The Pomp Podcast - David Kemmerer, Co-founder & CEO of CryptoTrader.tax: How The IRS is Viewing Crypto

Episode Date: November 15, 2019

David Kemmerer is the co-founder and CEO of CryptoTrader.tax. In this conversation, David and Anthony Pompliano discuss the new tax guidance from the IRS, why it’s so complex, why cryptocurrencies are becoming more difficult to report through the legacy infrastructure exchanges, and how CryptoTrader.tax is helping clients quickly and accurately report their tax treatments. BLOCKFI-----BlockFi allows you to keep your crypto, put it up as collateral, and receive a USD loan funded directly to your bank account. They do loans ranging from $2,000 to $10,000,000, and they're perfect for helping you reach your financial goals of all sizes. Visit BlockFi.com/Pomp to learn more about putting your crypto to work without having to sell it. CRYPTO.COM-----Crypto.com is a pioneering payment and cryptocurrency platform that seeks to accelerate the world's transition to cryptocurrency. With the vision of "cryptocurrency in every wallet", the Crypto.com App offers a full range of financial products with competitive pricing, well designed UX and high security. It is the best place to buy, sell and pay with crypto. COINMINE-----The Coinmine One is like an Xbox that turns your electricity into Bitcoin. You just plug it in, connect to wifi, and tap on the crypto you want. It’s so easy anyone can do it. Everything is controlled from the Coinmine mobile app and the Coinmine keeps getting better with over the air updates that add new coins, features and services to your Coinmine. Visit coinmine.com/pomp to get a Coinmine and earn crypto for powering a new world. ETORO-----This episode of Off the Chain is sponsored by eToro, the smartest crypto trading platform, and one of the largest in the world. Join 11 million other traders and create an account at etoro.com and build your crypto portfolio the smart way.

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. David Kemmerer is the co-founder and CEO of CryptoTrader.tax. In this conversation, we discuss the new tax guidance from the IRS, why it is so complex, how cryptocurrencies are becoming more difficult to report through the legacy infrastructure exchanges, and how CryptoTrader.tax is helping clients quickly and accurately report their required tax treatments. I really enjoyed this conversation and I learned a lot. I hope you enjoy it as well.

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Get VIP access to Bitcoin and crypto markets today. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys, bang, bang. I've got David sitting here with me. I'm super excited to record this episode. I get tons and

tons of questions about tax treatment around Bitcoin and cryptocurrencies. So I wanted him to come in and really just kind of talk through what's going on in the tax world and the product they've built and how it can be helpful to people. So thanks so much for coming to do this. Yeah, yeah. No, thanks so much for having me, Pomp. It's good to be here. All right. Let's start with your background. Obviously, there's not that many technologists who are excited about tax. So kind of what did you do pre-Bitcoin and cryptocurrencies? Yeah. No, you're exactly right. So my background, I've always kind of had the entrepreneurial feel. So coming out of school, I kind of wanted to decide, hey, what's the best way to apply

my background and get into more of the entrepreneurial world. And so I went the sales marketing route. Just thought that'd be the quickest way, right? When you look at building a company, I think the two most important things are people who are building the product or service and the people who are getting it out the door. So I wanted to really specialize in distribution, sales, business development. And so got going with a big software company, worked at Oracle doing sales for them for a while and then ultimately made the jump into entrepreneurship, launched a card game company that ultimately kind of took off. But it was like Cards Against Humanity for colleges and universities. So ultimately got into some like

legal troubles with their IP attorneys kind of coming after me. So after that kind of flamed out, I got really into crypto, kind of fell down the proverbial rabbit hole and started doing some market making high volume trading and so with that we kind of ran into the tax problem and so that's what ultimately sparked the idea for crypto trader dot tax all right let's talk about this uh this card game first of all what the hell what was going on with this card game yeah so um so yeah so coming out of school um i saw a kickstarter campaign for like a cards against humanity version but for like harry potter and uh it like had destroyed its kickstarter goals and i'm like okay that's like genius and it just got all these wheels in my head going on like

how cards against humanity gets way more fun the more hyper local it becomes so right the more and more people can like immediately relate to the content of the car game right and so kind of wheels are going and i thought the ultimate use case for that is bringing it to like college campuses where people, you know, live and die. It's this intense college experience. And so I started essentially just building the card game, right? Similar to Cards Against Humanity, but around your college experience and all the things that you do, right? I went to the University of Wisconsin, right? When you're at Madison, you know, whatever it may be. And so launched that and it just absolutely exploded. Again, getting back to like the distribution, which is what I

