Challenges in Crypto Tax Reporting for Accountants

If you are a crypto tax specialist, how do you handle account reconciliation for Bitcoin Ordinal transactions? As far as I know, currently there is no crypto tax software in the market that can automatically import ordinal transactions with all the details. I know some crypto tax service providers are adding ordinal transaction details manually in the crypto tax software they are using, which is a very time consuming process. We tried an ordinal transaction gathering software in the market, and found out that we cannot use it because it has some issues which make their report not usable for us. We have some clients investing very heavily in ordinals, so we have to deal with hundreds or even thousands of ordinal transactions. After a lot of research and analysis, we ended up having our in-house blockchain data analyst (a software developer) create a tool to automatically “decode” ordinal transaction data downloaded from the ordinal block explorer. The tool is saving us a lot of time and we get to escape the painful manual transaction adding process. Crypto transaction import is one of the top challenges we have been facing when serving crypto clients. When we can’t find a solution that’s available in the market, we have to create it on our own. That makes specializing in crypto tax services challenging but also very rewarding 😊 #cryptotax #bitcoinordinals #taxprofessionals #cryptocurrency

In addition to the final broker reporting regs released on June 28, the IRS also released several Notices and a Revenue Procedure. Revenue Procedure 2024-28 may be of particular interest. Why? - If you have previously taken an approach to determining the cost basis of your crypto sales by looking at all of your crypto sources and "mashing them together" as if they were held in one account (universal approach), that approach could be fine through 12/31/2024. - However, the IRS disagrees with this approach, so they are providing guidance on how to transition to a wallet-by-wallet approach beginning on 1/1/2025. - Revenue Procedure 2024-28 provides a safe harbor and two different methods for allocating the remaining cost basis at 1/1/2025 to each specific wallet or account to conform with the wallet-by-wallet approach. - Adhering to the safe harbor generally protects taxpayers from being assessed additional tax, penalty and interest. - In order to comply, amongst other tedious details, you must be able to identify and maintain records sufficient to show the total number of remaining digital asset units in each of the wallets or accounts at 1/1/2025, the number of units of unused basis, the original cost basis of each such unit of unused basis, and the acquisition date of the digital asset unit to which the unused basis was originally attached. ❗Here's the kicker: To meet the safe harbor standards, you must make a specific unit allocation (i.e., specifically identify which cost basis goes to which wallet or account) NO LATER THAN the first transaction completed on or after 1/1/2025 OR make a global allocation by describing the allocation method in the taxpayer’s books and records before 1/1/2025. - In other words, you have about 5.5 months to work through this reconciliation process. - If you are a taxpayer that has used a universal approach in the past, you may want to investigate *now* how to transition to the wallet-by-wallet approach. - If you have used a crypto tax aggregator in the past, now is the time to ask them how they plan to account for this change.

Are you ready to meet the IRS safe harbor for crypto tax basis reporting on January 1, 2025? As part of the digital asset "broker" reporting rules that were finalized earlier this year in the U.S., the IRS discovered that many taxpayers were using a universal wallet concept for assigning tax basis to crypto they sold. This means the taxpayer might sell BTC with a short-term holding period and tax basis of $30k from wallet #5, but instead, for tax purposes only, identify as sold BTC in wallet #3, with a long-term holding period and a tax basis of $65k. This type of identification within a single wallet is appropriate but crossing wallets (i.e., using an omni-wallet or universal wallet concept), is not compatible with the new 1099-DA reporting rules. For those that were using the universal wallet approach their remaining tax bases do not align with the new IRS rules going into effect Jan. 1, 2025. How to fix?? The IRS gave taxpayers a gift!! Revenue Procedure 2024-28, provides the gift of a safe-harbor that allows taxpayers to rectify the issue with no tax or penalties. Here's the catch: (i) taxpayer needs to have perfect records of remaining tax lots with purchase date and tax basis along with records of tax lots relieved in the past; and (ii) taxpayer needs to identify tax lots by wallet going forward. Sounds easy enough. But there are serious issues. Large funds that hold digital assets use third-party custodians and they cannot see wallet-by-wallet holdings in all of them. Some custodians show holdings as a Vault with accounts and sub-accounts. Others use sub-accounts broken out by type (e.g., DeFi, Funding, Investments). These systems are not specifying holdings at the wallet level. Moreover, most funds sell only out of their trading wallet which is otherwise empty. They move assets from custody or staking wallets into the trading wallet to make the sale. Thus, any identification would have to occur from the pre-movement wallet. While I would love to see this issue fixed prior to January 1, I'm not sure all custodians and taxpayers will get there. The upside is that the IRS is trying to make the best of a bad situation and keep the broker 1099-DA reporting on schedule. Absent signs of abuse, I don't expect the IRS to audit pre-2025 tax basis too harshly (JMHO). However, going forward taxpayers, custodians and administrators will need to get this right. The KPMG digital asset group is hard at work guiding the industry to an expedited solution. If you work with digital assets, you should be working with KPMG. https://lnkd.in/exwVaBNu