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Cryptocurrency has exploded in popularity, becoming a significant part of the financial landscape. It's no longer just a niche interest; it's a mainstream asset class.
Yet, as crypto gains traction, so does the complexity of managing it.
One of the biggest dilemmas crypto investors face is how to handle their taxes. Should you hire an accountant or use specialized crypto tax software?
Understanding your tax obligations is crucial. Incorrect or incomplete reporting can lead to hefty penalties.
In this article, we'll explore the pros and cons of using an accountant versus crypto tax software. We aim to help you make an informed decision for your unique financial situation.
Why is Either Even Required?
Legally
Cryptocurrency transactions aren't exempt from taxation. In many jurisdictions, including the United States and much of the European Union, crypto is considered a taxable asset.
This means that you're required to report your transactions to the tax authorities.
Complexity & Vague Regulations
The complexity of crypto transactions is not to be underestimated, and this intricacy makes tax reporting a labyrinthine task.
Firstly, consider staking rewards. These are a form of income, but how are they taxed? As capital gains? Ordinary income? The rules can vary by jurisdiction and are often still under development.
Then there's the issue of crypto-to-crypto trades. Unlike traditional markets, where you trade assets for fiat currency, crypto allows you to trade directly between different types of digital assets. This creates a challenge in determining the reportable fiat value for tax purposes.
What's the fair market value of a Bitcoin to Ethereum trade, especially when the value of each can fluctuate wildly within short periods?
Adding to the complexity, crypto tax regulations are often young and still evolving. This means that not only do you have to keep up with your transactions, but you also have to stay abreast of the ever-changing tax laws related to them.
And let's remember some types of transactions may still need concrete regulations. For instance, most jurisdictions still need to get regulations for yield farming or liquidity mining.
A 2021 report by PWC found that only 24% of jurisdictions they looked at had guidance for ICOs, 31% had guidance on airdrops or staking, 34% had guidance on forks, and even for mining, only 72% of jurisdictions had some guidance.
Of course, 2021 is a while ago, and tax regulations are catching up in some locations. In 2023, for example, Portugal first implemented taxes on crypto.
The lack of clear guidelines can make the tax reporting process feel like navigating through a minefield.
The Case for Accountants
Expertise
Navigating the complex world of crypto taxation can be daunting, but an accountant brings a wealth of expertise to the table. They have extensive knowledge of tax laws and can offer personalized advice that aligns with your specific financial situation.
Human Oversight
While crypto tax software is becoming increasingly sophisticated, there's a unique value in human judgment. An accountant can review your transactions for any inconsistencies and offer strategic advice that software might not catch.
Peace of Mind
There's a level of comfort and confidence that comes with knowing a seasoned professional is managing your crypto taxes. They can keep you updated on the latest tax laws and ensure that you're in full compliance, giving you the freedom to focus on your investments or other interests.
Localization
One of the standout benefits of using an accountant, especially for those outside the United States, is the advantage of localization. Many crypto tax calculators are U.S.-centric or adopt a one-size-fits-all approach.
An accountant familiar with your local tax laws can provide guidance that's specifically tailored to your jurisdiction, ensuring that you're in full compliance with local regulations.
Considerations Before Choosing an Accountant
Cost
Accountants offer a high level of personalized service, but this expertise comes at a price. However, for those with complex portfolios or unique tax situations, the cost may be a worthwhile investment.
Hourly costs can run into the hundreds of dollars. Considering the complexity of crypto transactions, you could be stuck with huge tax bills.
Time
Working with an accountant can be more time-consuming than using software. But for many, the personalized service, localization benefits, and peace of mind are worth the extra time invested.
Few Accountants Are Knowledgeable About Crypto
Crypto taxes are complex, and many accountants still need to spend the time to learn and understand local crypto regulations.
However, specialized tax lawyers/accountants do exist. In Finland, for example, one of the few tax accountants specializing in crypto taxes is Nordic Law, which specifically specializes in Web3, crypto, and Fintech.
The Case for Using Crypto Tax Software
Efficiency
One of the most significant advantages of using crypto tax software is efficiency. These platforms can automatically import your transactions from various exchanges and wallets, saving you the time and effort it would take to manually input this data.
Consistency
Crypto tax software is designed to be consistent and accurate. It uses algorithms to calculate your tax obligations based on the latest tax laws, reducing the risk of human error. This can be particularly beneficial for those who engage in frequent trading and have a high volume of transactions to report.
Accessibility
Tax software is generally more accessible than hiring an accountant. You can access your tax data at any time, make adjustments, and generate reports without needing to schedule a meeting with a professional. This convenience can be a major selling point for those with simpler tax situations or those who prefer a hands-on approach.
Cost-Effective
In most cases, using crypto tax software is more cost-effective than hiring an accountant. This makes it an attractive option for those who are budget-conscious or have a relatively straightforward crypto portfolio.
Considerations Before Choosing Tax Software
Localization
One downside is that many crypto tax software options are designed with a U.S.-centric or one-size-fits-all approach, which may not be suitable for those dealing with specific local tax laws. However, there are exceptions like Divly, which offers localized tax solutions, making it a viable option for those concerned about jurisdiction-specific compliance.
Complexity
Although crypto tax software is designed to simply crypto taxes for regular traders it still a do-it-yourself tool requiring you to upload your transaction history and declare your taxes yourself.
Furthermore, while software is becoming increasingly sophisticated, there may be complex tax situations that it's not equipped to handle. In such cases, the expertise of an accountant could be beneficial.
Comparing the two
Comparing Costs
When it comes to the financial aspect, the differences are stark. A tax accountant may charge between $150 to $500 per hour.
If you have a complex portfolio, the hours can add up quickly, making the overall cost quite high.
On the flip side, crypto tax software like Divly usually starts at $49 with transaction-based pricing meaning you pay according to the number of transactions you have. This can be a more cost-effective solution for many users.
At each transaction count level crypto tax calculators tend to be significantly cheaper than accountants.
Accessibility and Convenience
Crypto tax software is available around the clock.
You can work on your taxes whenever you want without the need to schedule an appointment.
With an accountant, you'll need to set up meetings. This can be a hassle, especially during the busy tax season.
However, the trade-off is personalized service.
An accountant can provide expert advice tailored to your specific needs, something that software can't fully replicate.
Final Thoughts: Making Your Choice
The choice between an accountant and crypto tax software boils down to your specific needs, budget, and preference for personalized service. Both options have their merits and drawbacks, so weigh them carefully.
If cost and convenience are your priorities, tax calculators offer a compelling solution. For those seeking expert advice, an accountant may be worth the investment.
