Unchained - Everything You Need to Know About Filing Your 2022 Crypto Taxes - Ep. 453

Episode Date: February 7, 2023

Lawrence Zlatkin, VP of Tax at Coinbase, and Shehan Chandrasekera, Head of Tax Strategy at CoinTracker, give a full accounting of everything U.S. crypto traders should be aware of as we inch closer to April 18. The two tax experts discuss the latest on how the IRS is approaching crypto taxation, going deep on everything from staking rewards to NFT royalties. Just a heads up: This interview is meant for informational purposes only and should not be construed as financial or tax advice. Show highlights: what’s new this year when it comes to reporting crypto transactions why staking is now firmly on the IRS’s radar how capital gains tax works for crypto the types of crypto transactions that are taxable as income the five situations where a crypto user incurs a taxable event the types of crypto activity that are not taxable what crypto holders can do to make tax time easier the IRS forms you need for various types of crypto transactions typical mistakes that crypto users make when it comes to filing their taxes why there’s not much you can do if you have assets stuck in Voyager, Celsius or other bankrupt crypto firms why you might consider arguing a “theft loss deduction” what to know about the Ethereum Merge as it relates to taxes things NFT creators should be aware of during tax time how the U.S. tax system can or cannot be applied to DeFi what tax forms you can expect to receive if you’re a Coinbase customer how corporations holding crypto may soon see favorable changes to current accounting rules why $5,000 is a key threshold for crypto donations Thank you to our sponsors! Crypto.com FTSE Halborn NYU Links Previous coverage of crypto taxes on Unchained: Your 2021 Crypto Taxes: How to Handle NFTs, DAOs, Airdrops and More Everything You Need to Know About Your 2020 Crypto Taxes  Why You Shouldn't Trust Crypto Exchange Reports for Your Taxes The IRS Is Cracking Down on Crypto Taxes: What You Need to Know  Guests: Shehan: Twitter CoinTracker Lawrence: Twitter Links: Digital Assets | Internal Revenue Service IRS CCA 202302012 (Crypto charitable donations) IRS CCA 202302011 (Coins which have substantially lost in value. Ex: Luna) MiCA – Overview of the New EU Crypto-Asset Regulatory Framework (Part 1) | HUB | K&L Gates CNBC: President Joe Biden to sign the bipartisan infrastructure bill⁠ into law—here's how crypto investors will be impacted S&P Global: What the US infrastructure bill means for cryptocurrency brokers and owners Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin, author of The Cryptopians. I started covering crypto seven years ago, and as a senior editor at Forbes, was the first Main Tree Media Reporter to cover cryptocurrency full-time. This is the February 7th, 20203 episode of Unchained. Web3 projects lost nearly $4 billion of crypto assets in 2022, but nothing is more expensive than losing trust. Secure your company with Hallborn's best-in-class security advisory solutions. Visit halborn.com for more. Footsie Russell, a leading global index provider,

has applied its trademark expertise, governance, and structure to digital assets, offering institutional quality data to build, manage, and measure investment portfolios. The Exchange-Vetted flagship index series measures the investable digital asset market, from large cap to microcap. Get your index data from a market leader. Find out more at footsie rustle.com. slash digital asset. Buy, earn, and spend crypto on the crypto.com app.

New users can enjoy zero credit card fees on crypto purchases in the first seven days. Download the crypto.com app and get $25 with the code, Laura. Link in the description. Become a disruptor in the emerging fintech space through NYU Stern's new Master of Science in FinTech program. This one-year part-time program is designed with full-time working professionals in mind. Visit stern.n.new.edu.org slash MSFT-Hifun Unchained. Today's topic is crypto taxes, and hopefully this episode will help the audience through what is likely one of the more challenging parts of their interest in crypto. Here to discuss our Shihan Chandra Seqra,

head of tax strategy at CoinTracker, and Lawrence Zlacken, VP of Tax at Coinbase. Welcome, Sheehan and Lawrence. Pleasure. Thank you for having us. Yeah, thanks for having us. Hets up, everyone. This show is all about crypto taxes. However, the interview is meant for informational purposes only. Nothing mentioned in this show should be construed as financial or tax advice. Please consult a tax professional about your own personal situation. I've been doing a tax episode every year about this time for quite a while. And I should say that, of course, as usual, we will be focusing on paying taxes in the U.S. Sorry for international listeners,

but this is just the majority of the audience, so that makes sense. Given that my audience likely knows at least some of the basics, maybe let's just start with some of the new things at an overview level. Sheehan, can you start us off with what's new this year when it comes to reporting crypto transactions? Yeah, sure.

So 2022 was a tough year for the industry. I mean, now we are in the tax season. There are some minor updates that you need to think about in filing your taxes. First of all, that infamous crypto question has been updated by the IRS. We first saw that appearing on the 2019 tax return. It went into 2020, 2021. And now we are seeing a much more expanded version of the 2022 tax form. So make sure you answer that question correctly.

And what is that question now? The 2022 question is, at any time during 2022, did you receive a sell, exchange, gift, or otherwise dispose of a digital asset? So the major update for 2022 is that in the previous years, the question was referring to virtual currencies. In 2020, they have changed the term to capture digital assets, which is a, you know, much more broader interpretation. So therefore, like, you know, clearly things like NFDs and anything.

anything that's in the blockchain that's considered a cryptographically secured asset, if you interacted with them, you will most likely have a check yes for that question. So that's one of the major updates. Other than that, there were a couple of chief counsel memorandums that was issued in the last couple of weeks. We can kind of go into that in the details in the coming minutes. But the major update is the question has been updated. Make sure you answer that question correctly going forward.

Just to add to what Sheehan said, there's always a lot. Also, I think some, I don't think there's necessarily more clarity, but there's more focus on staking and what staking represents and whether it's taxable. The service itself has added staking to the question and also put it on its website for the first time. So I would say there's probably just a renewed interest. People in this audience might have heard of the Jared case. I think Shahan referred to it last year. A question about timing of inclusion. And so that, we can talk a little bit about that and how that was resolved. But I think staking itself is front and center, the ETH merge. from last fall, September. I think all that has played a very important role, dynamic role in 2022. Great. Yeah. We'll dive into the details on a number of those issues later in the episode, but why don't we now just lay the groundwork for some people, obviously lots of meaty things to cover from 2022, including bankruptcies and ecosystem collapses. But let's just make sure people understand the general basics around how crypto is taxed in the U.S. as far as I understand, And there's one foundational concept that people need to grasp, which is capital gains tax.

Lawrence, can you describe which types of crypto transactions are taxed under this fashion and how capital gains tax works? So capital gains tax is really sort of a mechanism for taxing disposition of property. And crypto is viewed as property. That's one of the few things the government told us is way back in 2014 and notice. So when you buy, sell or trade or exchange, crypto, whether in any particular, form tokens, Bitcoin, ETH, NFTs, you're going to trigger what we call a capital transaction, and that will generate capital gains or capital losses.

