save you the most in taxes? Will they be around when you need them?
To help you answer those questions - especially as it relates to your crypto taxes, we have compiled some basic questions along with appropriate answers to ask a prospective tax accountant before you hire them to prepare your tax return.
1. How many crypto returns have you prepared?
Cryptocurrency trading or income from other types of crypto activity is a nuanced field, so this is a perfectly warranted question even if it seems forward. You’ll be relying on this individual or firm to know the regulations, terminology and ecosystem that those with cryptocurrency on their tax return must navigate.
Preparing a return with cryptocurrency is not like preparing a simple 1040EZ with one W2 form.
Do you really want to be the first or second tax return they’ve prepared with for someone in your situation? Many may not even be aware of the different possible accounting methods available that can make a significant difference in the amount of taxes owed.
The harsh reality is that most tax preparers have not yet prepared crypto tax returns and you should definitely work with someone with the commensurate experience.
2. Do you have experience in handling my particular crypto tax and accounting needs (mining, forks, fraud losses/hacks, decentralized exchanges, margin trading, airdrops, etc)?
Preparing a tax return with cryptocurrency trades alone can be significantly more complex than a normal tax return but when you throw in the many edge cases and outliers that exist in the space, heads start spinning.
Your current or prospective tax preparer may be experienced in real estate transactions, wage earners or some other specialty, however, if they don’t understand the underlying events and scenarios that are part of our world, then they probably aren’t a good fit to prepare your return; even if you like them otherwise.
3. Will you be reconciling all of my crypto wallet balances (exchange, desktop, mobile, hardware) to verify that my capital gain/loss is accurate?
One of the biggest challenges in crypto taxation is actually crypto bookkeeping and accounting. Unlike if you were trading stocks, you will not get a tidy statement with your trades from a brokerage house at the end of the year to have transcribed into your tax return.
Reconciliation of crypto trades is a semi-manual process and must be undertaken by those with experience. The data coming from the exchanges is raw and is often missing key pieces that can cost you dearly with overpayments.
Many traders, miners and those accepting crypto for goods or services have numerous accounts and wallets that must have the data combined prior to even getting to the tax return. This process is tedious as even with commercially available tools like Cointracking.info, Bitcoin.tax and TokenTax.us, oftentimes trades are missing or transfers are accounted for as trades.
If your tax preparer expects you to do all of this prior to handing things over to them, run don’t walk away.
4. Will you address my need, if any, for filing FBAR FinCEN 114 and FACTA?
Much of the crypto rules and regulations from a government perspective have yet to be written. Rules for foreign held assets are no different. A simplified version of these rules is that if you have over $10,000 held in any foreign institution you are required to file a FinCEN 114 with the US Treasury.
Also if you have traded over $50,000 in aggregate in a foreign institution then you are required to file a FACTA form with your tax return. The penalties for not doing so start at $10,000. Is crypto included in the rules for these forms? We think so, however, no one knows for sure. The safe approach is to file them — but many tax preparers don’t know how to or don’t specialize in these types of filings.
5. Have you traded (not just bought) crypto?
If they haven’t, should you trust them to prepare your return? I think not.
As you can see, there are many things that tax professionals need to know before they are worthy of preparing your crypto tax return. Make sure you choose the right one.
NOTE: If you want to learn more about the in-depth rules and regulations on crypto taxation, you can get a free copy of Crypto Taxes Made Happy: The Definitive How-To Guide For Preparing Cryptocurrency Tax Returns In The United States here on Amazon.