The Tax Rules That Have Crypto Users Aghast

Transcript

[Music] hi everyone welcome to Unchained the podcast where we hear from innovators pioneers and thought leaders in the world of blockchain and cryptocurrency I'm your host Laura Shen a senior editor at Forbes covering all things crypto if you love unchained please give the show a positive rating or review and iTunes those ratings and reviews help people find out about the show also spread the word on Facebook Twitter slack telegram and wherever you discuss crypto and don't forget to follow me on twitter at Mauritian this episode is brought to you by on-ramp your branding and website are the first things your users will see and in the current Wild West of ICS and blockchain startups you need to stand out from the pack on-ramp is a

full-service creative a design agency that will help amplify your brand for the perfect website logo collateral or custom design project get big results in no time by visiting think on-ramp comm the topic of today's episode is taxes in crypto and my guests today are tax attorney Tyson Cross of cross law group and CPA Jason Tyrel of Jason mtrs CPA P LLC welcome Tyson and Jason thanks for having us thank you so one disclaimer before we dive in while we hope the show is informative for everyone this is not meant to be financial advice and anyone who has any crypto Holdings should seek their own personalized tax advice so Jason let's start with you I think taxes are fairly stressful for people in

general and when you throw in crypto and its complexities their heads just start to spin so let's start with a broadest question possible but for the purposes of today's discussion will mostly stick with us tax regulation what is the overarching principle that helps explain how the government is taxing crypto transactions so the IRS refers to crypto currencies using the term virtual currency and the substantive guidance provided by the IRS was back in 2014 with notice 2014 - 21 which specified that virtual currencies would be treated as property for tax purposes for most users what that means is that they'll be treated as capital assets which makes

them substantially similar to either stocks or bonds for most transactions so you have a purchase a holding period a disposal and then a gain or loss on the transaction depending on what your basis was and and what the disposal value was okay and just because you know your yours you're using some terminology they're basically like what people would need to know is what price they bought it out how long they held it for and then whether or not they made money or lost money on during that time period is that what you're saying that's correct it's almost exactly the same as a stock transaction so for users that are

familiar with the reporting requirements for those they're substantially similar and Tyson what would you say is the overarching principle that you maybe the way that you think about how the government is taxing crypto transactions Jason described it pretty accurately I guess the one thing I would add and and because of the determination by the IRS that virtual currency is property that means that every single exchange a virtual currency is it as a taxable event so if you use virtual currency to buy a cup of coffee that is qualified as a taxable event if you exchanged one type of virtual currency for another that is also a taxable event it's not just transactions where virtual currency

is sold for fiat and so there's another reason why crypto and taxes have been in the news some of the listeners may have heard about the coin base summons it actually was the subject of a podcast last winter roughly a year ago people should go back and listen to that if they're interested in this topic why don't you guys describe what happened there and why this case is relevant to listeners sure so essentially what happened was an IRS office issued a summons to coinbase seeking all customer records of coin bases US customers I should clarify it was extremely broad summons that wanted all information that coinbase had essentially on their

customers including things as mundane as chat support logs there was quite a big dispute about that several party attempted to intervene coinbase ultimately also disputed or challenged the summons and that ultimately concluded in a court ruling back in late November that more or less granted coin bases summon the summons against coinbase by the IRS although with some modification the most important one being that coinbase only has to provide records of customers who had more than twenty thousand dollars of transactions of any type such as a sale deposit or withdraw so any users who who dollar

value of transactions of those types exceeded $20,000 coin base will be providing those records to the IRS and why do you think the IRS wanted just that level of detail what what was the impetus behind their summons frankly it was a fishing expedition the IRS is concerned that that people are using cryptocurrency for tax evasion or at the very least have taxable income that they're not reporting from cryptocurrency and the IRS pointed to essentially one example although there's kind of other parties involved of someone they did more or less catch

committing tax evasion using virtual currency and that was the basis for them seeking all records of all US customers from coinbase so they are trying to to look at cryptocurrency users and identify people who are evading taxes although I think a lot of people in the legal community would agree that it was an over broad and essentially a fishing expedition I'd like to add a little something to that if I can yeah go ahead so part of the IRS summons was a note that for 2015 something like like less than a hundred returns were filed that declared virtual currency activity and

to kind of extend the narrative of the fishing expedition my firm by ourselves filed more returns for that year with virtual currency activity so I'm not sure where the IRS got that number and and we can't be the only ones but we just I mean just my firm filed more returns than that oh wow oh that's interesting yeah I would add to that so did my firm so I think you know you have two people on the on the line right now that may have exceeded that number the IRS reported as being that the tax returns that were filed huh I wish I had known that back when we were writing the articles about this before the case was settled because

that's kind of interesting that their justification wasn't even based in fact but I wanted to just kind of define this term fishing expedition are you basically saying they didn't have any evidence of wrongdoing of any particular people but just wanted to like get as much information as possible and then and then find those people is that what that means right so a fishing expedition essentially the ideas that cast a broad net and they catch everything and maybe they're looking for the bad fish but with a broad net like that you catch the good ones too and the concern with that is that US people have rights under the fourth amendment to prevent intrusions of their privacy like that and so typically the government is required to

