Unchained - Everything You Need to Know About Your 2020 Crypto Taxes - Ep.210

Starting point is 00:00:00 Hi, everyone. Welcome to Unchained, your no-hype resource for all things Crypto. I'm your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto five years ago, and as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full-time. Subscribe to Unchained on YouTube, where you can watch the videos of me and my guests. Go to YouTube.com slash C-unchained podcast and subscribe today. crypto.com, the crypto super app that lets you buy, earn, and spend crypto, all in one place. Earn up to 8.5% per year on your BTC and more than 20 other coins. Download the crypto.com app now to find out how much you could be earning. Today's topic is 2020 crypto taxes. Here to discuss are Shahan Chandra Sikara, a CPA and head of strategy at CoinTracker, and Dan Hanam, CEO of Zen Ledger. Welcome, Cheyhan and Dan.

Starting point is 00:00:59 Thanks for having us. Just a quick disclaimer, before we dive in, while we hope that the show is informative for everyone, this is not financial advice, and everyone who has any crypto holdings should seek their own personalized tax advice. Also, we need to make one caveat, which is that this show will primarily be helpful for U.S. taxpayers. All right. So there are some changes to the ways the IRS is handling crypto this year. What are those changes? And what does that signify? Yeah, I mean, happy to start with one of them. I guess we can go back and forth a little bit. And this is Dan for people listening on audio. Go ahead, Dan.

Starting point is 00:01:37 Thanks, Laura. Yeah, I think one of the biggest ones that we saw was towards the end of December where the IRS released a new draft for the 1040, which is a question that came on for last year, but was on the schedule one and now has moved to the top of the 1040. So a little bit more prominent placing. And then they also- Which is sort of like the front page. page of your taxes? Absolutely. Yeah. So the schedule one is sort of like the front page, yeah. Pretty much. Yeah. So the Schedule 1 is a form that not every American needs to file. But this 1040 is typically a form that, you know, not if not everyone, the majority of U.S. based investors will need to file. Now that question's listed as the number one question. And some of the draft guidance that came out, I think clarifies a few of the issues,

Starting point is 00:02:21 mainly around if purchasing crypto, you have to check off yes. And under the new the new draft, you now have to check off yes under that question if you've purchased crypto, which is a little bit of an interesting conundrum in the sense that purchasing crypto is not necessarily a taxable event. But I think that's a big major change that we've seen to the newest draft and then to the movement of the question itself. Shihon, do you want to add to that? Yeah, yeah. So then you're right in the draft instructions. It did say that, you know, if you had purchased crypto, you would still have to check yes. But actually, I checked out the instructions yesterday, and they had removed that language.

Starting point is 00:03:02 So, yeah, it was interesting to me as well. So if you look at the instructions right now, it does not explicitly say that you need to check yes if you purchase crypto. However, if you purchase crypto, I think it would still be recognized under the receive category because it's such a broad question. But, yeah, I mean, yeah, there was a purchase that pocket. They removed it. from the final instructions. Wait, so now the final does not ask you if you purchased crypto? It does not explicitly say that you need to check yes if you purchase crypto. But in the question, you know, did you receive any cryptocurrency? So I assume if you're purchasing something,

Starting point is 00:03:43 you're receiving. So just to be safe, I would check yes. Yeah. Okay. And so what do those moves mean to you that now it's right on the 1040, it's the first question, and they're even asking if you've received crypto, which isn't necessarily a taxable event. Like, what do those changes mean to you? Yeah, yeah. I think a lot of people like think that, okay, if I answer this question, I'm going to get audited tomorrow. I mean, that's not the case. Right now, IRIS is trying to, you know, kind of get, I guess, a good set of data among, you know, U.S. taxpayers with some type of affiliation with crypto because right now they don't have this data. So by putting that question on the page one, they're going to expose this question

Starting point is 00:04:27 and the subject to roughly 150 million taxpayers and you're supposed to answer this question. You've got to say either yes or no. And your answer is going to be tied to your social security number and et cetera. So I guess I think what Iris is trying to do is they know that exchanges and everybody has seen tremendous amount of growth because of the recent bull run and the previous small runs. But the number of returns that they get with crypto has been in like, you know, thousands. So it just doesn't make any sense. So that's why I think they're trying to gather the information. And gathering the information doesn't necessarily mean that you got to be a tax bill.

Starting point is 00:05:03 Like, for example, like you said, Laura, if you receive like a cryptocurrency gift or something like that, like there's nothing to report by you sales check yes. And there's could be an situation. You could be like, you know, as you mentioned, you could be purchasing crypto. And the safe thing to do is to kind of check yes, but again, there's no taxable event. But by answering that question, I mean, whether you like it or not, you have to give that information to the IRS. And I'm sure that's going to go into some type of database and IRIS going to run some analysis in the future to, you know, do analysis among, you know,

Starting point is 00:05:37 the taxpayers with crypto applications, if they're finding everything correctly or not. Okay. Well, all right. So now we know this is important. So it sounds like not everybody who should have been reporting has been in recent years. So we might have some long-time crypto people who are just trying to wrap their heads around this the first time. So what is the main principle that people should keep in mind when it comes to their crypto and taxes? Yeah, I guess I'll start maybe Dan Kedat to that later.

Starting point is 00:06:11 I think a lot of people don't realize that crypto is regulated and it's taxable. Some people, they find out that it's taxable when they first see the question on TurboTax or when their tax practitioner asked them. So that's something to know. Like, crypto is taxable as a property. If you make any profits, you've got to pay capital gains, taxes. And if it's a loss, then actually you can write it off and you could even get a refund. So reporting your crypto transaction is not necessarily bad because if the market is down,

Starting point is 00:06:42 you could actually benefit. So, yeah. So the IRS first came out with this. rules in 2014, pretty much said crypto is treated as property. So from 2014 to 2020, we haven't seen any, you know, major differences in the way that we treat crypto, even though the crypto space has, you know, grown tremendously, you know, we have D5, stable coins, and et cetera. But unfortunately, according to the IRS, all cryptocurrency should be treated as property. And that forces some other challenges, but, you know, we just got to go with what we have right now. And when you say property

Starting point is 00:07:15 and you said that means it's tax like a stock. So that's kind of like, you know, you can have either long-term capital gains tax or short-term capital gains tax and that type of thing. Is that kind of... Correct. Yeah, I think that's an easy way for like beginners to think about crypto taxes, you know,

Starting point is 00:07:33 just it's literally like stocks. There are some exceptions, but just to kind of give an idea, you know, you have your purchase price, which we call in technical terms of cost bases, and then you have a sales price. If there's a difference, If it's a positive difference, you have a gain, and that gain is subject to either long-term capital gains or short-term capital gains. The long-term capital gains occur when you sell your coin after holding it for more than 12 months.

Starting point is 00:07:57 And then short-term capital gains occur if you were to sell your coin after holding it for less than 12 months. So it's pretty similar to stocks, but there's one exceptions. For crypto, the wash-sale rule does not apply because wash-sale rule is only up the stock in security under Section 1091. But thinking about stocks is kind of an easier way to approach crypto taxes in general. And just to flesh that out for people when you say the wash sale rule does not apply, that means if they were to buy back the cryptocurrency after selling it within some time period, then so typically for stocks that wouldn't trigger a taxable event, but it does for crypto. Is that what you're saying?

Starting point is 00:08:39 So the wash sale rule means that let's say a stock goes down in value. and then you're selling it and you're buying it back. If you do the buyback within 30 days after you sell it, that loss is going to get disallowed by the IRS because the idea is that IRS doesn't want you to give any credit for paper losses. But that's only applicable to stocks and security. In the crypto world, that's not applicable. What that means is you can literally, you know,

Starting point is 00:09:09 if you have your positions like, you know, in the red, meaning your cost base is higher than your market value, you can sell them, harvest your losses, and quickly get back into the same position without having to wait that 30-day wash sale period. So it kind of allows you to aggressively harvest your tax losses compared to stock. So that's actually one advantage. And I don't see people talking about it. They always focus on the bad side. Okay, why do you have to pay taxes? But if you plan things correctly, there are some unique advantages if you deal with crypto. Okay. Great. So in general, like what information?

