This guest article was written by Josh Bennett, CFP®, EA
Josh Bennett provides financial advisers with white-labeled, comprehensive tax filing and consulting services with a specialty in cryptoasset taxation through his tax company Vincere Tax.
How it works
Advisers maintain the relationship and the conversation with their clients but can provide immense value to their clients through adopting a knowledgeable professional in the background to file at a reasonable cost. Vincere Tax can also provide advisors with Crypto Tax consulting, so they can increase their knowledge for their clients.
Investing in Bitcoin and Cryptocurrencies is a beautiful new frontier that advisors and consumers alike should give real thought to making a permanent part of their portfolio.
These are just a few highlights that are commonly debated in the mainstream:
- Potential for substantial investment returns with regulation and technological adoption
- Noncorrelated to more traditional asset classes
- Political hedge
- Currency and consumer price inflation hedges
However, reaping the benefits of a new and evolving asset class doesn’t come without its headaches. The biggest headache for the average cryptoasset investor (or soon to be headache) is taxation. Most cryptocurrency investors (advisors included) don’t understand the tax implications of the varying tokens and transactions.
The IRS has put crypto traders on their hit list because billions of untaxed dollars are sitting in the crypto markets. Some are due to fraud, but I venture most due to lack of knowledge by consumers and professionals alike. Most investors are painfully unaware of the tax consequences of crypto (financial advisors, too!).
For example, we worked with a client who owned appreciated Bitcoin from being an early Bitcoin adopter. They had their bitcoin held as collateral through a Defi platform. They decided to change their collateral from Bitcoin to Ether using one of the Defi platform’s tools to take advantage of a run-up in Ether. They were unaware that they had just caused over half a million dollars in capital gains transactions. Fast forward to 2022, Ether is down and the taxes owed occurred with Ether at a much higher point. So now, they owe a large amount of taxes with a much lower asset base because weren’t able to plan properly.
The problem gets exacerbated because the IRS has issued limited guidance. They’ve issued some, but the crypto markets are varied and vast. Investors and professionals alike are left to create their own interpretations based on existing tax precedence. Then be ready to defend their position if/when the IRS does come knocking, or they need to be ready and adapt to changes in the tax code potentially causing refiling of past taxes.
The problem gets compounded even further because getting your tax information isn’t as simple as logging into a custodian to download a 1099-B (especially in the Defi space).
Enter a happy marriage between tech and expertise.
For clients to understand what they need to be compliant with the IRS, they need a solution that provides two things.
Investors need the ability to track and log transactions. Not all crypto exchanges and wallets currently aren’t completely tracking transactions for tax purposes.
Exchanges are likely to track transactions in the future for investors due to new legislation brought forth in the Infrastructure Bill. However, there has been much debate about the feasibility of the IRS creating a 1099-b form that can account for the nuance of different cryptocurrencies and even who gets classified under the umbrella of the legislation. There will likely be many amendments before the required implementation in the 2023 tax year. In the meantime, a reliable means of logging and tracking transaction is vital. The onus of capital gains and income tracking falls on the investor. Financial Advisors have an opportunity to help add massive value to their clients by providing a system that can track transactions and give transparency into their tax situation. Onramp allows crypto investors and advisors to track their transactions and log transactions for precise record keeping. However, tracking is just half the battle.
Crypto Investors need to understand the tax implications of different crypto transactions.
As mentioned above, there is currently limited guidance from the IRS on the tax implications of different crypto transactions. The IRS has provided a decent framework for interpretation, but there’s much room for, well, interpretation. So, investors and advisors are left to do their own research and create their own conclusions. It is vital to become educated in the tax implications of crypto transactions or work with professionals that already are. There are plenty of educational resources out there. The IRS website is an excellent place to start. Also, the resources offered in the Onramp Academy can help (they’re growing more robust every day). Onramp has also partnered with us at Vincere Tax to provide white-labeled crypto tax services to advisors and retail crypto investors. A word of caution as you look for professionals, there are people currently attempting to take advantage of people’s fears and the growing market posing as “experts” who are not. Make sure you vet out any crypto professionals with whom you work.
By creating an accurate log of your crypto transactions and staying educated, you’re putting yourself in a position to succeed. Again, cryptocurrencies can be a fantastic tool to build wealth. Still, they can quickly become a nightmare if you’re not taking the necessary steps to ensure you’re making the best taxation decisions.
The crypto landscape is evolving by the second. Still, take steps to create an accurate log of transactions (hopefully using Onramp #shamelessplug) and use a best effort to understand and make good tax choices (using Onramp’s partners and resources #shamelessplug2). Any audits you cross in the future will be a walk in the park.
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