What Investors Should Look For In A Crypto Tax Advisor

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Taxes, and crypto taxes, are a complicated and somewhat confusing aspect of getting into the blockchain and cryptoasset space. With millions of Americans having bought, sold, or traded cryptoassets in 2022, despite the large drop in prices during that time frame, it is clear that crypto has definitively arrived in the mainstream financial conversation. As virtually every mobile trading application, not to mention institutional trading brokerages, enable or allow crypto trading and transactions, the ease with which investors can gain exposure to crypto has dramatically increased.

Even with the fluidity with which crypto can be accessed, minted, traded, or used for transactional purposes, the tax implications of these activities remain something that can take investors by surprise. In the world of taxes, surprises can translate into large and unexpected tax liabilities; not a desirable outcome for either individual or institutional users of cryptoassets. With every transaction, minting event, mining operation, transfer, or swap of crypto generating taxable activity, tax bills can add up quickly. Multiple examples of this tax treatment taking taxpayers by surprise are widely available, and this raises the following question.

CPAs and tax preparers are always in high-demand during tax season, and the crypto tax niche tends to be even more overbooked, potentially opening the door for unethical actors to seize on this increasing demand. Let’s take a look at a few of the factors that investors, regardless of size, should take into account when looking for a crypto tax professional.

Experience versus experience. Working with a tax professional is always an iterative process, and the crypto tax space is no exception to this rule. A preparer might have significant experience preparing, filing, and dealing with general tax issues, but given how quickly the crypto space continues to evolve, it makes good business sense to inquire about direct crypto experience. In other words, one of the first questions that should be asked as part of the introductory conversations is just how much experience the tax professional has with crypto taxes specifically.

Especially for a client that might have a slightly complicated tax situation, incorporating crypto transactions and/or activities can further complicate the tax process. One additional factor that investors and advisors need to communicate about consistently is where the majority of the trading activity takes place. Different exchanges have different policies regarding 1) how much information is reported to the marketplace, 2) the frequency of said data, and 3) the ability of users to verify and/or confirm this information.

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Active crypto experience. Building on the prior point, another question that is important to ask early on in the conversation is how much hands-on experience the tax preparer has, outside of servicing clients. Many of the issues and potential pitfalls that could trip up taxpayers are only truly understandable if everyone involved has dealt with them on their own. Wallet security, private key management, minting of non-fungible tokens (NFTs), staking, and mining for cryptoassets are only able to be fully understood if the individual in question has participated in these activities previously.

When looking for a tax advisor to help navigate the often volatile and fast changing cryptoasset space, one of the most important qualifications is how deeply the preparer has been involved with crypto. This is not to say that every tax preparer should be an expert in all aspects of crypto, but in order to provide objective and competent advice, the tax professional should have dealt with these themselves. Even for seemingly simple transactions, such as stablecoins used for transactions, there are a number of indirect reporting and compliance factors that preparers need to be aware of, and help clients deal with them effectively.

Comfortable with ambiguity. Taxes and tax preparation can be thought of as both very straight forward and transparent, as well as requiring a certain deftness and comfort with ambiguity. The tax code is written with multiple exceptions, carve-outs, and other nuances that preparers need to 1) be aware of, and 2) be comfortable dealing with. Adding crypto into this conversation only further complicates this reality, and increases the amount of ambiguity that preparers and investors need to be comfortable dealing with.

Crypto tax preparation is, on the one hand, a very clear and transparent process; every transfer or transaction involving crypto creates an income tax reporting and potential payment obligation. Even though crypto-specific tax directives and updates to the tax code have not yet been published, tax authorities the world over have been proactive in prosecuting individuals and institutions attempting to skirt tax obligations. A well qualified crypto tax preparer needs to not only be comfortable with ambiguity, but also must be comfortable communicating with clients, regulators, and peers on these issues.

As cryptoassets continue to become more integrated into financial markets, payment processors, and a host of mobile applications, the importance of selecting and working with a qualified tax preparer will only increase in importance. Due diligence, as always, is an important part of the process, and being proactive will situate investors, CPAs, and tax preparers for success moving forward.