Have you found the road to find a good crypto tax preparer, a long and windy one?
Maybe you’ve got a ton of crypto and your current tax preparer hasn’t been keeping up with your needs.
And maybe the few tax preparers that have had some answers seemingly charge well above and beyond the others. Why is that?
You aren’t alone in your line of thought.
In an interview with Charlie Shrem on his podcast, Untold Stories in February 2020, Shrem asked a powerful, pointed question: Why are good crypto tax preparers so hard to find?
I’ll tell you why.
- A good crypto tax return involves not just general tax preparation skills; you have to have accounting skills to do the reconciliation of all the trades.
- A good crypto tax preparer also needs to have legal skills because the anti-money laundering forms are very much law-oriented.
When we do a tax return at Donnelly Tax Law, we call it a bulletproof crypto tax return.
- Not only do we report all the income, but we also report all the anti-money laundering forms.
- We report any Ponzi scams or financial scams where you lost money because you can itemize the loss and reduce your taxes.
- If you have ICOs and dead coins and junk coins that went nothing, we can declare a loss on those and bring in some savings.
For most clients who come to me, we have to go back and fix a couple of years’ worth of returns. So we do a tax amnesty form.
Because if you report the anti-money laundering forms after the deadline, which is the same day as taxes are due, it’s a $10,000 penalty.
In the current state of crypto taxation, you need a crypto tax law firm, or you are falling short in one way or another.
Crypto Penalties Can Be High If You Don't Have A Good Crypto Tax Preparer
In that same podcast interview on Untold Stories with Charlie Shrem, he made another bold observation.
Shrem stated, “Penalties are high too. I know traders who honestly went back and paid tens of thousands of dollars in penalties just because they messed up how they reported it or the number was not correct or whatever.
So penalties are a real thing; it’s not a few hundred bucks. It’s like a significant amount of money.”
And he was correct.
The IRS will audit crypto traders, and when they do, it’s primarily going to be because of violations of the anti-money laundering regulations. It’s not going to be because you didn’t add up 15,000 trades correctly.
Shrem then asked, What are the top three regulations you think the IRS will go after?
Why Does Nearly Every Crypto Trader Have A Schedule B Problem Without A Good Crypto Tax Preparer?
I would say virtually every crypto trader has what I call a schedule B problem with
- a financial interest in or signature or other authority over at least one financial account located outside the United States if
- the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
Schedule B on your tax return is the one where you list your interest and your dividend income. And at the very bottom, it has this question in part three which says:
“Did you have a financial interest in or signature authority over a financial account in a foreign country?” “Yes” or “No”.
Now, of course, Binance in Malta or whatever country it’s in, that’s a financial account in a foreign country; it would be hard to say it wasn’t.
So most people said “No” to that question.
Almost everybody says “No” to that question because US tax preparers never deal with people who have foreign assets.
After all, the US is so big. Everybody has all their bank accounts in the US, so everybody checks “No” or leaves it “Blank”.
Are Crypto Traders Required To File The FBAR Form?
The next question after that is, “Are crypto traders required to file the FBAR form?”
Shrem commented that opening an overseas bank account is something he avoids for this specific reason. He says he doesn’t need one and doesn’t want to deal with more compliance.
I told Shrem to open up his tax return, look for schedule B, look at the bottom, and see if he answered “Yes” or “No” to those questions.
And I challenge you to do the same.
Everyone should look at their past tax returns and look at schedule B at the bottom; it says, Did you “Yes” or “No” have a foreign financial account?
And then, the next question is, if you answer “Yes,” Are you required to file a FinCEN form 114 FBAR? Please see the instructions in the form, “Yes” or “No?”
Now, this has gone to the US Supreme Court, and the US Supreme Court has said that that question, as worded, has been in there for around 15 years, and it is sufficiently instructive that every taxpayer is under obligation to file an FBAR report.
People cannot use the excuse, “I didn’t know”. “I didn’t have to.”
The fact of the matter is we can get away with tax amnesty on that argument, but if they take you to court, they can nail you against the wall.
This question is how crypto traders will get taken down because they’re all going to say “No” to that, and this is very black and white.
There’s no “Well, I don’t have all the transaction records,” and there are no excuses or a song and dance. It’s black and white.
You said, “No,” or you left that “Blank” when you should have said, “Yes,”. You’re nailed; there’s no further discussion.
Plus, since that part is a Title 18, the Bank Secrecy Act, they can go immediately to prosecution for perjury for not answering yes.
When you sign your tax return, it says, “Under penalty of perjury, I affirmed that I have read my tax return, and I agree that it is true, complete and correct”.
And then you’ll sign your name. That’s what happens when you sign a tax return, which means that’s perjury.
This Question Is A Schedule B Problem For Crypto Traders, So How Do You Fix That?
How Does The US Government Define Foreign Assets?
The internal revenue code section 6038D says, “A foreign asset is any financial instrument or contract for investment purposes where the counterparty is not a US Person”.
Hey, look, the beauty of an exchange, even a US exchange like Coinbase, is you don’t have to know who you’re trading with. You may very well have been trading with terrorists from Syria; you have no idea even on Coinbase.
Why Is Tax Law So Complicated?
Shrem had a question, and he wanted to preface it with a little analogy.
“If I own a large farm and have multiple farmers leasing my farm, and the deal is that they have to pay me a percentage of their revenue based on how many clouds are in the sky. If it’s a non-sunny day, then their share of what they have to pay me is less.
Let’s say it would be in my best interest, and I would be super highly incentivized to build a system to make it as easy and simple and without any loopholes or without any complications for those farmers to report that.
Now, did you ever think at some point in the last 10 or 20 years, the IRS would say hey, maybe the reason that people don’t like us is that we’re so complicated to interface with?
Maybe people don’t like us because no one likes paying taxes, but it’s something that you’re born knowing that you have to do.
So why not make it simpler right?
Now I’m not talking about tax law; I’m talking about filing your taxes.
And then you have this behemoth like TurboTax; it is the only one, and then even there, it kind of sucks. Why hasn’t this been done better? Why hasn’t this been simplified?”
We Can't Blame The IRS For Needing A Good Crypto Tax Preparer; Blame Congress!
The truth is we can’t blame the IRS for this; the blame is on Congress. Congress writes the laws; Congress makes everything complicated; it works this way.
You want to have a sensitive tax system that is understanding to people. So if we could say, we had a flat tax. You just described the simplicity of a flat tax, right?
How much money you make, multiply it by 20% and give it to us—flat tax.
And we have that in place right now. It’s called the alternative minimum tax.
But what Congress says is yes, but lower-income people shouldn’t have to pay so much, so let’s have some deductions and incentives, and oh, let’s give them a child tax credit for how many children they have and people with more children need more credit.
Oh yeah, and if you make over a lot of money, maybe you should be paying a bit extra, and we put that in there.
And you listened to every single one of these explanations, and they all sound great, they all sound compassionate and meaningful. But the complexity layered on top of one another and then jiggling them every year twists them a bit and it becomes inconceivable. You cannot understand what’s going on. It becomes too complex.
People come to me and say, “Can you estimate how much I owe in taxes?” I have no idea; I could never estimate it. I mean, the tax law is just so complicated in different ways; everybody has a different situation.
So it’s Congress’ fault that you need an excellent crypto tax preparer.
Watch The Video
Watch the full video interview with Charlie Shrem, Untold Stories on YouTube.