Crypto data automation makes tax season a breeze
Ex-private equity advisor Alex Treece examines the inevitable regulation and taxation that comes with the more mainstream use of cryptocurrencies, and analyses how this is set to change in the coming months and years.
The last few months have seen the crypto market surge to levels previously thought to be unfathomable. Over the course of the last year, the total market capitalisation of the digital currency sector has increased from $200bn to over $2.1tn.
An increasing number of financial institutions are entering this relatively nascent space quite rapidly. Paypal, Visa, Tesla, and Microstrategy are just a few of the many mainstream players who have recently made their foray into the crypto world.
However, with the daily price movements of the crypto industry catching the eyes of investors and regulators all over the world, it is of utmost importance that people dabbling with crypto know how to track their digital assets because they may potentially be liable to pay taxes on them.
Crypto taxation awareness
Tim Davis, a principal in the risk and financial advisory practice of Deloitte & Touche, pointed out that as a general rule of thumb, we do not have to pay any taxes on our cryptos as long as we are simply holding on to them in our personal wallets. It’s only when the assets are converted back to fiat or traded that a taxable event occurs.
Moreover, government agencies and banks are also waking up to the power of this space. But despite the wave of adoption taking place across the globe, awareness of crypto taxation continues to remain low, especially since a lot of investors are only just beginning to learn about how to properly factor in digital currencies into their tax filings.
Increased regulatory scrutiny is inevitable at this point. Slowly but surely, it appears as though crypto taxation will become a heavily integrated part of the global digital asset ecosystem and with this reality comes the need for third-party tools to help accountants verify one’s digital currency gains and losses seamlessly — so as to be able to process crypto as part of their client’s finances.
It’s not just about being able to confidently process data for HMRC. Accountants need to be able to make knowledgeable recommendations on whether their clients should make certain disclosures on their cryptocurrency dealings. This could be for compiling tax returns, or advising when to offset assets if a client was close to their annual capital gains tax exemption limit.
Crypto-asset taxation guidelines
A vast majority of global jurisdictions have decently defined crypto-asset taxation guidelines to keep up with the increasing number of people now investing a portion of their portfolios into various digital currencies.
However, it seems as though additional taxation frameworks will be released in order to keep up with all of the innovation happening within this industry – especially in relation to DeFi solutions and NFTs.
A study released by Global Digital Finance showed that 19 out of its 22 professional crypto/digital finance members agreed that the introduction of new tax regimes would 'legitimize the industry' globally.
Furthermore, the members also believe that it is only a matter of time until massive tax changes start to be implemented by governments globally.
Automation is the way out of all this madness
With the crypto market attracting so much attention from authorities in recent months, it stands to reason that with time, more businesses operating within the blockchain and cryptocurrency space will have to actively seek out solutions to help get their crypto accounts in order.
There are already products available that can help users automate all of their crypto bookkeeping operations. For example, some white-labelled cryptocurrency dashboards can automatically download and store all of one’s detailed balance and transaction histories from multiple leading exchanges (anywhere between 50 and 100) and wallets in one place.
This data can subsequently be imported onto a computation engine and converted into detailed reports that accountants can employ to see which crypto transactions performed by their clients are taxable. And since a vast majority of these tools are scalable, they can be used by individual investors, retailers with equal ease.
Complex return filings, which could otherwise take hours, in a matter of minutes, thus allowing users to increase their work efficiency and avoid the hassle of manually going through individual transactions which can be quite a taxing task, both mentally and physically.
How accountants can adapt to this growing industry
The crypto industry is in need of accountants that understand the ins and outs of the blockchain and crypto sector for all of the reasons mentioned. Tax on crypto is coming and this means the demand for well-versed advisors in this emerging space will, slowly but surely, rise.
It is not a realistic nor a reasonable expectation for accountants to become coding wizards in order to cater to the crypto market. But it is imperative that they are at least able to ask intelligent questions to their clients when it comes to getting their crypto taxes in order.
For this to happen, they must first get down and absorb the fundamental concepts underlying blockchain technology. This will allow practitioners to use tools and platforms that are built for crypto taxations effectively.
Sector-specific education and training are also going to be a necessity if accountants want to provide clients with any sort of useful advice when it comes to taxation related to niches such as stablecoins, NFTs, staking gains, etc. For example, the NFT market is currently touted to be worth anywhere between $10 - $20bn while the total market cap of USDT – a stablecoin that has its value pegged to the US Dollar 1:1 – has increased from $6.3bn to $49.2bn over the last 12 months.
As a result, it is important for accountants operating within this ever-evolving domain to familiarize themselves with such emerging digital offerings that are fast gaining traction globally. Furthermore, getting one’s finances wrong or underpaying taxes can have severe legal repercussions as well —
Thus moving forward, it would be wise for companies, day traders, retailers to start seeking out digital taxation platforms that can help them meet their crypto finance needs in a highly stress-free manner.