Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Clinton Donnelly: Bitcoin & Crypto Taxes – What Every US Taxpayer Needs to Know (sponsored)

Episode Date: February 28, 2020

Income tax. Not a particularly exciting topic, especially when it comes to paying them. But something we all need to deal with nevertheless. We are all (or at least should be) aware of what our personal tax returns entail. But are you fully aware of the implications holding crypto can have on your tax filing?Clinton Donnelly, Founder of CryptoTaxAudit has done hundreds of tax returns for US citizens, both domestic and expatriated, and is an expert when dealing with filing crypto and Bitcoin taxes. He is also an Enrolled Agent, which means he meets the requirements of the IRS to represent taxpayers. Clinton has seen it all, and there's no situation too complicated. In our interview with Clinton, we explored the ins and outs of crypto taxes for US citizens – it was an information-rich conversation. US taxpayers who hold crypto will learn what they need to report to the IRS, as well as the practical, concrete actions one can take to make sure they are complying with the Tax Code of the United States of America.Topics covered in this episode:Your tax obligations are as a cryptocurrency holderWhat you need to report and how you can prepare a Bullet Proof tax returnHow to put yourself in ths shoes of a IRS tax auditorWhat to do if you get an IRS audit letter (hint don't panic)The biggest mistakes people make when filing their tax return and the risks they faceWhat to do if your crypto transaction history is messyWhat proactive steps you can take to improve your situationEpisode links: CryptoTaxAuditDonnelly Tax LawIRS Refused to Clarify Its Crypto Tax Guidance Isn’t Binding, US Watchdog SaysIRS Explains What Crypto Owners Must Know to File Taxes This YearClinton Donnelly, TwitterClinton Donnelly, LinkedinThis episode is hosted by Sebastien Couture. This podcast episode was sponsored by CryptoTaxAudit.com.

Hi, welcome to the first and inaugural edition of Epicenter Aftershock. My name is Sebastankuchi. These Aftershock podcasts are wholly sponsored, and that means that everyone you hear on these editions of the show paid to be here. But that's okay, because we have some amazing sponsors. If you're looking for the regular weekly edition of Epicenter, just look for the numbered episodes in your podcast feed. Today our guest is Clinton Donnelly.

He is a crypto tax expert. he's helped hundreds of U.S. taxpayers both domestic and ex-pay traded, filed their crypto tax returns. He's written five books on crypto tax, and he's the founder of Crypto Tax Audit. This guy has seen it all, and there's no tax return too complicated. If you're a U.S. taxpayer and you hold crypto, this is a really important episode that you want to hear. Here's what you'll learn. What are your tax obligations as a cryptocurrency holder? What you need to report and how you can prepare a bulletproof tax return?

how to put yourself in the shoes of an IRS tax auditor and what to do if you get one of those scary audit letters, which I certainly wouldn't want to get. What are the biggest mistakes people make when filing their crypto tax return and the risks they face? And what to do if your crypto transaction history is totally cluttered and messy and what proactive steps you can take to help improve the situation. Finally, you'll learn about crypto tax audit. It's a yearly subscription service, which is your Kevlar vest, in case you get audited by the IRS. It ensures you get competent representation and advice from experts so that you only pay the taxes that you legally owe. And I think you'll be pleasantly surprised to learn just how little it costs to get an IRS audit insurance policy from crypto tax experts. Thank you to Cryptotax

Audit for sponsoring this episode of Epicenter Aftershock and thanks to Clinton for offering this great advice to all of our listeners who might be concerned. And looking at our stats, I happen to know there are many of you. So with that, here is Clinton Donnelly of Cryptotax Audit. I'm here with Clinton Donnelly. He is a crypto tax expert. He has prepared crypto tax returns for hundreds of people and helped hundreds of people understand and dissect and clarify the situation, which is, you know, that everybody who has crypto has the face, which is to file their tax returns. He's also the author of many books on the subject, and I'd like to thank him for being our guest today. I have a pleasure to be here.

