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5 common crypto tax problems and how your clients can avoid them

Tax Law and News Crypto Tax

Even if you haven’t yet worked with a client with crypto holdings, you’ve probably heard horror stories about confusing technology, nebulous tax treatments, and scores of missing or inscrutable records. With the right crypto tax software, a lot of these challenges can be overcome, but there are still several common situations that can sidetrack the crypto tax preparation process. 

Here are some of the tax problems most frequently encountered by accountants working with crypto clients, along with recommendations for avoiding them. 

1. Your client can’t remember all their wallets or trades

One of the biggest crypto tax headaches is when a client can’t remember all of the platforms they’ve traded on and wallets they’ve used. This can cause incomplete filing, missing cost basis, and more labor for you as additional wallets are discovered piecemeal. If your client suspects wallets or transactions are missing from their records, contact a crypto tax firm that offers blockchain data analysis services. These crypto experts can help you locate all the relevant information. 

To avoid these outcomes, ask your legacy clients to begin tracking their crypto taxes during the year. They can do this by using a crypto tax calculator to sync new wallets via API as they’re acquired. Then, at the end of the tax year, they’ll have a record of all their wallets and transactions ready for you.

2. Your client can’t access their trade data

The most common reasons that crypto traders can’t access their data from exchanges include:

  • A platform shut down permanently.
  • A platform is locked to users in certain countries.
  • A platform only allows a certain number of transactions to be synced or exported at once.
  • A platform’s representatives won’t respond to requests for custom exports.

Unfortunately, these problems don’t have an easy fix. The best solution is for your clients to proactively track their crypto transactions. Encourage them to make it a habit to regularly record their trade history in their crypto tax software.

3. Your client used foreign exchanges 

There hasn’t been definitive guidance from the IRS about whether accounts on foreign-based crypto exchanges are considered foreign bank accounts. Some accountants may recommend filing a report of Foreign Bank and Financial Accounts (FBAR) if, at any time of the year, the sum of a client’s assets held on one or more foreign exchanges exceeds $10,000.

If you agree with this more conservative approach, make sure to research where the exchanges used by your clients are based. For example, Binance is headquartered in Malta and KuCoin is headquartered in Hong Kong. If you’re using crypto tax software, you’ll be able to generate a running total of funds in foreign accounts, so you’ll know if it ever reaches the level that may require an FBAR. 

Decentralized exchanges don’t have a fixed address, so it’s unlikely that they need to be reported on an FBAR.  

4. Your client’s DeFi trades aren’t importing properly

If a trader used any DeFi or non-fungible token (NFT) platforms that aren’t supported by their crypto tax calculator, that data may not be imported completely or accurately. For example, unsupported DeFi trades may not be recognized as taxable events until you manually edit them and classify them correctly. 

If a client comes to you with trades from unsupported platforms, it may be extremely difficult and/or time-consuming for you to clean and reconcile their data. For this reason, before agreeing to take on an engagement, confirm that your client’s crypto tax software plan will be able to handle their data. If it won’t, you and your client may need to discuss upgrading their software or bringing on additional support from crypto tax specialists.

5. Your client shared a wallet with others

Sometimes crypto traders will share a wallet; maybe they’re family or friends, or working together on a project. This creates a messy crypto tax situation; crypto tax software has no way to know whose trades are whose, so reconciling the data requires a lot of human intervention.

If crypto tax software can’t tell whose trades are whose, the IRS can’t tell, either. This means that in a worst-case scenario, the IRS may decide a client is liable for taxes on all the trades in a shared wallet—even if they know they didn’t make them or profit from them. 

Editor’s note: Check back often on the Intuit® Tax Pro Center for more content on cryptocurrencies and tax. A version of this article originally appeared on https://tokentax.co.

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