Now that tax season is over, the ABC Taxation Working Group has published a not so traditional best practices Cryptocurrency Tax Prep Questionnaire for tax preparers and accounting professionals.
The Crypto Tax Prep Questionnaire is a step-by-step approach to asking the right questions to collect the necessary information to file a tax return involving cryptocurrency. It is the first-of-its-kind on the market and is already field-tested and in use by CryptoTaxPrep.com, the leading provider of crypto tax preparation services for cryptocurrency traders in the United States.
Developed For Tax Preparers and Accounting Professionals
This questionnaire was developed to establish best practices for tax preparers and accounting professionals working with cryptocurrency traders and users. Until now, there was no standard process for tax and accounting practitioners to build out a flow that facilitated getting the proper information from clients because there are so many new variables that go along with preparing a return for a client that has cryptocurrency.
For example, there are many outlier scenarios and intricacies that apply only for people that trade or transact in cryptocurrency. Some examples are hard forks, airdrops or assets held on foreign digital currency exchanges. A typical client information sheet, client questionnaire or organizer used to collect tax information from clients does not have these types of necessary cryptocurrency-related questions. We invested significantly in the research and preparation of this questionnaire and learned a lot along the way.
Current forms being used to collect client information should be updated right away to include these questions pertaining to cryptocurrency transactions. Not doing so could set your firm up for liability and headaches with your customers later on when they could be caught for not claiming their trades. The following four questions should be incorporated into every practitioner’s general client information sheet:
- Did you sell any cryptocurrency?
- Did you exchange any cryptocurrency?
- Did you use any cryptocurrency to purchase any goods or services?
- Did you receive any crypto for selling any goods or services?
If a client answers “Yes” to any of those questions, you should present the client with the supplemental questionnaire below.
Key Supplemental Questions From ABC’s Crypto Tax Prep Best Practices Questionnaire
Q: Which exchanges did you use for the selected year?
If someone trades stocks, they receive a 1099B at the end of the year. In the case of cryptocurrency you don’t receive anything like that currently. But, by law, you are required to report the transactions from any of the various digital currency exchanges used even though they do not provide tax statements in all cases. The tax code states that all income has to be claimed regardless of whether it’s reported to the IRS or not. The IRS will eventually know what you or a client are transacting on an exchange because they have access to KYC (Know Your Customer) data provided during the account setup process. The IRS is doing more work in this area and will be firming up its processes and procedures shortly.
Q: Did you make any purchases from wallets for goods and services?
There are essentially three different requirements to be aware of here. At a core level, if someone sells crypto, that’s a taxable event i.e. you or a client sold your crypto and received US dollars in return for it. If people exchange one crypto for another crypto, that’s also a taxable event. When I say taxable event, in those cases, they’re capital events. They’re capital gains and losses. The third scenario is if you’ve used your crypto to buy goods or services, that’s also a taxable event because the IRS has deemed crypto as property. It’s essential you are selling your property in order to buy goods or services.
This all flows out of a notice that the IRS issued in 2014 called IRS Notice 2014-21. In that notice, they defined those requirements as to what capital events are for purposes of trading virtual currency or digital currency or cryptocurrency.
Q: Did you do any mining?
This question applies to anyone utilizing their computer equipment to mine crypto, to provide the resources of their computer equipment to power the networks — various blockchain networks — and verify transactions. When you receive mining rewards or provide computer resources to blockchain networks, those mining rewards are generally considered income or revenue for IRS purposes if done by an individual or revenue if done by a business entity. This, again, stems from Notice IRS 2014-21. In that notice, the IRS determined that when you’re mining crypto, it is called self-employment income if you’re doing it personally. Or if you’re doing it via an entity, LLC corporation, etc. and you own that equipment and that entity, then that would be revenue there as well.