So tell us a bit about your background and how you became interested in crypto. You know, my background is I have an advanced law degree in the international financial regulation, including taxation, and I'm an enrolled agent, which is the highest level of certification that the IRS grants authorizes me to represent taxpayers worldwide, which is what I do. I have clients in 48 different countries. I got involved with crypto tax reporting at the beginning of 2018 because everybody who had made a fortune in 2017 started to have serious tax questions. So I became a legal tax advisor to a crypto tax prep firm,

but quickly realized that it was far more complicated and continued to build my own practice. At this point, I've written five books on crypto tax preparation. I've done, I've helped, I've done 900 tax amnesty returns, and I have 100% success rate on that. And I have literally hundreds of clients, you know, my biggest clients, you know, doing hundreds, 200,000 transactions a year. But people having all sorts of complex situations, nothing's too complex for us in the crypto tax space. And I got a whole, it's not just me, I got a whole team behind me that helps me do this very effectively. What's a tax amnesty return? There are times, like, there are certain times when you don't file a form that you need to,

then you're subject to penalties. There are two, a couple types of these. One is someone who, like, just completely, and I know a lot of crypto tax people just stopped filing tax returns. They thought, you know, the taxes were illegal, and they stopped filing, and then a couple years go by, and you don't know how to get back into current. You've had a change of heart, or maybe you're more concerned. You don't know how to get back.

Well, tax amnesty allows us to come forward, voluntarily disclose this information to the IRS, and ask for forgiveness on penalties. The other one is the anti-money laundering forms that crypto-trader owners have to file. If you don't file these forms on time, it's a $10,000 penalty. It's not a tax. It's a penalty. So, and this is what Congress wanted to do to force people to remember to file these forms. So when people come to me and they haven't been to file, There's two of them.

That's 20,000 a year. You're looking at maybe three years worth 60,000. So we do a tax amnesty return, which means we're actually writing a legal affidavit that you sign under penalty of perjury. And you basically say, I'm sorry, I'm sorry, I didn't know. And we attach that to the return and we get people taxed amnesty. So we have a successful method for doing that. We have a perfect track record.

that's that's uh it seems very daunting to someone i think to to to ask the irs for forgiveness um there's something very symbolic there i think that no yeah that's a good question i mean there's lots of stuff in the code uh that the congress put there to protect taxpayers uh you know there might be reasonable cause that that if you did that if an auditor is auditing you that you have a chance to appeal to his manager or go get to go to the appeals board inside the IRS or get a third party inside the IRS to intervene when you're doing an audit, which are things that we do all the time for our traders who may get audited or non-traders getting audited as well.

So you're obviously very knowledgeable about this, but tell us a bit about your credentials and the qualifications that allow you to advise and represent clients and taxpayers. Well, as an enrolled agent, I've met the certifications the IRS has to represent people, And because I have a law degree, I actually interact with the tax code and the tax regulations. And do my own original thought, of course, doing research in the tax laws and the cases when we attack problems. Because what happened with crypto taxes is there were a lot of new terms. We didn't know how to pigeonhole crypto into the tax code or how the tax code applied to cryptos. and a lot of accountants who are skilled in, you know, the manipulation of numbers, but not skilled

in the reading of the tax law, you know, they, they froze. And as a result, you know, because I, you know, read the law myself, I interact with the law and read the commentaries, you know, I'm able to frame, you know, we have actually a nine-page opinion letter on the topic of like-kind exchange and why, you know, we've gone through the 1,400 court cases and seen which ones actually apply to allow like-kind exchange the work. We've written a legal argument as well on this new, I don't know if you've heard about it. New question on Schedule 1. It's the top form that, the new form that you report all your income on, it says,

did you, during the year, send, sell, receive, exchange, or have any financial interest in virtual currencies, which is their word for cryptocurrencies. So every taxpayer in the U.S. has to check yes or no on that question. And we've written the paper because we think that's actually a bit of a violation of people's rights, forcing you to swear under oath certain things that are basically personal matters. Interesting. So let's get into people's obligations. So what does the taxpayer need to report and how has that changed?

the years. You know, the tax code just gets more and more complicated. My father used to go down to the post office, pull some forms and with a pencil, or he would fill out the forms, right? You can't do that anymore. I mean, they got more and more complicated. Then people started using TurboTax Tax Act, these other software products, and then if you got too big for them, you had to go to an accountant.

So it's become more and more complicated. At this point, I'm going to say that TurboTax the Tax Act do not provide the type of support a crypto trader needs to report fully his crypto activity. I've defined, you know, when we fill a tax form, we hate filling it out, right? We just want to, you know, we've waited to the last minute. We just want to get it done and mailed or, you know, get it off our plate, right? So it's kind of like just get the form submitted and be done with it. Hope the number is low that you have to pay.

But I've said, I basically look at a tax return in terms of how I defend somebody when they're actually getting audited. Our company not just does tax preparation, but once you get that letter from the IRS, you know, where they start asking questions, that's when we do a lot of work. We kick in and represent people through a crypto tax audit. So I've defined what if I knew now, if I knew then what I know now, how would I have done the tax return differently? So we have four characteristics of a good crypto tax return. I call it a bulletproof tax return. You know, trying to put a Kevlar jacket on your 1040.

