Get to know cryptocurrency tax expert Clinton Donnelly and find out why prominent crypto whales seek him out for complex crypto tax reporting.
What Was Your Journey Into Cryptocurrency Like?
I became interested in crypto tax reporting back in 2017 when many of my friends were making a lot of money on Bitcoin and had tax questions. In January 2018, I had the opportunity to join Crypto Tax Prep as a tax law advisor in a company that was the fastest-growing crypto tax preparation firm in the country.
What About Cryptocurrency Initially Caught Your Attention, And Why?
I talked with over 800 people about their tax situation. I developed a keen insight into the complications that were involved in crypto reporting. As a result, my practice exploded with some of the largest crypto traders out there.
When Did Your Firm Begin Offering Cryptocurrency Tax As A Service?
In 2018, we started preparing crypto tax returns. We specialized in offering a white-glove “crypto capital gains” calculation service. We also specialized in providing significant savings by using like-kind exchange. We spearheaded the reporting of cryptocurrencies on the anti-money laundering forms FBAR and Form 8938, which are required by law.
Before 2018, I was already an expert at foreign filing obligations for Americans. I had my advanced law degree in international financial reporting and taxation, and I was an Enrolled Agent. Therefore, I prepared hundreds of foreign reports for foreign accounts, FBARs, and foreign corporations and was known as an expert in this niche.
Since then, I have written four books on cryptocurrency taxation, and I am a sought-after speaker in the area of cryptocurrency taxation. I have clients in over 62 countries, and across the U.S., I now have a team of 12 professionals working at Donnelly Tax Law.
What Specific Services Do You Offer To Cryptocurrency Clients?
Advanced Notice Of A Scheduled IRS Audit
With this special membership you can defend yourself from the IRS with as much as six months advanced notice of a schedule IRS audit.
Our CryptoTaxAudit membership provides the most advanced tools available to protect yourself. From early audit warnings and IRS account statements to pre-paid audit defense and courses to do your own crypto tax return, we’ve got your back!
Bulletproof Crypto Tax Return Methodology
- You will correctly enter all of your crypto gains and income.
- You will claim all your losses. Losses are the silver lining to help offset your gains.
- We will include Form 8275, Crypto Tax Disclosure Statement. It’s proven to reduce your chance of being audited substantially.
- We will help you make the best interpretation of the tax laws about cryptocurrency reporting that favors your situation.
- We will be filing the anti-money laundering forms, the FBAR Form, and Form 8938, along with our strategies for responding to these critical anti-money laundering forms.
- We have additional tools to track and monitor your tax situation throughout the year to lessen the chances of a crypto tax audit.
Want To Learn To Do Your Own Bulletproof Crypto Tax Return? Get this course FREE
Modular DeFi Instruments Tax Documents
DeFi allows us to have highly sophisticated investment choices, like liquidity pooling and yield farming, which are difficult to categorize in the tax law because they involve derivatives. The popular cap gain services deconstruct DeFi investments into short-term capital gains transactions. This results in higher tax rates. We have instead developed an approach to treat DeFi investments as a modular complex financial instrument. We generate a custom taxation summary statement to list the types of modular investments used and the net capital gain and income that resulted. Our approach typically results in a substantially lower amount of taxes. Unlike the capital gains services, we will stand behind our report in an audit.
Anti-Money Laundering Reporting
When I started doing crypto reporting, I realized that most crypto traders had anti-money laundering obligations because I was an expert at filing those forms. This is the real intersection for me and why my practice took off. People wanted my expertise in anti-money laundering filing and like-kind exchange reporting.
How Does Cryptocurrency Tax Preparation at Donnelly Tax Law Stand Out From Others?
At Donnelly Tax Law, we do more than prepare tax returns. We have actually defended crypto traders in audits from the IRS. 98% of tax preparers have never defended a tax return before the IRS. And of that remaining 2%, how many of them know anything about cryptocurrencies? We are talking about a microscopic field, and it is crucial when you are picking a preparer that you can find someone that can defend you until the end.