Starting point is 00:09:44 should people be recording in order to be able to report correctly for their taxes? I mean, I think a big misnomer is that you need to be tracking every single transaction and you need to be tracking your cost basis like yourself. So I think one thing like Zedlodger and like a coin tracker provides is software that is able to do that for you. So one thing that we typically recommend for our customers or our clients is to really track the sources. So for example, I'm using a Coinbase, a crack, and a Gemini. I'm using a ledger, a treasurer, a meta-mask. So really by tracking what wallet addresses you're using,

Starting point is 00:10:19 what exchange accounts you're using, platforms like the ones that we both provide, allow you to simply integrate API keys, integrate CSVs, integrate wallet addresses, and then our software actually kind of does all the in-between for you of calculating the cost basis, calculating your gains, your losses. So what we typically recommend is just making sure

Starting point is 00:10:37 that you're keeping track of what you're using, not necessarily, you don't have to have like an Excel spreadsheet or a Google document or handwritten notes of every single trade or every single transaction. But just making sure that you understand the sources that you're using and then making sure that you're preferably using a crypto tax software. We definitely believe that it makes your life a little bit easier and makes it really simple to get your obligations taken care of. Just to kind of give some contests to like, you know, people who are completely new to this.

Starting point is 00:11:07 like if you go to trade your stocks and securities in like TD Amitrad or JP Morgan, at the end of the year, you're going to get this form called 1099B listing cost bases, your market value and the gains and losses. Now, after you get that, it's just a matter of plugging those numbers into your tax return, then you're fine. But in the crypto oil, it does not happen because of the, you know, the complexities associated with cost bases and et cetera. So that's where these, you know, crypto tech software tools come in handy so you can connect

Starting point is 00:11:35 your exchanges and wallets. And those software can provide that cost basis and market value and gains and losses, then you can include that on the return. So, and without these software, and if you're using, you know, multiple exchanges and wallet, it's virtually impossible to you to kind of track those things. And sometimes, you know, you could even be overpaying taxes for no reason. So I'd recommend using any of these softwares. And actually, I just wanted to go back to, you know, that question about how, like, the very first

Starting point is 00:12:06 question on the 1040 right now is about crypto. I was wondering, what is the penalty for someone if they either accidentally or even dishonestly report that they didn't have any such crypto transactions or didn't receive crypto during that year when, in fact, they did? I mean, there's no major penalty, just an informational question. But, you know, when you sign the return, you're signing the return under penalty and perjury. So you were expected to report things correctly. And if you're intentionally, you know, lying on that question, that could even be considered like fraud. So to give an answer, I mean, there's no like a monetary penalty. And if you get it wrong, you're going to get penalized for 100 bucks or 1,000 bucks. You got to make,

Starting point is 00:12:50 you got to get the question right. And again, that question, again, a lot of people are scared of that question. And I wouldn't be scared of that. It's just an informational question and just answer it correctly. And if it's a yes, and the second question that you should be asking yourself is, do I have a taxable event or do I have other forms to file? So yeah. And then one other thing I was also curious about is there are all kinds of airdrops, but there are people who kind of, you know, are a bit active in crypto and then later are not active and, you know, whatever, like if they come and during some kind of bubble and then they drop out when things are a bit quieter. So if they receive anirdrop, but they don't know

Starting point is 00:13:32 that they've received it. You know, and they don't report that. Like, I mean, I guess you said there isn't a penalty, but, but it just feels like, like there could be a lot of instances where that would happen, right? Yeah, I think there could be instances. I mean, I think those, I mean, if you, you know, really forget to, you know, kind of look at your wallet to see if you receive any ad drop, I would say that's like an innocent mistake. You know, you're not trying to intentionally deprot the government.

Starting point is 00:14:01 Again, that's another situation where some of these crypto tax software tool come in handy because if you're using one of them, you can see the taxes at the end of the year and you're like, oh, I got an ad drop and luckily this software captured it, now you know you have tax liability and now you know you've got to answer that question correctly. All right. So let's now just walk through all the basic different types of transactions that can happen that can trigger taxable events. And let's talk about, you know, like what information you might want or need to record or, you know, what different factors in the transaction could affect what your taxes might be. So let's just start with the basic one. Someone buys crypto and then

Starting point is 00:14:42 later they sell it. Walk me through what that looks like for them in terms of taxes. Yeah. I mean, I think Jayhan mentioned it earlier just in the sense that, you know, once you purchase that currency, then you'll have that cost basis moving forward. So depending on how long you held that currency. As was mentioned, you know, if it's under 12 months, that'd be a short-term capital gain, over 12 months long-term capital gain. So one big, you know, factor is how long did you hold? And then obviously did that asset go up or down before you sold it or traded it? And I think that's another element that, you know, maybe we'll get into later of, you know, buying with dollars into fiat, crypto into crypto and then crypto back into fiat are kind of like the three main buckets.

Starting point is 00:15:24 So anytime you go from one crypto to another, that would be a taxable then. And that would, you know, come with another set of cost basis, another set of gains and losses. But yeah, so the purchase question kind of just depends because I think a lot of individuals may not realize that purchasing crypto with another crypto is not actually a purchase, but a trade. And, you know, comes with another set of obligations that comes separate than if you're just using dollars to purchase crypto. So there is kind of not gray area, but there's just a, there's some more context depending on

Starting point is 00:15:56 how you purchase that. But typically from dollars. into crypto, there would be no taxable event on that. And then, you know, depending on how long you held that crypto under 12 months, over 12 months. And then at the end, if you sold that back in for another crypto or exited back into Fiat, not only the amount that you held, the gains losses, but then typically some of your own personal information could be included in that as well, as far as your own tax rates and things like that. So there is some complexity to, to that question and some variables that kind of go into the overall purchase or sell of a crypto asset.

Starting point is 00:16:28 I guess just to kind of give everybody a summary, again, for those of you are brand new, remember these five situations. These are the five situations where you could owe some type of crypto taxes. So number one, as Dan mentioned, like, you know, you're pretty much cashing out. You've got a Bitcoin for $10,000. You're selling it for $30,000. You've got to pay taxes on $20,000. That's pretty easy.

Starting point is 00:16:49 Number two, when you go from one cryptocurrency to another, like you're spending Ethereum to buy Bitcoin. This is a situation that a lot of people don't get. because they're like, you know, I didn't receive any cash. You know, why do I have to pay taxes? Unfortunately, Irish doesn't care whether you receive cash or not. As long as you have access to some type of wealth by moving from one coin to another, you got to pay taxes. So that's the second situation.

Starting point is 00:17:14 And number three is when you earn crypto. You could be earning crypto through, you know, wages, you know, by working for somebody, it could be interest, it could be defy income, mining incomes, staking income. So those are taxable events. Number four is when you spend crypto to buy goods and services. You know, there's a bunch of crypto debuts and credit cards. Some people think, oh, I'm just spending, you know, crypto. It's not taxable.

Starting point is 00:17:38 It is taxable. So something to keep in mind. And lastly, adrops and Forbes. In 2020, Bissau, a couple of major ad drops, the Uni ad drops and the spark air drops. So those are the situations where you have some coin, but you don't necessarily have cash to pay the taxes. So you got to make sure you'll be told enough. taxes or at least after you get the airdrop, you convert the portion of that air drop to like a stable coin. So at the end of the year, you got enough cash in hand to pay the taxes. So those are the

Starting point is 00:18:07 five situations I would remember. Oh, wow. Okay, that's a smart tip. One thing that I wanted to ask also, so in that case where you are purchasing with Bitcoin or cryptocurrency, what if you've acquired the cryptocurrency at different times and then you kind of make a big purchase of something? something, you know, like, like, let's say it's like, you know, you received $20 of Bitcoin at one time and then, you know, $100 another time and $50 another time and then you buy a plane ticket that's, you know, more than $100. Well, let's say it's close to $200 and you still have other Bitcoin. Then how do you determine the cost basis?