So it involves four things. First, you've got to report all your income. Every transaction has to be reported. It's either capital gains, mining income, staking income. You report everything. Secondly, you have to report every crypto owner has to file two anti-money laundering forms. One's called the F-Barr. The other one's form 8938.

All but the smallest crypto owners would have to file these. So we do that. We also do the tax amnesty if you haven't done that in past years. The third thing is to claim all losses, such as if you had a Ponzi scam or a financial scam, there's a special way to report that so you can get a very powerful deduction of what you invested. Also, if you had a lost wallet or talking to one guy, he threw away his computer and he lost his wallet that was on the computer and he's lost lots of Bitcoin. How do we claim that loss? Well, there's ways to do that so that you can actually write,

whether you're writing it off to take the loss to reduce your, otherwise your gain. So that's the third thing. And the fourth is to put in a disclosure statement. Now, this is really interesting. One year, I hired a former IRS auditor to work for me doing complex tax returns. And every time he did one, he would throw in these disclosure statements. And I said, Maurice, why is this disclosure statement?

Why do you put this in here? And he goes, ah, you've got to understand the mind of an IRS auditor. They're overworked and they have quotas for how much they bring in in taxes each month. And of course, the important thing for hitting that quota is to be able to assess penalties. Penalties are generally a percentage. The accuracy penalty on unreported foreign transactions is 40%. So he said when you put in a disclosure statement, two things have. happen. One, it deprives the auditor of being able to claim the accuracy penalty, right? So he can't

make as much towards his quota. And he has to prove that what you said was inadequate. He has to attack it before he can attack the return. So it's more work. It puts him on the defensive. He said, when we would get a return, it had had disclosures in it, we would just close it up. We'd just close that return out, move on to the next one to be easier. So that's my goal. I want, by using a bulletproof tax return, I want to take somebody from me in low-hanging front. We would just close. fruit for the IRS to squeeze, move their fruit to the top of the tree so that the IRS won't bother as too much of a hassle. That's really, really helpful. There's one thing you mentioned there, which I think is really accurate. I'm not in the U.S., but it's also true here in France,

is that taxes are getting more and more complicated to do. Like, we used to be able to do these things very easily, very simply, and now there's more paperwork, there are more forms, there are more intermediaries required, you know, like turbotax or these types of software. And so, you know, the average person is overwhelmed, I think, by this. But there's one thing I think that kind of outlines and shows just how this complexity is obfuscated. I wonder if you, if you heard about this story where the U.S. Government Accountability Office disclosed the IRS's refusal to clarify guidance on how taxpayers should file their taxes. What does this story tell us about the IRS's policies and how should taxpayers approach this? This is an interesting drama that's going on

at the federal level. You know, the IRS came out with its initial guidance in 2014. It said crypto's are property. You got to report them like property. And then people started having questions, especially after 2017. You know, well, what do we do with this? What do we do at this? IRS wouldn't say anything. They wouldn't comment. Finally, a bunch of congressmen from the Joint Committee on Taxation

wrote a letter to the IRS Commissioner and said, you need to address this. IRS is afraid of Congress because Congress, because Congress has the ability to reduce the budget for the IRS. They're very afraid of Congress. Well, after this letter, the commissioner came out and said last year, he said, well, we're going to publish some guidance that are really clear up these questions.

Well, people are waiting and waiting and waiting. Well, October comes in, and they finally this guidance comes out. It comes out in the form primarily of a Q&A, about 45 questions of, you know, FAQ. And a lot of it's helpful. Some of it was a new area. Well, there were a couple issues that people were not satisfied with how much have been done. So the government accounting office, which is kind of like an accountability watchdog inside the government, they came out with a paper that said four things.

One is these FAQs, that the IRS needs to modify them to say that this is only a comment and that the IRS is free to change their minds on this. It's not permanent. It doesn't have the weight of regulations. It's just an opinion. He said the IRS can change. It doesn't have to abide by the FAQ. He said, you need to come out and say that.

Secondly, they said, you need to speak about the form 8938, which is where you report foreign assets, one of the two anti-money laundering forms, you need to give guidance to crypto traders on how to fill that out if it's required. And then the third thing they said they came after FinCEN and IRS, because they're joint on this, is the F-BAR form for reporting the foreign exchanges. You need to provide guidance to crypto owners on how to do this. Well, before they published this article or the paper, they always give a chance for the agency to comment. And it came out Last week, here we are, it's probably like the 14th. It came out, the 14th of February in 2020.

