5 things every US accountant should know about cryptocurrency
Correctly reconciling and reporting crypto transaction history can be a formidable task, but as digital assets become mainstream, it’s a challenge that your firm will almost inevitably face (if you haven’t already).
Because TokenTax specializes in crypto tax, we’re sometimes contacted by other accountants who are struggling to track and make sense of a client’s crypto transactions.
Based on these experiences, we’ve identified five things we wish every accountant knew about cryptocurrency.
5 crucial crypto tax facts
1. Not every crypto exchange issues a 1099
If you have clients who are very active in the crypto space, it’s likely that they will have traded on an exchange that doesn’t issue 1099s (or doesn’t issue 1099s that cover all types of transactions).
Although Biden’s Infrastructure Bill requires US based exchanges and brokers to send 1099s starting in the 2023 tax year, they are currently not required to do so—and some have opted not to.
For example, Binance.US, the American offshoot of the world’s largest crypto exchange, stopped issuing 1099-Ks after the 2020 tax year. Instead they will send 1099-MISCs, which only report income from rewards or staking.
This means that if you’re only considering data from a client’s 1099, you could be missing a large portion of their transactions.
It’s important that your clients keep track of the platforms on which they’ve been trading. If they’ve made transactions on an exchange or protocol that does not issue 1099s, they will need to obtain their trade history from the company as a .csv download.
2. You can use HIFO accounting to lower a client’s tax liability
The IRS allows specific ID accounting for crypto assets. This means you can use the highest-in-first-out (HIFO) method to apply cost bases to sold assets, potentially significantly reducing your clients’ tax liabilities for the given tax year.
Using HIFO or other specific ID methods requires investors to keep detailed records of their tax lots. Too often this is not what has happened, leading to headaches for accountants because of a preponderance of missing or incorrect cost basis.
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