Starting point is 00:18:51 Yeah. Yeah. This is where, you know, you know, tools like ZenLedge and CoinTrack are coming handy. So IRS is saying that if you can specifically identify the unit that you're deemed to be selling, meaning if you have all the detailed records of every cryptocurrency that you purchase, with the date, with the unique identifier and everything, for tax purposes, you can pick and choose which unit that you're selling. So in your example, ideally, you want to be disforcing the coin which you paid the highest amount for,

Starting point is 00:19:24 thereby, you know, reducing your gains. So you can achieve the specific ID if you're using like a crypto tax tool because if you're using a tool, you automatically keep all those records. But if you don't use a tool, it becomes on, it's your responsibility to track them on excess spreadsheet or something. And in case you get audited, you got to prove this is how you achieve the cost basis for that specific transaction. Okay, let's walk through a few other scenarios.

Starting point is 00:19:50 So what about people who mine cryptocurrency? what do they need to do to report their taxes correctly? Yeah, happy to chime in. I think it really just depends on how that mine currency is received from a corporation or an individual. So if you have an LLC set up and you're having a mining facility run through a business or a business entity, it's a little bit different than having an individual. So that's kind of a big difference. But at the end of the day, that mining income would be considered as taxable income for crypto-taxed.

Starting point is 00:20:23 purposes. They're pretty much the same thing from, from what, you know, what we've discussed earlier, when you receive either that distribution from a pool that you may be operating with or from, you know, maybe, you know, by luck you're able to get a, you know, get your own block and get your own block reward. That access and that transaction would be viewable on the, on the blockchain. You'd be able to see the timestamp when it came in, the value that is worth in USC value. And then treating that income would be just as taxable income. A lot of the times that we see, whether it's individuals or corporations, a lot of that mining income or mining revenue

Starting point is 00:20:57 is then used to fund future business operations. So if you're converting that income back into dollars or using that income to then purchase, you know, a new ant miner, a new, you know, bit like a new facility or things like that, then being able to track that is interesting as well. So I think we've seen that if you're mining cryptocurrency, a lot of times it's better to even just set up a simple LLC

Starting point is 00:21:22 and how that income come through the business versus a singular entity, because you have a little bit different tax rate as a corporation versus an individual. Sheehan, I don't know if you had anything to add on that. Yeah, I think that distinction is super important, like how you're going about doing the mining operation, because you could be mining as a hobby, meaning you could have a couple of mining machines on your basement versus you could, you know, take investors' money and just mining as a business.

Starting point is 00:21:49 If you're mining as a hobby, you've got to pick up the income, as Stan mentioned, the income is the market value every time you get those, you know, Bitcoin or whatever, the coin that you're mining. And you would sum it up on an annual basis that would be your income. If you're hobbies, unfortunately, you cannot deduct your mining-related business expenses because it's considered a hobby under the IRS. Now, the second option is your mining as a business. If that's the case, you pick up the income, you get to write over the mining operation,

Starting point is 00:22:19 related expenses like rent, utilities, subscriptions, and also equipment. Because these equipment, as you guys know, they're pretty expensive. And luckily, the IRS code allows you to, you know, depreciate up like a $1 million worth of equipment under Section 179. And there's bonus depreciation and there's de minimis safe harbor rules, meaning if you have receipts and if something is below $2,500, you can just write it off. Like, you know, they don't even ask what it is for. So it's very beneficial. Like whenever you earn income by leveraging like equipment or like, you know, like a capital intensive type of business,

Starting point is 00:22:55 IRS has, you know, very favorable tax rules. So yeah, I mean, talk to a tax advisor about kind of structuring it. But the TLDR here is that if you properly run like a mining, especially proof of work mining business, you're actually making money, but you're not paying any taxes because you get the deduction from the depreciation, which is a non-cash outflow. So it's pretty.

Starting point is 00:23:15 beneficial if you do it right. And one other thing is, so Dan kind of very quickly was just like, oh, when you mine it, you can get the price from any block explorer. So is that just how you determine the cost basis? Because as we know, the price of, you know, let's say it's Bitcoin can vary, depending on what country you're in. I mean, of course, I know we're talking about the U.S., but like still, like even recently there was kind of this question of what was the high that Bitcoin reached back in the 2017, about. And it turned out, you know, if you look at coin market cap, because that's using sort of like a global reference, it's higher than U.S. exchanges. So, yeah, just for a minor, then would they have to kind of try to pick a U.S. price?

Starting point is 00:24:01 You know what I mean? Yeah. I mean, for us, we run full nodes as well. So I think that gives you a little bit more granular detail than using like a block explorer, like blockchain.com or Bitcoin.com or a block explorer. So running a full note allows you to essentially look at the exact timestamp, look at the exact cost basis. As you mentioned, even finding that USD value can vary depending on if it's listed on a Coinbase, a finance, a crack. And, you know, I think you've covered in some of your previous podcast some arbitrage opportunities back in 15 and 16 where, you know, U.S. and basers would buy on a U.S. exchange and then sell in Asia and then get the arbitrage opportunity between the two listed prices.

Starting point is 00:24:41 So we've definitely seen that the price, the price is not always consistent. And it really just depends on kind of what you're using. We use multiple price feeds. We run full node. So we have kind of a different ability than I'd say an individual. I imagine, you know, a coin tracker is using the same types of technology. So I think as an individual, it's a little bit harder to figure out exactly what, what cost basis and what USD value you should use. But by running a full node, it gives you a little bit more granularity than just,

Starting point is 00:25:11 using a block explore, for example. Yeah, I mean, running a full node is a great option. And all these, you know, crypto tech software, like, you know, they, they rely on these, you know, pricing data providers. So what these data providers do is they combine, you know, pricing from various sources and they kind of, you know, clean up those, you know, bad, you know, bad actors and other bad prices. And, you know, we rely on the market value coming from, from those, you know, pricing data

Starting point is 00:25:37 providers as well in conjunction with, you know, running your own nodes and directly. getting the price fees from the exchanges. And just so I'm clear, so on a node, it's not like you're going to get a USD price. It's more that you will know the exact moment of time. Is that what it is? And then you can use that against the index. Is that what you're saying? Pretty much.

Starting point is 00:25:57 I mean, for a note, it just gives you a little bit more granularity into the timestamp, into the amount, into the fees that were paid, and things like that. You can still find that in a Block Explorer as well if you entered in the transaction hash or the address. So it's not like it gives you completely different information, just a little bit more granular detail. But as Sheehan mentioned, typically using like a pricing aggregator, I mean, in my opinion, I think Coin Gecko has kind of taken that top spot

Starting point is 00:26:24 versus the coin market cap, especially recently, especially after the acquisition. And we've seen some gamifying of the data with coin market cap in the last like a year or so. But I think Coin Gecko has been a very trusted resource that we've seen. Yeah, we'll leave that. out for now. But coin market cap and coin gecko probably the few biggest ones. There might be. There might be. But coin gecko is one that we think has done a really great job of, as she said, pricing out or aggregating some of these additional price feeds, cleaning up the prices

Starting point is 00:26:55 and giving you kind of one universal price that you can use across multiple exchanges. And then earlier we did reference, like if you earn crypto, so let's say some employer does pay you in crypto, then how would that be taxed? Yeah, so there's two levels of taxation. There's taxes that employer has to take care of, and there's another level of taxation for the employee. For the employer, you've got to pay your typical payroll taxes and etc. So that's a whole other administrative burden on them.

Starting point is 00:27:27 But there are major companies like Coinbase, and if you elect to do so, you can get paid in crypto. So it's pretty common. So that's the employer side of things. As an employee, if it's properly included on your W2 or 1090, and in USDA, that's pretty easy. You just kind of plug that into the return and you're fine. But in most cases, like employers in this space are not super educated.

