OST LIVE #065: Crypto Tax Best Practices in 2019



hello everyone and welcome to also live in weekly broadcast on watching branded tokens in token economies we feature weekly guests to discuss the latest in blockchain and the current projects that they are working on and with us today we have as a cream Eclair he also goes by Zack and he is the co-founder of token tax and on this episode we're gonna be discussing best practices for US taxpayers and we're gonna provide or Zack is gonna provide a global perspective on crypto tax regulation but with before we get started Zack welcome to us alive thank you so much for having me how's am excited to be here excited to talk about crypto taxes and hopefully gave you all of your listeners and Watchers something useful going into this tax season wherever they are in the world yeah so you know hope to provide you guys with information if you have any questions for those of you that are watching this live feel free to type those in in the chat and once we get towards the end we'll jump into the chat and if we have time we'll go through your questions but just as a side note before we go further this episode is not to be taken as any financial advice we're just having a one-on-one conversation an interview to provide information on on you know crypto tax regulation in the US and what Zack knows about what's going on in the world in regards to crypto taxes but before we jump into the tax questions that can you tell us a little bit about your background as is and your work as a CPA yes so I've had a pretty eclectic work background oh yeah I graduated with degree in accounting degree in finance and then went and worked in didn't go straight into accounting I went into Investment Banking spent a couple years doing that and then I went and I got involved with a program where financial professionals were teaching financial literacy to inner-city high school kids and talking about compounding interest in checking accounts and how to have credit responsibly and things all of us should know and so basically I got into teaching for a couple hours a week and I've solutely loved it and just decided alright I'm gonna take a break from the corporate world and I went into Teach for America here in New York City and I ended up teaching math to high school and middle school students and you know infusing it with entrepreneurship personal finance the stock market game taxes just helping people understand and not just the the students I had but even teachers and other people in the in the building would come by and you know you realize wow even financial professionals don't know that much about this stuff and it's enormous ly valuable and understanding financial literacy act adds 20 30 % tear to your lifestyle to your earnings and then from there I kind of arced back to the business world wouldn't worked at Bain imprint Capital worked in impact investing on the VC side and also spent some time working in Africa and India during my summers off so doing corporate structuring legal structuring basically helping nonprofits over there become social enterprises and become self-sustaining and not dependent on donations so kind of the new my my hope for the new form of capitalism where companies not only do good but also make money so that they're self-sustaining and you know from living in Zimbabwe from working and impact investing I started to learn about cryptocurrency and wanted to get involved was an investor was going to meetups in New York and you know at a crypto time I see Meetup I met my current co-founder Alex who was working on a platform to basically help people file their crypto taxes but it was just for connecting to coin base and you know it it didn't have a lot of the functionality of token tax and I was like Alex we could do this much bigger we could teach people about specific shares accounting it'll make a huge difference in their taxes we could teach people about tax loss harvesting and we could basically democratize access to this knowledge that only people who have private wealth managers or private accountants managing their family office or really wealthy people have and we can kind of just teach people in the crypto community for a much lower price and so that's how token tax was born back in 2017 and so now we're getting ready for our text second tax season but and then congratulations for that so how long ago did you get your CPA I don't have my CPA all right yeah I worked as I worked in finance and accounting and I'd probably just know more about random crypto tax stuff than than anyone ever wanted to know or have expected to know but yeah I never sat the exam basically so it's a four part exam that I would have to sit in the state of Colorado but I have all the other requirements to be a CPA but I don't personally file taxes I have CPAs on my team who who filed taxes good so how big you before the call you was telling me about the team was growing and especially with this tax season he gives a looking to get a bigger space so how big is your team currently yeah we're ten people right now in New York and we also have a couple engineers in LA shout out to them who have been doing a great job building all of our infrastructure like our pricing databases our exchange tools things that we're actually looking to sell or you know let other startups use as a way to avoid reinventing the wheel you know we built connections to 40 or 50 exchanges via API plus we support all these other exchanges via CSV like that transaction record and Excel that you can drag and drop into our system and you know that was a huge amount of engineering work and we'd love to help other startups get a leg up and not have to do the same thing but we're about half crypto and crypto tax accountants and half engineers I'm here in New York good and we'll get into a little bit of that towards the end in regards to how to track transactions but let's get started with the decrypted landscape can you provide this a little bit about it tell us a little bit about the global landscape on cryptocurrency or maybe do you think we should leave this question to the end um now I'll give a quick overview so you know