show that it has a you know reasonable basis for seeking that kind of information and a belief that criminal activity is occurring and having one or two or three maybe small examples of it doesn't seem like it's enough to justify obtaining the private information of millions potentially of us-based customers and then how do they determine tax evasion versus ignorant or is it the same thing in the eyes of the of the taxman there's not really a meaningful difference from an enforcement perspective the vast majority of cases where there's underreporting of income or under reporting of tax don't

necessarily go to the criminal stage so I mean that's where you would have tax evasion that that would be a criminal issue so so there's not a meaningful difference if they're just looking to collect revenue and most cases don't go to a criminal phase anyway okay so let's go back to what Tyson talked about about how these tax regulations apply and so many different instances of types of transactions it sounds like it applies if you use Bitcoin to pay for a lamp on overstock as well as if you are a day trader trading in you don't even kind of lesser known more like penny stock type coins or you know if you're an employer

who's decided to pay your employees in ether so like what are some other examples of different ways in which you might use cryptocurrency where you would have to be thinking about it as if you were selling or purchasing stock well the the payroll in ether example is a good one because one thing that a lot of our clients overlook is the requirement to accrue and remit payroll taxes on those payments so that has to be done in just the same way as if you were paying in cash we have clients that are high-speed trading we have clients that are using virtual currencies as a means of remittance overseas the thing is

virtual currencies are fungible in a way that that stocks are not there's a lot of things you can do with them especially with ether now with the ability to write and and carry out smart contracts you really can't do that with securities so that there's just a lot more things going on that could generate tax consequences than with just a generic Sherriff stock and so earlier when you were saying that people would need to record their cost basis like the price they bought something at let's say that I have been buying just for simplicity's sake let's just say it's Bitcoin over a period of time you know obviously because bitcoins are fungible

I don't know like what price when I count my Leila and let's say I had a gain by the time I sold some or spent some or whatever how would I calculate that like what's the price from which I should count my gain is it the most recent most recently purchased Bitcoin are the oldest Bitcoin I have or like how does that work this is actually something that a lot of our clients struggle with and the good news is that the exchanges keep records that are pretty much what you need from a taxation perspective for you so the answer is your your basis is whatever you paid and the IRS doesn't specify how you have to match byes with cells as long as they're the same amount

so first-in first-out works lastin first-out works if you want to go through and cherry-pick and do the matching by hand that way that would work also I'd be extremely time-consuming but you could do it so so yeah I mean there's there's not a lot of guidance provided by the IRS in this area specifically and so lastin first-out is like using your most recently purchased crypto and then first-in first-out is using your oldest but is there one that you generally recommend for people or does it depend on their own personal circumstances we generally recommend first-in first-out and the reason is we have habitual

relationships with clients that we've been working with for a number of years and first-in first-out is the easiest way in the same data set to ensure that you don't mark the same lot of coins as disposed more than one time however we've we admit that that that this year has been extraordinary and so that will not always result in the lowest possible tax outcome in a following rate environment it would you know in a rising rate environment it would not and this is definitely a rising rate environment yeah and I would also tend to agree we also default to first-in first-out for clients the the issue here

this is just one of many problems or I should say the finer details of cryptocurrency taxation that the IRS has failed to provide guidance for to US taxpayers and so people are struggling with determining something as simple as you know which method you use for calc in your cost basis and FIFO is I tell clients probably the safest option because it is the most widely accepted or used in other types of property and so if you really want to make sure that you have no potential issues down the road you know with the IRS or them declaring that some other methods you used is not a reasonable method for crypto currencies and FIFO would be the

safest option and the problem with that and is that taxpayers right now because there's no IRS guidance they're forced to choose do you adopt a method that is safest and thereby only or can result in you paying more taxes or do you adopt a method that's better for you from a tax standpoint but potentially may expose you to some dispute with the IRS down the road and that's a very unfortunate position for taxpayers to be in and I think the IRS really needs to make an effort to clarify some of these things so that people don't have to to decide between those two not preferable options and do you think that the IRS will eventually provide guidance on that or do you think that that's something that

they've purposely left up to individuals you know it's hard to say they are very understaffed under budget at the IRS they're busy and frankly crypto currency is is not a very large segment of the population right now and so I think their resources are probably better applied elsewhere with that said it seems like they should at least make some effort like Jason pointed out earlier the last time they provided notice was in 2014 and if they you know so it's been four years now so I think it's time for some of these issues to be clarified hopefully they provide that guidance sooner than later

it may cause more issues if they do it at the end of March like they did last time right before the filing deadline people may have already filed but in general and they've been criticized but for not providing guidance already by the Taxpayer Advocate and another agency so I think it is probably time for them to make that effort and if they do clarify things will that be something that needs to apply retroactively Li or will it just apply go forward well the problem is that it can apply retroactively Li they're not creating new law they're just clarifying their interpretation of how their law existing law applies to cryptocurrency so it is in fact actually possible for it to apply retroactively Li but we