Starting point is 00:27:49 They're still new and their startups. Sometimes they just kind of, you know, send out like, you know, hey, here's some coins, here's some bitcoins as you're of compensation. In that case, it becomes employee or the contractor's responsibility to have detailed records of every time you receive those coins, the value of those coins, and you got to sum it up. and that should go on your taxes. So again, that's another situation where these crypto tax software could come in handy because as soon as you enter TimeSamp, it can convert the coins into USD

Starting point is 00:28:20 and it just shows you what needs to be included on the tax return. And then what about, I mean, I know this isn't super common, but it does happen. What about peer-to-peer transactions that don't involve in exchange, you know, something kind of like a local Bitcoin's or Paxville? How do you handle that? for us specifically, it's a little bit trickier than using like a Coinbase or Binance. We have an API key or a CSV set. But one of the things that we offer in, and I believe CoinTracker does as well, is the ability

Starting point is 00:28:47 to have a custom CSV or a manual entry where you can actually manually enter in the specific data set. So if you're using like a BISC or a local Bitcoins or another provider that's more peer-to-peer, there's still an additional element of having to track that yourself and then enter that in. And that's kind of how we are looking at it right now. because of the nature of the, you know, I know sometimes the exchange is not even the best word or like decentralized exchange or, for business, for example, there's not really like a company behind it. So it gets a little tricky because there's not like a customer support person or like a tech team that, you know, will be able to provide you a transaction detail. So it just becomes a little bit more, a little bit more tricky for the average investor.

Starting point is 00:29:31 But at the same time to be, you know, fully transparent, the average investor in crypto is in my. opinion is not really using those services yet. They're typically going with a coinbase, a crack and if they're a US, a Gemini, one of those US-based exchanges that have a Fiat on-ramp. And that's another differentiator, I think, as well, is most of these peer-to-peer exchanges don't give you the ability to go from dollars into crypto. They're normally crypto to crypto. So you still have to use another Fiat on-ramp to gain crypto. Let's say you, you know, $100 into Bitcoin, into your Bisc account, you know, Bitcoin into whatever, you know, asset type you like. So, Typically, that's another distinction is with a Bisk or a local Bitcoins.

Starting point is 00:30:10 You're not able to put dollars in and then trade with them. You're having to deposit crypto in, then use that crypto. So there's a little bit more advancedness, I guess, to using those platforms where the average new user, and I could be absolutely wrong, but the average new user is typically looking for a Fiat on ramp. They're looking for someone that can help custody and hold their coins for them. And those centralized providers really provide that in a neat, easy to use. the time in a mobile app. I guess that's my perspective. But if you're using those, we and I believe CoinTracker does as well, still gives you the opportunity to manual

Starting point is 00:30:44 enter those like singular or putting them into a CSV and then adding a complete CSV file in. So you can still account for that. It's just it adds an extra step or two. All right. So in a moment, we're going to talk about some of the more obscure types of crypto transactions that may actually really appeal to my audience, such as, you know, yield farming and staking and validating and earning interest in all kinds of stuff. But first we're going to have a quick word from the sponsors who make this show possible. Crypto.com, the crypto super app that lets you buy, earn, and spend crypto, all in one place. Earn up to 8.5% per year on your BTC. Download the crypto.com app now to see the interest rates

Starting point is 00:31:27 you could be earning on BTC and more than 20 other coins. Once in the app, you can apply for the crypto.com metal card, which pays you up to 8% cash back instantly. Reserve years now in the crypto.com app. Back to my conversation with Dan Hanam and Shehan Chandra Sechandra. All right, so let's walk through some of these more obscure crypto events. Let's start with yield farming, because that was quite the crazes last year. I'm sure this is going to make a lot of people's tax is a bit more complex this year. What information do they need and how do they determine cost bases, etc.? Yeah, I would say it's a mess. There's so many layers of taxation for a typical yield farming type of transaction.

Starting point is 00:32:14 So for those of you who don't know, like, you know, typically what happens is, you know, you buy a certain type of coin in a decent, you know, in an ERC-20 type of environment, and then you earn some type of governance token, and then you lend the governance token again on another platform, and you can just do it on multiple layers. It's like Russian nesting dolls or something. Yeah, and on the top of that, there are other platforms who kind of help you optimize your entire strategy. Again, it's a tax nightmare. Luckily, you know, there are tools that's kind of kind of help you kind of figure out those, you know, interest income, you know, the P&L-based type of accounting, meaning like, you know, you have an entry price and exit price, and then the difference is a PNL, the profit or loss, and then you pay taxes on that.

Starting point is 00:32:57 So, again, it's an emerging area. IRS probably doesn't even know that that this exists. But again, we had to work with what we have from 2014. So it's challenging. But, you know, there's enough guns there to infer the right tax implications for those transactions. Which is what that? Because, like, for instance, so like if, so like with the sushi swap thing, when you start

Starting point is 00:33:26 providing liquidity to uniswap and then you receive. the sushi, is the cost base is just whatever the sushi is trading at at that moment? Or like, how do you? So in the case of Uniswap, like, that's, that's a whole different conversation. But usually the easy way to think about Uniswap is that, you know, you're providing liquidity and then you, then you close your position with your liquidity pool. If there's a difference, then you're going to get pay, you're going to pay taxes on the P&L, the profit and loss. So that's just a uniswap, you know, how, how I think it should be tax, although I know once you put the coins into a liquidity pool, the ratio changes, and it just doesn't make sense for anybody to track those ratio changes

Starting point is 00:34:10 and treat them as individual sale. It's just too much, too much work for no reason. Just speaking of veal farming, generally, I mean, again, everybody's doing it a different way, every platform is doing in a different way. Every time you earn something like a governance token or an interest, that's treated as order or income, and that establishes, the cost basis for that token. And then when you later sell it, you got to pay capital gain taxes on the difference between the cost basis and the sales price. And then, you know, you do this multiple times and you just got to make sure that you track

Starting point is 00:34:41 all of them. Okay. So the value for the sushi, you know, when, when they were doing that vampire mining on Uniswap would be just whatever it was trading for at that, like whatever the trading price was for sushi. Is that the cost basis? That is correct. Again, it's not like direct tax guns that has been issued by the IRA. This is how I think it should be created in a more practical way because there's nobody to answer

Starting point is 00:35:09 these questions except us. So, yeah. Yeah, there's still a lot of gray area in the inference between what's written and in using other guidance to kind of put together what we would recommend. The good thing from up here like accounting or tax perspective, as far as on the opposite side of, you know, once they're, how are they tax? But then how can you track this and how can you easily and accurately, you know, report this? The good thing is because a lot of these platforms, there's a uniswap, suce swap, you know, maker compound, you know, on down the list,

Starting point is 00:35:41 most of the time you're interacting with a wallet address, whether that's a meta mask or my theorem wallet or one of these other, you know, providers. And the good thing with our software and I believe coin tracker as well is you can just enter in that wallet address. So I know in our last question we had mentioned like entering in manual entries or entering custom CSVs for the average user or even for myself, like trying to do that with, you know, defy or yield farming or something like that would get pretty complex. But the good thing is you can enter in an address and then we'll pull in that transaction data directly from that address where it went, you know, what pool you went into, what pool you came out of, things like that. So after you kind of sort through how it's taxed,

Starting point is 00:36:18 on the opposite side, being able to report that accurately and concisely and getting that into your tax forms has to become a little bit of. easier because you're getting the distributions out to a wallet address. And then you can just enter that wallet address soon. We can see the activity in that address. And obviously, with a lot of the yield farming, people were making crazy amounts of interest for, you know, allowing their tokens to be borrowed or whatever it was. So how does earning interest get taxed by the IRS?

Starting point is 00:36:50 Yeah. I mean, generally speaking, earning interest at the time you receive it, you just have how to pay taxes based on the market value. That interest is taxed as order or income. Again, I know it sounds like interest, but technically speaking, it's not considered interest because for you to earn interest income, you got to put money in a certain institution. So in this case, we are not dealing with money. Instead of money, we are putting property.

Starting point is 00:37:16 So the technical, I would say it's more like other income. But either way, the tax freedom is the same. You know, you just got to be order income tax. is at the time you receive it, equal into the market value at the time you receive it. Okay, so it depends on what your income bracket is, what amount you're going to pay. That's correct, yeah. And then you have a separate form for that as well. And I think that may be a segment we'll get into as far as like what are the tax forms,

Starting point is 00:37:40 where are they used for? But with like the Schedule 1, you'll have a listing of, you know, that income that comes in, which is separate than an 89-49 or a Schedule D or some of these other tax forms that are kind of more focused on a purchase or a sale of an asset. versus just the interest or income that comes in. Okay, so this is interesting because basically, so for people doing yield farming, depending on the complexity of the transactions that they're doing,

Starting point is 00:38:06 they could be paying capital gains taxes in addition to ordinary income taxes, even if it looks like kind of like a single cycle of yield farming. Is that right? So I actually wrote a post about this. In my opinion, when you say yield farming, it consists of like at least seven to eight transactions, meaning you're opening up a loan, you're getting interest,

Starting point is 00:38:30 and then you're selling the second token to another one. And all those different layers of transaction have different bays of getting tax. And your entire tax bill depends on the summation of those 708 transactions. So it's really hard to say, okay, how should yield farming be tax? It's hard to say because every platform is doing a different way. and then that yield farming phenomenon consists of different, like at least 708 transactions. Okay, all right.

