The market for cryptocurrency tax services is growing rapidly, and it is providing forward-thinking tax professionals with an opportunity to capture oversized profits.
While we’ve seen the market cap of bitcoin and other cryptocurrencies dramatically fall from around $800 billion at its height to around $200 billion today, the number of developers, traders, companies and professionals joining the larger cryptocurrency and blockchain ecosystem has continued to increase in spite of this “crash.”
What Does This Mean?
For starters, it means that blockchain and crypto are very real technologies that aren’t going away anytime soon. Second of all, it means that the services, companies and professionals that are focused on providing support and infrastructure to the larger crypto market are seeing their demand curves go up and to the right; that is, they are increasing. This is true for those that provide cryptocurrency tax services.
This begs the question: What does the future of cryptocurrency taxes look like? In the United States, various agencies are still grappling with this question.
Are Cryptocurrencies Securities?
The first piece to nail down when looking into this question is the security one. Whether or not the IRS and government will continue to tax crypto the way that they currently do (as property similar to stocks) depends largely on if they see it as a security.
The SEC noted earlier this summer that cryptocurrencies like bitcoin and ether “are not considered securities at this time due to their decentralized nature.” However, the majority of other cryptocurrencies are. Summarizing William Hinman, head of the Division of Corporate Finance for the SEC, “If coin buyers are looking for a return on their asset, it is safe to assume the SEC will rule that piece of crypto a security.”
The IRS, on the other hand, has remained rather silent and still treats all crypto as property for tax purposes.
Moving forward, it looks as if the majority of cryptocurrencies will be classified as securities. This makes the most sense seeing that the vast majority of consumers who buy cryptocurrencies are doing so because they are hoping to make a return on their money.
So crypto taxes aren’t going away?
As long as crypto is treated as an investment, likely not.
Where the Market Is Today
We are in an interesting position at the present. The consumers that own bitcoin and other cryptocurrencies are being told by the government that they have to pay taxes on their gains. However, the average consumer lacks the training and knowledge to navigate the complex tax reporting process.
Most Americans rely on tax professionals to handle and report their taxes each year. The IRS reported 63 percent of all returns were done by tax preparers in 2013. This is why companies like TurboTax and H&R Block exist. However, the majority of these “tax professionals” still have no clue what cryptocurrency even is, let alone how to properly report it on taxes. This puts the crypto owners in a difficult position as they don’t have many people to turn to for advice or guidance. Many are scrambling to figure out how to do all of this themselves.
In the future, tax accountants and firms that specialize in cryptocurrency will emerge to capture and service this market. We are already seeing it happen with specialists like CryptoTax Advisors and Azran Financial. The demand for tax services largely outweighs the supply, and the first movers are the ones who stand to capture the oversized profits.
I don’t think it’s far fetched to believe that large businesses will be built from this gap in supply. Firms that specialize in blockchain and crypto audit, tax, compliance and advisory services will emerge and look very much like the Deloittes and H&R Blocks of today’s world.
Companies that fail to innovate will fall victim to disruption.
Will the Rise of Crypto Tax Accountants Eliminate the Need for Crypto Tax Software?
As already stated, the current market is in a strange position. Consumers are the ones primarily utilizing different crypto and bitcoin tax software to generate their 8949s and necessary tax documents. They are then giving these reports to their accountants and tax professionals to finish their holistic returns for them. It’s a cumbersome process.
As more and more crypto specialists emerge, the consumers will no longer have a need to use these services. They will simply find a crypto tax specialist to work with and hand over all of their data. That will be the end of it for them (much simpler). The crypto tax specialist will then be the one who uses the software to handle the difficult number-crunching activities like figuring out cost basis, gains and tax liability.
It’s no secret that new markets create opportunities for enterprising individuals and companies to provide new services. We’ve seen it over and over throughout history from people selling jeans and pickaxes to 49ers during the gold rush to companies creating apps for the iPhone. The explosion of blockchain and cryptocurrencies is no exception; it will bring about a number of new opportunities, with crypto tax services being one of them.
This is a guest post by David Kemmerer and is intended for information purposes only. It should not be construed as tax advice. Opinions expressed are his own and do not necessarily reflect those of Bitcoin Magazine or BTC Inc.