would hope that in this situation since there's been so much uncertainty about many of these issues that the IRS takes a stance you know with more of a forward-looking approach instead of making taxpayers agonized over whether they need to go back and amend previous tax returns that aren't consistent with the guidance that the IRS ultimately provides well and if you're saying that the IRS has understaffed then maybe they will also think that that's a good idea because then they don't have to do with all those amended returns well so I wanted to ask about something else which was earlier you mentioned what information the exchanges give to you so what exactly do they make available to their customers and does it depend on where the exchange is based like for

instance you know if I use coin base and let's say by Nance do I get different information from the two of them yeah I mean that's a problem right now in this space is that there's no standardized form of reporting so certainly exchanges are free to report different information generally they all make the basics available to you as far as buys and sells and deposits and withdraws I've seen issues and and maybe Jason would agree with some of the ways that margin trades are reported or short sales are reported that can make it difficult when you go in tax time to calculate someone's capital gains so yeah what are the complexities there how is how is

that different from what you've already described well the issue is in the way that those types of trades are settled at the exchange some of these exchanges will place those trays a margin trade or a short sale for instance it shows up in your report just like any other trade although when they actually when it's done on the platform they essentially just settle it out against your position so they'll just pay you the profit you make or take away the the loss you have from your Holdings there on the site and so you do end up with sort of this inconsistency in the way that it's treated at the exchange first mechanically how it's actually reported to the user yeah I would add to that this this is a real challenge for us because each exchange

keeps records they're their own way and and some records excuse me some exchanges don't keep records in a way that's easily accessible to two users especially the exchanges that are outside the United States so it could be something as simple as terminology where a sale is referred to as a cell or a sale or it can be something as dramatic as what Tyson just pointed out there's no unified reporting regime I really thought that there would be a 1099 B requirement and you know forthcoming it doesn't look like that's going to happen anytime soon so we're just kind of left with what the exchanges decided

to do for us yeah you know I was wondering about that 1099 B thing because that was something that Brian Armstrong proposed when coinbase was you know in its legal battle with the IRS and I mean as far as I know that they didn't take him up on the offer which was surprising because it just seems like a pretty common-sense solution here do you have a sense of why that was I just don't think that the IRS can create a new requirement like I mean I don't think that's something they can just do as a deal with with one particular constituency I enticing would probably be a better one to answer this than me yeah I mean procedurally the IRS can't impose you know that kind of

tenant and I'm filing a requirement just unilaterally in a negotiation with coinbase ultimately it's going to get their 1099 will become a requirement for US based exchanges I'm sure it's just a matter of time soon wait does that mean that like it's a different agency that would impose that requirement and not the IRS now you know the requirement for a 1099 I think it just wouldn't be appropriate to make that determination as being a settlement you know negotiation deal with coinbase right and I'm not saying that they would do that just for that one case but that they might take that suggestion and say oh hey this is a smart idea as an agency like we should you know issue that I

don't know you know some new regulation or something to make this a requirement across all crypto exchanges or you know I don't I don't know how that would work exactly what something like that yeah you know and that's a good question I'm not exactly positive we'd have to check the statute generally statutes on tax matters prescribe the general outline and then allow the secretary to basically make decisions based on how that's going to happen and the details of what those requirements would look like and so from that standpoint it is possible that I could just come out of the IRS you know deciding that a 1099 B is a requirement that virtual currency exchanges have to comply with one problem though is that virtual currency is fungible and so and it's very easily

transferable and so unlike shares of stock that you buy and sell typically on a single brokerage you can move these around and that makes the information that the particular exchanges can report on 1099 be less than useful because they don't have your cost basis information all they can do is report perhaps your cells but they don't know which how much you paid for that coin if you bought that coin on coin base for instance and transfer data bit tricks and sold it at bit tricks a 1099 be from bit Rick's may only report the sale and it may actually make things more complicated for taxpayers to accurately calculate their income since those two entities wouldn't

be very accurate so then what are you recommending to your clients are you having them kind of like creep their own spreadsheets or something to track all this themselves yeah and coin base is actually confusing a lot of users or at least of my clients Jason maybe yours too because they're providing a tax report now where you can calculate your taxes but they just treat if you deposit a coin into a coin base they use the cost of the market price of the coin on that day as your cost basis and if you produce your tax report it's gonna be completely erroneous I think I think taxpayer is actually gonna rely on that report not fully realizing that it's completely incorrect yikes that seems like something you you

should tweet at them and say hey guys you're doing this wrong people are gonna you're gonna get the IRS to come after you again yeah yeah I mean I think they're trying to help I mean they really are they're they're trying to prevent unwelcome regulation coinbase is not a tax preparation platform and and I think most people realize that the 1099 B issue you know to add on to what Tyson said before could actually be prejudicial to taxpayers because the IRS uses 1099 information as as a standard of reporting for income so if you have coins that you liquidated for $50,000

during a year with no basis reported the IRS is going to automatically assume $50,000 in profit anyone who's ever gotten a CP 2000 notice which is a it's a mismatch between reported income and declared income notice knows that it you know the IRS doesn't always get the whole picture so I think that the the coin basis is just trying to do their best to keep the IRS out of their business and that's what their best looks like right now unfortunately so just going back if I have bought my bitcoins somewhere else but I move them to coin base in order to sell them you know back in a Fiat into my bank account