love and what I'm really good at is marketing, et cetera. And with that, right, everyone who buys that card game, it was called college cards, right? They bring other people to the game, right? So they buy it and then they have to go play it with eight other people. And so naturally you get this viral effect with this game and it starts to snowball. And we were selling tens of thousands of dollars of this card game at the University of Wisconsin. And so ultimately the university takes notice to that. And I got some cease and desist from the law firms that represent them. But I expanded out to Michigan, to Ohio State, to University of Texas. Ultimately had to shut everything down after a long process, but it was really cool. I thought it was my ticket to,

you know, building a really big business. And so I think it's interesting that you look at it as the hyper-local component makes it more interesting. What was the, like, give me some examples of the things that were in the game right so for university of madison i have no clue anything that's there but like what were some of the things that were actually part of the game yeah i mean it was it was obviously very um explicit content and that was the point get people like talking but it'd be like you know getting your fake id taken at the kk which is you know a popular bar on campus or like you know certain professors right um econ 101 with elizabeth kelly so it was very very specific like these inside jokes right that everyone who went to

Wisconsin would know Greek life played a big role, right, in making fun of certain sororities and fraternities. And so, again, whenever it's this hyper-local, you'll get people tagging each other on Instagram posts. It's such like a Facebook social media product. And so just all that virality built in, it just blew up. But we ran into problems, right, where you get the trademark people from Wisconsin. Even though we weren't directly using any official Wisconsin trademarks, Anytime you're associating yourself with the school, with those types of places, you're going to run into problems. So it was unfortunate.

It left a bad taste in my mouth just because, you know, it's a work of satire. We're not really taking anything away from Wisconsin. We wanted to pay them a royalty, but they wouldn't even do that deal. They just didn't want the game to exist. So it was tough to swallow. But, like, ultimately, blessing in disguise because that led me to the world of crypto. Got it. And so you said that you guys were doing like some market making and stuff like that.

Explain that a little bit more. Yeah. Yeah. So this is back in 2017. And I sat down and had dinner with a really good friend of mine. And he told me this interesting story of his brother who was doing market making on Binance. So essentially writing scripts and programs to automate the trading for a lot of these assets. And he was making $70,000 a month in 2017.

So obviously, I was blown away with that. I immediately call up my brother after that dinner, tell him about it, my brother's pretty technical, and we decide to start trying to build a market-making bot similar to what my buddy was describing on Binance. Wasn't as easy as I thought it might be, but essentially what you're trying to do is provide liquidity to these exchanges

which back then, very early on, and you can just trade the volatility of these assets and make the spread, right? And it's a high-volume strategy. So we started doing that. We weren't like crazy. So we were making some money This is really when everything's starting to run up. So like we were doing well, but not well enough anyways, though So the market making side that's kind of how we got into it It was ultimately just because I heard someone was making a lot of money

And so ultimately as you're doing that there's lots of transactions and you got to pay taxes So I'm assuming that's what turned you on to the tax problem. Well, yeah, so I had no idea about the tax implications of this stuff. But keep in mind, I had just recently been burned by the law from the card game. So when I found out about this, it scared me. And I was like, you know, Michael, who's my brother, I was like, hey, we have to somehow be keeping a record of the U.S. dollar value of these, you know, Bitcoin, Ethereum, whatever the asset we were in at the time of the trade, because that's what you need to know to calculate

the capital gain and capital loss, you know, on the transaction. And in the world of cryptocurrency, right, especially with exchanges like Binance, nothing's quoted in U.S. dollars. So tracking that becomes seriously a nightmare. And so we ran into this huge problem, scoured the internet trying to figure out, you know, how we fix this. There was nothing out there. And so myself and my two other partners, not my brother, but we were all kind of doing this together. We kind of flipped the switch and we're like, this could be seriously an infrastructural piece of this market if it really does continue to expand, right? Like it or not, taxes aren't going to go away. And I very much believe that, you know, for crypto to reach mainstream and to kind of expand its use cases,

it has to play nicely with the current financial world and the current system. And so, you know, just flipping the switch, we're like, this could be a really important piece. So we essentially build software to automate the tax reporting process. And you've got no background in tax? Well, so I studied finance and accounting at school. I was going to go into investment banking and consulting, decided not to. But so in that sense, I have some, but no, I'm not like a tax accountant or anything. But like, to be fair, this stuff is pretty, pretty simple, right? All right. So let's just start with kind of crypto tax 101. What are the aspects of the law that are important to pay attention to and kind of how does crypto tax work today? Yeah. Yeah. So crypto tax

