Crypto winter is here. Bitcoin and Ethereum, the two largest digital assets by market cap, are down over 60% since all-time highs—and the rest of the market is faring much worse.
While it's impossible to predict when the market will recover (though if history indicates, it will), the 2022 tax season is a certainty. And as such, accountants should help their clients thaw their crypto financials out sooner rather than later.
Here are three battle-tested crypto accounting tips to pass on to your clients that will make your life easier, no matter the season.
1. Make lemonade via tax loss harvesting
In a year where prices are down, selling assets to lock in losses is a great way to potentially reduce your client’s taxes. This, of course, is only applicable if the market value of the digital assets is below what they originally paid.
Businesses have the additional benefit of deducting losses on future profits, referred to as net operating loss carryforward. The US allows net operating losses to be rolled over indefinitely up to 80% of taxable income.
Tax loss harvesting also opens the door to another opportunity if you’re willing to walk through it: wash sales. Yes, you heard that correctly. Unlike equities, this practice may be allowed for digital assets—at least for the time being. Lawmakers were close to eliminating the ambiguity in the Build Back Better act, and there’s actually a fair amount of debate in the industry, so as with all things, talk to your financial advisor.
If you don’t want to practice wash trading, there are other ways to lock in losses as your clients prepare for tax season. For example, they can sell from BTC into WBTC or purchase liquidity pool tokens.
2. Keep diligent records of every transaction
Strict record keeping is a must. While many think of the blockchain as this all-seeing, self-documenting technology, that doesn’t mean it’s easy to interpret for tax purposes.
People’s circumstances might have forced them to sell off their positions, while others may have “bought the dip.” Either way, every single buy, sell, and use of crypto is a taxable event –– and no one wants to spend late nights going through CSVs to catalog it all. Fortunately, there are software solutions that plug directly into your client’s wallets that automatically track all of this and feed it into your accounting systems.
Finally, another reason to keep diligent records is because of capital gains. Yes, the market may be down, but the amount of time your clients have held crypto will determine if they’ll pay short-term (12 months or less) or long-term capital gains (more than 12 months).
Fortunately, you can help minimize the taxes your clients owe by changing how you compute your cost basis, typically most beneficially with the Highest-In-First-Out (HIFO) accounting method. Yet another reason to use software to make your life easier come tax season.
3. Ensure your clients practice good wallet hygiene
Good wallet hygiene is essential as organizations scale because it helps accountants understand transactions from a workflow perspective as they process them. Always keep transaction-specific wallets (e.g., investments, DeFi transactions, revenue, etc.), and use a consistent naming system. For example, if your client is a non-fungible token (NFT) creator, make sure they keep a separate wallet for royalty payments.
Pat White is the co-founder and CEO of Bitwave, a software platform that provides cryptocurrency accounting, tax tracking, bookkeeping, DeFi ROI monitoring, and crypto AR/AP services for enterprise businesses.
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