then it's upon me it sounds like to make sure that I know what my cost basis was so is not to have to pay you know in this example of the 50,000 not have to pay taxes on the full 50,000 like let's say let's say I spent twenty thousand you know and then took out fifty thousand it would be the onus would be on me to to log that I paid twenty thousand is that correct yes and it's also on you to report that at tax time okay and the other thing I was wondering about is so a service like coinbase they charge one point four nine percent for transactions where you convert back to fiat and then also actually also when you buy so you pay taxes on the fee or what happens

with the fee no that that either becomes part of your basis or it's deducted from your the proceeds of the transaction so it's it's essentially a deduction from from your gains and then does that does the same thing apply if I'm transacting on the Bitcoin blockchain and let's say I pay a $40 fee what happens with with that fee how do I treat that tax on twice it would be the same it's deductible okay and then for the Hodler is out there I do they pay any taxes you know and if so how much and what information do they need to record-holders know that there is no tax consequence unless you actually engage and attract a taxable transaction so

that would be an exchange of goods services other property or money so if you're holding there is no tax on the appreciation that's occurred in in those holdings and I'll point out that's another area where I see confusion among clients is that on coinbase if you withdraw your coins and transfer them to a new exchange on that tax report that coin base provides you it treats that as a taxable sale and so clients who see that are confused and so we can clarify that the act of withdrawing virtual currency from the exchange and moving it to a paper wallet or to another exchange is not a taxable event and then if you're shifting coins that you bought

let's say on the retail side of coin base over 2g tax the institutional trading platform or a professional trading platform is there any taxable event at that moment or no no the transfer of cryptocurrency from wall to dress to wallet address as long as you know you were still the owner is not a taxable event okay and and then actually to go back to my question about the hot lers when they buy that's not a taxable event either right as long as they buy with fiat if they use Bitcoin to buy an altcoin that would be a taxable event it's treated as if they sold the Bitcoin for cash and bought the altcoin so they may have a taxable event they're on the

Bitcoin side of that train okay so let's talk more about crypto to crypto trades are those ever treated as like-kind exchanges and can you also just define this term like kind exchange sure so this is probably the most common question I get right now under section 1031 an exchange of property that is of like kind does not cause the recognition of gain or loss and so the question is does cryptocurrency qualifies like-kind property and the problem really is that cryptocurrency is a new asset class we know it's property the IRS clarify that

in in the notice they issued in 2014 so it is at least technically eligible for like-kind status under section 1031 but that's not really enough you have to look at the nature and character of the property itself and it takes a pretty in-depth analysis to determine whether the property involved is in fact like-kind and we don't have any direct authority on point there we have cases and regulations and IRS rulings interpreting the nature and character test for other types of property and so we can try to analogize cryptocurrency to these other types of property but it just doesn't fit very well because it's

this is a new asset class and it just tends to not fit very well within the existing legal framework so I tell clients or people who at least consult with me about this like-kind issue it is possible for cryptocurrency to be like hind and it's certainly not let's call it illegal to report it that way on your tax return but the issue is that because there's no direct Authority the IRS is effectively free to disagree and reach a different conclusion and reject the use of light kind if they do that you as the tax payer would have to either fight that out and possibly go to Tax Court or or even higher courts to resolve the issue or simply pay the tax that they've assessed against you plus interests and

then potentially penalties and the penalties are going to apply if if you don't have a reasonable or adequate I'm sorry legal authority for arguing that cryptocurrency is is like kind property and so that's really what the issue comes down to is is there sufficient authority to treat it that way and if not then you'd be facing penalties if you report it that way on your tax return and didn't that recent tax bill also restrict that to only real estate or something like that right so the new tax bill amended section 1031 and essentially makes like-kind exchanges going forward only applicable to exchanges of real estate okay but it leaves open the question of what

happened to like-kind exchanges in crypto before this new tax bill is that what you're saying right so it is technically still on the table for previous years and you know it's anyone's guess on how the IRS is going to play this one based on the number of people asking me if they can file like on exchange for previous years on cryptocurrency I think that'd probably be quite a few people doing it that way and the most important thing though is that they have to remember just because it's not taxable it doesn't mean you you get to skip reporting it on your tax return like kind exchanges still are reported on the tax return using form eighty-eight twenty four so if you think that like kind exchange treatment is sort of an easy way out of the reporting

requirements and the difficulty of accurately tracking your crypto trades it's not it's still need to be calculated and reported on your tax return oh wow for people who do a lot of that that sounds like a total headache all right we're gonna talk about taxes on hard Forex airdrops mining lost coins and for ICO issuers but first I'd like to take a quick break to tell you about our fabulous sponsor on-ramp if you're starting up a new project or need some design or branding help on an existing one on-ramp has you covered on ramp is a full-service creative agency that helps numerous companies including many in the crypto space maximize their brand awareness gain traction and accelerate growth on-ramp has a passion for assisting brands and boosting business results and can help with everything