Starting point is 00:39:01 Well, super fun for you guys. And I'm sure the IRS is going to love this when they really get into it. Okay. So another new thing that, well, it's not really new, but, you know, with Ethereum 2.0, it became a bigger thing with staking or validating. How does that kind of activity get taxed? Okay. I'll start with Ethereum 2.0 because that's the big news because Ethereum is the second because currency with the market cap.

Starting point is 00:39:29 So again, we still don't know how it's going to look like in the real world because I hear like, you know, some exchanges are providing like some type of liquidity token while your original, I don't know, 20 or 32 Ethereum are being locked in the Ethereum 2 like, you know, smart contract. So again, I actually explained this on my tutor as well. We can speculate how it's going to look like, but we just don't know how exactly going to play how exactly this will play out in the real world. But generally, speaking about staking, like something like TASO, like you got to, you know, the conservative way to treat is that at the time you receive those staking rewards, you had to pay older income taxes based on your income tax record. So that's the most conservative way to go about that.

Starting point is 00:40:15 All right. Yeah. No, that is true because there are different ways to stake. And I did do an episode with James Slazis of Dharma Capital because they launched liquid staking, I think is the name of the company. And yeah, I do think they're giving people tokens because I think you can do like a fraction rather than the full 32th as your deposit. So, okay, interesting. All right. So we briefly did talk about air drops, but why don't we go through that? in terms of, you know, what people need to know and report for their taxes.

Starting point is 00:40:52 Yeah, I mean, I think we covered some of it in the sense that a traditional air drop would just be taxable ordinary income from the income that comes in from that air drop. Most of the time, especially with an air drop, a lot of the times, especially like maybe hardcore Bitcoin users that have been around for a few years, whether it's BSV or BCH or some of these, you know, there's like 100 different Bitcoin forks. a lot of times they'll not want to keep the fork, and they'll actually trade that fork right back in for additional Bitcoin. So there's, it kind of just depends on what you do with thatirdrop, what you do with that fork. And then with the air drop,

Starting point is 00:41:25 you know, we went through kind of how you could track that, how you can report that. I think Chian mentioned like the uni air drop or like the one inch air drop. Those were kind of pretty large air drops this year, where it kind of depended on how many addresses you used to interact with the protocol. So with Uniswap, you could actually have 100, 200, 300 different wall outages that all interacted

Starting point is 00:41:43 and all received anirdrop. So it becomes a little complex, but using software like either of ours really allows you to kind of simplify that process. So the income that you'd receive from the air drop would just be included among other income, whether it's mining, whether it's staking, whether that's interest or quote-unquote interest.

Starting point is 00:42:03 And then what you do with that asset moving forward, if you keep that asset, then you go into that holding period. If you trade that asset in, same thing, hold it period, gains, losses. So there's kind of due assets. not necessarily there's a double tax, but there's just multiple factors of once you receive that air drop, what you do with it.

Starting point is 00:42:19 But the airdrop itself would largely be considered taxable income that comes in. And then, you know, as we mentioned, figuring out what the USDA value is of that air drop when you received it. And then we've seen some, you know, as Sheehan mentioned, and I think anyone that kind of lives in this space, there's a lot of gray area and a lot of lack of guidance around an airdrop and when do you actually own thatirdrop? So do you own that airdrop when it hits your wallet?

Starting point is 00:42:43 Do you own that air drop when you actually claim that token? Do you use that air drop when you actually move that token? So there's a lot of gray area in the sense that we really just haven't had clear guidance directly from the IRS. So firms like ours, our tax attorneys, Chehan, CoinTracker, other platforms in the space, try to typically recommend more of a conservative approach. At the end of the day, you know, you are putting your names on these tax forms. So, you know, you have a little bit of optionality of what to do,

Starting point is 00:43:15 but we typically recommend taking a conservative approach and then listing that income along with any other income that you're getting from your crypto asset activity. The scorebed app here with trusted stats in real-time sports news. Yeah, hey, who should I take in the Boston game? Well, statistically speaking. Nah, no more statistically speaking. I want hot takes. I want knee-jerk reactions.

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Starting point is 00:44:21 That's why CBC News is putting more journalists in more places across Canada, reporting on the ground from where you live, telling the stories that matter to all of us. Because local news is big news. Choose news, not noise. CBC News. Yeah, and one other factor with the airdrop and also the fork would be when, like if you have those coins on a exchange, when that exchange makes those coins available to you. Because as we all remember from, you know, when Bitcoin forked into Bitcoin cash and Bitcoin, there, I think there were several exchanges, Coinbase probably being the most famous one where people could not access their Bitcoin cash until four months later or more than four months later. So I guess that would then affect your cost basis, right?

Starting point is 00:45:11 Because like if the price at the time of the fork is different from the time, from the price at the time that you receive it on the exchange, then you would have a different cost basis. Yeah, correct. So I think the concept that we are talking about here is called Dominion and Control. So Iris actually came out with the guidance in 2019-2019-24 revenue ruling. So, Iris pretty much said that you have a taxable event at the time you gain domain and control of the coins that you get. So it's not the time you claim it because the claiming doesn't mean that you can, you have actually control over it.

Starting point is 00:45:50 It's the time that you see your coins on the wallet and you have the ability to do whatever you want with that. On that specific time, that's when you have a taxable event and you got to report the order income equal into the market value. at the time you gain the domain and control. Okay. And I just had a realization, because this has happened to me, let's say that you have some coins in some kind of wallet, and that wallet receives an air drop or whatever it might be, but then you cannot access that wallet anymore.

Starting point is 00:46:26 So you still owe taxes on that money. This totally happened to me, by the way. I lost a fair amount of ether. But anyway, sad story. I was trying to buy my dot-e-n-s name because I knew there were like squatters after it and miserably fails. But anyway. That's a good question. Again, I would answer that question using logic.

Starting point is 00:46:52 So, yeah, I mean, obviously at the time that coins hit your wallet, you have a taxable event. But if you could prove that, okay, you no longer have control. over that wallet, you know, you don't have the private keys. I don't think you should recognize income. It just doesn't make any sense because you don't have the dominion. You have the dominion, but you don't have the control over that wallet because you just don't have access to it. So I would not record it. By the same time, I would not claim a loss because that might raise a red flag to the IRS. So it just disregarded. And I know it's sad, but what can we do? Okay. So then, so, we're going to do. So, we're just, so,

Starting point is 00:47:32 I think we went through pretty much all the major transactions that people will, you know, be interested in. There might be some others that I didn't think of, but I think that's pretty comprehensive. But then there are actually certain things that people might do with their crypto that they don't need to report or that wouldn't be taxed. So what are some examples of those? I mean, honestly, at this point, with the treatment of it as property, there's really not that many that don't come under some sort of tax. I think the clear one is using dollars to purchase crypto. So if you go into an exchange and you put in $100 and buy Bitcoin, Ethereum, et cetera, that itself is not a taxable event, but then tracking that cost basis and figure out what you did with that token moving forward would be.

