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The Challenge Of Cryptocurrency Tax Reporting – Clients Shoot For The Moon While Tax Preparers Seek Strong Footing Here On The Ground

It is clear that the IRS is increasingly focused on tax reporting for cryptocurrencies, which the IRS classifies as property rather than currency. (See Notice 2014-21, 2014-16 IRB 938). Last tax season, tax preparers, along with their clients, in many cases struggled getting accurate cryptocurrency transaction records. In some circumstances, preparers charged clients higher return preparation fees if the return included any cryptocurrency-related transactions even though the client might only have been dabbling in cryptocurrency transactions as a sideline.

Recordkeeping for cryptocurrency transactions can be a burdensome and time-consuming task, especially for clients who may be unaware of what records to provide to and maintain for tax preparers. This task is compounded by the fact that from the tax preparer perspective: (1) this author is not aware of any formal industry accepted treatise or training curriculum to guide tax professionals practicing in the cryptocurrency taxation area; and (2) the limited IRS guidance on the treatment of many types of cryptocurrency transactions.1

Though classified as “property” by the IRS, there are several peculiarities with respect to cryptocurrency transactions. Some cryptocurrency transactions may result in ordinary income (for example, income from mining), while others may result in gains or losses (for example, gain from the sale of a cryptocurrency held as an investment). There are also novel methods of transacting in cryptocurrencies, such as staking via a cryptocurrency exchange to monetize cryptocurrency holdings. The result is that tax reporting for cryptocurrencies can get quite complicated. Note that even tax preparers guided last tax season by Notice 2014-21 and related IRS guidance nevertheless found that such IRS guidance does not address all cryptocurrency tax reporting requirements, for example, the exact method required to calculate fair market values for certain cryptocurrency transactions and the records required to document these values.

Looking ahead to next tax season, there are steps preparers and their clients can take to help ease recordkeeping and tax reporting burden for cryptocurrency transactions. Recent software innovations can significantly ease the burden of cryptocurrency recordkeeping and tax reporting for the next year. Some of the software platforms that preparers and their clients can consider using are: Accointling,, CoinLedger, Cointracker, CryptoTaxCalculator, Koinly, Taxbit, TokenTax, and ZenLedger. These software platforms can provide accurate cryptocurrency transaction records at any given point in time as many have the ability to synchronize all of a client’s wallets and cryptocurrency exchanges daily, while also updating the pricing frequently every hour to provide users information on cryptocurrency holdings. Some of these platforms may also assist clients in optimizing cost basis accounting methods, as well as provide insights for tax-loss harvesting. Finally, many of the platforms have technical support available to address cryptocurrency “grey” areas such as wash-sale rules, margin trading and airdrops.

Despite the advantages of using these software platforms, in some cases it may not be easy to persuade a client to utilize these technologies. Some individuals may transact in cryptocurrencies for their primary attribute of privacy, and would never agree to use these software platforms since they want their cryptocurrency transactions to remain as “anonymous” and “untraceable” as possible; notwithstanding the obvious public nature of blockchain transactions. In cases where a client is unable to provide records for significant cryptocurrency transactions and refuses to allow their records to be tracked through such software platforms, a preparer may need to determine whether the client is deliberately withholding information or whether it is just a case of sloppy record keeping.

In some circumstances, preparers may need to consider disengaging from clients that exhibit the former behavior. In cases where a preparer decides to proceed with disengagement, thought must be given to addressing it tactfully and professionally in a way that their practice is safeguarded from liability, and the client doesn’t end up feeling antagonized. Accordingly, preparers may want to consider proactively developing procedures to establish a threshold for cryptocurrency tax records to be provided by clients, or perhaps even requiring clients to sign agreements to allow the preparer access to client cryptocurrency transactions through one of the platforms mentioned above.

Recordkeeping remains a significant hurdle for cryptocurrency tax reporting. Preparers can, either themselves or by creating awareness in their clients, minimize a great deal of pain before next tax season by utilizing software platforms to streamline recordkeeping. The use of these platforms may also identify opportunities to minimize a client’s tax liabilities by avoiding mistakes associated with calculations of cost basis and tax-loss harvesting, and may also minimize errors in filed returns by ensuring that the tax code is applied appropriately to transactions. While such software platforms may not reduce the complexities associated with cryptocurrency taxation, they may reduce the pain associated with it by reducing the burden of recordkeeping.


1 See for a compilation of current IRS guidance.