Most people think of it in the form of securities. So when you buy, sell, hold, or trade stocks or bonds, when you trade those, then that triggers also capital gains or losses. The capital gain system within the U.S. stands apart from the regular system, what we should call ordinary income, which is wage income. So you can also do crypto transit. You might be paid in crypto. That's a very different concept.

Still triggers income, but it doesn't necessarily trigger capital gain income. Capital gain income is taxed at a different rate. It's netted. So capital gains first have to be netted against capital losses. That's going to create an issue from what you raised earlier about the treatment of losses, which unfortunately has created more of issues in 2022 than in prior years. We can talk a little bit about that because the answer for losses is a little bit, I think less beneficial. It'd be less palatable for most people. But it's a separate mechanism of

tracking, calculating you net all that out. When you end up with net capital gain, you pay tax in a maximum rate typically in the US of 20%. If you're an individual, it might be subject to net investment addition. There's a surplus tax, supplemental tax that's applicable. But that's, it's less than the ordinary income rates, which are usually for at least high income individuals in the 30s. So it's a separate parallel system. there's another way that crypto transactions can be taxed, which is as income. What types of transactions or events would you say are taxable as income? So wages. So you might receive crypto in the form of wages. Actually, the way the government treats that is you receive wages,

then you purchase crypto. So it's not quite the same way. But if you receive compensation in the form of crypto, then that's also going to trigger. You would be subject to income tax. Staking is also yield, rewards, other parts of the ecosystem that trigger what we call ordinary income, that is actually taxable as well, but it's not taxable at capital gains rates. It's taxable as ordinary income. And that's taxable at a higher rate for most high-end individuals. And Sheehan, would you have anything to add on that? Again, just to summarize like here, especially if you're brand new to crypto,

just remember these five situations. And if you fall into these five situations, you could have a tax. taxable event and a liability. So number one, just cashing our crypto. Pretty self-explanatory. You have Bitcoin, you sold it, and made a profit. You got to file taxes. Number two is crypto to crypto trades. Even though you're not necessarily realizing cash in hand, you still have to pay taxes if you're making a gain. The third situation is when you spend cryptocurrency or an NFT to buy a goods or service. That triggers a disposition event and you might have a taxable liability there. Number four is when you earn crypto, that also triggers a taxable event.

That's what Lawrence just described. You can earn crypto currencies to wages, staking income, mining income, yield, interest-type products, and etc. And the final debunket where you could be subject to taxes would be air drops and hard forks. You know, air drops happen frequently in the industry. I'm not sure if we had any significant hard fork events last year. Maybe we can talk about it through and merge in the coming minutes. So yeah, so if you have those situations, you will likely have a tax liability and you will also have to file additional forms to report your information to the IRS

and pay the taxes. All right. And then let's quickly clarify which types of crypto activity are not taxable. Hoddling the mere purchase of crypto and holding it in your wallet, the trend. transfer of crypto from one wallet to another wallet is another good example of things that people might do that is non-taxable. Anything that does not what I call monetize or create something different is going to be non-taxable. A stop fork. So the eth merge, I think, is also viewed by most people as a non-taxable event because it was just essentially the change in the code underlying code.

It went for proof of work, of course, to proof of stake, but it was essentially the same token. just the reformulation of that token itself is what we view as a non-taxable event. So those are probably the best examples, I think, of what people might be doing. And what about receiving crypto as a gift? So a gift is generally not. So a gift is usually taxable on a donor. So there are limitations just in terms of how gift taxes is against another system of tax that's apart from the income tax system. If you exceed a gift tax exemption, then that might be subject to gift tax.

but that's applicable to the donor. The donee does not pay tax. It's a gift. So it's not considered income in the traditional sense. And you actually receive it with what we call a carryover basis. So you receive the same basis that the donor had in the asset beforehand. So any built-in gain associated with that is going to be taxable to you, the donee, when you dispose of that asset as well.

And just in general, what behaviors would you advise crypto people to adopt when it comes to transacting to make tax time easier? To make tax time easier, I would say keep track of your assets, keep track of basis, evaluate what you've actually purchased and sold. You can try to trigger gains or losses to net so that you end up in a better position overall within your tax. If you've done this, if you do this before the end of the calendar year. So it's essentially sort of to recognize what assets you've had, gains and losses,

if you have built-in gains, maybe have losses that you can trigger. The rules for crypto are a little bit more generous in terms of what we call wash sales. So you can actually trigger, even if you want to hold on to the asset, it's not true for the regular financial services world tradfine. But most people believe that watch sales don't apply to crypto, so you could actually trigger a loss to offset gains. Do you net out essentially at zero so you're not taxable on those, even if you purchase that asset again afterwards,

as long as there's a meaningful change overall in terms just the time they're both separate transactions. So it's really just calibrating your gains and losses so that you can effectively manage them as effectively as possible, while keeping track of those assets, what was your basis? That's probably one of the hardest parts because unless you're transacting only on one exchange, and Coinbase, we'd love for you to do everything in the Coinbase ecosystem. So we'll track that for you. but if you're doing other things within defy or transferring it to your wallet or doing things elsewhere, no one's going to keep track of that better than you do.

And you have to essentially select report gains or losses, even if that is not reported on a particular exchange or given to you as a transaction report. All right. And obviously, this is a new and emerging area. And, you know, the tax system is sort of, or the tax code is sort of applying kind of existing situations on a crypto. So are the processes around reporting crypto codified to the part where it's obvious which forms you're using to report different activities? And if so, what are those forms? Yeah. I guess at the individual level, the forms that you need to file are very clear.

Let me kind of walk into some of the forms. We spoke about that crypto question on the front and center of the 1040. So the 1040 is like the forms. form that you file to report not only your crypto, but all of your taxable income and expenses. So 1040 is one. Form 89.49 and Schedule D are most commonly used forms, especially if we have capital gains and losses coming from crypto, disposal, and crypto and also NFTs. Schedule 1 is another frequently used form. There's a line Z where you can report other income coming from staking income, mining income that you do as a hobby, or any type of other miscellaneous types of income that you earn in the crypto space. And there could be other forms like, you know, Schedule C,

for example, if you have like a mining operation that you're running as a trade of business, so you can report that income and also, you know, claim some of the expenses. So yeah, so those are the main forms just to summarize the 1040, Form 89, 49, and Schedule D to report your capital gains and losses. Schedule 1 to report your other income. items and schedule C if you have like a trade of business where you do a mining or even could be a staking operation as well. All right. And then last question before we dive into some of the crazy events from last year and how

those apply into crypto taxes, what are typical mistakes you see that crypto people make when it comes to their taxes? I think Lawrence mentioned this briefly. If you're dealing with a stock broker or like an employer, people are used to getting some type of tax form that summarizes your income, gains, and losses. And they're kind of used to looking at that form and reporting that on the form 1040 and you're done with your tax work. Unfortunately, the crypto will, it doesn't happen. So the burden of kind of reconciling your transactions across multiple wallets and exchanges fall on you. One of the big bitfosa we see in this

phase is that, you know, you're in the tax season and you don't know how much gains or losses you made during the year. So not tracking that cost faces could be time-consuming, like, you know, especially if you had to do it right now in a quick period of time. So just know that there are, like, you know, certain crypto tax software that you can use to kind of mitigate that and you can kind of automatically calculate the gains and losses. So not tracking your basis and competing your gains and losses is one of the biggest pitfalls that we see. I would say the other misconception that that a lot of some folks in this space have is that they think that crypto is anonymous, therefore it's completely invisible to regulators.

