Crypto creates new hurdles for financial advisors this tax season
Cryptocurrency investors face two big headaches this tax filing season: the Internal Revenue Service is ramping up scrutiny of digital assets, and some investors owe large tax bills after cashing in last year’s hefty profits on Bitcoin and other blockchain-based coins.
The twin challenges, a counterpoint to Bitcoin’s blockbuster gains so far this year, create new complexity for financial advisors with clients in digital assets. Investors can also owe tax if they received crypto as payment for work, or if they used Bitcoin to shop at retailers like overstock.com or Home Depot.
Most advisors direct their clients who want to invest in digital currencies to special exchanges, like Coinbase, or to niche funds. But while advisors usually rely on their clients to do the heavy lifting come tax time, they’re not entirely off the hook.
“This is going to be the first season where we tackle” clients’ crypto taxes, “and on a case-by-case basis,” says Chad Norfolk, a CFP and Senior Financial Advisor at WMS Partners in Towson, Maryland. The firm, he says, helps clients “aggregate the data and get it over to the accountant.” But for some clients, “we might have to triage it with the accountant.”
Navigating a tangle of electronic records
Merely owning crypto is not a taxable event; potential tax bills arise only if an investor sells, trades or spends it. That’s where things get woolly for tax purposes.
Digital-asset exchanges don’t typically send investors an annual statement showing the gains or losses needed to calculate a tax bill, in contrast to what traditional brokerages and funds do for stocks and bonds. Some crypto firms and funds send out a 1099-K statement, with a copy to the IRS, but that only shows gross proceeds. And the forms go only to investors who have undertaken more than 200 transactions with at least $20,000 in gross proceeds.
Some firms don’t even send out that statement. Exchange Coinbase, the most valuable crypto company in the U.S., ditched the statements this year in favor of a separate 1099 form for investors who racked up at least $600 last year in various fees and rewards.
The upshot is that many investors have to sift through their electronic records to manually calculate their cost basis: what they paid for their crypto, what they sold or traded it for, and the resulting tax owed on the difference. Bitcoin, now at around $49,000 after years in the doldrums (it spiked briefly in December 2017 before falling back), nearly tripled last year, finishing close to $29,000.
Even the pros find the taxes daunting. “It’s complicated,” admits billionaire investor Michael Novogratz, the founder, chief executive officer and chairman of Galaxy Digital Holdings Ltd., a financial firm focused on digital assets and blockchain, with $1.2…