from website and logo design to social and content strategy focus on your core technology and leave the rest to on-ramp to learn more and see how they've helped passionate entrepreneurs achieve their dreams go to think on rap calm I'm speaking with tax attorney Tyson cross and CPA Jason Tyra about taxation of crypto so let's talk about hard forked coins how will people be taxed on those like for instance you know if I held Bitcoin on August first let's say I had five bitcoins and then I therefore received five Bitcoin cash how will I be taxed for these new Bitcoin cash that I know hold that's a really interesting area because there's not a direct analog in the tax code for a hard fork that where

you would typically see a property split under normal circumstances would be like a stock split where you have a two-for-one and the two shares of stock each have half the value of the one that you had before or a property split incident to a divorce where you have say a piece of property that's divided in half but you don't end up with more property than you started with with a hard fork in the the virtual currency land you end up with something that's new that didn't take anything from from where I came from if you will so we're they're suggesting to clients that they treat it as a capital asset with a basis of zero and and then that would start their holding period and they either

have a long or short term capital gain depending on how long they held the asset Oh interesting you recommend they start from zero well what if they had bought their bitcoins and we're holding them on a centralized service like Zappo or coinbase which did not make the Bitcoin cash available until months after it had been released then do you still recommend that they use zeros their cost basis yeah we do and the reason is Bitcoin didn't give anything up Bitcoin did not lose any value or have any fundamental change at the time of the fork so the the zero cost basis makes even more sense in the in the scenario you just gave because the the point at which the

client had an unrestricted right to the coin was different from when the coin actually forked so as long as you assume a zero basis there's there's no there's no harm to the client okay and that with the same reasoning apply to something like air-dropped coins where again you know holders on a certain an existing blockchain will suddenly receive new coins that I think is less clear and Tyson may disagree with me on this I think an airdrop is different from a fork in that you kinda have to do something for the most part to participate in an airdrop so I would say that those coins usually would be

considered ordinary income at the time received and that would establish their basis and then you would have a capital gain or loss from there but I would want to make that determination based on the circumstances of each individual airdrop event as opposed to it on a blanket basis okay and when you say that you mean that you would pay taxes simply upon receipt of the coins because their income that's correct okay yeah and you know if I can add lore I think this is a great example of where we need better guidance from the IRS because the light jason said there's no analogy for this in the tax code it's just a completely new concept of the heart Fork and I've written previously on this and you know

basically the thoughts I've shared really are more of a strict interpretation of the code I think if you look really closely and take a very conservative interpretation both the hard fork and an airdrop or taxable advance at the time of the hard fork but there's a there's serious issues with that viewpoint and both practically and administratively from the IRS is perspective it's essentially unworkable I think because frankly people don't know about hard Forks now something is high-profile maybe as the Bitcoin cash certainly a lot did but I'm assure you there are some people who had no idea and so requiring them to you know recognize income it didn't even know about certainly it becomes an issue and the problem here is that we're back to that situation where taxpayers have a

difficult decision to make as far as do they pay more tax to be safe or do they take a more reasonable approach but risk some kind of issue with the IRS down the road and I have clients who are very early adopters and and have very large Bitcoin holdings and so for your average person that Bitcoin cash fork maybe was several hundred or maybe a few thousand dollars of potential income depending on how you treat it but if you're a very large early adopter of Bitcoin but I have one client in particular who was about 6 million dollars of income potentially from the Bitcoin cash hard fork so do they treat that as taxable income at the time of the fork or do they wait and take the what I think is probably a more

reasonable approach and uses zero cost basis like Jason was recommending the issue there is that the if the IRS thinks that the it was taxable at the time of the hard fork they did underreported by six million dollars and that carries significant consequences with it and so those taxpayers are put in a very difficult position of deciding the correct way to treat it so we do need guidance on that point but I would just wrap that thought up by saying I tend to recommend the same way that Jason does as far as just using a zero cost basis and recognizing that game when the when that new crypto is disposed of yeah well I think it would be difficult with the Bitcoin cash to to figure out what the income was right because it took kind of a while to

figure out a price even and then I don't know if that price was consistent across different exchanges am i wrong like I feel like there was a lot of confusion initially yeah and that's one of many you know check marks on the box that say that it's not administrative leap ossible to treat the hard fork as a taxable event at the time that occurs and valuation is a good example of one of those problems with that approach also that would be a terrible outcome for the taxpayer let's let's take that same hypothetical client with the six million dollars in gain he reports six million dollars in ordinary income in year one and then let's say on the first day of year two that Bitcoin cash had gone to zero so now he has a six million

dollar capital loss which he can't necessarily deduct against his six million dollars in income and because capital losses are limited to three thousand dollars per year how long is that going to take to write off right so let's talk about another instance in which we sort of have new a new coin being out of the ether which is what happens with an initial coin offering if I am issuing the new coin and how am i text on that you know that was a very interesting question at least a one that maybe people tend to overlook and it's sort of ironic because you do have projects that are conducting an IC o---- and on one hand they don't want to be a security because they do want to stay

