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Why the Last “Crypto Winter” Means Extra Work in Tax Season | Thomson Reuters Regulatory watch and compliance learning


[guest author: Trevor English]*

While the ongoing “crypto winter” may signal a slowdown in crypto trading activity, it may mean a big boom in opportunities for tax professionals down the road.

The cryptocurrency market cooled down in 2022, signaling the start of what many in the digital currency space are calling a “crypto winter.” Essentially, these seasons of declining trading volume and price action are simply the crypto equivalent of bear markets. For tax and accounting professionals, however, crypto winters can counterintuitively signal a potential job boom in advisory, wealth management, and tax filing services.

While at first glance these macro events in the cryptocurrency space may seem like a signal that cryptocurrencies are failing, crypto winters are quite common in digital currency markets. The last winter was in 2018 and lasted about 18 months.

What happens during crypto winters in many cases is the discounting of losses and the realignment of trading and market sentiment. Traders discounting losses may present significant tax work opportunities as the realignment of market sentiment opens the door to possible tax advice.

When it comes to cryptocurrencies – which the IRS treats as property rather than currency – standard capital gains and losses are incurred. As traders reap massive gains in 2020 and 2021 from the market boom, many have not set aside enough funds to properly pay taxes on this relatively new asset class. This means that for many traders they are faced with now heavily depressed asset value in today’s crypto winter, large capital gains from previous trades, and no easy or clear way to pay. the tax bill.

Of course, these are not problems unknown to tax and accounting professionals – in fact, these problems can be solved, or better yet, avoided, with the proper focus and understanding of tax exposure management. in the cryptocurrency markets.

Understanding the crypto mojo

However, going back for a moment, it is important to understand the stature that crypto has in modern financial markets. While crypto was once the ugly son-in-law of finance and viewed by many as an amateur chimera, it is now firmly entrenched in institutional and enterprise adoption. While many coins in the space will likely fail, the core assets and underlying technology infrastructure of blockchain are here to stay.

There is a common phrase in crypto, “Bear markets are for building.” While this is typically used as an application for businesses in the crypto space, it also applies to tax, legal, and accounting professionals. As euphoria sets in in crypto, this cooling period is the best time to establish advisory practices around cryptocurrency to prepare for future market growth. Highlighting the massive adoption in the upper echelons of finance for the crypto space and the potential future customer growth, massive opportunities still exist for companies and professionals looking to establish themselves as experts in taxation and cryptocurrency advice.

While planning and preparing for success is an integral part of this discussion, there is another aspect as well. As a large number of traders begin to experience this crypto winter, as mentioned earlier, they find themselves in one of two scenarios:

  1. Big capital gains on the book, with no easy way to pay them — With crypto-assets still in place at the start of 2022, many traders sold at highs to lock in their gains. These same traders now expected to be able to sell the rest of their assets, which have now fallen significantly, to cover their tax bills.
  2. Large trading volumes from active trading in volatility — High transaction volumes require an automated solution rather than manual tabulation. Traders who incur heavy losses need help in knowing how to apply those losses to minimize their tax burden; Where, they are presented with significant discounted earnings with the need for assistance on how to minimize and properly pay these taxes.

Every tax situation is different, of course, but both of these global scenarios represent significant market capitalization opportunities for tax and legal professionals looking to expand their practice. They also represent a significant amount of work in the coming tax season, whether for the individual trader or for the tax professionals they are looking for.

This crypto winter represents an important opportunity for tax professionals to develop a practice in the field of crypto tax advice or planning. The next step after identifying the opportunity is to equip your firm with the tools to manage these new assets. Fortunately, professional-focused tools exist to help companies position themselves to increase engagements and add new opportunities for crypto advisory and tax planning services with clients.

As the current crypto winter of 2022 persists for what is, for now, an indiscriminate duration, there is no better chance than this to start preparing for the next crypto boom. Understanding, planning, and equipping your firm with all the necessary tools and knowledge to handle the influx of crypto clients should be on every tax firm’s roadmap.

*Trevor English, VP/Ledgible.io

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