Unfortunately, that's not the case. There are a lot of ways that the IRS knows that you have something to do with crypto. It could happen through these 1099 reporting that exchanges do. Like, for example, if you receive some type of 1099 form, that means your activity has already been reported to the IRS by that program. So if you do not report that in mind on your tax, there will be a noise. IRAs also uses these subpoenas to exchanges, and if your name and information get leaked

as a result of these subpoenas, then they can audit you and see if you really reported those amounts. Another way regulars know by your crypto is by using some of these software like chain analysis cypher trades. They can essentially go through the blockchain activity and assign real-world identities to anonymous transactions and wallet. So just don't think that crypto is anonymous. I mean, it's publicly available in the blockchain, and it's visible to the regulators. So make sure that you report your activity to the IRS and other regulators.

In fact, I would reinforce that. So the IRS, if it's focused resources on anything in crypto in the last few years, it's been on enforcement. So it is quite concerned that there's underreporting related to crypto. So resulting in the question that we discussed, earlier, a lot of focus on John Doe Summons, which Shahan referred to. And the mistake that I think most people make something that's surprising to me, but if you don't receive a form, and that form is put in your shoebox and then given to your accountant, let's say in March or April,

if you don't receive a 1099, you think, well, I didn't earn anything, nothing happened, so they're afraid of to have to report it. But the form is nothing more than just a mechanism for providing information to you and to the government. So there's a matching system associated with that. But it's really just informational so that you can then follow your tax return. And the fact that we don't really have a 1099 mechanism yet for crypto, we're expecting it most likely sometime this year to be introduced in the next year or so. You most likely, including if you're customer of Coinbase,

you're not going to receive a 1099B, which is the most typical form. But it doesn't mean that you're not subject to tax. So you should remember, as Shahan just, I think, made very clear, if you have income, then you should still report that income and don't assume the IRS won't know about you because they have tried other mechanisms have focused enormously on trying to find out where people are and whether they're reporting income or not. All right. So now we're going to get into the meaty bit of the show.

One of the sad things is I noticed from the script last year that the first major new trend whose tax implications we discussed was NFTs, but this year it's going to be bankruptcies. So for people who have become creditors in one of the many bankruptcies or liquidation proceedings, what do they need to know when it comes to their taxes? Oh boy, this one's going to be a hard one because I think this is where the rules are very strict and they're going to be somewhat painful. So losses in the tax system is essentially predicated on recognition of them. And a bankruptcy in and of itself is not a recognition of that. So you might have lost a substantial amount of money in Voyager, Celsius, Genesis, FTX, and yet you may still not be able to

recognize a loss associated with that. So you're kind of stuck with where you are itself. Now, if you have built-in losses for crypto assets as well, that itself is also not a tax event. So Bitcoin dropped from 60,000 to, let's say, 60,000 at 1 point now, 20. So you have a built loss associated with that. Until you sell it or dispose of it, it doesn't create a taxable transaction. So let's separate those two and transactions into themselves. So if you do something, if you recognize a loss because you sell or traded, let's say on Coinbase or an exchange, that is a taxable transaction. That will trigger a loss. That will. That loss if you're an individual is limited, unless you have capital gains, to $3,000.

It can be carried forward, but it's essentially a very small number that you can then use, which is why, as we discussed earlier, one of the benefits of managing your portfolio is you might be able to balance those losses against gains because we manage losses against gains. But both of those depend on recognition of that. The IRS itself released a chief counsel advisory memorandum just actually about a month or so ago. On the very very, point of what built-in losses represent, whether crypto is a security, whether you can take the we call it worthless securities, worthless stock deduction. You cannot. I mean, I think they've made that very clear. You can take a general capital loss if you trigger a loss, but you can't

trade as a worthless stock deduction, which is another available avenue for that may have been applicable to crypto. Now, when it comes to bankruptcy, that's not, as I said before, a recognition of that. So it really creates, I think it will create a lot of anxiety for people about what to do, whether they can do anything. Now, there is a theft loss deduction that you can take. This was used in the Madoff scandal. So in the Madoff scandal, the IRS actually provided pretty beneficial and favorable guidance on how to take theft losses associated with the Ponzi scheme of Bernie Madoff. And to the extent that you think that there's been theft, for example, with FTX or another platform, you think that you've been misled, your money was absconded with, it was taken away, your assets, you gave it and thought they were custodied and then they weren't, they were used for other purposes. You might be able to benefit from a theft loss.

Now, this is a little complicated because there are very strict rules of how to claim this. You have to be, it has to be engaged for profit. So you have to purchase your crypto for profit. The theft itself has to be a genuine theft. Bankruptcy is not theft. So I think let's make that clear. But if the bankruptcy is the result of theft, then you might be able to argue that there was theft.

And as I said, I would really love the IRS to provide guidance on just as they did with Bernie Madoff because of the number of people involved. If you really were, if the IRS felt, if we have a broad enough number of people, who are implicated by this, I think something along those lines would be quite helpful overall in providing some support for what I just described. But you can read the guidance. The Bernie made off Ponzi guidance is still out there. So it's still applicable. It's not like that's disappeared. So you can still rely on the overall contours. And that involved when to recognize it, how to document it, how to report it. But a theft loss might be available. Other than that,

you just simply have the recognition event, as I described earlier, which is that you have to sell they asked it, have to do something with it, and therefore trigger an actual loss. And just so I understand this part that you're saying about theft, that would mostly apply, I guess, to customers of FTX.com, which, you know, technically was restricted from, you know, I'm not sure exactly how to define it. It's like Americans or, but I'm sure there's probably Americans with like corporations elsewhere or something that participated on FtX.com. So maybe some group like that because do you think the theft provision would apply to the to customers of FTXUS? Again, it's very fact specific.

So, you know, FDXUS also is in bankruptcy. We're not entirely certain about how assets were commingled with FTXUS itself. You know, we've heard what SBF has said about whether those assets can be satisfied, the liabilities can be satisfied. But I think it's relatively unclear. We might still have U.S. participants on the FTXU. the foreign exchange based in the Bahamas. So that might be applicable as well. There are other examples of misleading statements that have been made elsewhere within the crypto economy either with, you know, I don't want to name names, but I think, you know, there's other examples where

people would argue probably that there is misleading. They've been misled. Their assets haven't been used in the way they thought they were being used. They can't withdraw them. They thought they were just making deposits. They were statements made about whether it was FDIC insured and it wasn't FDIC insured. And so when those entities went into bankruptcy, the claim is that there was fraud being committed. Once you have fraud, I think, again, fraud is not theft. Bankruptcy is not theft. I'm simply positing a possibility for someone. Otherwise, I just think we have a very unsatisfactory answer for most people, which is you can do nothing. You can sit and wait, which is, I don't think, a very helpful answer. But if you want to explore the contours of theft,

I just think there is sort of this avenue that was provided, I think, very favorably by the IRS in 2008, 2009. Okay, so just to spell it out for people, like, it sounds like you're saying potentially people might work with a tax professional to find a way to argue that the made-off guidance applies to things that occurred with Celsius or Voyager or Genesis. There are so many bankruptcies, I'm wondering if I'm missing one. But 3AC, it sounds like that's what you're saying. It depends on your situation. You'd want to talk to a tax professional who knows the made-off guidance. Okay, okay. And Sheehan, you know, what do you want to add on that?