The GAO article came out, and the IRS's position was, we are not going to change the FAQ to say that it's non-binding. Make it clear, because it is clearly non-binding. They weren't going to make that clear. They were not going to make that clear. Secondly, they said, we're not going to change anything about, we're not going to comment anything about the F-BAR or the 89-38 form. You know, the FinCEN.

group said that they would come out with some additional guidance later. So the IRS basically said, we're not going to comment. Now, there's two ways I see this. One is, hey, the F bar is pretty, in my opinion, it's very cut and dry. There's a question on Schedule B, which is the form where you list your interest in dividend income. Question 7A says very clearly, I think it's clear, did you ever, yes or no, did you ever have financial interest in or signature authority over a financial account in a foreign country? So the question is, if I have a account at Hit BTC in China, is that a financial account in a foreign country?

Yes or no? All right. Then the second question says, if you answer yes, you have to file the F bar form, yes or no, are you going to be filing it? Yes or no? So it's very clear. In fact, the Supreme Court, this has been taken to court. The Supreme Court said this is sufficiently instructive

that all taxpayers are obliged to file the F-bar form. So maybe the IRS is sitting here saying, hey, we're not going to give guidance on things that are obvious, all right? That might be their position. But it'd be kind of nice if they said that. The other position would be that they're uncomfortable saying anything because they have messed up so many times in giving guidance. that if they say one thing, someone's going to slap them on the backside for not

addressing something else. So I think at this point in time, the commissioner has basically taken the position of we're not giving any more guidance. We know the Secretary of the Treasury said recently, Stephen Munchin, that they're working on more guidance. Who knows? But in my opinion, I think the IRS is leaving taxpayers out in the lurch. And it tells me that they're not completely...

clear in their own mind what their strategy is, which puts everybody at risk and everybody should take a very conservative posture in terms of doing your tax returns. Right, because I mean, as a cryptocurrency user, you might have an account, right? You said like a hit BTC or, you know, maybe a finance account or, you know, any crypto exchange, you could also maybe have Adams staked with the staking service abroad. Is that financial interest? Is that an account with that staking service? It seems to be that, well, one, your taxpayers are not necessarily, I think, informed on where these exchanges are.

Does Hit BTC have a presence in the U.S.? I don't know this. I mean, I don't have a Hit BTC account, but not to pick on Hit BTC, but, you know, having to figure out where these exchanges are headquartered. And then all of the other sort of confusion around what constitutes a financial asset or financial interest, I think, is something that a lot of people, you know, might feel unclear about. You're right on. Let's now switch over and talk about the tax return a little bit more specifically. You know, help our listeners put themselves in the shoes of an IRS tax auditor. what are they looking for?

And, you know, if you get one of these IRS audit letters, what should you do? This is an important question because we're now starting to see audit letters come out. I have one here from one of my clients who's getting audited. He had done an amended return. We only did part of it. And the part that he did is getting audited. And we have, and this is the second one, so we actually are seeing a pattern, the exact same words are being used, so it's very informative.

A couple of things to take away from this. There were people who got letters last year in 2019 that the IRS called educational letters suggesting that they might want to tune up their tax return. Well, this guy, he never got one of those letters. He was reporting about $38,000 of income in 2017. I'd call that a small amount. And he's getting audited. And, you know, the audit starts.

All audits start with a request for documentation. And it's very daunting. I'll read you just a little bit. You know, you and I were talking beforehand, right, about, you know, if you've been trading long enough, you know, you got scraps of records all over and different websites and some people sent you emails and other people sent you, you know, SMS text. And, you know, all you could get was screenshots of a certain, like, shape shift transaction. I mean, it's cluttered. So all of a sudden, you have to

get this document. You get this letter. IRS wants you to provide copies of all emails, screen prints, hard copy prints, transaction receipts maintained by the taxpayer or provided by any third party such as a exchange, broker, peer-to-peer facilitator, wire transfers, direct deposit records, a list of all virtual currency kiosks or ATMs used and their location with copies of the acknowledgement receipts. You'll like this one. A list of all virtual currency received from hard forks, faucets, tipping, or any other method

where a sale-by exchange was not initiated by the receiver, commonly called airdrops, including the date, the type, the amount of the currency received, the data sale, other dispositions, including amounts and descriptions of what was received. All right. And then so it just, you know, this is, plus list all your blockchain addresses owned or controlled at any time by you. A list of all transactions related to virtual currencies, virtual currency lending,

including collateral for a loan, loan agreements, promissory notes, ledgers, transaction receipts, pledge, security collateralization agreements, all cryptocurrency exchanges. So you get the feeling, this is terrifying to get this, right? If you've never used cryptocurrencies and, you know, you were presented with this, you'd never want to touch cryptocurrencies.