being the actual law itself. Right. Yeah. So I think the easiest way to break it down just because it's much more relatable for people is comparing it to the world of stocks, because cryptocurrency like stocks by the IRS is classified as property for tax purposes. And so what that means is when you're selling or disposing of your cryptocurrency, right? When you're trading it, whatever, whatever it may be, you're incurring capital gains and capital losses, right? And that's the same as the world of stock trading, right? So let's run through a quick example, right? Let's say I buy $100 of Apple stock, right? People are very familiar with this type of thing. And let's say two months later, that investment has appreciated. Now that same Apple stock that I bought is worth

$150 and I cash out, let's say I sell that Apple stock. Well, from that transaction, I've incurred a $50 capital gain, right? And I will owe a percentage of that gain in taxes. And so that's capital gains, taxes, people who are familiar with equities, with property, you know, real estate, they're familiar with the world of capital gains, capital losses. And so what a lot of people don't understand is cryptocurrency is treated the exact same way, but because of the transferable nature, et cetera, with cryptocurrency, some additional challenges arise when it comes to tax reporting. I was kind of getting into them, right, when I was talking about the Binance example. But so let's look at a cryptocurrency example. Let's say I, again, buy $100 of Bitcoin with Coinbase,

okay? And, you know, again, two months later, let's say now that Bitcoin is worth $500, dollars. Right. I've made some money. And let's say I cash out on Coinbase, make that five hundred dollars. Well, I have a four hundred dollar capital gain and I'll owe a tax on that. And so the tricky part with so that at a high level, right, that's how it works. The tricky part with crypto is the different taxable events that trigger these gains or losses. So, again, looking at the world of stock trading, what actually triggered my gain was when I sold my Apple stock. Right. In the world of crypto, disposing of property, your cryptocurrency, can be when you're selling it for fiat currency. Also, though, when you trade it for another cryptocurrency.

And this is where kind of the challenges arise because let's say I bought that Bitcoin for $100. It appreciated $500, but let's say I didn't cash out and I instead exchanged it all for Ethereum. So that triggers a taxable event. Like I realized my $400 gain in that Bitcoin and I also need to pay a tax on it. And as I'm sure you can kind of imagine that, right? Crypto to crypto triggering taxable loans makes the situation more sticky and challenging from a reporting and compliance standpoint. Yeah. So part of this is just that there's when it gets treated as property, there's certain elements in the tax code that make this much, much more complex than it kind of historically has been. when it was just an investable asset, like a stock, et cetera.

And so one of them is crypto to crypto, right? So what you think is, hey, I'm not selling my Bitcoin. I'm just simply trading my Bitcoin for Ethereum because I want to use that for something. And let's say that you're not even speculating on price. You're literally just using the digital asset. That is still a taxable event because in kind of the minutia, you've sold Bitcoin, you've bought Ethereum, right?

It's how the tax treatment is. On top of that, even when you go to sell that Bitcoin, it may not execute in one single transaction, right? It could get broken up into six separate transactions in order to sell it. And my understanding is that that's also a taxable event. Yeah, exactly. So that's all correct. Other taxable events, right? And this stuff is annoying, right? Because obviously, cryptocurrency is a lot more, you know, it takes on so many characteristics, right? It can be this form of digital money. It very much is an investment that people are speculating on. It's also, you know, utility tokens, right?

There's so many use cases. So it is challenging that the IRS blanketly treats everything as property, but that is how it's handled right now. What do you think it'll take to change that kind of guidance, right? In terms of today they treat it all as property. Is there something that you see coming down the pipe or some kind of inflection point that would make that evolve into some other guidance? Yeah, honestly, not really. So the one thing that I think would be cool, honestly, I don't think it's going to happen. My team has a lot of conversations with a lot of people very close to the IRS. One thing that I think would be cool would be to implement like a de minimis tax exemption where, you know, the first $1,500 of capital gains is tax free and you

don't need to be necessarily reporting that because then you know if i'm using bitcoin to buy a tv or to purchase some goods or services then i don't necessarily necessarily need to be tracking my capital gains or losses if it's up to x threshold now to be clear that's not how it's handled today right all of these things do realize your gains or losses in the asset um other things that i think would be cool in the future and again i'm not sure how likely this is but if the irs actually explicitly came out and said and didn't blanketly cover everything right and was like hey for stable coins which are designed to be a medium of exchange right these shouldn't be triggering capital gains and losses every time you transact with it right that's just

a nightmare for businesses for retail investors it's unfortunate that it's treated that way but if you know they actually classified separate assets differently right bitcoin for example that's always going to be property too many people use this as an investment right i think pop you're you're very much bullish on it as an investment and so that's always going to be have income associated with it and therefore capital gains capital losses but for the stable coins especially right that shouldn't be treated as property because it's designed as a medium of exchange but for the irs to have to actually classify that they would have to seriously like come out and say, hey, this is a form of currency, which I don't think they're willing to do.

