Many crypto holders are reporting their crypto transactions for the first time as a effect of the United States Internal Revenue Service's question about "virtual currency" on the 2022 revenue enhancement return course.

It is a big question for some taxpayers — many have not reported their crypto gains in the past or may have washed then without a cracking deal of precision. Should a taxpayer let bygones be bygones or file an amended return to accurately reflect their historical income from crypto? The IRS subpoenas of crypto exchanges for taxpayers' trading histories certainly raise the stakes. To layer more on, statutes of limitations, potential penalties and/or IRS leniency may vary based on the degree of previous noncompliance.

Related: IRS Crypto Tax Return Question — Be Careful How Y'all Answer

Decisions in one tax yr have consequences in future years. This is because proceeds/loss amounts vary based on which crypto assets are treated as purchased or sold and when these trades occur. Sale of an asset in one year raises the question of how or when a taxpayer acquired that specific asset in the by. If an acquisition was the fruit of mining, staking or an airdrop that was not reported, a taxpayer may demand to explicate why this transaction was not reported as income on their previous yr's tax render.

Given the contempo changes and uncertainties, new software has been designed for investors, traders and other participants in the crypto ecosystem. Such tax compliance software is necessary considering, different traditional financial avails, trading and other activities in crypto are not reliably reported — or oftentimes non at all — on IRS information returns (such as 1099 forms).

Trading in cryptocurrency differs from trading in traditional financial assets in a variety of ways. This includes the move of taxpayer avails beyond exchanges in nontaxable transactions, paying fees in upper-case letter assets (rather than cash), differing tickers from one exchange to the adjacent, decimal precision and the unique transactions that only occur in the cryptosphere. These are some of the reasons why traditional or generic tax compliance software often falls short in serving the crypto ecosystem.

However, not all crypto tax software is created equal:

  1. Some ignore fees associated with transacting in crypto that typically leads to an overpayment of tax on gains or an understatement of losses — which tin be used to offset taxable gains. It's important for your software to properly account for transaction fees and so your taxable income is not overstated.
  2. Some practice non properly accost the uniqueness of crypto data, such every bit the differing tickers across exchanges for the same asset and varying decimal precision. Mistakes in these ii areas can lead to inaccurate taxable income calculations and risk of an audit.
  3. Some exercise non provide sufficient flexibility for the particular taxpayer's circumstances or blindly utilize imprecise or generic tax principles. This rigidity can have agin financial consequences for taxpayers in the absence of detailed IRS guidance. One example is the reporting of airdrops, mining and staking rewards where some taxpayers believe the IRS's guidance is too broad when applied to different factual variations. Some other example involves the potential for claiming ordinary, rather than upper-case letter, loss treatment for certain crypto assets. Ordinary losses are oft easier to use for reducing taxable income.
  4. Some offer taxpayers accounting methods for crypto that are impermissible in the Usa — e.g., average cost — without adequate warnings. Others practice not support or display the benefits of tax optimizing methods that allow taxpayers to identify assets with the highest revenue enhancement bases as the ones sold, a method known equally highest-in, offset-out.
  5. Some only match acquisitions and dispositions on a single exchange rather than beyond all of a taxpayer's unlike trading venues. This can have a textile bear on on taxable income calculations. More often than not, this will also result in non-optimal taxable income calculations when applying different bookkeeping methods such as outset-in, first-out, final-in, first-out and highest-in, first-out.
  6. Some were developed in a vacuum and not subject to the rigors of independent audits for Service Organization Controls relevant to software-as-a-service providers. But crypto software providers with the highest level of internal controls for reporting, security, privacy and processing take both SOC 1, Type 2, and SOC 2, Blazon 2 certifications. The use of software without these certifications increases a taxpayer's risks — both tax and non-tax related.

The list goes on, and there are even more points that can exist made in choosing the right crypto tax software for an expanse where there is niggling specific tax guidance. The lack of specific guidance for crypto does not mean that there are no rules, however. It just means that a finer-tooth comb is needed to make up one's mind which tax rules apply to crypto, and how that application differs from traditional financial assets.

At that place tin be advantages to such an analysis that tin can significantly reduce tax expenses or increase a taxpayer'due south refund. A flexible tool is oft needed to help users make informed decisions that can ultimately salvage taxes or increment a refund.

The views, thoughts and opinions expressed here are the author'due south solitary and exercise not necessarily reflect or represent the views and opinions of Cointelegraph.

Roger Brown is the head of tax and regulatory diplomacy at Lukka. He has more than 27 years of experience as an international tax and financial products lawyer. He spent a decade at the national office of the Internal Revenue Service writing regulations and other guidance, and prior to Lukka, he spent a similar period of time as a partner in Ernst & Young'due south financial institutions and products office. After being tasked to be the lead international tax partner on a number of Ernst & Young's largest banking, insurance and other uppercase markets clients — often bridging the intersection of tax and capital letter markets regulations — Roger became one of the company's leaders in the fintech and blockchain space.