Just to add, like, if you're curious, you know, when we say the Bernad of guidance, we refer to revenue first city 2009-20. So you can actually Google it, and it's easy to read PDF. It clearly lays out what you need to meet to claim a deduction as a Ponzi loss. Take a look at that PDF, talk to your tax advisor and see if you're eligible to take a deduction under that provision. And also ask the tax advisor, if it even makes sense for you to kind of explore that avenue, sometimes, you know, those deductions could be limited by other court section of the tax, you know, your tax profile. So it's not even worth considering some of this deduction because it could get disallowed by

other things. And then the second thing to consider is that is it even worth kind of claiming some of these deduction and opening your tax return to other, you know, audit risk and et cetera? So that's where you kind of need to know your specific fact patterns and your overall tax profile and also work with like a good tax advisor. So then you can kind of leverage that promotion adjustment before kind of jumping into saying that, oh, I want to take a deduction or write-off. I mean, Rite-offs, they also commit certain risks. So make sure you work with a qualified advisor people looking into these deductions because these are somewhat sophisticated deductions and write-offs.

Okay. And I might have misspoke earlier because I just realized that Genesis bankruptcy wasn't filed until 2023. So for those taxpayers, is it that bankruptcy doesn't affect their 2022 taxes at all? Again, a bankruptcy itself is not a definite, it's not a taxable event. So you'd have to have a loss. So you'd have to have something that was triggered through a transaction. The transaction could be you disposed of you, I sold my crypto or my interest in, you know,

whatever I invested in in Genesis to let's say Shahan or whatever. So I think that, again, that's sort of the defining feature for when you can actually claim a loss. So you have to have a taxable event. At that point, you can then recognize whether you get a capital loss or not and be able to use it and then against capital gains. If you're going to try to make the argument, as I said earlier, that there's been theft involved. That actually can arise even if you don't have a taxable because that depends not on what you do,

but rather what the recipient did. They stole your assets. They did something other than what they said they were going to do with them and what they represented that they would. So that could happen even prior to bankruptcy. You could, if there were some, again, this is proof, so it's fairly complicated. You'd have to have documentation. If you had proof or some evidence that was satisfactory to the government, then you might be

able to make the argument that it's tough. All right. So in a moment, we're going to talk about other kinds of losses in crypto, but first a quick word from the sponsors who make this show possible. Become a disruptor in the emerging fintech space through NYU Stern's new Master of Science in Fintech program. This is a one-year part-time program divided into one online and six on-site modules that take place in New York and in rotating global locations. The new program is designed for experienced working professionals who want to strengthen their fintech skills or transition to

fintech leadership positions. The next application deadline for the inaugural MSFT class of 24, beginning May 23, is March 15th. To learn more about the program, visit stern. n.new.edu slash MSFT-Hifenchained. Futsi Russell, a leading global index provider, recently announced the launch of its market cap digital asset index series. The newly launched Futsi Global Digital Asset Index series, built in association with the experts at digital asset research, measures the investable digital asset market from large cap to microcap,

leveraging a transparent asset and exchange vetting process. Futsi Russell has applied its trademark expertise, governance, and structure to digital assets, offering institutional quality data to build, manage, and measure investment portfolios. Get your index data from a market leader. Find out more at footsie rustle.com slash digital asset. $3.8 billion of value was stolen from crypto projects last year due to compromised private keys, exit scams, flash loan exploits, and other preventable causes. Hallborn offers preventative security solutions for every stage of your software development

lifecycle. From smart contracts, layer one, and DevOps audits, to advanced penetration tests, risk assessments, and incident response. With over 150 industry partners, including Anamoka brands, Salana Foundation, and Ava Labs, Halborn's best-in-class security advisory solutions ensure the safety of company assets and user trust. Visit halborn.com for more. Join over 50 million people using crypto.com, one of the easiest places to buy, earn, and spend over 250 cryptocurrencies. New users enjoy zero credit card fees on crypto purchases in their first seven days.

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Another one of the huge events in crypto this past year was the collapse. of Terraluna, how are people who were invested in a coin that went to zero or close to it going to be taxed? Can they deduct that loss? Does it depend on whether they sold? Or, you know, what do you do in that case where the value of what you own just simply plummeted to almost nothing? So again, this is going to be unsatisfactory because it's not really dissimilar from what we just described with bankruptcy. So the mere reduction in value of, a crypto asset is not a taxable event. And the government, as I said, has made that clear in a recent Chief Counsel Advisory

Memorandum. So when something, and they actually use an example very similar to what you just described, they described an asset, a crypto asset that diminished a value to like to not something nominal, even though it might still be traded. It was essentially nominal in scope and what certainly didn't represent what it was purported to be. And they concluded then, A, it wasn't a security, crypto was not a security. under the entire revenue code, under the definitions of the code.

So you can't claim a worthless securities or stock deduction, which is what's available. So you have to sort of depend on the original lost characterization. That, as I said, requires a transaction. So if it's so publicly traded and you dispose of it, you will trigger a capital loss. If I sell that, even if I transfer it to Shahan and he pays me whatever nominal value, there is for that, that would trigger a loss as well. again, based on those loss limitations that we described earlier, which are for most people pretty unsatisfactory as well.

They're limited losses, naked losses, capital losses, and that parallel capital gains and loss system are deductible only to the extent of $3,000. They're carried forward so you can use them in future years, but that's not a very substantial amount. It depends on your facts and circumstances, obviously, but that's effectively limited. However, as I said, if you have other capital gains that you triggered, that's why it's very useful to go through your portfolio and see what you can trigger at the end of November, December, and figure where you want to be and whether there are things you can do affirmatively

to balance out those to them. And if you triggered a capital loss, you weren't able to use it in 2020 for 2022 tax year. You can still do that for 2023 and then use it for 2020. Yeah. Yeah, just to add, we'll color on what Lawrence mentioned. So if you read the Irish tax code, if you want to have like a capital loss, there must be a saleo exchange of one asset with another asset. So again, you could have coins or even NFTs in your wallet that have effectively gone to zero. And you might be thinking, okay, how can I write this out?