Got it. And so obviously this is going to be super difficult for the individuals who are transacting in this stuff. Right. But they rely on experts in accounting and tax. Right. So whether it's lawyers, accountants, et cetera, I can't imagine that those folks are experts at cryptocurrency tax treatment, et cetera, because they're just doing so much other stuff. What are you seeing in kind of the expert help vertical, right? Where I'm some individual, I'm a business, I need help with my taxes. I go to my accountant, I go to my lawyer. How up the curve are they and educated on this stuff versus are they kind of just shooting in the dark and really they just need as much help as they can get? Yeah, that's a great question. So have you listened to the

podcast? All I do is great questions. So honestly, there is a huge lack of supply in tax professionals, accountants enrolled agents who are familiar with this stuff so with that lack of supply right means the demand is exceeding supply meaning the tax professionals who are very comfortable with us can charge a very large premium on servicing this you know lack of supply and this high demand in the market so we're seeing that start to change but yeah like you said the vast majority of tax professionals of accountants have no idea how Bitcoin how how Ethereum, how whatever it is, is treated from a tax perspective.

And when their client comes to them, right, when they have a collateralized debt position with MakerDAO and they're, you know, getting interest payments and they say, how do I treat this on my taxes? You know, the accountant's going to run away very quickly. We're seeing that start to change, right? A lot of firms are actually starting to build an entire tax practice around crypto because it's a great avenue for client acquisition right now, right? If you can have on your website, hey, we're familiar with crypto,

you're going to get a ton of clients right now just because, again, there's not much supply, but there's a ton of pent up demand, especially as the IRS starts increasing awareness about how this is tax enforcement, et cetera. But yeah, you hit it. The vast majority of professionals out there have no idea how this is treated from a tax perspective. Got it. And so what did you guys build to solve this problem? Yeah. So great question. So we built crypto trader dot tax is the application that my team. That's a great name, first of all. Thank you. All right. So what does it do? Yeah, the name is very much an SEO play, just trying to game Google. So yeah, so the high level pitch is we built the software automates the entire cryptocurrency tax reporting process.

And we're very much focused on the consumer. So you can frame it up in your mind like a turbo tax for cryptocurrency investors. Now, I will say we also build tools for tax professionals, for exchanges etc but really what it does is it allows someone to land on our platform we integrate with all major exchanges and cryptocurrency platforms so they can suck in all of their transaction history into the platform with the click of a button right and once everything is into crypto trader dot tax then they can generate their tax reports for the year with the click of a button so it really automates the entire capital gains capital losses reporting so that you as a cryptocurrency investor or user or enthusiast can then just go plug this report

into your TurboTax account, into TaxAct, or just give it to your tax professional. So they don't have to know anything about how crypto is taxed, how to do it, how to do these calculations. They can just file that form like they're used to with stock trading. And how easy is it for you guys to interface with the exchanges? Like, are these APIs pretty sophisticated and built out? Or there's kind of a lot of customization you have to do for each one? Yeah, that's, again, a funny question because, I mean, it's so drastically different across the board. Like, working with Coinbase's API is awesome, right? They have a great team there. But, I mean, there's problems with it, too. Like, there's certain things, there's bugs in their API. But it changes so much across the

board. And that's one of our biggest challenges is there's no uniformity across these platforms and exchanges and so from my team's standpoint we have to dive into every single api every um you know specific exchange and build out that integration from scratch so um to answer the question no there's no uniformity but we we take that onus from the user right and we make it easy then once you're actually in our platform skirt skirt want to know who has the best url crypto.com That's right. Crypto.com. They're a crypto platform with one goal. Motherf***ing mass adoption. That's why we're all here. We're trying to get crypto in every wallet.