there was a big g8 meeting down in Argentina and a lot of the lot of the major players from different countries are talking about cryptocurrency is a security which is how the which is like what a stock is like Tesla stock McDonald's stock Google stock Google bonds well they don't have bonds but Apple bonds so securities have special special taxation rules in the US and special registration rules which is why all these ICS were problematic the initial coin offerings because basically from the SE C's the security Exchange Commission's perspective they were unregistered security offerings and so that's kind of the lens that we are viewing cryptocurrency tax through because unfortunately the IRS hasn't really given any guidance but until like in 2014 they said oh it's not a currency as and it's not like the Euro or the dollar it's property you have to pay tax on it and every single event when you sell it has to be reported even if you just bought coffee for four dollars you need to report that and that's pretty much the last thing they said other than pay your crypto taxes yes crypto de crypto is taxable and all events have to be reported but they haven't said anything about here's how you should treat a fork here's whatever accounting method here's how airdrop should be treated so a lot of what we have to do is take the rules we know for property info for securities and use common sense and be conservative be consistent just follow all of the the Maxim's in accounting and what the IRS expects from everyone but basically we're kind of writing our rules writing them publicly and saying hey here's an article on Coyne desk an open letter to the IRS or the AICPA you know a group of accountants are submitting rules and and ideas to the IRS but none of them have been formally adopted and once that happens I think you'll see a much easier process for accountants to get on-boarded right now it's so difficult because there isn't like one set of rules you can memorize for accountants they kind of just have to use their best judgment and not every situation is the same so you have like delayed purchase tokens you have air drops you have staffs you have you know people getting scammed like BIC rail but then you also have people losing access to their wallet now you have quadriga people had had crypto at quadriga exchange in Canada and now that went bankrupt or that you know their founder unfortunately passed away and he apparently had the only code to one hundred ninety million dollars with the crypto and you see stuff like that and it's like what's the tax treatment from that's how we're we're thinking about a lot of these things and there isn't necessarily one exact answer which makes this so difficult and then you know you see the UK they just had their tax season end on June on January 31st they have an April 6th to April 5th year which is interesting they have average cost accounting which is very different than what's allowed in the u.s. they have a lot of special rules but they actually came out there what their version of the IRS the HMRC came out with many pages of rules and guidance about how crypto should be taxed so that was super helpful but that's one country and I we would love to see the IRS follow suit and give more guidance there but right now we have customers all over the world and luckily calculating gains and losses is very similar and then in each country it's kind of which accounting method is allowed what are the tax rates is there long term and short term and so we're doing a country-by-country basis and we basically have an encyclopedia of capital gains and losses by country or mining income taxation by country but the the bottom line is that it's pretty much different in every country the calculations are similar thankfully but the exact way of filing and what has to be filed is different from country to country great and we'll try to get through as many of those taxable events as we can on this episode I don't think we have time for all of them because there are quite a bit but I guess we'll keep other countries in mind when going through this is the usual way most of their listeners from I don't have the the geographical data right now but it's it's pretty global I'd say maybe half from European countries and then a good chunk from from the US yeah I'd say the base base majority maybe like stir in a number and I think maybe 30 percent US but got a follow-up on that yeah that's super helpful I mean even in Europe every country is different you know Germany has if you're over a year you pay no taxes Spain requires five so you know if you're from a country where we don't mention you could always just come to the website token taxco and ask those questions via intercom on the bottom right my team and I are always there to chat and explain whatever and we'll send you the info we have about your country because I know it's gonna be really tough to hit eight countries in a one-hour show let alone one definitely so so we'll keep sort of the US and mine for this episode and if you focus on another country maybe you can follow up then but let's start off with debunking some of the common myths or misconceptions about cadeau taxes the first one being is there a minimal capital gains or loss that one must incur before they are required to report yeah great question so in the US no there's no minimum even if you lost a million dollars and every single trade you made you lost money on you have to report it even if you only bought Bitcoin and then spent it one time to buy a coffee or to pay someone online for some subscription or whatever you have to report that technically and you report it as a sale and you have to report the cost basis so when you bought it how much you paid for it and the gain or loss on that sale and that's what make this so difficult you have to report it in US dollar terms and then you know just to compare in the UK if you have under eleven thousand three hundred in games you don't have to report anything it's honestly a much better system yeah it would it would be bad for business for us but that's totally fine I would much rather have it so that way fewer people have to file tax