out of any sort of trouble with the SEC but on the other hand if they're not of security they certainly are then selling a utility token is typically the nomenclature that's used for that and basically they're selling a product or service and either way you know under the Internal Revenue Code there's a specific carve out for money raised through selling shares of stock or a membership interest in a partnership that is why normal IPOs are tax-free those provisions by their very language used would not apply to cryptocurrency being sold in an IC o---- so I'd be curious to hear with Jason things but I I think that it's taxable income to the

sellers of the token yeah I agree with that we work with a lot of companies that have put together icos and there's really only two ways you can go it's the other a security or where it's a product essentially and what we tell clients is that if you have not registered with the SEC then you've kind of made your bed in that respect and you know you are going to have to pay tax on revenue okay and what if I mine crypto how am i text then ordinary it's just ordinary time okay and same if I'm paid in crypto is ordinary income what if i gift my crypto to somebody or do I pay taxes on that in

that circumstance the gift tax rules would apply so there is a tech there is a tax free gift limit it's $14,000 per person per year and under that limit you don't even have to report so let's say you had one Bitcoin which is let's say it's worth exactly $14,000 but it has a basis in your hands of ten if you gift that to somebody it just it's just it just leaves your hands tax-free and then the recipient takes a carryover basis from you if you go beyond so you don't need to tell them what you paid yes you do

once you go beyond that the tax free gift limit you start to eat into your lifetime it's it's like me a state exemption limit and I don't know what it is off the cuff it's in the millions of dollars but that at that point you would be required to file a gift tax return but you probably still wouldn't owe any gift tax unless you had gone through your your lifetime tax free gift limit yeah that limit just got raised to 11 million dollars if you're single 22 million if you're married with the new tax bill so long story short most people don't need to worry about the tax consequences of gifting krypto although as Jason pointed out if it's over 14,000 you are required to file a gift tax

return just so the IRS can track how much of that a lifetime exception you've stopped and what if I've lost my crypto meaning what if I've lost my private keys like maybe I was hacked or I throw it the hard drive they were on can I deduct those losses and if so what amount do I deduct is it the amount of December 31st or the amount from the time I lost them oh that's a good question okay so but I don't know tysyna a thrown away hard drive if what do you have is is that a theft or casualty loss if you destroy your own property you know that's interesting that there's a lot of different fact patterns that can come up in this context for whether a loss is a

casualty loss or a theft loss and run into clients all the time you have different examples of things happening you know the exchange closed down or they were hacked and tried it's interesting yeah tragic boating accident you know the unfortunately the first rule I mean assuming you qualify for a theft or loss deduction and that'll have to be determined with your tax advisor I think to make sure but the loss is based on what you paid for the coin so right off the bat most people aren't too happy frankly about that outcome there's also phase-outs on when you can even deduct the the casualty loss on the tax return and I'll just add finally the casualty losses were one of those things

that got thrown on the chopping block in the new tax bill so actually going forward there's not a mechanism to deduct lost coins anymore whether they were stolen hacked or results of a crashed hard drive oh my gosh that's well so I'm floored by the fact that you said that the amount that you deduct is what you paid because obviously for people who have seen huge crypto gains I'm sure they they don't like that but then knowing that going forward you can't even detect any of these losses especially and does not even apply if you've lost crypto on an exchange as we know the history of crypto is riddled with exchange hacks well it depends on the fact pattern so a capital loss is

different than a theft or a casualty loss a theft or casualty loss under pre 2018 law was an itemized deduction a capital loss is taken on a different part of the return so you may have a case that you you know to make that you have a capital loss in an exchange failure as opposed to a casualty or a theft yeah and that's there's actually a really interesting wrinkle here in the law that is maybe worth exploring more now that the casualty loss deduction is gone and and that's when you can abandon property and take a capital loss for the abandonment and something I haven't honestly I haven't looked into too closely yet but it's been on my list of

things to do for clients who are in this situation because you can actually abandon property and take a capital loss so how do you abandon crypto that's on an exchange that folded I mean there's a lot of mechanics there that become difficult to navigate but it's at least maybe a potential option down the road worth exploring for for clients who lose funds on these exchanges and are sort of desperate to get some kind of benefit out of that for tax purposes at least well okay and let's talk also about wash sales can you define what that is and describe how the IRS treats wash sale of crypto assets sure the the short answer is that wash Dale rules do not apply to virtual currencies and to kind of expand on what the wash Dale rules

say you cannot purchase a an asset that is the same as or substantially similar to one that you have disposed plus or minus 30 days if you look at the wash sale rules they specifically apply to securities and notice 2014 - 21 does not lump virtual currencies in with securities securities have some specific attributes that are not shared by virtual currencies one of which is that you have a counterparty with a security you really don't with virtual currency a security guarantees you some sort of rights or privileges or has obligations

associated with it not so with virtual currencies so at least in my opinion virtual currencies are not even similar to securities so I think they're unlikely to fall under the wash sale rules and so just taking that in conjunction with what we were saying before about how like-kind exchanges are so I cryptid a crypto trades are not like hind exchanges does that mean if I sell my I guess like let's say my sell my ex RP at a loss but or not and not sell betrayed it for let's say ether which then goes up then I can have both a loss that I can deduct as well as but then later I have the capital gain yes I