Crypto.com is helping people do that through buying, earning, lending and card payment. Everything you could want at Crypto.com. Go help your boy out. Tell him Pomp sent you. Download the app or visit Crypto.com. Pomp's got you. Always. Ever wanted to get into mining and didn't know how? don't worry your boy Pomp's got you everybody got some electricity and wi-fi all you got to do is go to coinmine.com you buy a coin mine it's like an xbox or a playstation that helps you turn your electricity into bitcoin that's right you purchase it it shows up at your doorstep you pull it out

of the box you plug it in connect to your wi-fi five minutes or less you're mining bitcoin all you have to do is control it from the mobile app they provide and then you receive over-the-air updates that add new coins and new features on a consistent basis. Kind of like how Tesla does over-the-air updates and updates the car software. Just you're updating your CoinMine. Consumer mining made easy. That's right. Go to CoinMine.com, tell them Pomp sent you, and thank me later. One more word from our sponsor, BlockFi. Their new interest account allows you to securely deposit your Bitcoin or Ether at BlockFi and receive 6% annual interest paid monthly in cryptocurrency. this rate actually compounds so you receive a 6.2 percent apy which is very attractive given the

alternatives so you can actually take your bitcoin you can deposit it with blockfi and get paid an interest rate of six percent in return go check out blockfi.com slash pomp again blockfi.com slash pomp to sign up and start earning interest on your crypto today got it and so after i come to your website. I sign up. I owe off you into my accounts. You suck in my data. You kind of do all your analysis. What do I get as kind of the end product of this? Yeah. So you get an entire tax report and that contains a lot of things. Number one, it contains a breakdown of all of your capital gains and capital losses, short-term, long-term in the fiat currency that you transact in. So that's really important, right? Everything's going to be denominated in US dollars. And that's

with our historical engine that we've built, the software will go back and retrieve the price of Bitcoin on July 13th, 2015 at 3.13 p.m. And we can get that data down to the minute. So it's extremely accurate reporting from a U.S. dollar perspective. But in terms of what the output you'll actually get, you'll get IRS Form 8949,

which is your capital gains and losses statement that you need from a tax reporting perspective. You'll also get a complete income report, we call it, which details, let's say you're a cryptocurrency miner, let's say you're getting staking rewards or you're running a masternode, right? That's treated as ordinary income, right? Not necessarily capital gains, losses.

And so we'll break all that down automatically in US dollar terms, right? So a digestible income report, again, then you can just give this to your accountant, plug it into TurboTax. We also give you a complete audit trail report, which details every single taxable event that you incurred and exactly how we landed on that calculation.

So let's say the IRS ever does come knocking at your door, you can just give them this audit trail and show them, hey, this is exactly how I calculate the taxes on every single taxable event. Here you go, sift through it. And a number of other things, but those are the main things. So that's the output, right?

You're getting an actual report that then you can go file yourself. You could easily give it to your tax account or you can easily plug it right into TurboTax or TaxAct. Got it. And then how do you guys make money? Yeah, so it's completely free to get started with our software. So you can jump in, import all of your trading history, get in all of your income, make sure everything looks good.

We don't want to put a pay gate right in front of just getting. So getting started is completely free, but we make money when you want to generate your tax reports, which here in the U.S. is typically once a year. So the regular user will come to us, generate all their tax reports and pay anywhere from $50 to $300 to download their entire tax report for that year. So it's not like your typical subscription or software as a service, right, where it's a monthly fee. We're just a one time a year. You generate your reports, you pay for it, and then you're good to go. Got it. And then how do you think about the evolution of the business?

Right. Today, you guys are super focused on crypto taxes. Are there other areas that you're eyeing in terms of where you could potentially expand in the future? Or will you just kind of go deeper in the tax vertical? Yeah, so right now, the immediate areas of expansion is actually international expansion. And then a number of other things going deeper in the current market we operate in. But so, for example, capital gains, capital losses are treated very universally, right? Now, there's some nuance.

But, you know, for example, in Australia, they pretty much treat this stuff exactly like the U.S. does. So from the technology that we've built, we can almost immediately serve another market. And so we just launched Australia this past summer. We're rolling out Canada in the next month. We'll go to U.K. here before the year's over and international. Right. So we just need to tweak the logic of the software to account for slightly different variations of the rules. Right. Slightly different things. But it's all the same. Right.

It's you're trading this stuff and you're making money. And so that is a form of taxable income. So that's the immediate. And two is to go deeper in the current market. So I'm sure you know there's so many different use cases of crypto, you know, margin trading, you know, staking, all this stuff. You know, it's all income, right? It really is. People are using this to generate income, whether that's, you know, these new DeFi services where your interest from loans, right?

