Investing in cryptocurrency has exploded in the past few years. So it’s no wonder that the IRS has started to take notice of these digital goods. As a tax professional it is important for you to stay updated on the latest developments in the world of taxes and if you didn’t know about it already then now is the perfect time to learn just what cryptocurrency is and how it affects your client’s taxes.
What is Cryptocurrency?
Cryptocurrency is a virtual currency that can be traded for real world goods or services. Crypto is protected by cryptography, a field of computer science that secures information through code. This means that only those for whom the information, or in this case cryptocurrency, is intended will be able to access it.
Cryptocurrency is decentralized and instead distributed over a wider network of computers, this allows it to theoretically exist outside of government control. While this may sound great for those who wish to keep their business private from the government it also makes cryptocurrency a hotbed for use in illegal activity.
Taxing Cryptocurrency
For many investors the highlight of cryptocurrency is its ability to exist outside of governing influence. However if the IRS feels like it’s missing out on taxable transactions then crypto investors beware. On that note, the IRS has provided two guidelines for handling the taxation of cryptocurrency in the US.
- If cryptocurrency was purchased or sold for the purpose of an investment then it qualifies for the capital gains tax.
- If the cryptocurrency was used as a form of income then it will be taxed under the standard income tax.
Reporting Cryptocurrency
As a tax preparer it is vital you stress to your client the importance of reporting any cryptocurrency transactions they might have done that year. If the IRS suspects that your client may not be reporting all their crypto assets then they could be facing an audit. Starting in 2023 cryptocurrency exchanges will have to issue 1099-B forms to taxpayers as well as the IRS. During tax season, if there are any differences in the 1099-B forms and your client’s tax return then it will trigger an automatic red flag with the IRS.
What Does A Tax Preparer Need To Know?
While there are no official IRS guidelines or specific questions to ask your clients, at the time of writing this article, that does not excuse you from doing your due diligence. As a tax preparer it is your legal and moral obligation to ensure your client is being honest about their finances.
However, the best way to start the conversation about crypto is the simple ask, “do you have any cryptocurrency?” Stress to your clients the importance of reporting their cryptocurrency transitions and the consequences of not reporting them. As the tax preparer it will be your job to determine if the transactions count as income or investment and file them accordingly.
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