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4 common challenges tax pros face with cryptocurrencies

Cryptocurrency is treated as property for tax purposes in the U.S., not as currency. As a result, the tax reporting requirements for cryptocurrency look very similar to traditional stock trading: Owners incur capital gains and losses that must be reported on each taxable event. However, due to the nature of cryptocurrency and how it is transacted with, complications arise for tax professionals. This guide walks through the four most common challenges faced in cryptocurrency tax compliance.

1. Assigning cost basis

Cryptocurrency is most commonly bought, sold, and traded on cryptocurrency exchanges like Coinbase, Gemini, Bittrex and others. In a sense, these exchanges look similar to stock broker sites like Etrade or Charles Schwab that allow users to buy and invest in stocks. Instead of stocks, cryptocurrency exchanges allow users to buy and invest in digital currencies. The difference from a tax reporting perspective is the limitations that exchanges face. Because cryptocurrency is a transferable asset, and users can send and receive it fluidly from their exchange wallets, the cryptocurrency exchanges are generally unable to give users an accurate 1099-B form at year end. This form traditionally breaks down each taxable event, cost basis, and gain/loss necessary for creating Form 8949.

Because of this reporting inability, tracking cost basis across multiple different cryptocurrency platforms becomes extremely difficult for tax professionals. If your client has not been keeping detailed records, it can be helpful to use crypto tax software to automatically pull historical cost basis and fair market value for all trades and transactions.

2. Loss of access to transaction data

It is not uncommon for users to have completely lost their transaction data needed for tax purposes. In the past, exchanges like Mt. Gox and Cryptopia have shut down due to liquidity issues and left users without historical transaction data. Other times users simply lose access to accounts.

There is very little that the tax professional can do if a client has lost access to their exchange or wallet account(s) and does not have a record of the historical transactions. The best approach is to work with the client to attempt to put all the pieces together as accurately as possible, then at the end, post a manual adjusting entry to zero out the ending balances for each “lost” account. In order to do this, all the ending balances for each existing account that the client still has access to must be reconciled first.

Original Article Posted at : http://www.accountingtoday.com/list/4-common-challenges-tax-pros-face-with-cryptocurrencies