Because I don't want to do any activity. And in most cases, some of these coins don't even have any liquid markets that you can find easily. So you might be thinking, okay, I want to take this as a righto to reduce my taxable income. Now, the memorandum that was issued by the IRS clarified that you can only take a capital loss if you have a sale or exchange. So my advice to you is that if you have coins or NFC that have gone to near zero values, find a market or somebody unrelated party to dispose of that asset and get something back. It could even be like $0.001, but that establishes that capital loss. that's allowed by the IRS versus kind of going into taking the deduction as a

worthless security deduction or kind of abandoning it. Again, these are so much sophisticated deductions. Whenever you're kind of, you're going to taking deductions or losses, kind of other than capital losses, which are very frequent, then your return and your tax profile kind of get surfaced among other tax returns that the IRS receives because these are very niche type of deduction. So again, if you have this situation, I highly recommend you talking to tax advisor because they can look at your risk profile and your entire tax profile and guide you the right way to take the deduction.

Another comment I would make is that you really only have the capital loss mechanism and the disposition or taxable exchange that Chehan described. There is a loss provision in the code, but essentially it was eviscerated in the tax in 2017. And so there is no availability for general losses within our existing system right now. It's deferred until, although it was limited by, you could put it on miscellaneous expense, that's no longer available, at least through 2026. All right. And because this is crypto, I also have to ask, how would someone who was the victim of a scam or rugpole, you know, apply that to their taxes?

Let's say, you know, I'm sure you guys probably follow Zach XPT. there's a number of these rug pulls, especially with NFTs. So if people put their money into something for the promise of something that wasn't delivered, then what can they do with that on their taxes? Well, I think, again, that raises the question of whether that's theft. So the only thing you really can do is if you feel that you've been subject to theft, you might be able to take a theft loss deduction along the parameters that we just described in the more probably elaborate mechanisms that maybe somewhat more sophisticated mechanisms,

but scams are scams. So essentially they result in the same, they arise in the same criminal activity, which is effectively someone has stolen your money. What do you do? You argue that you had a theft loss. If you had the asset for profit, you might be able to argue along the lines of the Ponzi scheme guidance

that you have a theft, and therefore can take a theft loss deduction, which is not only available and not treated as capital, which is beneficial. It's just more readily, once you're able to claim it, actually is a more useful deduction even than a capital loss deduction. Okay, but it sounds like obviously would just depend on the facts of what happened.

It sounds like that's not just something anybody can claim they would have to argue for it. Is that correct? Yeah, so I think the sad part of all this is that the rules are actually pretty clear. So losses are very limited in our system of taxation in terms of their usability to offset income. And so either you have a capital loss, which depends on actually having a closed transaction, such as a sale or exchange or disposition, or you can potentially in these more extreme cases argue that there was theft. So there's a theft loss deduction that is, if you can make the case for it, can be very beneficial. Beyond that, you're pretty much out of luck. It's like bankruptcy, losing money.

The tax system is based on income. It's not necessarily based on law, at least for individuals. If we're talking about businesses and we're talking about netting income for profits, this is a very different set of facts and different animal. But if we're talking about individuals who are just investing for profit, the system is, unless you have capital gains to offset that, you're not going to be able to use your capital losses. Unless you have a theft loss, you're not really going to have that available to you,

unfortunately, just the way the system is built. And in a similar vein, how should people handle it if they had crypto in, say, a DFI protocol, or in a cross-chain bridge, that either got hacked or, as happened with mango markets, the markets were manipulated and then drained. How would that fall? Yeah, how would the tax code apply in that situation? So that's an interesting one because I think with defy protocols, where people don't realize, and this is just a trap for the unwary, perhaps,

When you enter into a Defi protocol and you've pooled or you've done something on the defy itself, you might have actually triggered a taxable transaction. Mostly, I think in the prior world, at least prior to losses, other than the facts you just describe people, probably didn't realize that they might have actually triggered games at that point. Because I think once you commingle, you put it on a different platform, you do something else with it, you've done something that in our world is considered to be a closed disposition transaction, and that might trigger a capital loss.

So at that point, you might be able to argue that the defy transaction itself constituted a taxable loss and therefore be able to trigger a capital loss that you can use to offset against capital gain income. So there's probably more structure than what you just described with Terraluna, which is just this built-in loss that you can't otherwise claim. You could argue that the defy transaction itself gave rise to a taxable transaction. That's, again, pretty exotic and pretty complicated, it because some people would argue that in more mainstream situations,

defy is simply a loan, alone of your crypto, which is going to be restored at a later point with exactly the same attributes. And there is generally pretty favorable rules associated with what we call securities lending, and people like to think that crypto could be thrown or at least put within that system itself, so that with lending itself, I think most people would argue that the mere lending of crypto is not a taxable transaction. So again, that's a little bit of, you know, there's a distinction between one versus the other.

But if you're doing something more, I think more extensive within DFI, as people have done, as I said, you're pooling, you're trying to generate yield. So you've transferred the asset and ownership rights to someone else. That could very well constitute a taxable transaction, triggering a capital loss. All right.

So a brighter spot in crypto that people will be interested in is how staking will We've alluded to it at different points, but I want to call out one case in particular that saw a lot of discussion in 2022. And it was mentioned earlier in the show. It involved Joshua and Jessica Jarrett. And they had this case involving TASO tokens that they had created through staking. And they fought for a certain position, which is that gains made through staking should be considered income only at the moment that those tokens are sold.

And a judge actually ruled the question moot since they'd already been issued a refund. So is there any kind of broader significance for people that they can draw from this case and apply to their staking gains? I would say my own personal deal. I think the IRS has pretty much told us what they think about staking. So I think you can, of course, take your own view and consult you with your tax advisor. You can do what the Jared's did. But the IRS is essentially told us that staking is taxable upon receipt when you have dominion and control over the asset itself. So if you have received staking rewards, they're basically return to you in the form of staking rewards in your wallet.

You've staked yourself or you've validated with another validator and you've received a component of that. That's going to be taxable upon receipt. I think I would advise people not to take the position that's not taxable. most exchanges, including our own, we would, we have a lot of it. We try to offer a lot of guidance in this area as well, just over the overall tax system. If you receive more than $600 on a major exchange like Coinbase, you're going to be receiving a 1099 myth, which is essentially just a statement that tells you how much taking rewards you have. That's also reported to the government. It's matched. If you don't report it, it'll be, you'll be questioned about it. They do have matched. That's one of the things the government does very. very, very well. It matches those forms against the income that you then report. If you don't report it, they'll ask you why. Now, you may take a position that it's still not taxable. You can contest that. You can file a refund claim. You can do all the things that Jarrett's did. But in essence, I think the government views that as taxable. I don't think that's the end of the world,

actually, for most people. I don't know. It depends on your prognosis or your view about the future. If you think crypto is bright as I do, I don't know that it's necessarily terrible because once it's taxable, it's taxable at the value you've received it, which presumably will be a lot less than when you actually monetize or sell it. Now, if you treat it as taxable only at that later point, that's taxable as ordinary income. Shahan described how that goes into other income. So at that point, everyone agrees there's a taxable transaction and you've received something, but that's ordinary income. If on the other hand, you receive the reward, you report it, you then take a basis in that asset representing what that was when you received it. And then,

you actually monetize it, that will be a capital transaction subject to a more favorable capital gains rate, which could be almost half of what you actually would have paid otherwise. So, again, it's not, no, people are built, have this predisposition that deferral, not paying tax today is always beneficial. But I think we probably have to put this in context. I think in many cases it might actually be better in the long run to just recognize this smaller component of income and then take it into account as capital gain at a later point. Shihan, do you want to add anything on that case? Yeah, again, as Lawrence mentioned, this, you know, recognizing income today is not the end

of the world. It's a timing difference. It's a matter of when you report the income versus how much income you report over the lifetime of that asset. The other thing I want to somewhat of an update was that, again, still IRS hasn't issued any official guidance on staking. The only update that we saw this month was that they updated the digital assets page on the IRS website. Now we clearly say is that staking income and mining income is subject to tax consequences. So that's kind of like the small hint that we have from the IRS when it comes to how to go about staking income.

