Web3 companies face unique challenges when it comes to prepping for tax season, and they need to employ smart strategies to tackle them.
No company looks forward to tax season, but for Web3 businesses, preparing can be particularly difficult. Global operations subject Web3 businesses to a variety of tax regulations and compliance requirements, and many regions lack regulatory clarity. Different digital tokens may have different tax statuses, making correct classification and reporting a tremendous challenge. The complexity is further increased by having to keep meticulous records of various cryptocurrency transactions, dealing with crypto-to-crypto swaps and managing market volatility.
Further, the incorporation of blockchain and cryptocurrency data into accounting systems presents additional technological obstacles that the overall tax accounting software market hasn’t caught up with yet. And last — but certainly not least — Web3 companies are likely to come under increased tax authority scrutiny. The bottom line? In all their operations, Web3 companies must constantly keep an eye on the tax implications of their activities and diligently work to ensure they’re meeting their obligations. Below, seven members of Cointelegraph Innovation Circle share their experience to help Web3 companies prep for a (relatively) smooth and simple tax season.
Choose a tax-friendly country and ensure on-time payment
On-time payment of taxes and proper clarity with the tax authorities can prevent unnecessary harassment. Crypto businesses are seen with a degree of suspicion throughout the world — even in those countries that are supposed to be crypto-friendly, like Singapore. Further, it is very important to choose a tax-friendly country such as the United Arab Emirates to lower your business expenditures. – Abhishek Singh, Acknoledger
Ensure all activities are accurately documented
Web3 companies approaching tax season should engage with a tax professional who is well-versed in crypto and blockchain transactions. Ensure all activities, from token sales to smart contract interactions, are accurately documented. Being proactive can mitigate potential tax liabilities and compliance issues. – Tomer Warschauer Nuni, Kryptomon
Don’t take any shortcuts
Being prepared is vital, as not only is the space continuously adapting, but it is also volatile. This means that if you do not plan correctly and take the right measures, you could find yourself in troubled waters. Seeking the help of professionals who know the crypto and Web3 space well is incredibly important. – Ilias Salvatore, Flooz XYZ
Maintain meticulous records and seek expert legal counsel
Although cryptocurrency appears to be moving out of legal “gray areas,” its institutions still face significantly greater complexity in terms of accounting and tax compliance when compared to those that operate with fiat currency. Maintaining meticulous records and collaborating with a legal and compliance firm that specializes in digital assets and blockchain is paramount; it’s essential to have guidance on current and forthcoming regulations. – Sheraz Ahmed, STORM Partners
Automate transaction tracking
In the digital forest that is Web3, every crypto leaf has its shadow. Instead of waiting for “tax winter,” harness the glowworms of automation! Design a system that illuminates every transaction, making tax season feel like a serene, moonlit night rather than a stormy evening. – Arvin Khamseh, SOLDOUT NFTs
Hand transaction information to experts with specialized software
Work with accountants who are familiar with the crypto space and who can take your transaction information and plug it into specialized software that can sort and summarize the data from the blockchain. You don’t want to manually do that, especially if you are the type who trades several times a day. – Zain Jaffer, Zain Ventures
Find an experienced crypto tax accountant
Work with a good crypto tax accountant as early as possible. Make sure they are experienced in handling both traditional and crypto transactions from both a tax and an accounting perspective. Look for a tax specialist who has deep personal crypto experience as well as extensive crypto tax technical knowledge and who is knowledgeable in using crypto tax and accounting software. – Sharon Yip, Polygon Advisory Group, LLC
This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.