How to Choose a Crypto Tax Professional (Part I)

The anatomy of tax return prep and where to start: The legacy tax approach

Let's examine the anatomy of tax preparation which is helpful when going through the process of choosing a crypto tax professional. Pre-crypto taxpayers either self-prepared tax returns or hired a professional. It's either one way or the other and taxpayers rarely had a reason to get returns prepared in some other combination. A taxpayer could have ownership in business entities with various "partners," so the CPA firm preparing the respective business tax returns would likely not prepare one or more individual returns for the "partners." Nonetheless, in the latter situation there is still one return preparer per tax return.

Crypto accounting and tax management can be extremely complex and complex things require specialists. Professionals have to recognize their professional limitations and a lack of crypto knowledge forces some CPAs to direct their clients to crypto experts. As a result, some taxpayers end up having more than one preparer per tax return which is a unique phenomenon.

The two pre-crypto tax prep methods are:

1. Taxpayer self-prepares (do-it-yourselfers)
2. Taxpayer hires a professional  

The crypto tax approach

There are two distinct parts of a crypto tax return:

Part 1. Crypto tax calculations get completed with crypto tax software. The ultimate goal is to produce a Form 8949 detailing all crypto trades and disposals.

Part 2. The taxpayer completes their business or individual tax return and includes Form 8949 for crypto.

The summarized version is:

Part 1. Crypto tax Form 8949 (or similar tax form)

Part 2. 1040 Tax return (including #1) or business tax returns (i.e., 1120, 1120S, 1065)

Note: US taxpayers, for example, complete a 1040 tax return (or business tax returns) and form 8949. The exercise is the same for other jurisdictions, but the tax form is different.

Five ways to complete tax returns

These two parts can be achieved five different ways depending on how the taxpayer wants to go about it. The crypto tax part may be conquered separately from the rest of the tax return resulting in five possible methods for completing crypto tax returns.

Scenario 1: Taxpayer self prepares their entire tax return including crypto tax calculations.

Scenario 2: Taxpayer does their own crypto calculations and hires a CPA to complete and file their tax return.

Scenario 3: Taxpayer hires a CPA for their crypto calculations and then self-files their own tax return.

Scenario 4: Taxpayer hires a CPA to both calculate crypto taxes and complete and file their tax return.

Scenario 5: Taxpayer hires a CPA to calculate crypto taxes and uses a different CPA to file their tax return.

The summarized version is:

1. Part 1 = taxpayer and Part 2 = taxpayer
2. Part 1 = taxpayer and Part 2 = professional
3. Part 1 = professional and Part 2 = taxpayer
4. Part 1 = professional A and Part 2 = professional A
5. Part 1 = professional A and Part 2 = professional B

Where do you fit?

Some taxpayers already know exactly where they fit in the four possible methods for completing a crypto tax return. If so that’s great. Otherwise, taxpayers are going to start with the method they used before crypto entered the picture. The true do-it-yourselfers will continue to self-prepare because they don’t know any other way and the taxpayers who always use a professional will continue to outsource.

The outsourcers use professionals because they cringe at the thought of self-preparing or understand experts can provide massive value. Do-it-yourselfers may realize their crypto tax complexity has exceeded their own capacity and seek expert advice. Additionally, crypto is in the regulatory crosshairs leaving many taxpayers wanting a second set of eyes to make sure their taxes are accurate and complete. Regardless of how you conclude the need for a crypto tax professional the next question is how to choose the right one.

Where to start

If you have a great relationship with your CPA or tax professional start by asking them how they recommend completing your crypto taxes. If they don't have the expertise, then CPAs, for example, are required by ethics to recognize their limitations. CPAs without crypto expertise should either refer their client to someone with the expertise or state they don't have the expertise to help. This example assumes a taxpayer who prefers professional expertise and starts the path to finding the right person.

The new shingle

Most businesses would love to increase their revenue and CPAs and tax professionals are no different. It's also not every day new revenue opportunities come along. Crypto is one of those rare opportunities because it presents so many unique and complex challenges from a tax perspective. Tax return preparation is massively commoditized and large service providers offer low-cost tax prep. Meanwhile the cost of crypto tax prep comes at a premium multiples higher than tax returns without crypto. The crypto opportunity starts bouncing around professional webinars and networking events and the next thing you know legacy tax prep service providers throw up shingles offering crypto tax prep. This is where crypto tax due diligence begins for finding and hiring an expert.

Key Takeaway

The original due date for US tax returns for pass-through entities (3-15-23) has passed and is fast approaching for individuals (4-17-23). Extensions are you friend for multiple reasons especially if you need to hire a professional late in the game. Tax returns can be extended for 6 months giving you plenty of time to sort things out. (Extensions do NOT extend the time to pay)

In Part II, we take a deeper dive into the due diligence process and provide some golden nuggets.

Good luck and remember your goal is always a Crypto Bullseye™.

Yours in Crypto,

Kirk Phillips, CPA, CMA, CFE, CBP

DISCLAIMER: The information in this post can not be construed as tax, legal or investment advice because professional advice can only be dispensed with an executed engagement letter.