For tax preparers attempting to take into account all the variables, crypto volatility can be a pain. However, cryptocurrency owners can make their accountants’ lives easier by adopting a few best practices.
Maintain meticulous records of all your transactions.
You can’t ignore blockchain recordkeeping, sorry. Many people envision blockchain as an all-knowing, self-documenting technology. And in some ways, it is. However, blockchains are not like bank statements, which clearly record detailed information such as the vendor and payee, as well as, in some cases, a brief description of the sold item.
In actuality, blockchains are essentially a permanent record of letters and numbers that can be studied using a block explorer like Etherscan, but the information isn’t accessible to the general public. Copying and pasting this information into a spreadsheet and emailing it to your accountant will not make the transactions transparent and will make filing next to impossible.
Only use one Crypto exchange.
Using numerous exchanges complicates things for your accountant during tax season. The more price sources you use, the more difficult it is for your accountant. Two factors account for this. For starters, each exchange exports its data in a separate format, increasing the possibility of errors when your accountant mixes CSVs. Second, this is a time-consuming, manual task that adds to your billable hours. Everyone concerned is in a lose-lose position.
Maintain excellent wallet hygiene.
Good wallet hygiene is vital for both skilled traders and everyday people since it assists accountants in understanding transactions from a workflow standpoint as they process them.
Although it may appear that keeping all of your digital assets in one place is the best option, this is not always the case. Maintain transaction-specific wallets for investments, DeFi transactions, and revenue, and employ a consistent naming system. Keep a separate wallet for mining payouts if you are a miner. Keep a separate wallet for secondary royalties, and so on, if you manufacture NFTs.
Speak with your accountant frequently.
Accounting may quickly get tricky when it comes to tracking activity between and across multiple exchanges, blockchains, and wallets, and then appropriately reporting that activity to your accountant. Talking to your accountant early and often can help mitigate this and ensure you and your accountant are always on the same page.
Automate everything you can.
We’ve all heard the expression, “The only certainties in life are death and taxes.” However, this is not the situation with crypto taxes until regulators provide clarity.
Our final piece of advice is to minimize as much uncertainty as possible in this process by using software to automate and streamline as many of these operations as possible. Fortunately, many solutions interface easily with digital wallets and accounting software—you simply need to choose the one that works best for you.
The tax laws are very complex. Our short blog articles cannot cover in full all the nuances of the rules. Your specific facts may hold various opportunities and possible risks that only trained, experienced, and highly qualified tax specialists can spot. We encourage you to find such help, rather than trying to figure it all out on your own. Consider giving this marketplace a try by posting your project and signing up here.
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