mean in that situation those are separate transactions assuming you don't treat them as like kind if you treat them is like kind that would be no gain or loss on the transaction so what Jayson saying and I agree with him is that crypto is not covered by the wash sale rules as they're currently drafted and if if crypto continues to grow in widespread adoption that'll change eventually you know there's a reason why the wash tail rules exist is to prevent you from harvesting tax losses when you have positions that have dropped in value you could just sell it trigger the tax loss which will offset your other gains for the year and then you buy back the position again and your investment position has not changed yet you have of this favorable

loss that can offset other sources of gains on your tax return so that's what the watchdog rules trying to prevent I'll point out one thing you know just from the law standpoint there's this stick the IRS keeps in its back pocket called the economic substance doctrine and it says that any transaction that lacks economic substance apart from the tax benefit can essentially be disregarded by the IRS so when I'm talking to clients about wash Dale rules I caution them because yes in theory you could have a position that goes negative you could sell it to trigger the tax loss and then buy it right back again a moment later and in theory the wash Dale

rule or specifically the washtub rule would not apply however that type of transaction is at risk under the economic substance doctrine because your position your economic position has not changed it's identical and the only reason you did that transaction was for the tax benefit of harvesting a loss so the IRS could disregard that right but what I was asking was if you exit a poor performing crypto asset like like let's say you know X RP has dropped recently so let's use that as an example so let's say I trade that for something like ether that has gone up but probably over at the same time period then then I do actually benefit from both the loss as well as but it which you know but then

obviously I still have the gains yeah you know in that situation I mean your position has changed and that's what the wash sell rule is looking at you know you switched to a different crypto so that loss you incurred on ripple in effect was real you know you change positions you realize the loss you've acquired ether your position has changed and so not only does that transaction not fall within the wash sell rule simply because Kryptos aren't securities but also from a economic substance standpoint that's a different you know you've you had economic substance in that transaction because you did actually in fact change your position from going from ripple to ether so for 2018 what habits do you recommend crypto enthusiasts pick up at the

beginning of the year so as not to make their taxes a year from now too painful you know I'm sure Jason hears the same thing I taught the client to number one or a ghast that every exchange of crypto two crypto is a taxable event that that fact still doesn't seem to have permeated the crypto community so one of the best things you can do aside from simple things like keeping good records is be a little more deliberate about the exchanges you have sometimes users are just kind of swapping in between Kryptos almost for fun and they don't realize that they're really creating quite a mess for their tax return and so when you say to keep good records it would be what you paid for it the date or the amount you sold it for what what else

would you want to log on such a spreadsheet you know I mean that's the most important thing the the date the quantity the coin you gave up the coin you got back the price and you know we've talked about the records that exchanges keep for you and generally those are fine to use I mean if you're doing the significant amount of trading practically speaking you can't really manually keep those types of records anyways you're going to have to rely on the exchange reports but I do run into people all the time who have done trades through shape shift or other decentralized exchanges that don't provide transaction reports and in that situation that's where it falls on you to keep track of those same thing with making a nice geo investment any of those exchanges that occur off of a normal exchange platform you're gonna

have to keep manually in order to accurately calculate your tax return I just want to expand on that a little bit because I think Tyson hit the nail on the head with be a little more deliberate the number one issue that we have had with clients in the past is especially this past year we have clients that say I didn't know I didn't keep any records what do I do and and the short answer is well you're already out of compliance there's not really anything you can do except try and report something and you know just being a little more deliberate about your activity being aware of what you're doing and what is expected of you under the law can go a long way to avoiding head

in the future and are things any easier more streamlined for people if they use an LLC to trade I don't think so no no I don't think so and what do you recommend or are there any either tax accounting software or any any other programs that you think people could use to help with this headache yeah you know the big two that are out there right now are Bitcoin tax and coin tracking dot info and and they're they're tools that help you essentially conduct the calculations you need to do in order to figure out your capital gains with crypto they'll run FIFO or LIFO or whatever basis method you choose in order to to calculate your

gains and I'm not aware of any others I think that from you know they seem to work fine from what I hear I can't you know personally vouch for either but that was definitely the most to popular I don't know if Jason knows of any others those probably are the two that are in the widest use there probably are others but those are the two that we use and we found that they work very well and so I it sounds to me like obviously regulation in this area has not been set there's a lot of work that needs to be done clarifications to be made I've heard about this cryptocurrency fairness and Taxation Act and I wanted to first you know have you describe what that is and whether or not you think it's a good

idea but then also describe whether or not you think there are any other countries out there that have taken either a much more progressive or conservative stance on crypto taxes and whether or not there are any policies that you see are being instituted abroad that you think we should be adopting here in the US was that the bill that came up last year and I don't think anything happened with it correct yeah I love talking about the crypto currency tax Fairness Act because it's just it's just such a bizarre bill if you look at it essentially what the bill said was that transactions with a gain of less than I think it was $200 from tech okay