You know, it's a great deterrent for people, to use crypto and like get into defy and this kind of stuff. I got a story for you. Last week I was talking to a guy. He was in college and he had invested in Fawcett's, must have been when it was a high school. And he'd been getting, he'd gotten a couple Bitcoin by now. So I'm taught, he calls me up.

He conferences in his dad. All right. So he's like, you know, we talk about it. Now he then invested all this cryptocurrency into a Ponzi scheme called BitConny. Act and pretty much lost it all. So I said, well, you had a big run-up in 17. That's actually a taxable event, you know. So I said, and you don't have to pay taxes on it.

And he's like, oh, I should just sell everything. I'm not going to invest in crypto's. I don't want to pay taxes. And I said, no, no, no, no. You got to understand. Taxes are good, all right? The more you pay in taxes indicates you're making a lot more income. I would rather be somebody who I'd rather make $100 and pay $30 of it

and taxes and keep 70, then to only earn $20 and have to pay no taxes. Taxes are kind of like a badge of the fact that I made a lot of money. So, you know, and if you kind of think about this, the wealthiest, the people in the United States that are the wealthiest are living in the states that have the highest state tax rates typically. Same thing internationally. Like you're in France has one of the highest tax rates, but there's a little bit of the lot of wealthy people in France. So if you've conversely, if you go to the poorest countries,

they have the lowest tax rates. So, or lowest participation in the tax at all. So taxes are not bad. You don't want to pay more than you have to legally, but, you know, focus on making income, not trying to avoid paying taxes. The biggest tax break that all crypto traders get is what's called long-term capital gains. If you hold a coin for more. than a year before you sell it, then your tax rate goes down to 15%. Otherwise, you're up at, you know, you're up in the 25, 33% range, depending on your bracket. So this is the biggest tax break.

And Congress wants, Congress has given that to you. It's a longstanding tax break. It's something that we should strive for to do long-term capital gains. Because you work too hard for your money to just flush it down with regular tax rates. So let's go back to this audit letter and what people should expect once they get this audit letter. Very good. That's a great question.

So there's a lot of, it's kind of a mystery. And if you've never been through it before, it's Gary. And I was talking to this client here who's getting his cryptos audit. He's been audited two times before, right? So he said, I know the drill. I know what's happening. I said, you know the most important thing, right? He goes, yes, I know that I'm never supposed to talk to the IRS agent myself.

I go, that's absolutely right. It's just like on the TV shows. You know, you never talk to the policeman when they're, they've got you in their interrogation room. You always wait for the attorney. It's during those few minutes before your attorney shows up that they're going to squeeze you for stuff that you're going to regret later. So never talk to an IRS agent.

Even if you think you've done everything, you know, picture perfect, it's not, they're not interested. They already start with a presumption that you're bad. That's why they're auditing you, you know. And a lot of these auditors are not happy people. All right. So you get a letter. It says you're being audited and it has a information.

information request and please get us these documents in 30 days. All right. So all of a sudden you're panicked, right? I got to get this stuff together. I need somebody to represent me. It's not going to be my accountant because he didn't know what he was doing when he wrote the traction. He got me into this problem in the first place, right?

So you've got to find someone who knows crypto, who knows how to defend people. That's what we created a crypto tax audit for. So what we do next is we introduce ourselves to the rep, to the auditor so he knows immediately that he's not going to talk to the taxpayer. He's going to be talking to a third party. It takes the emotion out. It forces him to be, he can't play as many games. Secondly, we package, we give him all the documentation he requests.

And then I have a conversation with him. I say, look, you know, we, especially if he has a bulletproof tax return, we say, look, you know, we've got disclosure statements here. We've done everything. This guy is above the board. You're wasting your time with this person. We want them to feel like they're wasting their time. and if he tries to push it, I'm going to drag him out and make it unfruitful for him.

So that's kind of what an audit is about. Now, okay, so an auditor, after this dialogue might take a couple months, the auditor says, all right, I think, I'm the auditor and I think you owe this money. Well, now what happens? We have a couple lines of action. We can either appeal to his manager. We can go, we can file a new process hearing. We can appeal any determinations that came out.