returns over in the UK if you work for a company the same way like in the US when you get a w-2 your company actually files your tax return for you so most people in the UK haven't haven't actually ever filed a tax return unless they're self-employed which is just awesome and you know it's a model the US should look at the more we look at other systems and other countries I realize there's it's insane how many people in the US have to file even though have such a simple situation and you know crypto even crypto being very very a lot more complicated than just a w-2 if we had a minimum threshold as you said way fewer people would have to file and this would be a lot less of a burden but unfortunately no in the u.s. everyone asked to file whether you lost money had only one transaction whatever yeah and it may definitely seem overwhelming so for those of you that did get in wobbles crypto just push through this in and you know I buy the wall because you don't want the worst-case scenario from from the IRS but what are some of the top most common mistakes that people make in regards to cryptocurrency and taxes yeah I think I think we may have made a list of a few but number one is they don't keep good records and so this just makes people this just makes life so much harder when you know you trade it on five exchanges you you kind of did an okay job and you kept all the records for four exchanges and then you just didn't record anything for your shapeshift traits and then it's kind of like alright well you're missing an entire gap of data so what we have to do is go and create synthetic trades become be conservative and say alright we look at your closing balances you've got 18 Bitcoin according to our our system but we know you actually only have 14 and did it and you're you have 7/8 less than you should and so we have to make these synthetic trades and we know it happened in this six month period then we have to find the lowest price and it's a very manual process and you're gonna end up paying a lot of money to an accountant or spending a ton of time yourself filling in this missing data or reporting incorrectly or whatever and so you know please keep good records you know a lot of us probably saw it happen with wick we and then quadriga which is a tragedy and so liqui is gone now and they basically disappear even if you go to their website there's nothing there so if you didn't get your data from them you could just be out of luck now and so you know a lot of the token tax customers put API keys so that all their data all their transactions are automatically pulled through so luckily when liquid and quadriga made these announcements we were able to pull all the data for everyone who had API keys in our system and so that's just another reason to have good hygiene use a tracking tool you know by the end of this week we're gonna have free where you can create a free account and actually import your data and just use it to store your data for situations like this because we feel really bad and it's gonna make everyone's life harder now that no one is able to get their quadriga and liquidate ax and so keep good records that's number one number two is not realizing that crypto – crypto trades are taxable events if you you know a lot of people tell me oh I never sold crypto I've only you know bought Bitcoin and aetherium on coinbase and then I bought a bunch of all coins on Finance well how did you buy those alt coins on Finance right you had to use other crypto to buy them so that counts as both a sale of Bitcoin or aetherium or whatever and a buy of an altcoin and so a lot of people maybe that's a little bit mind-bending for them because they don't think of it as oh I sold Bitcoin for the altcoin they just think oh I bought alt coins I never sold them and that's not how it works a crypto – crypto counts as a sale unfortunately you know a lot of people from coinbase from Gemini from a lot of other US exchanges are getting 1099s yesterday or earlier this week and what's happening is coinbase basically said a lot of the withdrawals are taxable events and you know some of the other crypto tax platforms as well and you know that's not actually the case unless you were selling it or using to pay for something and that's why a lot of people are over paying their taxes who use the coin base tax reports and what happens is they come to our site and then we help them alright these withdrawals from your coin base account to your finance are actually not taxable events but you need to make sure you report all your by Nantz events all your by Nance trades because someday when the IRS comes and says hey coinbase told us that you had this other sale and then you say oh no I transferred it to my buy Nance that wasn't a sale coinbase was incorrect and you explained to the IRS they're gonna say alright we'll show us what happened to those trades it and then you're gonna be like oh yeah all my finance trades are right here down the the 8949 which is the gain loss report you have to file in the US which I saw is the next question coming up good yeah yeah that's uh those another question is which forms the people report gains and losses you know there would be income if it would crypto but I guess let's get into let me backtrack you mentioned tracking crypto that sort of the question I had for the end but I guess what will look over that now so I guess the standard way that an individual would go about tracking their trades or their advising cells would be to go on at the exchanges that they use in and download the CSV files are and open it up in Excel and try to sort them through in sort of chronological order and track where them where each trade went whether it went from inside and outside and exchanged so what are some tools that people can use or some methods that people can can use to make this a much smoother process yeah you're exactly right you need to every there's no standardized format for one every Exchange has their own type of CSV and some of them call it like cracking they call it a Ledger's report so everyone's like wait I have 244 Ledger's why when I import it is only 140 trades or whatever and it's like oh well