Starting point is 00:48:14 So I think that's a clear one is the purchase of crypto with Fiat or using dollars to purchase crypto is one that's not necessarily a taxable event, but would likely need to be tracked depending on what you do. As far as other ones, I mean, there's not really that many. as far as, you know, anytime you make a trade, you know, as we walk through, there's kind of a misconception of using crypto and purchasing another crypto that that should be considered a purchase. But as the treatment of property, you're essentially selling one piece of property and acquiring another piece of property. So that crypto to crypto transaction typically covers, you know, 95% of all activity, whether

Starting point is 00:48:50 it's, you know, some type of yield farming, some type of just trading, you know, then we get into margin trading, futures, options, derivatives, and those all have taxable events. And so pretty unfortunately for the U.S.-based taxpayer, there is not that many buckets or types of transactions that aren't taxable in some regard. But I don't know if she had any, that didn't come to mind for me. Yeah, yeah. I'll give you two more examples in addition to what Dan mentioned, because this is a question that I get all the time. Transfers between exchanges and wallets that you own are not taxable. It doesn't matter, you know, your portfolios, but million bucks or 10 million bucks, if you're transferring from Coinbase,

Starting point is 00:49:29 you own to another exchange of wallet that you own, it's not taxable. So that's that's, that's a second one. The third one is, uh, if you're receiving a gift or if you're sending out a gift, uh, those are not reportable transactions because if I'm receiving like a gift, that's, that's not income. Of course, you would say yes to that crypto question on page 1040, but there's no tax obligation. So, so I would say those are the other two situations that you would have something to do with crypto, but there's, there's no taxes. Oh, I was saying just to, uh, to add on to that, not necessarily with another aspect, but I think what we got, especially back in 2017 or 2018, was some users that were like, why do I need to upload my wallet addresses?

Starting point is 00:50:08 There's no taxable events. All I'm doing is transferring back and forth. But seeing that transfer allows us to then probably attract that cost basis between exchanges, between wallets, between protocols, so that when you make that purchase, we can see what lot or depending if you're using FIFO, LIFO, or specific ID, where that came from. So I just wanted to put that out there as well, because I think we get a lot of questions, I imagine CoinTracker does as well of, why do you need to see my wallet? There's no taxable events that are occurring in the wallet specifically

Starting point is 00:50:33 if you're just transferring back and forth. But seeing those transfers allows us to have a complete flow of funds that we can look at and then be able to track cost bases according to your transaction flow. So I just wanted to add that in because it's definitely a frequent question that we see a lot. Yeah, and for people who don't know that LIFO, FIFO, whatever, is just last in first out,

Starting point is 00:50:54 first and first out, which are different ways to determine cost basis for your taxes. But as they were saying earlier in the episode, specific ideas even better because then you can really do the tax loss harvesting really well. Okay. And one other thing is, what about stable coin purchases or transactions? How are those taxed or do they even need to be, you know, reported or whatever? I mean, the purchases using USD for stable coins, it's not taxable. There are, there some stable coins, you know, they're, you know, theoretically they're pegged like, you know, to USC one to one, but there's some minor fluctuations, sometimes 0.99, 1.01. I mean, unfortunately, like, if you want to be really conservative, you know, those are like taxable events, you know,

Starting point is 00:51:38 for those, you know, 0.1 or, you know, minus 0.1 or plus point 1. But on an annual basis, like if you're constantly transacting with stable coins, those fluctuations kind of, kind of evens up. So that's my take on that. Okay, okay. So, yeah, like, maybe just in case you'd want to do it, but it's not going to have a huge material impact. Exactly. All right. So then let's, because, you know, we've been talking about some of the kind of different forms and this issue with the wallets versus the exchanges. But I am curious, what are exchanges typically doing in terms of the types of forms they're sending out? I do know, I actually like look to myself and it doesn't appear that there's kind of like a general,

Starting point is 00:52:23 standard for the way people are doing it because cash app sends a 1099B and coinbase sends a 1099 MISC. So what are all the different forms that people might receive and how would that affect like, you know, what they would do with their taxes? Yeah. I mean, the simple answer is what our exchange is doing, not enough. You know, it's been an issue for quite some time and we haven't seen much precedence. Even, you know, an example is Coinbase was actually sued by the IRS. for transaction data for customer records and still has not really given much thought or effort to having a robust solution. So from an exchange perspective or even a service provider perspective, we haven't really seen much attention or much care for the individual taxpayers. It's,

Starting point is 00:53:11 you know, it's make sure you come in, make sure you pay your trading fees and then, you know, good luck on the back end. So we're now starting to see more exchanges, especially this year with the movement of the 1040 and increased IRS enforcement, not only from enforcement, but investment, that exchanges and service providers are really starting to care more about how do we serve our customers on the back end. As far as the forms, I think, you know, we both kind of smirked a little bit when we heard the 1099B or 1099K or 1099 miscellaneous because we've seen multiple forms that really don't provide a comprehensive report. She had mentioned earlier for using like a TD Ameritrade or an e-trade, typically an investor is using one platform and all that activity

Starting point is 00:53:47 is happening on that platform. So, you know, I come into Schwab and I put in 100 bucks and I make some trades and then at the end of the year, I have my 1099, and then I'm pretty much done. With crypto, the average investor that we've seen with our data set is using anywhere between six to 10 different exchanges. Then they're using anywhere between 10 to 15 different wallets. So, and that's an average user. You know, we have some users that are using hundreds of different exchanges, hundreds of different wallets. They're making hundreds of thousands, some millions of transactions every year. They have automated bots. Like, you can get pretty, pretty crazy with it. But, but yeah, I mean, I think the value of, and not to shill either of our

Starting point is 00:54:21 platforms too hard, but I think the value of our platforms is we've kind of gone in and do a lot of the, the grunt work for our customers and our clients. Instead of having to put together a spreadsheet from finance and Coinbase and Gemini and Cracken and all these other things, we allow you to aggregate all your exchange activity, all your wallet activity. We do all kind of the messy hard work for you and then spit out these nice clean tax forms that you can either file yourself, you know, send your tax professional. I believe we both have like turbotex integrations where you can, you know, one click and drag and drop right into turbotax and be done. So, Yeah, we've definitely seen exchanges and service providers not really care too much just yet.

Starting point is 00:54:57 We're starting to see that from a partnership perspective as well, where exchanges are now looking for both of our platforms to help them handle their clients. You mentioned like staking platform before. We've seen like slingshot or staked or some of these other platforms that are understanding that what they're doing on the platform has a taxable event, same thing with like a lolly, a fold. These other providers are now starting to realize that if they can provide easy-to-use, an accurate tax software for their clients. It just makes it an more enjoyable experience.

Starting point is 00:55:26 So not to get on too much of a tangent there, but I think we're starting to see exchanges to care. Our platforms and our software really do a lot of the dirty work for you of aggregating all of that. And I think that's where the complexity of crypto comes from is that you're trading on five or ten different venues. You're trading between 10 or 20 different blockchains that all have different ways to view them.

Starting point is 00:55:47 You're trading between different wallets and things like that. So the more complexity you have, the more you typically need to use the software like one of ours. But that's just my opinion and my perspective. But on the 1099K and 1099B, it really doesn't give the taxpayer unless the taxpayer is just using Coinbase. Like if you sign in, all you do is put dollars in Coinbase. You make your trades just on Coinbase. You do nothing else. Then there's some ability to say those tax forms are useful.

Starting point is 00:56:15 But the vast majority of people in crypto are not using one exchange. they're not using one wallet, they're using multiple. And when you start mixing wallets, you start mixing blockchains, the ability to track your cost base is accurately, reliably, and quickly becomes a little bit harder. And then that's where our software kind of comes in to help that process for our clients. So you're essentially saying like these forms are old. They, you know, are from kind of the time before crypto.

Starting point is 00:56:39 And so none of them is really perfect for reporting crypto. And so that's why we're not seeing the exchanges kind of like pick one form to send. And then it sounds. like you're also saying that even like for you, this provider in this space, like you're not really using the forms. Is that what I'm getting? I mean, pretty much. I mean, for us, like even so let me let me tell you that like the fundamental problem that we are having in the crypto space, right? So if you're dealing with TD Amritory Trader J.B. Morgan, it's easy for them to internally track the basis because of the nature of the space. And if I'm moving stocks from T.D. Amidreary to J.P. Morgan,

Starting point is 00:57:16 they communicate with each other. So when I'm not. I get the 1099B from JPMorgan, they know my cost spaces. But in the crypto space, if I transfer my coins from my ledger to Coinbase, I cannot expect Coinbase to know my cost bases. Right. This is the problem. And this is the reason why we don't have uniformity when it comes to information reporting. And it's not the exchanges for it. Just the space. And that's why we need tools like, you know, Cointrack and Zen Ledger, because we are those third-party intermediaries that aggregates all those sources and give the taxpayer what they need. And we are the only people who can do

Starting point is 00:57:54 that because we are in the middle. Exchanges cannot do that. Taxpayers cannot do that. It's too complicated. It has to be that intermediary. So that's why these crypto tax software are super important. Right. Because you would have visibility, not just to know what happens on the exchange, but even what happens in their ledger or their metamask or what, okay, got it. All right. So yeah, I was going to ask you a question about, you know, if someone is just using MetaMask or Ledger or whatever, what they would need to do. But it sounds like really it's just that they need to plug into some kind of crypto tax software. Exactly, yeah.

