Get to know crypto tax expert Clinton Donnelly. Learn why prominent crypto whales and high-net-worth crypto traders and investors seek him out for complex crypto tax reporting.
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.
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.
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 earned my advanced law degree in international financial reporting and taxation, and I was an Enrolled Agent, authorizing me to represent taxpayers before the IRS. I prepared hundreds of foreign reports for foreign accounts, FBARs, and foreign corporations and became 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 71 countries and across the U.S. I now have a team of nearly 20 professionals working with me.
We created Audit Defense, our flagship membership service that notifies members when they have been selected for an audit by the IRS, often up to six months in advance of the actual audit. This provides us enough time to prepare, recalculate, and amend the tax returns under audit. We also provide audit representation and defense services with membership.
We created the bulletproof crypto tax return methodology. It’s the type of return you’ll wish you had filed if you ever get audited by the IRS. It correctly enters all of your crypto gains and income. It claims all the losses you are entitled to. After all, losses are the silver lining to help offset your gains.
We include Form 8275, a Crypto Tax Disclosure Statement. It’s proven to reduce your chance of being audited substantially.
We also help you make the best interpretation of the tax laws about cryptocurrency reporting that favors your situation.
We also file the anti-money laundering (AML) forms, the FBAR Form, and Form 8938, along with our strategies for responding to these critical anti-money laundering forms.
DeFi, or Decentralized Finance, allow traders to use sophisticated investment techniques like liquidity pooling and yield farming. These investments are difficult to categorize in the tax law because they involve derivatives. The popular capital gain services deconstruct DeFi investments into short-term capital gains transactions. This results in higher tax rates.
Instead, we 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.
When I started doing crypto reporting, I realized that most crypto traders had anti-money laundering obligations because I was already 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.
At CryptoTaxAudit, we do more than prepare tax returns. We defend crypto traders in audits from the IRS. Did you know that 98% of tax preparers have never defended a tax return before the IRS? And of that remaining 2%, few 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 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 also have a law degree, and we have a team of Enrolled Agents, which represent our clients before the IRS. I defend people all the way up to tax court, even preparing their case and working with tax court attorneys. That’s why we have such larger clients that we have defended and continue to represent.
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 second mistake is to fail to file AML 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. The IRS can then assess an additional $10,000 penalty for every crypto exchange that is unreported. And they can do this for every year that it happens.
As a result, the AML 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. Either it was filed, or it wasn’t.
Failing to claim all your crypto 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.
The biggest challenge for crypto tax is a bookkeeping challenge. It’s trying to calculate crypto capital gains. While there are many services to help, the complexity 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 Interfaces). 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 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 everything 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 CryptoTaxAudit, we defined the concept of a “Bulletproof Tax Return”. Out of the dozen consumer tax packages and professional-grade tax software packages, few of them can assist in creating a “Bulletproof Tax Return.” This shows how vulnerable the American public is to generating weak crypto tax returns, which puts all crypto owners at financial risk. Except for ProSystem FX and Ultratax, the others currently fall short.
The future is like 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 yet developed a Form 1099 format for cryptocurrency exchanges in the U.S.
The accounting profession has also turned its back on cryptocurrency reporting. Most CPAs refuse to accept any knowledge of 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.
For crypto tax preparers, accountants, and CPAs, I recommend that their errors and omissions professional liability insurance is adequate to cover the errors in AML reporting. I think it’s essential that crypto accountants become crypto investors themselves to understand the taxpayers better.
For crypto investors, my 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. And, be sure to use the tools and services that know how to work properly with cryptos.
DISCLAIMER: Opinions and perspectives of the author, host, and guests. It should not be construed as U.S. taxpayer advice. There are often multiple interpretations of tax law. Various strategies may be suited to specific individuals and for particular situations. Seek out professional tax, legal, or financial advice from CryptoTaxAudit or from other reputable companies.Back to blog
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