Crypto Tax Prep Business Booms as Trading Surges and IRS Tightens Screws

Creative Commons, modified by CoinDesk Crypto tax preparation is big business in the U.S. as cryptocurrency investing has mushroomed into a $1.9 trillion global market .

Startups that help Americans calculate their crypto gains and resulting tax bills have been raising hundreds of millions and achieving billion-dollar valuations. Even traditional tax-prep services have been rolling out offerings for this blooming niche. And perhaps not a moment too soon, with valuations near last year’s all-time highs, a proliferation of novel ways to profit on digital assets and the IRS on the hunt for crypto tax cheats.

It’s hard to gauge the size of this niche. “If I were to put out an estimate, I’d estimate that the U.S. crypto tax prep market is currently worth $400 million, but that number is growing exponentially year-over-year as regulators clamp down.” said David Kemmerer, co-founder and CEO of CryptoTrader.Tax .

The IRS started looking into cryptocurrency closely in the summer of 2019, when it sent thousands of letters to taxpayers whom the agency suspected of not reporting their crypto-related taxes properly.

“What I’ve seen in the past few years was consumers started to realize they have to pay taxes, but it was so overwhelming that they just ignored it,” said Michelle O’Connor, vice president of marketing at TaxBit . But then they started receiving “scary IRS letters.”

In October 2019, the IRS published its first detailed guidance on how taxpayers should declare crypto-related income. The same year, the agency included a question about cryptocurrency transactions in the Schedule A of individual 1040 forms. In 2020, the question became obligatory for all U.S. taxpayers .

“We will see the highest compliance rates among consumers and enterprises filing their crypto taxes for 2021 and expect to see the compliance rates grow exponentially year-on-year moving forward,” said Dan Hannum, chief operating officer of ZenLedger .

Down the road, technology will become increasingly complex, with decentralized finance ( DeFi ) and non-fungible tokens ( NFT s) gaining adoption, and with the taxman looking over their shoulders, more people will need help managing their tax liabilities.

The IRS differentiates between various kinds of transactions, so cryptocurrency accounting might be tricky, and the safest way for consumers often appears to be asking for professional help – or using specialized software.

“We believe that due to the massive uptake in crypto last year especially, that the crypto user base could be sitting close to 16% of the U.S. population, bringing us to 53 million potential crypto taxpayers,” said Robin Singh, founder of Koinly, citing last year’s Pew Research report about crypto adoption in the U.S.

Mark Steber, chief tax officer at Jackson Hewitt, the country’s second-largest tax prep firm with storefront offices nationwide, cited a more modest estimate by the consulting firm Chappuis Halder: about 15.3 million account holders, or about 9% of taxpayers in the U.S., and 35 million to 68 million globally.

The available official numbers are not that impressive, points out Shehan Chandrasekera, head of strategy at CoinTracker: the IRS has so far released stats for the 2019 tax season, and according to the report , only about 928,000 taxpayers said they did crypto transactions during the 2019 fiscal year (fresher data is not available yet).

“Based on trends and market insights, we believe at least half of the U.S. tax-filing population (~75 million) has something to do with crypto,” Chandrasekera said.

“Some may have taxable transactions where they have to file forms with the IRS. Some may be HODLers with no reporting requirement until they sell assets,” he added, using crypto slang for long-term holders.

Last August, TaxBit, which calculates crypto taxes both for consumers and the IRS , ​​ raised $300 million in a Series B round at a $1.33 billion valuation. CoinTracker raised $100 million in January and is now valued at $1.3 billion. The company also announced an exclusive deal with Coinbase to help the Nasdaq-listed exchange’s users to properly report their crypto taxes.

Koinly , another firm in this category, is “seeing a significant uptick in our user numbers,” said Singh. The reason underscores the relative immaturity of the crypto industry.

The uptick “is fueled by the 1099 forms that exchanges are sending out to their users,” Singh said. “These forms are completely inaccurate in most cases since crypto traders have a number of wallets and exchange accounts, and no one exchange can produce an accurate report of the entire crypto activity.”

This problem is also what led two years ago to the “scary IRS letters” O’Connor mentioned. Cryptocurrency exchanges sent generated tax reports for their users, but […]

source Crypto Tax Prep Business Booms as Trading Surges and IRS Tightens Screws