Starting point is 00:58:29 Okay. All right. So let's talk about one other new trend that it's not really involving money, but it is a kind of crypto transaction, which is NFTs became kind of, you know, a little bit of a thing this year. And, you know, by NFTs, we're talking about non-fungible tokens, which are sales of, you know, digital art or collectibles. So I don't really know how this is tax, but my questions are divided into like taxes from the purchaser's side. So why don't we just start there? So if I'm like, if I'm collecting some kind of digital art, then what do I need to report or log or, you know, do I pay taxes on that? Yeah, NFTs is definitely like a new trend in crypto that we're seeing.

Starting point is 00:59:12 I think one of the benefits and one of the disadvantages is the fact that they're based on different ERC standards, most of them. So, for example, with a lot of traditional crypto, they're based on ERC 20, TRC-10, TRC-20, BEP2. And those are really like common standards that things can be built off of. So if you look at like the crypto ecosystem, you know, 5,000 of the 10,000 tokens are some form of BRC 20. So in NFTs, you have ERC 721 and 1155, which are the two main like token standards that can be built off of. The good thing as what the NFT or non-fundable token stands for is that you're not swapping these as like, for example, which you can swap $1 for $1 and it's the same thing. You're buying a specific and rare and unique form of property.

Starting point is 00:59:57 And the ability to track that is somewhat easy because, you know, most of the things are happening on chains. You can see, you know, most of these platforms are using dye or eth or some type of crypto to purchase that transaction. If you go on like an open C or a super rare or a rarable NFT platforms, you're not really able to go in and with like a credit card. and purchase an NFT. You're using ether die or some type of crypto. So seeing what you paid for it, seeing when you paid for it, seeing what, you know, that acquisition, that cost basis is,

Starting point is 01:00:27 is pretty easy. On the flip side, we're just not really seeing the velocity of those NFTs like we are with crypto. So we're not seeing an ERC 20 token or ether die being traded back and forth a million times. We're typically seeing in the concept of a lot of NFTs are based on like art, for example. So a user that's producing a piece of art, they're not really reselling that every day or trading that material. They may, you know, sell it later on. For example, you know, we saw the crypto punk sale. I know we did, for instance, use dates, but within the last couple weeks, that went for, you know, $700,000. So we're seeing large purchases of NFTs, not only on the art side, but digital, digital music, digital content, digital creative assets as well. So we're starting

Starting point is 01:01:11 to see the mixture of culture and currency come together, which I'm personally really excited about. But as far as tracking it from a tax perspective, it's somewhat similar in the sense that you're still going to have a cost basis when you purchase that asset. There's not really much you can do with the asset yet. And I think that's the interesting part of NFTs is how do we make these things viewable? Do you put it on the central land or a somnium space? Can you put it into like a digital art museum and have people pay like a feed of view it like you would with like the Louvre or like a museum of natural art or something like that? but not to get too much on a tangent there. The tracking of the purchase is pretty standard.

Starting point is 01:01:49 And then because the asset is typically a 721 or 1155, being able to track where that asset went, it is pretty, pretty easy. And then if you sell that back into ETH or Dye or USDC or whatever, then you'd have a similar accounting method, just like you would with a traditional crypto where, you know, cost basis. How long did you hold it? What did you sell it for and things like that? So it does become similar because a lot of times you're not able to purchase the dollars and then you're not able to sell that back into dollars.

Starting point is 01:02:19 So even like the Cryptopunk reference I just brought up, that wasn't a sale into dollars. I was, you know, crypto is used to purchase that asset from someone who paid crypto to purchase it originally, if that makes sense. So because it's still kind of in that crypto ecosystem and not hitting these Fiat rails, you're not seeing some of the complexity that could come with the accounting. So I know that's a little bit of a tangent there. but hopefully that gives a little bit of kind of clarity and context to NFTs. Okay. And then I'm assuming for the creator, their income from that is just taxes normal, ordinary income? Yeah.

Starting point is 01:02:53 I mean, if you're in the business of creating art, I mean, yeah, it's just like getting paid in USDA and you're getting paid in some type of coin. So, yeah. Okay. And then I don't know if this is different or if it's, you know, similar. But what about the people that are creating their own social tokens? like there's Alex Masmadge who created Alex and then Marguerite Descartesel created coin because they're kind of like creating their own sort of money or economy.

Starting point is 01:03:23 So I'm not sure how they handle their taxes for that. I mean, typically like creation of something is not a taxable event. I think the question arises, you know, when that person decides to sell it for like some amount of like huge money. In that case, you know, most likely the different. You know, the cost basis and the sales proceeds will be taxed at some type of capital gain. So I haven't seen, like, you know, a lot of people, it's not that prevalent yet, but I'm pretty sure as we move forward, you know, we're going to see so many of these great transactions.

Starting point is 01:03:56 And there's always going to be a lag behind the innovation and the IRS coming and telling these specific guidance. So at that case, you know, we just had to come up with the reasonable guidance based on what we know. Okay. Yeah. I mean, I think it's like their fans are earning the coin by doing different things in their, you know, economy. And then and then later there's a there's maybe a price attached. So we're over an hour, but we still have a few important questions.

Starting point is 01:04:25 During the defy craze this past summer gas fees on Ethereum were quite high. And in general, you know, high transaction fees have been an issue for quite a while on several different blockchains. So how do those fees that people pay affect their taxes? Yeah, I mean, if you treat the gas fees correctly, you could get tax benefits. Like say that you're transferring, you know, Ethereum from one wallet to another. You could add the gas fees to the basis. So when you later sell that coin, you would have a lesser gain because you're kind of getting the benefit of paying for that gas fee. And if you're selling in a transaction, you could reduce the sales price with the gas fee.

Starting point is 01:05:04 So that way you're kind of reducing that. So again, as long as you're kind of reporting those things, directly and capturing those correctly, you can get some type of tax benefits. And again, that's where the crypto tax software coming to play because there's no way that you can do these things manually. All right. And then at the end of the year, there may have been some people who made crypto donations because most likely over the course of 2020, people did see their crypto holdings go up.

Starting point is 01:05:29 So how should those donations be handled tax-wise? Yeah, donations are great too for you to reduce your taxable income. And it's just one of those situations, like rare situations where IRAs kind of gives you two benefits in one transaction. So number one, when you donate like long-term coins to a charity, you get to bypass the capital gain taxes. So that's huge. Number two, you get the deduction equal into the market value at the time you send the coin to the charity. And that deduction reduces your crypto income and also like non-crypto income like W to business income and etc. So, yeah, it's good.

Starting point is 01:06:08 But I wouldn't make the charitable donation decision based on the taxes. I mean, you should be motivated by other things, but there's a generally good, it's a good way to reinstate income, generally speaking. All right. And so there's also kind of, you know, two really popular platforms for purchasing cryptocurrency that actually don't do something that some of these other exchanges that we were discussing allow, which is they don't. don't allow people to withdraw their crypto to their own wallets.

Starting point is 01:06:39 And so that means all they can do if they would like to dispose of it, or not dispose of it, but I guess gain control of those coins, is they would have to sell it within the app. So how would that affect their taxes? And what I'm talking about is PayPal and Robin Hood here if I didn't mention them. Yeah, this is a great timely topic, especially with Robin Hood. So, yeah, I think the problem with Robin Hood and PayPal is that right now you cannot transfer out your crypto coins from those platforms to somewhere else. So for any reason, if you want to kind of completely move out of the platform, you're left with one option. That one option is you got to cash out your crypto, get the cash, and go to somewhere like Coinbase and buy your crypto.