There's a lot of different escalations. points that the laws or the regulations provide for us to do that. IRS won't really tell you that much about it, but we work that process in order to protect rights and to escalate it because an auditor just wants to assess a big penalty and move on, because that's how he gets measured, right? You might need to speak to somebody more intelligent and more rational to actually get them to dress. Hey, look, these crypto traders, these auditors probably know less about crypto than

And anyone who's been watching your show for a month, right? They know, you know, they don't know it. They just know their little thing. It's confusing to them. So the key is to be as thorough, be as polite and kind to them as possible, and make them go away. That's the best strategy. So there's one thing that you mentioned in that audit letter, which I think is particularly

interesting because a lot of people that are in crypto, you know, like, especially like the old timers, they got into Bitcoin in 2011. back then people were buying pizzas on Bitcoin Talk for 10,000 Bitcoins and sending each other Bitcoin tipping. There have been a number of forks over the years. And there are people out there who have crypto that they don't really know where they got it or when they got it or how they got it. It might be on an old hard drive. It's like finding old photos, right? You're like scrummage to your old hard drive and you find pictures of like when you were back in high school or something like that.

And then, oh, you take that and you put it into your sort of clean photo album. Well, not with crypto, because if you do that, then all of a sudden, you know, you need to start reporting that stuff. How should people kind of deal with this clutter? Well, first of all, when you're audited, you're audited on a specific year. In this guy's case, it's 2017. So a lot of those types of transactions refer to are probably, you know, before then. And the auditor, he's been given the 2017 tax year to audit you. He's not interested in 16 or 18 unless he thinks he can increase his quota attainment.

So, you know, so he's not going to be looking there at those other years. Secondly, and I think this is really a couple words of assurance here. One, for all your tax, all taxpayers, a tax return is not like your high school math test. where you have, there's a perfect answer, you're trying to get 100%. It's not like that at all. It's about getting close, all right? Because a lot of these things get to be debatable. How much was the gain on this coin?

I don't know, I can't prove it. It's not a vagueness, right? We want to get to close. And that's, so I want to, because some people are just overly worried about those details, right? They're worrying more than the auditor is going to worry. And I just want to give people that assurance. when they audit cryptos, really, and I've studied this, they cannot really do a bottoms-up audit in the same way you as a taxpayer had to calculate your capital gains for all your trades.

I mean, it's a nightmare. But they're not going to double-check that because they have no better records than you do. They have probably lesser tools than the ones you used online. So the way they audit is rather than looking at starting from the bottom up is more of what I call a top-down audit. They're going to look to see if you reported enough income that they expected. So, for example, this was a very, very real case. A guy called me and he had received a 1099 tax form, a 1099K from Bitrix for a million dollars. He said he was outrary, he was terrified.

He said, I never had more than $28,000 on Bitrix. How can they issue me a $1 million? you know, 1099K. And I said, well, hey, look, here's, here, and this will give us an idea how they audit. Imagine, when you do a capital gains report, you list every transaction, you say, I, I, on this date, I bought this coin for this amount, I sold it at this amount, and it had, this is my gain, all right? So I have what you call it cost in the proceeds.

I said, look, so imagine this. So let's, and he was a little bit of a high frequency trader. So let's imagine this. He takes $20,000. He puts it all on ETH. The next day he sells it, it's gone up to $21,000, right? So he's got cost of $20,000, and he's got proceeds of $21,000, a $1,000 gain. So he does this again the next day, $20,000 in, and the day after that, $21,000 out.

So I got two transactions. What does that look like on his capital gains report? What are his total proceeds? Well, it's $21,000 plus $21,000. it's $42,000. He never had $42,000, right? Well, if we look at the fact the cost column, that said 40. And the total gain was $2,000.

Well, how do we correspond this? Well, he was a high-frequency trader. So those numbers just got really high, all right? I had one client, high-frequency trader, $420 million in proceeds, all right? But that wasn't how much money he made. It's just the way it's counted. Now, the IRS uses that number to see, like, they're going to explain. They got a 1099K from Bitrix for a million dollars.

They want to see at least, maybe more, but at least a million dollars showing up there on your capital games report. It doesn't mean you had that as income. But that's the high-level check that they're looking for. If you report more than they know about from Bitrix, well, then the IRS is just happy, all right, that you're being honest.

But we want to account for anything of a 1099K nature. So that's kind of how the IRS does that. So not to panic too much if you get a large 1099K. Okay, so they're using these 1099K as a sort of an indicator to see which people potentially they could look into and into audit more thoroughly. Exactly. So what is the thing that you see in your practice where people are getting their returns totally wrong?

