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Tax Tech & Innovation

Why the latest ‘crypto winter’ means extra work come tax season

Trevor English  VP /

· 5 minute read

Trevor English  VP /

· 5 minute read

While the on-going "crypto winter" may signal a slow down in crypto trading activity, it may mean a big boom in opportunities for tax professionals down the road

The cryptocurrency market has cooled off in 2022, signaling the start of what many in the digital currency space call a “crypto winter.” In essence, these seasons of diminished 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 boom for potential advisory, wealth management, and tax filing services work.

While on the surface these macro-events in the cryptocurrency space may seem like the signal that cryptocurrencies are failing, crypto winters are fairly standard in digital currency markets. The last winter occurred in 2018 and lasted about 18 months.

What does come about during crypto winters in many cases is the actualization of losses and the re-alignment of trading and market sentiment. Traders who are actualizing losses can present significant tax work opportunities while the re-alignment of market sentiment opens the door to potential tax advisory.

When it comes to cryptocurrencies — which the IRS treats as property, rather than currency — standard capital gains and losses are incurred. As traders come off of the massive gains in 2020 and 2021 from the market boom, many haven’t reserved enough funds to properly pay taxes on this relatively new asset class. This means that for many traders, they’re faced with a now heavily depressed asset value in today’s crypto winter, significant capital gains from previous trades, and no easy or clear way out of paying the tax bill.

Of course, these aren’t problems unfamiliar to tax and accounting professionals — indeed, these problems that can be solved, or better yet, prevented, with a proper focus and understanding on managing tax exposure in cryptocurrency markets.

Understanding the crypto mojo

Backing up for a moment, however, it’s important to understand the stature that crypto has in modern financial markets. While crypto was once the ugly stepchild of finance and seen as a hobbyist’s pipe dream by many, it’s now firmly planted in institutional and enterprise adoption. While many coins in the space will likely fail, the core assets and underlying blockchain technological infrastructure are here to stay.

There’s a common phrase in crypto, “Bear markets are for building.” While this typically is used as an applique to companies in the crypto space, it applies to tax, legal, and accounting professionals too. As euphoria settles down in crypto, this period of cooling off is the best time to establish advisory practices around cryptocurrency in order to prepare for future market growth. Underscoring the mass adoption in the upper echelons of finance for the crypto-space and the forthcoming potential growth in client base, massive opportunities still exist for firms and professionals looking to set themselves up as experts in cryptocurrency tax and advisory.

While planning and setting oneself up for success is a decent part of this discussion, there’s another aspect as well. As the massive number of traders begin to experience this crypto winter, as mentioned before, they’re finding themselves in one of two scenarios:

      1. Large capital gains on the book, with no simple means to pay them — With crypto-assets still up at the beginning 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 dropped significantly, to cover their tax bills.
      2. Large transaction volumes from active trading in the volatility — High transaction volumes present the need for an automated solution, rather than manual tabulation. Traders left with large losses have the need for assistance on how to apply those losses to minimize their tax burden; or, they are presented with significant actualized gains with the need for assistance on how to minimize and properly pay those taxes.

Every tax situation is different, of course, but these two overarching scenarios represent large market capitalization opportunities for tax and legal professionals looking to expand their practice. They also represent a significant amount of work come the next tax season, whether for the individual trader or for the tax professionals they seek out.

This crypto winter represents a significant opportunity for tax professionals to build up a practice in the crypto tax advisory or planning space. The next step after identifying the opportunity is equipping your practice with the tools necessary to handle these new assets. Luckily, professional-focused tools do exist to help position firms to increase engagements and add new crypto tax planning and advisory service opportunities with clients.

As the current crypto winter of 2022 persists for what is, at the time being, an indiscriminate length of time, there is no better chance than this to start preparing for the next crypto boom. Understanding, planning, and equipping your practice with all of the tools and knowledge necessary to handle the influx of crypto-clients should be on every tax practice’s road map.

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