Individuals and organizations that use digital cryptocurrencies must begin reporting capital gains, and comply with regulatory guidelines. Firms must also implement appropriate auditing and accounting procedures for crypto assets and report such transactions to tax authorities.
On October 9, the Internal Revenue Service IRS released official legal guidance on cryptocurrency taxation for the first time in five years.
Alon Muroch, CEO of Blox, a widely-used digital asset accounting platform, recently shared his views and insights with Crowdfund Insider. Muroch discussed the potential ramifications for digital currency investors regarding the new IRS guidance around cryptocurrency hard forks and airdrops.
Muroch also talked about the most common accounting mistakes digital asset investors are making that lead to errors in their tax filings.
Crowdfund Insider: Please tell us about the potential ramifications for crypto holders regarding the new IRS guidance.
Alon Muroch: “With regards to the potential ramifications in the eyes of the IRS, the consequences for businesses and individuals will likely remain the same. However, businesses will be far more obliged to be attentive to updates and official guidance by governments and regulatory bodies.
For many small and individual investors that invested years ago, they may not even know about claiming their digital assets. In the near future, we will start witnessing more cases of crypto holders that failed to properly file their taxes, and more people will begin to understand the possible consequences.”
Crowdfund Insider: How does this guidance differ from previous releases from the IRS?
Alon Muroch: “The guidance we have received so far is still quite vague and is relatively aligned with how most cryptocurrency accountants or tax practitioners were already operating.
The most intriguing component was the IRS stance on forks and airdrops and the clarity over its potential tax obligations. We won’t see a comprehensive breakdown of cryptocurrency taxation until the government takes a more substantial role. Until then it is best to be prudent, proactive and transparent when accounting for your crypto assets.”
Crowdfund Insider: Please tell us about some of the most common accounting mistakes crypto holders are making that lead to errors in their tax filings.
Alon Muroch: “Most crypto investors or those that hold any form of digital assets neglect to effectively track and manage their assets securely and easily. In the past, many people have forgotten their passwords, private keys and essential information to simply view or access their own assets. Technology is playing a huge role in correcting this mistake.
Additionally, crypto holders fail to report and account for their entire digital asset portfolio for accounting purposes, auditing or annual taxation. Crypto holders are also at a disadvantage due to the fact that many crypto exchanges have limitations on accessing your historical data, which is needed for tax reporting.
By failing to report any or all of their assets, tax calculations become inaccurate, leading to incorrect results. This could potentially lead to consequences from the IRS.”
Crowdfund Insider: What are the pain points CPAs identify as the biggest hurdles to accurately track and report clients’ crypto holdings
Alon Muroch: “There are three primary challenges that occur for crypto accounting and its accounting professionals. Investors, businesses and holders of cryptocurrencies are often unaware of the legal guidelines and are rarely in possession of complete financial records for their personal crypto holdings.
This poses a serious challenge for tax practitioners and accountants that need to rely on exact and complete records of assets or transactions when auditing or filing taxes – for businesses or small investors.
Fortunately, technology will play a central role in the way businesses, operators, investors and professionals account and manage their digital assets for general accounting or tax purposes. If traditional currency becomes digital it is fair to believe that accounting and taxation will one day be digital too.”