What to Look for in a Crypto Tax Pro

Introduction

Cryptocurrency tax reporting can be a challenging task, even for seasoned investors. While tools designed for crypto tax reporting can help, they don't always account for every scenario or nuance in the law, making it difficult for many crypto holders to ensure complete and accurate tax filings. As crypto tax regulations continue to evolve, the need for an experienced tax professional is more important than ever. Here are some key factors to consider when hiring a cryptocurrency tax pro to ensure you're maximizing savings, reducing risks, and meeting all necessary compliance requirements.

Understanding of Cryptocurrency Transactions

 A crypto tax professional should be well-versed in all the complexities of cryptocurrency beyond just buying and selling. Given the rapid evolution of technology and the introduction of new types of assets and transactions, such as ERC-721 tokens, liquidity pools, or NFTs, your tax advisor must be up-to-date with these changes. They should be able to provide clear guidance on how specific transactions, including staking, mining, or decentralized finance (DeFi) activities, are taxed. It’s essential to test their knowledge before hiring by asking about more advanced or recent crypto activities you may be involved in.

Familiarity with Crypto Tax Software

 Your chosen crypto tax professional should not only be familiar with industry-standard tax software like CoinTracker, Koinly, or TokenTax but should also have strategies in place for handling transactions that these tools can't accurately report. Many crypto investors experience discrepancies when using software alone. A reliable tax pro will ensure your returns are precise, even if the software makes mistakes. Furthermore, they should be flexible enough to work with whatever platform you choose and help transition smoothly if you decide to switch.

Tax Treatment Options and Guidance 

Since the IRS has issued limited guidance on cryptocurrency tax treatment, there are often multiple approaches to how you can report your crypto transactions. Some methods are safer, minimizing the risk of IRS penalties, while others can yield greater tax savings but come with a higher level of risk. A crypto tax professional should clearly explain your options and help you make informed decisions about which tax treatment method to apply to your crypto activities. This empowers you to manage your tax bill while reducing potential liabilities.

Year-Round Tax Planning 

Good tax professionals don't just help at tax time—they help you optimize your tax strategy throughout the year. For example, tax loss harvesting can be an effective way to reduce tax burdens by offsetting gains with realized losses. If you're making gifts or donations of crypto, your advisor can guide you on how to maximize tax advantages from these transactions. Additionally, if you plan to relocate for tax benefits, like moving to Puerto Rico to take advantage of Act 60, they should assist with the legal process and compliance to help you save on crypto taxes.

Supported Cost Basis Methods

Your choice of cost basis method is crucial to your tax outcome. Crypto transactions have different methods for calculating taxes, such as FIFO (First In, First Out) and Specific ID, which are recognized by the IRS. Be cautious of professionals who recommend unsupported methods like HIFO (Highest In, First Out), as they often lead to complications or IRS scrutiny. Using an IRS-approved method ensures you're not exposed to penalties or forced adjustments during audits.

Audit Defense Experience 

If you're facing an IRS audit, you'll want a crypto tax professional who has direct experience with defending cryptocurrency tax audits. These types of audits are complex, and many crypto tax issues can be miscalculated by the IRS. Your tax pro should be able to challenge the IRS findings, potentially saving you thousands of dollars. Experienced professionals should also be able to anticipate which aspects of your return might attract scrutiny, helping to minimize the likelihood of future audits.

Start Early 

Given the growing demand for crypto tax professionals, it's important to start your search as early as possible. Tax professionals with expertise in cryptocurrency are limited, and they often fill their schedules months in advance. Starting early ensures you have time to properly prepare your return and make informed decisions without the stress of last-minute filings.

Conclusion 

Selecting the right crypto tax professional can make a significant difference in your tax outcome, ensuring you remain compliant and save money. When searching for the right professional, prioritize their understanding of cryptocurrency transactions, familiarity with the software you use, ability to explain tax treatment options, and experience with audits. By carefully considering these factors, you'll be in a better position to navigate the complexities of crypto taxes with confidence.

This article is written for educational purposes.

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