The BlockFi guys. I know all this stuff is taxable and it's all challenging because, again, nothing is typically quoted in USD. It lives in these fragmented places. And so we can go deeper in the market by further servicing, you know, margin traders, lending platforms, DeFi. So there's a lot to go after. And it's kind of, you know, get your roots planted in the core and then just blow it up from there. So those are the two really big focuses. Got it. And how similar are the tax guidance in these other countries?

So in terms of capital gains, capital losses, they're the same. But is Bitcoin and cryptocurrencies treated as property in all these other countries? Or do you see kind of a wide variety of treatments? Yeah. So in the vast majority, it's treated very similarly. And that means it's treated as property. It's treated as this investment. Now, there's some one-off countries where they've said, hey, we're not even going to tax capital gains and losses. Portugal, for example. There's some other ones that are.

But the majority are treating it very similarly to the U.S. So, yeah. Now, again, there's slight variations. For example, Canada, you're required to use average cost basis as your costing method, which is kind of getting into the minutia of actually doing the accounting for capital gains, capital losses. But here in the U.S., typically you're using first in, first out, last in, first out, or highest in, first out to optimize or minimize your taxable gains. But, yeah, it is actually honestly treated pretty similarly. Like I said, Portugal is a little bit different. There's some other countries that we don't service at this point, but treat it a little differently.

Got it. And then how about businesses, right? So we talked a lot about kind of crypto traders themselves, but how do you guys see the corporate customers or potential customers and how they're kind of interacting with this tax guidance, especially when, like, let's say, for example, they're just receiving Bitcoin because their customers are paying with it. What's going on there? Yeah. So in that example you just gave, that's pretty straightforward, right? It's still just a form of income, right, that these businesses would be receiving if they're being paid in Bitcoin. And again, the income they're recognizing should just be the fair market value of Bitcoin at the time they receive it.

Now, where things get really complex and I feel bad for is the exchanges that operate in the U.S. and the actual companies that are very much crypto native companies, just because they have an enormous set of rules, regulations that they need to comply with. Right. And and, you know, we don't, you know, so like, for example, if you're considered a money transmitter, you have to comply with FinCEN, you have to do all these things. Right. And that's why you see a lot of exchanges leaving the U.S. because the cost of doing business and complying is tough. Now, again, we don't we don't service that. But from a business standpoint, that's challenging. Now, where we do work with exchanges and we have a bunch of partnerships with them is, you know, all of their users, right, cryptocurrency exchange users, platforms, they have this tax reporting problem. And the exchange themselves actually fundamentally do not have the ability to give their users capital gains and capital losses forms, which is this fundamental problem in the space that a lot of people don't have a handle on.

And I like to explain it's this like user expectation versus reality problem, because a lot of cryptocurrency users, right, perhaps they're used to, you know, going to a typical stock broker or brokerage house like an E-Trade or a Charles Schwab or, you know, a Betterment, right, all these kind of fintech type things where that's where they're doing their investing, their stock trading, you know, whatever it might be. And at the end of the year, right, that Charles Schwab or E-Trade gives them a 1099B, right, a tax form that they can go and file with their tax return, right? And on that form, it breaks down everything they need to do their capital gains and capital losses calculations. And tax professionals are used to getting a whole bunch of these, right, from their clients that they plug into their software. Where TurboTax, for example, is used to just letting you import these 1099Bs from the Charles Schwab's and the E-Trades to automatically do this. But cryptocurrency exchanges fundamentally cannot provide this type of form. And that's because of the transferable nature of crypto. So let's run through example because it's really interesting to wrap your head around.

And it's this huge problem in the space. So I love to compare it to stocks, and that's just because they're treated very similarly from a tax perspective. So again, let's go back to the Apple stock. Let's say I buy Apple stock in Charles Schwab, and I do some investing, buying, selling over the year. At the end of the year, Charles Schwab can give me that form

that shows, hey, David bought Apple stock at $100. We're seeing that he sold it at $150. we're seeing that then he went into you know tesla sold at xyz right and all these are broken out to me on the form that they give me at the end of the year but cryptocurrency exchanges cannot do this and that's because the data is so fragmented and i can i can send bitcoin into my coinbase wallet or into my gemini wallet from wherever right and so coinbase right they don't have an entry in their database as to what price I originally bought that Bitcoin for. So they're just seeing that 0.051234 Bitcoin appeared in my Coinbase wallet. That's when the entry gets entered in