And again, As Soros mission, and also as a practitioner, I would advise anybody to kind of take the conservative position and report income at the time we receive the staking reward that established the cost base and when you later sell it, you pay capital gain taxes. All right. So what about, I mean, we kind of said the Ethereum merge. That's not a taxable event. For the earning interest portion, is there anything to mention there? or frankly, also the ETH POW tokens that people probably received at the time, and in most cases, probably sold. So a lot of questions to unpack all very good.

So let's take ETH proof of work. In some instances, you might have been eligible to receive proof of work, but you did not receive those Athens because the exchange didn't, doesn't support it. So if it's not supported on your exchange, it might just be sitting out there and you can't really use it in any fashion, unless you transfer the eth to yourself to your digital wallet. The system is built on the notion of what we call dominion and control. So if you had a right to it, but couldn't claim it and couldn't monetize it,

then you're not taxable on that upon a receipt. You'd have to wait until you can actually receive, you'd have dominion control over that asset. So I think just more broadly, I think most people believe that the ETH merge resulted in a non-taxable exchange with mainstream ETH. So ETH, whether you call it, ETH or ETH 2, whatever you call it, that EF, which became proof of work to proof of stake is non-taxable. The proof of work, which is toward our view like a chain split and the creation of a new

token, the IRS has told us that that is a taxable transaction. Did that actually in one of the few forms of guidance that we have in a 2019 ruling with Bitcoin Cash. So that's a taxable transaction. As I said, just like with Bitcoin Cash, if it wasn't supported on the exchange and you didn't receive it, then you're not taxable on what you don't actually own or monetize. But it will be a taxable transaction at that point. You mentioned interest. I often a little wary about when people use that term in the form of crypto because interest is for a tax lawyer is basically for the forbearance of cash fiat.

It's not associated with anything related to crypto. So if you own an asset that produces what we call interest, I would prefer to call it yield or rewards. It's treated as miscellaneous income. It's not really treated as interest in the traditional sense. That may mean me just a tax lawyer talking and sounds like I'm just talking gobbly de gook and so it doesn't really mean anything. It means something for most people in the system, but it's not interest per se,

but it is taxable upon, again, upon receipt, just like staking rewards. yield, if you own a stable coin, you receive rewards, if you're on the Coinbase Exchange and you, we have possibilities to earn income through Coinbase Earn. Those are all taxable to you when upon receipt. It'll be reported to you if you receive more than $600, but it's taxable to you nonetheless. All right. Let's all now discuss NFTs, just because this was still a major trend for a good part of the year. Let's just walk through all the various transactions around NFTs and how those might be taxed. So for instance, receiving one, selling one, minting one, issuing one as a creator. Let's run through all those. Okay. So when you talk about NFTs,

I guess there are two parties. So you could be an investor or you could be a creator. So let me kind of go to the investor side first. Investor side of taxes are very similar to trading cryptocurrencies or any other coin. So when you cash out on an NFT, that's taxable. When you go from one FD to another and you make a profit, that's a taxable event. I don't know any situations where you can spend an NFD and get a good or service, but if that's a case, that is taxable because you're disposing of an asset and that could create like a gain. If you earn like royalties as an investor through subsequent sales, you know, that's taxable. You typically had recognized the royalty income at the time you receive it and you pay taxes on that.

So that's the investor side. Again, very similar to trading coins. Now, for the creator, it depends. It depends on how you have set up the business, if you have a trade of business or etc. But generally, when you sell your NFT to somebody else, that triggers order income for the creator, if you're in the business of selling NFTs. And again, you sell it, you recognize income. And if you run your NFD, create a business as a trade-off business, you can also offset

related expenses against the NFT income. So that might involve your subscription to software that you used to create the NFTs. Could even be gas fees and etc. That's anything that's essential to running that NFT business could be a business expense, which you can use to offset that NFT income. You might also be subject to what's called self-employment taxes. Again, if you're doing this as an active trade of business, so there's something to keep in mind.

And also make sure you pay your quality taxes. if you run this as a business because IRS kind of assess taxes at a high level for income that you make in each quarter. So if you were to wait until the tax day, you might have to pay extra penalties because you didn't pay the taxes that would do at the end of every quarter. So something to keep in mind. I think most people associate today NFTs with art objects like board a yacht club and collectibles. And that's, I think,

Sheehan highlighted that may not always be the case. It's a broad term. I just had a discussion about this with the Europeans in the context of V18 indirect taxes. So an NFT could ultimately become a security or a bond on the blockchain that essentially is part of your portfolio with Goldman Sachs, for example. So it's non-fundable, essentially non-fundable asset. In the context that Sheehan just described, which is like the one that we think about, Sotheby's painting or the Sotheby's NFT that sold for like $5 million. That might be treated as a collectible. A collectible is subject to a different tax rate when it's sold.

It's subject to a 28% tax rate. The legacy of, I think, when the capital gains taxes were reduced in 1998 or so. So it's just taxed at a different rate. It's still treated as capital in nature, as Shaham described. You can dispose of it. That's the collectible component. But more broadly, it might be lots of other things. It might be, as we know, like, I just think this has such enormous potential.