Like, what is the most common mistake that people make while filing their crypto return? The two biggest mistakes people make is one, they're not filing the anti-money laundering forms, the F bar in 8938. These are massive. These are $10,000 penalties. Moment the IRS finds it mails you a letter that you didn't submit an F bar, that's a $10,000 penalty right there and then. And then when you actually fill out and give it to them, they'll count the number of

exchanges you reported, multiply it times $10,000, and they'll hit you with a penalty. All right, so five exchanges, $50,000 plus the original test, $60,000. And they can do this for multiple years. This is a massive financial exposure. It's an easy-to-fix situation. The second biggest mistake people made, particularly in 2017, was they thought they only had to report transactions on their tax return where they went to cash. So if they went from crypto to cash or fiat, then that they would report. They thought that if you went from crypto to crypto to crypto, that you didn't have to report those because you hadn't taken any gain out.

There's a legal word for this. It's called like kind exchange tax code section 1031. But the biggest mistake they then made was, yes, you can do like kind exchange up until the end of 2017 when the law changed. But the mistake they made was they didn't list all these trades on the tax return. In order to get like kind exchange, you have to list them. So they didn't list them. They're not entitled to them. So it's a massive exposure for people.

These are the two massive mistakes that people make. Yeah, especially the crypto-to-cry changes, those are particularly hard to track because if you used a service like Shapeshift before they introduced KYC and everything, there's no account, there's no email confirmation that's sent to you. So there's really not much of a way that people can actually trace these, except for like doing a screenshot and keeping it in their files. Well, a screenshot's about all you can do. They're very dangerous, those exchanges from a tax.

position because they leave you with very minimal documentation. It's not in a structured format like a spreadsheet. You know, it's screenshots and you've got to stick them somewhere, as you were described before, clutter. I believe as people start to do their tax returns more and more, we're not going to put up with exchanges that do not provide good tools for pulling your transaction logs and in the future, you know, generate accurate 1099 records. I think this is something that we should put our foot down as traders. that we won't put up with stuff that gets us into trouble. So as a crypto holder who's concerned about maybe some unreported holdings or unreported exchange accounts or unreported gains,

what are some proactive steps that these people can take to protect themselves against a potential audit and potential penalties in the future? The pain that taxpayers feel is like I realized I didn't do it right in 17 and 18. I didn't do my taxes right. And I now, this is the common sentiment that now I want to do my 2019 taxes right because I think here in 2020, I'm going to make a fortune and I'll be able to pay off back taxes, but I don't want the IRS to come after my fortune because I screwed up in past years. Well, the good news is there's tax amnesty to fix the insurance. anti-money laundering forms that I haven't been filed.

I go back and I do the like-kind exchange analysis. And really, there's very few people in the country that do like-kind exchange analysis. And I will do it and I save people fortunes. Last year, a guy came to me. He was a doctor. He made a lot of money and a lot of was withheld by his practice. But he also invested. He had, in 2017, he had gotten up to $2 million in crypto assets, crypto to crypto trading.

He told his accountant in 2018, I need to report this. And the accountant goes, well, let's just file an extension. So September comes, October comes. The accountant hasn't filed his return. The accountant never filed the return because he was paralyzed on the cryptos. So here then, you know, we talked to me last year. He goes, Clinton, I got two problems. I got all this gain.

Plus, I never filed my tax return. Now, hey, the IRS was pretty happy with him because they'd gotten like, they'd withheld like a hundred thousand dollars already. So they like that. All right. So I said, look, here's what we did. We filed his tax return. We did like kind exchange on 2017.

As a result, he had no taxes owed for his crypto trading. The like kind exchange, which was available through the end of 17, you know, passed on to 18. And then he had gains. But at that point in time, he didn't have the penalties. He's able to get long-term capital gains treatment on it. Saved them. We calculated roughly $500,000. I love that the accountants are also scared.

Hey, actually, I've really become much more aware of this from clients calling me up. I mentioned at the beginning in Schedule 1 of income now. You have to answer this question. Did you have any dealings with virtual currency, right? Well, all tax preparers have to ask that question now because it's in the form. They have to answer it. Yes or no. All right.

But then guys are telling me that the account, Well, very few accountants, in my opinion, really understand what to do with cryptocurrencies, which is, you know, I have an opinion about that. But what people are now telling me is that their accountants have a statement in there which says they're not responsible for any reporting related to their cryptocurrencies. So how would you like to have your tax return done by a guy who's not taking responsibility for doing it right? You know, how much did you pay for that return?