We know how to defend people before the IRS. If accountants have never defended their work on crypto tax returns, how do they know that they did it right? How do they have a feedback loop that tells them what is working with the IRS and what isn’t working to come back and change how they prepare the return. Without that feedback, it is essentially like preparing crypto tax returns in the dark.
I have a law degree, and we are a team of enrolled agents. I defend people all the way up to tax court. That is why we have such massive clients that we have defended and represent.
What Are The Top Three Mistakes You See Cryptocurrency Clients Make When It Comes To Crypto Tax?
- The top mistake that most crypto traders make is incorrectly calculating their crypto capital gains. They fail to realize that crypto-to-crypto trades from the beginning of 2018 are all taxable. Using crypto capital gains services is quite complicated from a bookkeeping standpoint. Therefore, most people incorrectly calculate their gains.
- The number two mistake is to fail to file anti-money laundering forms when required. Anyone who has traded on foreign crypto exchanges may be obligated to file these forms. The penalty for not filing these forms when required is 10,000 dollars. The IRS can then assess an additional 10,000 dollar penalty for every crypto exchange not reported. They can do this for every single year that it happened. As a result, the anti-money laundering penalties can swiftly rise to six-digit figures. It requires minimal effort from an IRS auditor to assess these penalties because it is black and white. It was filed, or it was not.
- Failing to claim all losses is the third mistake. When cryptos are lost because of scams, rug pulls, Ponzi schemes, lost wallets, and closed exchanges, these losses can be deducted, which may reduce tax liability.
What Are The Top Three Challenges When It Comes To Tax For Cryptocurrency?
- The biggest challenge for crypto tax is a bookkeeping challenge is trying to calculate crypto capital gains. While there are many services to help here, the problem continues to grow each year. The issue is that people are often dealing with thousands of transactions from different exchanges. There is no standard for data interchange between exchanges. There is no standard for APIs (Application Program Interface). APIs are of low quality for exchanging transactions, and each year the problem gets compounded by additional transactions. We need much more sophisticated tools to calculate and track gains.
- The second challenge is going to be poor record-keeping by tax preparers regarding their crypto transactions. Many exchanges don’t keep transaction information, or they do it poorly. There are usually too many transactions for a trader to remember all the things that happened.
- The third challenge is that no tax software truly supports cryptocurrency, whether it’s consumer retail tax software or tax software used by professionals. At Donnelly Tax Law, we have defined the concept of a “Bulletproof Tax Return,” and out of the dozen consumer tax packages and the dozen professional-grade tax software packages, only two of them can create a “Bulletproof Tax Return.” This shows how vulnerable the American public is to generating weak crypto tax returns, which puts them at financial risk. Except for ProSystem FX and Ultratax, the others currently fall short.
What Will The Future Of Cryptocurrency Tax Look Like For Clients?
It is a murky pool of water, and the water is rising. The IRS has provided weak guidance on cryptocurrency tax reporting. Consequently, tax software is not able to respond to this. The IRS has not come out with a 1099-B format for cryptocurrency exchanges in the U.S.
The accounting profession has turned its back on cryptocurrency reporting. Most CPAs refuse to accept any knowledge for the cryptocurrency tax report. These put the taxpayer in a weak position because the software doesn’t support them, and the professionals don’t support them either, so they are vulnerable to the IRS.
Please Share Your Most Important Piece Of Insight For Other Cryptocurrency Professionals And Investors.
For crypto professionals, I would make sure that their errors and omissions professional liability insurance is adequate to cover the errors in anti-money laundering reporting. I think it is essential that crypto accountants become crypto investors themselves to understand the taxpayers better.
For crypto investors, my piece of advice is to insist on only doing business on exchanges that provide vital transaction record-keeping because weak record-keeping causes them to have significant tax defense ramifications.