It's going to be one of the great use cases for crypto going forward. You might have an NFT in the form of, I have the right to use a hotel room during the Super Bowl. And so I can then enter it into the marketplace, exchange it in a decentralized fashion as opposed to going through an established centralized marketplace. That itself can trigger gain or loss, right? So it might trigger other types of, and that's not necessarily. a collectible, but subject to a different tax rate overall. So it depends on the form itself, but the way most people think about it, just to be,

to be clear about how collectibles are treated, you'd have collectible gain. That's subject to a tax rate of 28%. Last year, another big topic was the uncertainty around how the infrastructure will would affect crypto taxes. And yes, that is a discussion from 2021 that I think is still reverberating. to today. So has any of that been resolved? And if so, what are the changes? What do people need to know about how this affects their taxes? The simple answer is no. Nothing, nothing has changed. So we actually know now that the regulations that were promised that will introduce this 1099

reporting mechanism that I think Shahan referred to, supposed to produce something called a 1099 DA for digital asset. That's pending in front of it. So it's left the Treasury to, department and it's gone to what we call the OIRA that's a regulatory oversight body within the Office of Management and Budget. They have a time frame that they can, their perspective is what is the impact on the overall economy, efficiencies as part of the paperwork reduction act. So it's in front of them, meaning that the regs are really imminent. But so, and that we got an announcement. So the effective date of the statute actually is to start tracking bases beginning on January 1st. So for an exchange like Coinbase, I think, where we clearly agree that we are a broker within the definition of

those rules. So we would have prepared for that and been expected to start tracking bases for our customers. That's not an easy thing to do. You have to build systems. And that's a fairly complicated mechanism. So we worried about what this ultimately meant with the effective date, but the IRS actually did announce right around Christmas time that once the regs are issued, those rules would become effective only when they're finalized, which we're expecting to be sometime, let's assume in the fast-paced world of government that that occurs sometime in 2023, probably won't require us to track bases until 2024 at the earliest. And I think even that's pretty ambitious overall based on what we're talking about is we're already in February

and it takes, you know, we would argue, a year to build systems to be able to do all that. I don't want to bore everyone, but when broker reporting was introduced in 1099B, it took years, really, even though there were fairly accelerated effective dates, it took years for the industry to prepare for that, and the IRS to build systems to even take that information in. Because remember, it's not just what we build is we have to stem this to someone, and they have to be able to use it in a constructive, intelligent way. So that does take time. So the short answer, short and sweet, nothing happened of any note. in 2022, but we're expecting things to happen in 2023. I think what will be even more interesting in 2023 is not the broker reporting mechanisms that apply to Coinbase. I actually view that as fairly uninteresting. We're building systems to accommodate that. We understand that.

I don't think that's particularly interesting in it of itself. It's the broader ramifications on defy, on NFTs, whether they're going to be included, Not what I would view is sort of the non-financial components and also the broader decentralized components where there is no centralized exchange. And there's not a built-in mechanism for anyone to, anyone to point to who contract these assets. The government has been, the IRS has been, I think, quite reluctant to essentially exclude those parameters from the reporting mechanism. But we don't typically have reporting mechanisms, like to say NFTs, for example,

their non-fungible assets are typically non-financial in nature. We don't typically report retail transactions to the government. We can talk a little bit about cash transactions, and there's a mechanism for that. If you have silver $10,000, but broadly speaking, if you're buying and selling an NFT, a collectible, there's no reporting mechanism associated with that. So to introduce it here is another expansion of the state and about reporting and about privacy. And defy is another area. So we don't, I don't even know how that's enforceable.

in the current world. I spend a lot of time on this issue because I think it's an important one of what we're going to do. The full power of blockchain and defy is really where we think we're going once that happens. The built-in systems of centralized reporting don't readily apply and can't be grafted onto that. So I think it just presents challenges of how our tax system will evolve with that. But we're expecting some guidance from the government about how they think about that. and how they want to apply it to the broader crypto economy. And so I recognize that this show is meant to be, you know, kind of more like a service podcast for listeners,

but I'm very interested to hear how you think, you know, our tax system can be applied to defy if you just want to go down to that tangent for a second. Well, this is a rabbit hole. So, I mean, the rules we talked about earlier are equally applicable. Like the tax system is not, While the broader tax system in crypto comes, as we know, in so many different flavors and so many different varieties, but the contours of whether you tax income and whether it's capital in nature or ordinary, that's really no different, broadly speaking, for 50,000 feet. So if you're monetizing, earning income, otherwise earning the driving gain from trading, disposing of assets on a decentralized versus a centralized platform, the only difference is that there's no centralizing. mechanism that's in the established TratFi world today, or even under broker reporting for

Coinbase, for that to be reported to the government. So it's just that's the power of decentralized peer-to-peer transactions. It doesn't mean it's not taxable. It just means that the existing mechanisms to report it and to collect tax on it in advance, perhaps, those are not readily available. And that's why I think that presents interesting policy challenges, because we have to resolve, If the full power potential crypto is realized and we migrate more towards a decentralized peer-to-peer world, and we can spend a lot of times of how extensive that would be, how integrated that could be into the broader economy, whether the average person is going to be sophisticated enough to do that, we can spend a lot of time on that.

But if that's a significant component of the future of crypto, of digital assets, it really is going to test the contours of the tax system because it's still taxable. People are still going to have to report it. But I think the government is very skeptical about whether people actually do. So they're going to want to introduce mechanisms to then still create taxability or some type of control mechanisms so that people actually report those taxes. My own personal view is that digital ID tokens, privacy tokens, things that can be inserted for the limited purpose of reporting of KYC, if you use that term because people react to that type of thing. but to introduce some type of mechanism so that we can have some type of enforceability or reporting of those transactions, I think that to me is the, I certainly don't have answers

to these things right now, but I think we have to have that discussion because the more it migrates off to that, the more it becomes for the government, something like, let's say, tornado cash, Monaro. So it just becomes something, if it's totally private, it's outside, it's not subject to any type of centralized control. The government assumes, rightly or wrongly, that there won't be taxes paid on that, and that's going to create an enormous shift of potential revenue from the government to a decentralized platform. And ultimately, that's not viable for the long term. I think we probably all recognize that we still have to pave our roads, open our schools.

So there just has to be some answer to these questions. These are, now we talked about direct taxes, which is what we call income taxes, this is equally true for what I call transaction taxes. So when you buy or sell, you do the trading of NFTs on an NFT platform, unlike OpenC, Coinbase NFT,

those may be subject to sales tax. And so various states have woken, you know, they've woken up to the potential revenue source. Well, these are basically just like collectibles and we tax the transfer of collectibles. How do we do that? You can't really do that on any,

centralized platform. If OpenC, if you're doing this through a smart contract with EF, there's no reporting mechanism associated with that. So how do you then report that? It's equally true for transaction taxes. It's something I talk about with the Europeans, about VAT. A lot to talk about in this space, but and a lot of challenges, actually, just in terms of how government's going to react to that. Yeah, it's going to be super interesting to see how all this plays out, assuming that what it is that crypto people want to build to actually pants out the way that they hope. But, okay, so just to kind of quickly go over, again, you know, things that can help the listeners of the show. Obviously, a number of people are

probably using different exchanges or other entities. So what kind of help or forms or whatever can they expect to receive from different crypto exchanges or other entities they might use? Well, we have a relationship with a partnership with coin trackers. So for more, I think more advanced trading. But if you go to the Coinbase Exchange, today, you'll find a pretty extensive set of modules and guidance associated with how to pay your taxes, what everything we just described, I think is described very well. So we give people help in terms of how to think about taxes in terms of what they should report, how they should report it, how they should treat it. We also provide them with transaction history. We won't provide anyone with a 1099B.