$600 would be exempt from tax and so this would basically engineer a loophole for for anyone who could write a script that would ensure that no lot of coins ever had a gain of more than six hundred dollars to just never pay taxes ever and I think the idea was to kind of promote virtual currencies as a means of exchange so that you could reasonably go and pay for a cup of coffee or whatever without having to report that it's never going to become law bit because it's it's just it's just too easy to exploit in a way that that makes virtual currencies on taxable yeah I completely agree and are you seeing

anything happening abroad that you think would be maybe a wait for us to go here in the US you know we have a potential solution to this issue and it's the way that taxes are done for foreign currency exchange foreign currency if you trade it as an investment is taxable capital gains if you use it in a personal use transaction I believe the threshold is two hundred dollars of gain anything less than two hundred dollars is not a taxable and not reportable and that's why you can go on vacation to Europe and use euros to buy a cup of coffee and not you know have any concern about gain or loss and even if you come out to the US and and sell your euros back at the bank you don't

have to worry about gain or loss and so that's what we need we need a I don't I don't think we need necessary to treat virtual currency as currency but we at least need to apply a similar tax regime where you have this exception for personal use transactions which is much narrower than the the bill that was proposed last year and I think would adequately address the issue that Jason correctly brought up that if it's just a flat dollar exemption there's too much opportunity for a manipulation of that I think the problem with that though is it's not really clear that that the use case for virtual currency as as a replacement for fiat that that's really expanding I mean I've been in the space

for close to five years I think Tyson you've been around just as long as I have if not a little longer and the kind of Golden Age of that was 2013-2014 when it was cheap to transact in in virtual currency and specifically Bitcoin and it kind of seemed like that the number of merchants that were accepting it was increasing and we've seen a lot of pullback in the last several years from that so there's I don't think that there's this vast community of people out there that's just waiting on the edge of their seat to you know for the day when they can use Bitcoin to pay for a cup of coffee every single day if there was then they seem to have evaporated over time

interesting yeah and if I can point out one thing and maybe it's a little tangential but cryptocurrency right now as we've shown by just discussing the tax elements is outside the existing regulatory and legal framework and it doesn't fit well within any of the current rules and I'm sort of surprised at this point that we haven't seen more effort in the community to put forward a lobbying effort in Congress in order to get things like personal use exemption or other clarification on points related to the regulation of cryptocurrency to make a better effort as far as lobbying goes to make those things happen and and maybe I've just overlooked it but as far

as I can tell there's not a very concentrated effort on that front and and at this point now in 2018 I think it's safe to say crypto is probably here to stay at this point and so now maybe it's the time to really start making an effort to get the legislation that we need to absolve a lot of these issues that are making the use and adoption of cryptocurrency difficult well maybe that's something that coin Center one of the advocacy groups can work on for listeners who have not heard that episode with coin Center from season two or maybe it was season one actually they were just amazing and really interesting and we got into all kinds of interesting discussion around icos and stuff like that so to wrap up what is the number

one biggest takeaway that you'd like listeners to know about crypto and taxes well I would say that the most important thing to remember is that every exchange is taxable and that means that you have a burden as a time pair to keep track of your activity with crypto and you can rely on exchanges to a degree and you know assuming they don't go under to report to you your activity but at the end of the day the obligation is on you and so that's an important duty that you need to make sure you're meeting and that would imply keeping records of exchanges and trades that happen off of exchanges and and just making sure that you're able to comply adequately with your tax

reporting requirement and to put I guess a more positive spin on on the lawyers comments this is a really exciting time I think for virtual currency and for me at least it's been fun to see how many clients have have Jed really changed their lives over the past five years and and specifically in the past year I mean I have a client that is like a cheque herder grocery store and probably has never made more than thirty thousand dollars in his life and made a million dollars last year trading virtual currency and that that that is a a life-changing event for this guy so you know with regard to tax there's no one

hundred percent tax rate and even if you're in the top bracket this year it'll be thirty seven percent you still get to keep what 63 cents out of every dollar that you make it's too easy to just report your taxes and pay what you owe and then and then keep the rest to try and duck it and and and not meet your obligations you're probably going to be found out you know and in the end it's going to mess it up for everybody all right well I've been speaking with Tyson cross and Jason Tyra it's been fantastic having you both on as guests where can people get in touch with you or see more of your work I can be found at Bitcoin Tax Solutions comm I'm on

Twitter now I'm new to Twitter but my handle is Tyson P cross and I'd love to catch up with anybody who wants to discuss cryptocurrency taxation and you can find me at Tiber CPA com I'm also on twitter at tyra CPA though I not so active great well thank you both for coming on the show thanks so much for joining us for this episode on crypto and taxes to learn more about Tyson and Jason and to find previous episodes of the show with other innovators in the blockchain and crypto space check out my Forbes page forbes.com slash sites slash Laura shin owl so be sure to follow me on twitter at laura shin new episodes of unchained come out every other tuesday if you haven't already rate review or subscribe

on itunes or wherever you get your podcasts if you liked this episode share it with your friends on facebook twitter or linkedin unchained is produced by me laura shin with help from Elaine's lb and fractal recording thanks for listening [Music]