So how can you help our listeners who are in the U.S. or even, you know, I think like a lot of our listeners are also expats and live abroad, but still have to file taxes in the U.S. What do you offer them? We have a lot of experience with expats and a lot of expat traders. My company, we do a lot of tax returns. We do the bulletproof tax returns that describe. But in order to help the most amount of people, we are now offering a service called

Cryptotax Audit at Cryptotax Audit.com. and for a low annual subscription rate, you get audit protection on any return that the IRS would come after you for, and particularly if it's related to cryptos. Now, no matter what they're coming after to, we can help you with it. But if it's crypto-related, then our IRS representation services and tax research are done for free. If it's directly a crypto-related problem. And we can do that because we're going to be, we're handling a lot. Lots of them, we understand how they're coming after it.

We know how to come answer those audit letters and how to deal consistently with these auditors. But, you know, when you do a tax return, there's a lot of other work that's done besides talking to the IRS. You have to, you know, gather up lots of documentation and, you know, synthesize it into something meaningful. That's other work that has to be done.

So also in the crypto tax, subscribers to crypto tax audit, get access to some, first of all, you get a free copy of our crypto health check book, which helps you look at your past tax returns and see, you know, how good are they, you know, what do you, you know, have you done the things you need to do? It's a magnificent tool, it's about 38 pages long. It's chock full of good stuff. Secondly, we have a couple video mini courses.

One is on how to prepare the F bar in Form 8938. These are the anti-money launching forms. I did this because accountants do not know how to complete these. Software like TurboTax and Tax Act will not even file the F-Barr form. And most accounting software for professional grade tax software will not do the F-bar form for you. So, you know, in order to empower my subscribers, I've given them a video. They can learn how to do it and how to subscribe it themselves. They'd be educated.

And then we also have another video, how to use TurboTax to file a crypto. Tax Return. Turbo Tax does not support really a true crypto tax return. So I show you how to basically go off-roading with TurboTax, how to jam in some extra forms so you can create, you can put a Kevlar vest on your tax return and feel better at night. I want to do things that are affordable for people because not everybody can afford to have a firm amend your returns for you, but if you have some help, you can do it yourself. That's the biggest help I do. And if somebody really has a complex problem, they can reach me on the crypto tax audit web page, you can schedule a consultation, and we can talk and

fix your returns. So how much does this cost? $97 for a year. So for $97 a year, you get this e-book, you get the videos, you get the how to complete your turbotax crypto return, but you also get, you described it earlier as sort of an insurance policy. It's an insurance policy for the IRS representation. Now there's other things in responding to a tax return that are not IRS representation. You got to put together the documents and all that sort of stuff. There's a fee for that. The video mini courses have a very nominal fee for them as well. I don't have to surprise anyone. But we charge that so we try to keep the quality up and keep it out there. I'm looking at putting more things out there. So yeah, it's a tremendous value. I think for the vast majority of traders,

This is what, you know, plus you're getting, you're getting hooked into the A team. The moment you get an IRS letter, you already know who you're going to call. You know, you'll be calling my staff, me, will be going right to work to get you the best defense to keep, you know, the IRS. I got a quote here for you by a U.S. Senator Henry Belmont. He says, in a recent conversation with an official of the IRS, I was amazed when they told me if taxpayers in this country ever discovered that the IRS operates on 90% bluff, the entire system would collapse. So that bluffing is in full, it begins when they start sending you this audit letter. It's all about scare. It's all about fear. So, you know, that's why I want to protect people, defend people,

show them how to defend, do it a good tax return, and then represent people who do get selected. Okay. I just want to drive this point home here. So what people get, when they sign up for this, this defense annual subscription, is that they get the peace of mind. If ever they get one of these forms, if ever they get audited, you'll have their back, essentially, and you'll be representing them with the IRS, and you'll be calling those bluffs, basically, and helping them make the best of the situation, and helping them file all of these disclosure forms and putting together this bulletproof tax return, as you mentioned. Exactly.

That sounds great. I mean, that seems like a great value. It's fantastic. And there's nobody else doing anything like this. Accountants aren't doing it. TurboTax Tax Act are not providing. They don't support crypto traders. They don't offer anything like that.

You're on your own. But we give you the tools as part of the service because the best time to fix a problem of your tax return is before you get the letter. So that's why we put those tools out there to show you how to do that. Great. So please remind people where they can find you

and how to get more information about this. Cryptotaxaudit.com. You can go there to subscribe. If you have an immediate need, you can also, there's a page for non-subscribers to contact our offices and have a half-hour consultation. Clinton, thanks so much for being on and helping provide this great resource to our listeners. That's a real pleasure to be here with you, Sebastian.