That's, we don't think applicable to our industry yet, so we don't actually do that. We will provide 1099 MISC for staking rewards, as I described earlier, for anything over $600. So I think this is true of all centralized exchanges. They'll probably do the same thing. And you can find that on at least our website. So you'll find education, modules, just instructions on how to effectively do all this, guidance in terms of how to report gains or losses. If you're just simply trading on Coinbase, you can easily track your basis through your transaction

history. You can calculate your gains or losses. If you're doing something a little bit more exotic, elaborate, if you're transferring from Cracken to Coinbase and then or from Coinbase to Cracken, there's no basis transfer in that. Again, that might be the future, but it's certainly not the rule today or you transfer it to your wallet and then you did something else with it. In that instance, I think Shahan can describe what he does, but we know we have links to our partnerships with various third-party providers that can help you go to the last mile, what we call the last mile in terms of reporting your taxes, one of which is a service like CoinTracker, which does that with more.

They try to build API so that you can extract all this information to produce an intelligent in fashion. CoinTracker is not the only one, so I love Shahan, but there are other competitors as well, but Sheehan can certainly describe what he does. Yeah, just to what Lawrence mentioned, And if you're just a single exchange user, say, for example, you're only using Coinbase or Gemini, I would encourage you to go to the tax center and see if the exchange is giving you the right gain and loss report.

And Coinbase is doing a great job. You've got to log into your exchange and see what kind of reporting your exchange has. But if you're a multi-exchange user, including DFI, say, for example, you have Coinbase account, and a bunch of Metamask accounts, a lot of, you know, cross-sections going in and out of those places, you will need some type of aggregation tool like Co-Tracker to kind of connect all those places into one place and calculate your basis and calculate your gains and losses accurately. So without an aggregation tool, the tracking and applying the right tax rules is virtually impossible. So make sure you use some type of aggregation tool to figure out your gains and losses on which you had to pay taxes on this tax season and also going forward as well.

All right. And now let's just quickly talk about, you know, corporation taxes. There are some companies who hold Bitcoin or other cryptos on their balance sheet. And the Financial Accounting Standards Board recently came up with standards for presentation and financial statements and disclosures. How does this affect those corporations holding crypto? So I'll take a step about it. So so far, under Gap, generally accepted accounting principles that probably the credit

companies how to follow. If you have crypto and your balance sheet, it's treated as her indefinite life, intangible asset. And if you look at the financial statements of Tesla's, you know, micro strategy, you can see how they're treating this way. The bad news is that there's big disadvantage for the company for following this treatment that's, you know, that's in the gap rules. Essentially, when you buy, you know, position of Bitcoin, you report that at the cost. And later, if the value goes down, you had to mark it down and recognize a loss for book purposes. However, if the market value goes up for that Bitcoin or whatever the digital asset, you do not get to market up. So in 2022, we saw like a lot of

companies, you know, Tesla and micro strategy, they were booking like this massive amount of book losses because the market kind of went down and they were never able to kind of mark it up for book purposes. And that kind of affected their financials, how the industry and investors kind of see the strength of the company. But there's good news. The good news is that the FastB, Finance Economy Standard Board, is now trying to treat crypto in a different way when you hold in a corporation. So going forward, they haven't still finalized as a ruling said, but going forward, you get to keep crypto at the market value. So meaning if it goes up, you get to mark it up and recognize a loss for book purposes. If it goes down, you get to report a loss.

So the good news here is that when investors look at the financial statements, they kind of see the true picture of that balance sheet because the coin there is now marked to the market. So that's a good news versus having that previous model where you only get to market down and you don't get to mark it up when the market goes up. All right. Well, this has been a really comprehensive discussion, but is there anything that we didn't cover that you feel crypto people should know about their taxes? I would say just don't make, I think we did cover this, but don't make the mistake that just because you didn't receive a report or information from someone that you, if you have income, that you derive from crypto on defy or elsewhere, that you don't have to report that because you actually do. And so the most important thing about owning crypto, unfortunately, is record keeping because it's essentially decentralized.

It puts more of the burden on you to keep track of your assets. That's benefit overall because the better you track them, the more you can evaluate when to trigger gains or losses, what those gains and losses otherwise are. Otherwise, at some point, you may receive a report from a brokerage, which has a zero basis. It's just like a blank because it doesn't really know what your basis is. So it's really on you to sort of keep track and keep good records for associated with your assets. So don't make the mistake of not reporting it and also keep track of it. And don't lose sight of the need to like the shoebox is not really going to be very helpful anymore.

Yeah, I guess let me add one more thing to what Lawrence mentioned. 2022 was a tough year for the crypto industry. I don't think a lot of people made any gains. But just know that if you sold your assets, you should. claim those losses on your tax return. We've discussed the limitations. I mean, in any given year, if you don't have any other capital gains, you can only get to claim $3,000 worth of capital losses. But say that for some reason, you have $100,000 worth of capital losses. So in this year, you get to claim $3,000. But that entire remaining $97,000, you get to carry it forward

indefinitely to future years. So in the future years, when the bull market returns and you have gains, you can use those losses to offset those gains. But in order for you to carry it forward, what you have to report those losses in the tax return today. One more thing. So I'm not like Steve Jobs here with Apple. I don't work for Apple. Is that we didn't talk about charitable deductions. So you can, and the service actually issued, I think Shahan referred to this earlier.

There was a chief counsel advisory memorandum on charitable deductions. So for charitable deductions, you can donate crypto to a charity. If it's appreciated, it works no differently than you don't recognize the gain or loss associated with the transfer appreciated property. if it's more than $5,000, then it has to receive an appraisal. And people had sort of assumed that because crypto is readily tradable and therefore has a readily, what we call a readily ascertainable fair market value through a very efficient mechanism of all the various exchanges,

that you could simply rely on that as evidence or indicia of what you're allowed to deduct. The IRS, in a fairly harsh, probably not inaccurate legally, but a fairly harsh memorandum said, no, you have to receive an appraisal, a qualified appraiser from a real qualified appraiser. And if you don't, then you're subject to penalties as well. So there's no reasonable cost penalty, even though you said, well, it was traded on X and therefore it was worth more than $5,000. So yes, you can donate crypto.

Good thing. Please do if you're charitably inclined. If you do more than $5,000, be aware that there is an appraisal requirement. Wow. We'll see a new industry spouting up of people doing crypto appraisals for charitable donations. All right. Well, this has been just a fascinating show. It's been a pleasure talking to both of you. Where can people learn more about each of you and your work? I'm at Coinbase. You can go to Coinbase.com. So I think that's probably the easy. I'm on LinkedIn as well. That's the worst where you can find me. I'm at coin tracker.com. You can find me on Twitter.

My handle is their crypto CPA, so please reply. If you have any questions. Perfect. Well, it's been great having you both on Unchained. Our pleasure. Thank you. Thank you. Thanks so much for joining us today. To learn more about Sheehan and Lawrence, as well as taxes and crypto, check out the show notes for this episode.

Unchained is produced by me, Laura Shin, with help from Anthony Yun, Mark Murdoch, Matt Pilchard, Zach Seward, Juan Aranavich, Sam Shriam, Pam, Tam, Chimdar, Shumdar. Shonk and CLK transcription. Thanks for listening.