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For most US taxpayers, using a cryptocurrency tax software in conjunction with a self-service option like TurboTax is the easiest way to get your filing done. However, if you are a sophisticated taxpayer with several sources of income such as business income, investment income, rental property income, etc. you are probably using a CPA to handle your taxes. If you are holding cryptocurrency, there are some key things you will want to look out for in deciding whether to hire a new CPA and/or keep your existing CPA.
Gauge the CPA’s General Familiarity With Cryptocurrency
Cryptocurrency is a novel subject for most CPAs. The vast majority of CPAs have never heard of cryptocurrency. Before hiring a CPA to do your crypto taxes, a good preliminary question to ask is “Do you own any cryptocurrency?” If the answer is “Yes”, chances are significantly greater that the CPA has gone through practical nuances associated in this space. This understanding is crucial to properly understand your cryptocurrency tax questions and apply the correct tax guidance. If the CPA does not own any crypto, ask about his/her past experiences with cryptocurrency related clients. CPAs who have successfully helped cryptocurrency clients in the past may still be a good fit to help you.
Watch out for “Know-it-alls”
To build a true expertise on any area of tax, there has to be detailed guidance, laws, regulations, and case law around a specific topic. The guidance in the cryptocurrency space has been very general since the issuance of IRS Notice 2014-21. In fact, there are NO crypto specific tax laws; there is only guidance issued by the IRS. Some of this guidance may not even be binding. This means that the guidance can be subject to varying interpretations and taxpayers can take slightly different positions on their return depending on their risk appetite. As a result, there are no formal crypto tax experts right now; instead, there are those individuals who have gained expertise through real world experience, conversations with regulators, and by being up to date with new crypto tax news.
Further, good CPAs have an open mind. Currently, there are only few direct answers to crypto tax questions. A strong CPA should be able to communicate these uncertainties to you plainly. For example, staking income could be taxed in a variety of different ways. Some also argue that it should be taxed only when you sell the tokens, not at the time you receive them.
Ask How Your CPA Reconciles Gains And Losses
Assess how your CPA leverages technology to calculate your cryptocurrency gains and losses. There are several cryptocurrency tax software options which help you reconcile crypto gains and losses for tax purposes. Ask your CPA what software they use to reconcile the transactions. If they run them manually by hand or in a spreadsheet, that is a red flag. Manual calculations are extremely time consuming (which will be reflected on the fees) and often inaccurate due to complexity of the crypto space. Valuation and tracking basis across multiple exchanges and wallets are virtually impossible to perform manually.
Disclaimer: this post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.