their database. But they have no history as to what my cost basis in that Bitcoin is, meaning what I actually spent to acquire it. And so at the end of the year, they can't give me a capital gains and capital losses report because they have no idea the original price I purchased. And, you know, you can imagine this gets so complicated because people are sending wallet to wallet all the time. They're pulling it down in a cold storage. They're sending their income they've made from a mining rig right into the exchange to go cash out, etc. And so the end of the year comes around and the users are so accustomed to being able to just download their tax forms from their provider. And the exchange is like, well, we can't really do

that. Sorry. So the onus falls completely on the consumer and they're kind of left high and dry. And again, that's just because of the nature of cryptocurrency, because this stuff can be transacted and sold and sent from wallet to wallet, that the exchanges themselves cannot provide this form. And so that's the solution, right? That's the problem that we solve with CryptoTrader.tax. Got it. And so as you see and talk about these forms, the IRS is now asking every American whether they've actually traded cryptocurrency or not. Talk a little bit about this. Yeah. So this was crazy. So, I mean, the past month has honestly been probably the busiest from a cryptocurrency tax standpoint. And again, that's because the IRS released its first guidance

in the past five years. Technically, it's the second one they've released, but it's first update to the original 2014 tax guidance on cryptocurrency in October. We're in October 2019 for those listening two years from now. And two days after they released that guidance, they also released a draft of the future 1040,

which is the standard income tax form that every single taxpayer in America fills out. And on this draft that they sent out to all the tax software companies and the big accounting organization to kind of prepare for it, they sent these out. On that form, there is a checkbox that, you know, under penalty of perjury now, every single American taxpayer, which is roughly $150 million, will have to check yes or no to the question, did you buy, sell, transact, or obtain any financial interest in any virtual currency? And so as a taxpayer, you know, throughout the year. And so as a taxpayer, you will have to check yes or no. And so this is just blowing open the floodgates of, you know, awareness. You know, the media outlets are going crazy over this.

It's just really crazy. And so, yeah, to answer that, it's newly on this new 1040 that everyone will have to fill out. All TurboTaxes and TaxAct will have to ask their customers now, hey, did you ever transact in virtual currency this year? And so, we're just seeing, you know, compliance from that perspective just go through the roof. I'm actually more shocked, not so much about the IRS asking that question, but that only 150 of the 325 million Americans pay taxes. Yeah. Well, I mean, if you think about it, it's like so many people file jointly. And if you're like under, you're not actually filing your own tax return.

So, like these are individual tax returns. It's estimated at 150 million. Got it. Okay. Right. And so where do you see this all going kind of moving forward? What are you excited about over the next 12 months? Yeah. Well, so obviously this is really big for, you know, our company at CryptoTrader.tax just because we're doing a lot of educating in the market.

And that also comes with, you know, the tax professionals and accountants. Like I said, majority of them really have no idea what's going on in this world. So, you know, that's a big focus for us is educating those folks, you know, bringing them software tools to help make their world easier as they serve a bunch of clients. And as they now go and ask their clients if they've ever transacted with this type of thing. So we're excited about that. And then I think we're also just excited about making the world of crypto investment, you know, transacting in it easier. And so, you know, all this taxed off tax talk can leave like a bad taste in your mouth. I get it.

I don't like paying taxes either. But, you know, we receive hundreds of chats on our customer support lines from our users who are like, hey, you guys made this so much easier. I was literally dreading this for months. I I'm like so I'm so comfortable staying and trading in crypto because I know I can just you know generate my reports simply and stay compliant and it's about making it easier and so I'm excited about that because you know anytime you can make transacting and operating in this world of crypto easier you you allow more mainstream more people who are not as technical um comfortable in the asset class. And we're really seeing, you know, with this guidance, with all this IRS activity,

you know, they're validating this asset. Like, this is going to be on the IRS 1040 schedule one that's, like I said, filled out by 150 million people. And that's validating this market, right? We're not seeing any slowdown in the market. I think it's going to keep exploding. And again, I'm excited just to make the tax reporting this ugly, not sexy process super easy for people. That's what I'm saying, though. For sure. Before we get into the rapid fire questions, where can people find out more and kind of find the product and learn more about it? Yeah, so you can find us at CryptoTrader.tax.