Starting point is 01:07:30 But the problem here is that when you cash out, you got to pay taxes. So that's pretty unfortunate because people should have the ability to move to another platform without having to pay taxes. But these platforms, they're just working away that if you want to move out, you got to cash out. Again, that's the downside. I mean, but don't get me wrong, there's so much, you know, good things that are offered by these platforms as well. I mean, especially Robin Hood. It brought like a bunch of, you know, retail millennial investors to, to, to, to, you know, finance and expose them to crypto. So there's good stuff, but there's bad stuff as well.

Starting point is 01:08:06 So for years, the crypto industry has been advocating for certain changes to the way crypto is taxed. In particular, they would like to see what's called a de minimis exemption for crypto transactions, which means that under a certain dollar amount, crypto transactions would not be taxed. So that would enable you to buy a cup of copy with Bitcoin without triggering a taxable event. what do you think the prospects are now for something like that to go through? Yeah. So this bill was introduced, I think, 2019 or something like that. And then there was this, you know, there was COVID happened.

Starting point is 01:08:42 And there's a change in the administration. So I don't even know where this bill is right now. But for those of you who don't know, like it pretty much said that if you're, if you're transacting under 600 bucks or less, it's not a taxable event. So that's the bill. I mean, it's good for the adoption. But at the same time, the way that Bitcoin has been soaring over the past few years, like for me, it works more like a investment tool or a capital asset.

Starting point is 01:09:11 I don't see people spending it to buy a cup of coffee or stuff like that because I don't think it's designed to work as a currency, in my opinion. I was just about to say, I think the nice thing about the de minimis was just the sense that, and I may be wrong, but I don't think it was specifically just around Bitcoin. So I'm 100% on board with Sheehan. And like, I wouldn't use my own Bitcoin personally to purchase, you know, Starbucks or Dunkin' Donuts or anything like that. But I think, you know, if you have another asset that is currently used more as a medium exchange, I mean, I personally believe that, you know, as we continue to see a price increase and stabilized in Bitcoin, we'll eventually

Starting point is 01:09:48 get to kind of different aspects of money that is used for. We're kind of still in that store of value range right now. But yes, I think that's the nice thing is that it's not just for Bitcoin. So if you have other assets that you prefer to use like a, you know, a Tron or something like that where, you know, there may be a higher supply where you can easily purchase more at, you know, roughly the same cost. Then it kind of makes sense. But yeah, I don't think there's been much like new news. And I think under the new Biden administration, it's kind of a wait and see with what Biden Yellen and, you know, some of the new appointments, where they go, where they go, they started and how that kind of all plays out. Yeah, there was one other potential change that

Starting point is 01:10:29 FinCEN flagged, which is the agency released and noticing it intended to amend regulations so that so-called F-bar or foreign bank and financial account requirements are applied to crypto held overseas. So what does that mean? What does that mean for crypto holders? Yeah, so right now, if you're holding crypto in a foreign exchange or location, it's not subject to FBAR reporting. FBAR is like a form that you file with the FNCENC, whenever you have any type of assets exceeding $10,000 in any time during the period. So to be like super clear here, it's not applicable right now. The FBRA is not applicable right now.

Starting point is 01:11:14 But in January, the FinCent really is like a very brief note. I think 2020-02 or something like that saying that they intend to change that. Again, that's all they said. So if they've released that if they passed that law, if you're holding crypto in, let's say something like finance.com and at any time during the year it exceeded $10,000, you would have to disclose it. It does not mean that you've got to pay taxes or anything like that. You just had to disclose it under the bank secrecy act. All right. So why don't we end on? And tips for 2021, because I think we can all feel in our bones that 2021 is going to be a big year for crypto.

Starting point is 01:11:55 So what are your tips for people to establish habits that would help them now, so or not to establish now, so that a year from now, they can breeze through their taxes? Okay. So just know that IRAs pretty much publicly said that they are going from this educational mode to more like enforcement type of moving, starting 2021. So just, I would say, just stop playing, you know, games and just report your gains for crypto. And then, you know, just make sure you answer your questions correctly. Just be aware of how crypto taxes work.

Starting point is 01:12:31 Just know, like little things like, you know, selling your long-term crypto is always beneficial. You know, do taxes harvesting. Make sure you donate crypto if you have gained, you know, big amount of, you know, unrealized gains. And then, you know, last but not least, you know, make sure you. you use some type of crypto tax software because that's the only way you're going to know your right amount of gains and losses. And if you don't use one of those things, you're going to be all paying taxes or you're going to be understating your income and you're going to expose yourself to the IRS. So those are my points.

Starting point is 01:13:03 Dan, what about you? No, I think he gave a great summary. I mean, we've seen personally with our new 2021 customers that are coming in for likely 2021 taxis and they're purchasing it on average 3.8 years worth of tax forms. So we're seeing a ton of increased adoption from a compliance perspective where they're coming back and either amending 17, 18, 19, 20. They may have never filed for those years and they're now filing for the first time. So we're seeing a lot of increased adoption, not only from the movement of the 1040 question, but we've also seen IRS civil and criminal divisions now with investments into crypto tax software and blockchain analytics services to now be able to go out and use those

Starting point is 01:13:43 offers for enforcement. So we're seeing not only like the increased compliance on the front end, but increased enforcement on the back end. I think Sheehan mentioned, you know, the tax loss harvesting is a huge ability to really offset your gains. And the cool thing is that it can be used for crypto and non-crypto as well. So, you know, if you have W2 income, if you have stocks, bonds, those of the things. Donations is a big one. And then, you know, as we mentioned earlier, just keeping track of what you're using, I think, is the biggest one. You know, Shian mentioned using a crypto tax provider. You know, I strongly believe in both of our companies.

Starting point is 01:14:15 You know, we've raised venture capital. We've, you know, we have built solid teams, solid product, been around for quite some time. So using a crypto tax software is definitely a great tool. And then just making sure you're keeping track of what you're using. You know, as we started the conversation where you don't have to track every transaction or anything like that. Gas fees can be included in those wallet addresses, as we mentioned.

Starting point is 01:14:37 So just really making sure you're tracking what you're using and then using a crypto tax software is really kind of like the bow on the end, I guess. All right. Great. Well, thank you for helping me give listeners a very comprehensive show. Where can people learn more about each of you and Zen Ledger and CoinTracker and Cryptotaxes in general? Yeah, I mean, I'm pretty active on Twitter. My handle is at the Crypto CPA, so it's pretty easy to find.

Starting point is 01:15:04 If you need a crypto tax software tool, you know, you can go to coin tracker. io or you can go to CoinBased Tax Center. We are directly integrated there as well. So, yeah. Yeah. As Sheen mentioned, my handle's not as nice. My handle is just D-Hanam, D-H-A-N-U-M-8, pretty active on Twitter. You know, our website is just Zenledger.com.

Starting point is 01:15:27 And I think one thing that may be interesting to some of your listeners as well that may have outside crypto activity is in addition to our do-it-yourself options. we also have fully prepared tax professional plans. So we have a team of tax professional standing by that can help you with your crypto and non-crypto activity. So if you just want someone to do it for you, sign off a minute. And I think that's a big thing we're seeing a lot of users at they want to make sure if the IRS comes knocking, they're knocking on the tax professional door and not their door. So just another thing that may be interesting for some of your viewers that may have activity outside of crypto that just are looking for someone who can handle both.

Starting point is 01:15:58 Great. Well, thank you both so much for coming on Unchained. Thanks for having us. Thanks so much for joining us today. To learn more about Dan and Zenletcher and Sheehan and CoinTracker, as well as crypto taxes, check out the show notes for this episode. Don't forget, you can now watch video recordings of the shows on the Unchained YouTube channel. Go to YouTube.com slash C slash Unchained podcast and subscribe today. Unchained is produced by me, Laura Shin, with help from Anthony Youen, Daniel Ness, Shash, and the team at CLK transcription.

Starting point is 01:16:28 Thanks for listening.

Unchained - Everything You Need to Know About Your 2020 Crypto Taxes - Ep.210

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