5 Ways to File Taxes on Time and Avoid Extension for Digital Assets Transactions
Did you file your taxes in the fall by requesting an extension because you were not prepared to file them this spring? If so, you’re not alone. Many digital asset companies struggle to keep their financial records organized and up to date. Filing late can result in penalties, interest, and stress.
It doesn’t have to be that way. You can help minimize the late filing penalties and interest by starting to get your books in order now. Here are some tips to help you prepare your financial records now and file your taxes with ease next year:
- Take inventory. Compile a comprehensive listing of all wallet addresses (both public and private) as well as all exchanges on which you transact. Maintain this listing and ensure it remains up to date. Then, identify and classify the types of digital assets you/your company owns and transacts in (i.e., crypto assets, stablecoins, non-fungible tokens (NFTs), wrapped tokens, etc.). Each type of digital asset may have different accounting, tax, and regulatory implications.
- Retain year-end reporting from exchanges. Regulations requiring crypto exchanges to issue a Form 1099 are still in the proposal stage. Not all exchanges on which you transact will issue a Form 1099 to you. Depending on your trading volume, export your transaction history on each exchange you utilize and retain for your records (should be done at least quarterly).
- Take wallet snapshots as of 12/31/2023. In addition to exporting exchange data, obtaining a snapshot of your digital asset wallets provides you with a record of the balances and values of your digital assets at the end of the year. This will be useful for reconciling year-end balances and transaction details which will be used to calculate year-end realized gains and losses.
- Assess potential software implementation. Understanding the volume of your transactions is key when assessing if there is software that will help you gain efficiencies over tracking your digital assets in spreadsheets. While spreadsheets are a great tool, they are prone to formula errors, data entry issues, and the possibility of incomplete data. By utilizing a software, you are able to take advantage of automated features, including transaction pricing and coding, and could potentially integrate your digital asset subledger with your current accounting system. More importantly, in the event a new company wallet or exchange is identified, adding that missing activity via a software platform takes a fraction of the time when compared to layering in the new activity via a spreadsheet.
- Track nonemployee compensation. United States tax regulations require businesses operating in the US to issue 1099 reporting for nonemployee compensation totaling $600 or more, even if the payments were made with digital assets. Nonemployee compensation refers to the money a company pays to an independent contractor who provides services. The 1099 reporting filing date comes up fast, 1/31/24 for 1099-NEC and 3/31/24 for 1099-MISC. Retaining records of all vendor and contractor payments as well as collecting W9’s/W-8-BEN’s from all vendors and contractors is useful in determining the 1099 reporting eligibility.
By following these tips, you can get a jump start on getting your books in order now and make tax season less stressful and more efficient next year.
How Centri Can Help
It is imperative that you choose financial reporting experts who understand digital assets and financial reporting requirements. Our dedicated, skilled professionals collaborate with international and domestic token issuers, digital asset exchanges, including decentralized finance platforms, venture capital, miners, media, blockchain and enterprise platforms, and other leaders. This allows us to find solutions for your unique accounting needs. Please contact us to explore how our expertise aligns with the specific needs of your company. Remember, the sooner you start, the better off you will be.
Partner | Digital Assets Practice Leader | CPA
Michael is a Partner at Centri Business Consulting and the leader of the firm’s Digital Asset Practice. He has more than 10 years of experience in the accounting treatment of various transactions, including complex debt and equity...
About Centri Business Consulting, LLC
Centri Business Consulting provides the highest quality advisory consulting services to its clients by being reliable and responsive to their needs. Centri provides companies with the expertise they need to meet their reporting demands. Centri specializes in financial reporting, internal controls, technical accounting research, valuation, mergers & acquisitions, and tax, CFO and HR advisory services for companies of various sizes and industries. From complex technical accounting transactions to monthly financial reporting, our professionals can offer any organization the specialized expertise and multilayered skillsets to ensure the project is completed timely and accurately.
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