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US tax industry poised to profit on crypto filing flood

By Ernie Sadashige

15:40, 4 February 2022

Tax concept with tax forms and calendar
US taxpayers must list individual crypto transactions on their tax returns – Photo: Capital.com

More Americans than ever are expected to report cryptocurrency transactions this tax filing season, boosting profit for tax service providers stuck in a space beset by stagnant growth.

“We are now heading into the biggest crypto tax season in cryptocurrency history by a long shot,” said CoinTracker chief executive and co-founder Jon Lerner. He told Capital.com his company is seeing a significant increase in user growth and sales early in the tax season.

The growing popularity of virtual currency, along with new tax reporting rules that take effect next year, are fuelling the trend.

“There’s definitely a surge, there’s no doubt about that,” said cryptocurrency expert Kirk Phillips, a certified public accountant known as “The Bitcoin CPA.” “(People) have been messing with (cryptocurrency). Now they have a more compelling reason to make sure it’s dealt with.”

CoinTracker automates cryptocurrency portfolio tracking and tax compliance and integrates with popular tax programmes including Intuit’s TurboTax and Blucora’s TaxAct.

The company and its competitors, along with accountants, are expected to benefit from the increased adoption of virtual currency and accompanying regulation that will force some US taxpayers to list hundreds – or even thousands – of cryptocurrency transactions individually on their tax returns.

A ‘flat’ tax season

Cryptocurrency compliance will provide fresh revenue for a tax industry struggling to increase profit in a flat environment.

Data by the Internal Revenue Service (IRS) – the US tax administrator – shows taxpayers filed the same number of returns in 2021 and 2020: 169 million.

Tax preparer H&R Block expects the industry to be “flat to slightly down” this year, said chief executive Jeff Jones on the company’s fiscal second quarter earnings call.

That’s where cryptocurrency comes in. Virtual currency requires more complex and more costly tax returns. For example, a TurboTax customer who previously used the free version would need to upgrade to the $69 Premier programme. H&R Block’s Premium online goes for $49.99 and TaxAct charges $34.95. The amounts are modest, but all the companies offer options to allow accountants to prepare returns for hundreds of dollars more.

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Tapping crypto compliance

The tax industry is gearing up to meet the anticipated demand.

“This would be the year to dive in,” Phillips said. “Because that’s where tremendous opportunity will be.”

CoinTracker is hiring aggressively. “We are seeing all-time-high user registrations on a daily basis,” CEO Lerner said.

H&R Block has invested over $1m in incremental training for every client-facing tax preparer and manager to ensure their expertise.

“In July this was identified as a key area we were wanting to be the experts in,” H&R Block told Capital.com. The storefront and online tax preparer is also increasing its focus on retail and crypto trading by adding functionality to its do-it-yourself tax preparation platform and by promoting the knowledge of its experts.

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“I think it would not be outlandish to believe that the actual tax gap could approach and possibly exceed $1trn per year.”
by IRS Commissioner Charles Rettig

Closing the ‘tax gap’

The number of US taxpayers reporting cryptocurrency transactions is expected to jump in the coming years with new mandatory reporting requirements for cryptocurrency exchanges.

The infrastructure bill, which became law in November, will require cryptocurrency “brokers” to disclose transactions to the IRS beginning in 2023.

“Industry growth around cryptocurrency tax compliance is exponential” and will affect “tens of millions of US cryptocurrency-holding taxpayers in the next two years,” Lerner said.

IRS commissioner Charles Rettig told the US Senate Banking Committee in April that virtually currencies are a $2trn market.

The IRS has not said how much tax it expects to collect from currently unreported cryptocurrency transactions but has said nonreporting contributes to a tax gap that could approach and possibly exceed $1trn per year.

The IRS is eager to collect its fair share of tax. “We need information reporting almost across all lanes,” Rettig testified. He noted that tax compliance is about 99% when there is substantial information reporting and withholding of tax. Compliance drops to 45% without reporting.

In 2019, 927,970 taxpayers told the IRS they had virtual currency activity out of 67.7 million total returns filed, the latest number available.

A reporting ‘nightmare’

Phillips, who is a member of the Virtual Currency Task Force of the American Institute of Certified Public Accountants (AICPA), said the new rules will bring a new set of problems because not all reported transactions are taxable.

“(The IRS) is going to try and make it so everything gets boxed in and gets reported, but it’s going to be a nightmare,” Phillips said. “There are going to be mistakes.”

He warns multiple exchanges may report duplicate transactions and the IRS will have no way of knowing whether items represent taxable income or non-taxable transfers.

“It’s not going to solve anything. It’s going to make it worse. It’s going to clog up IRS inquiries. It’s going to have people disputing what’s being reported and on and on.”

A global market

The American rules are not only path for tax industry growth. Crypto is a global phenomenon. CoinTracker says it syncs over $50bn of crypto assets on a daily basis, or an estimated 3% of the global market. The supports taxes in the UK, Canada and Australia and plans to expand to additional countries this year.

It recently raised more than $100m (£75m) in Series A funding. Lerner said CoinTracker has not tapped into the funds yet, which will be used to help scale cryptocurrency tax compliance and portfolio tracking to millions of people globally.

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The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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