That's probably the easiest way. If you want to reach out to me, it's David Kemmerer. And probably the easiest way is just on LinkedIn. David Kemmerer. All right. Rapid fire questions. What do you think is the most important company in crypto other than your own? Ooh.

um probably one of the exchanges i'd say probably coinbase sitting here in the u.s um what they are doing is pretty impressive what's the one uh regulation that you would change or improve if you could um either the accreditation laws where you know you have to have x net worth to participate in a lot of this um not crypto stuff but just in general um or the irs ruling around how hard forks are taxed i think it's kind of short-sighted um and i would just more treat it as a zero cost basis and not as income when you receive it what's the most controversial thought you have in crypto so that when you say it people will vehemently disagree with you no

Hmm. I'm still not sure where a lot of this is going. And I think, you know, in crypto, you get so many people who are so sure that Bitcoin is going to be, you know, the reserve currency of the world. And like, I challenge that. I'm still not sure it's not going to go away. I can tell you that um but yeah i'm not sure as to how this is all going to play out but it's going to be a good ride for sure so basically the the upside like what how far up is the ceiling to some degree fair that's my question you're saying yeah that's basically how you think yeah yeah exactly it's like this isn't going to go away but like what is that what's the upper limit right because it's so often compared to the internet and right looking at how far that has become and it's like

I'm not a hundred percent sure still it can do that. We'll see. There is so many exciting use cases and sometimes I'll flip flop back and forth between that. Some days I'll be, Oh wow, this could become like absolutely enormous. You know, looking at specific use cases, like, um, I love what the guys at like brave and basic attention toker are doing. I think that's awesome. I think that really gets me excited when you're talking about a way to monetize your own data. So yeah, I mean, I contradict myself, but it's hard to see as I'm sure you can agree, right? Ultimately where it's going, but maybe you disagree. No, not at all. What do you think is the most important book you've ever read? Yeah, so I'm a marketing sales guy and I'd say

Traction by Gabriel Weinberg. That's like an awesome framework. What is that about? It breaks down essentially every traction channel that a business can use to market or distribute their product. And so, you know, he breaks down like, I think it's like 18 in the book, the 18 different ways you can market or distribute your product. And once you have that wide framework for each business, the traction channels that are, you know, optimal for that certain business change, right? So for the card game company was very social focused and sharing, right? For the company that i'm doing now it's very content marketing heavy it's very search engine optimization right all that stuff so it just does a really good job of breaking down every single traction channel you

can use to market your products and then figuring out well which ones should i use for x business that i'm in today if you had to pick the most important book for someone in crypto what would you pick? Probably the Bitcoin standard, I think. Why? I think it's just, again, a good fundamental, it'll get you just thinking about money, you know, why we think these US dollars in our pocket have value um and ultimately challenge your perspective there all right before i end each episode i let you ask me one question but uh aliens real not real oh yeah do you believe yeah i i definitely think so i um actually like took an astronomy course way back in college and you learn about like the drake equation where it's kind of like just the the sheer probability about it right how

many planets out there are circular or orbiting stars at you know a habitable zone and there's like zillions of them so i think just by that when i was when i was in high school there was nine planets like that was it pluto was one of them but uh now there are way more than nine uh what one question do you have for me to wrap this up yeah okay um i want to know what do i want to know what do you want to know i want to how you actually because i don't know this. How did you originally get into crypto? Through mining. I started building mining facilities. I saw that they were very similar to data centers. It's a no-brainer to me that data center is a pretty good business to be in. It's infrastructure. You don't really care

kind of who's successful, who's not. You just want as much data going through your pipes as possible. With mining, it was very similar. I really didn't care so much about the price because it was a cashflow based business, right? So as long as my cost, uh, to mine is lower than the cost of whatever I'm mining, um, pretty good business. And so, uh, got started there and then fell deeper and deeper and deeper down the rabbit hole until, uh, somehow now we have this podcast. So do you still mine? Uh, yes. Um, not quite as much as I used to, but, uh, it's gotten more competitive, I'd imagine. Yeah, it's gotten more competitive. And also it's a, it's a game of incredible capital, right?

So it's just really capital intensive. And for me, it's like, hey, look, do I just buy Bitcoin or do I buy equipment to then mine Bitcoin? There's pros and cons to each strategy. And so I do a little bit of both. So not too bad. Where do you live

in case people want to meet up in person? Yeah, so I'm located in Austin, Texas. So if you're in Austin, yeah, feel free to hit me up. We feel like there's lots of Bitcoiners and crypto enthusiasts down there. Yeah, no, it's a really good community. There's a lot of us. It's tight-knit.

Just Texas in general, actually. You know, Dallas, there's a lot of folks, too. So, yeah, I'm in Austin, Texas. Awesome, man. All right, well, thank you so much for coming to do this. And then we'll have to bring you back around tax season to remind everyone to pay their fucking taxes. Yeah, thanks for having me, man. Hey, everyone.

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