not every Ledger is a trade but it's also not 2 to 1 sometimes 3 go and whatever basically there's no standardization across the industry so you need a tool like token tax where what we do you we have step by step instructions for every single exchange out there and if you're on some really obscure exchange just give us the CSV or whatever output and we'll have our engineers add it so that it's automatically supported in the future but for now you can put it into our manual template or someone on my team can help you you know that's the difference of token taxes like we have accountants in crypto tax expert sewer who used to work with me at bain & @ JP more who are Excel wizards and can fix any data formatting and have the have the formulas and the templates to do that to get it all into one format and keep it in one tracking software system and once you have it like that then your life is already exponentially easier because this is what we were doing before token tax I you know you have all these different formats you basically need to be an Excel wizard and an accountant in order let it you know just to get your data into one of these systems correctly and then to make sure that you're actually creating the right gain/loss report that it's actually compliant that they're using US dollar spot prices the same way there wasn't a single system out there for doing this from my own taxes or for people who were asking me for help and that's why when I met Alex I was like let's do this the right way let's build on top of the shoulders of giants and not not reinvent the wheel from a tracking tool or whatever but just make really good tax reports and have people checking your work but at the end of the day the best tools out there if you're trying to do this on your own or Excel and you know at least you have a copy on your computer but I really recommend using something like token tax and now we're gonna have a free version for just keeping your trade somewhere so that you always have them in your back pocket whether an exchange disappears or whatever happens you know mal Cox for example we have many many clients who bought crypto at Mount Cox and didn't track it so when they go to sell it in 2017-2018 there's all these missing cost basis and you know we have to help them recreate that data so just get in the habit of saving all your crypto data somewhere and in the future you'll be able to just hand it all over to some someone like us we can figure it out for you and get your taxes in order for however long back that you need to file good yeah so the most important part before file eNOS is to to keep track of your crypto data and make sure you have that data whether you keep track of it manually or you use a third-party service and well can I just and you don't need to keep track of everything in Excel yourself if you're trading on an exchange the exchange should keep it somehow just get the data from the exchange what you really need to keep track of for yourself is if you do these icos or you know initial coin offer if you were sending aetherium in an over-the-counter trade and getting whatever other altcoin back keep track of that just keep track oh I sent nine etherium and I got you know ten thousand zero X or whatever it is or the same for these stats these like future tokens that you'll receive potentially in 2019 2020 those aren't tracked at exchanges so you don't need to keep a copy of all your coinbase and Gemini trades you just need to make sure you download the CSV s from those exchanges and the thing is who knows which exchange will disappear tomorrow and so that's why it's good to keep your records as up-to-date as possible yeah fortunate as it is definitely most of these exchanges will provide you with with your trade history and I think an important concept before we get into the u.s. taxable events to understand sort of the basics is cost basis so can you sort of explain the 101 of cost basis and maybe some accounting methods of like rifle or FIFO and that yeah exactly so there yeah happy to so basically cost basis is how much you paid for that crypto so let's say in a really simple world in 2017 you bought one Bitcoin for $1000 in January 2017 and then another one for 10,000 in November 2017 and then in December you went in sold one Bitcoin so both of those big winner in the same wallet you sell one and if you use and let's say you sold it for $15,000 we know we all know the price spiked in December 2017 you know this happened to a lot of people they sold one now most accountants out there people doing it in Excel they do it using they would do things using FIFO where all right we sold the first so that's first-in first-out so the first Bitcoin you bought is the first one you sell so as you can see in this example $15,000 of proceeds minus one thousand cost basis means your gain is 14,000 that's what you pay taxes on whereas if you use LIFO last in first out then your gain is 15,000 minus 10,000 your gain is only 5,000 you can see it's dramatically lower and so FIFO LIFO and then we have something called minimization and again this is all for this is how I trade my own stocks in real time when I sell Google shares and how every hedge fund and every every savvy investor should be trading when you sell your Google share you get to see the tax lots that you've bought say you've been buying it quarterly every you've been reinvesting your dividends you've bought more Google shares every quarter for the past ten years whatever it is when you go to sell some of them you pick the ones you want to sell and you can pick the ones with the highest cost base you you know what I do is I pick the ones that minimize taxes so I don't necessarily pick the ones I just bought I'll see all right I've had those for over a year so the long-term capital gain rate comes into play let's say it's 15% instead of 30 or 40% for short-term capital gain but I do the math and I say all right with selling which Google shares are gonna minimize my taxes and go down the list when I'm selling and so we have that algorithm at at token tax for crypto and basically the idea is people are tracking their own tax Lots they know they're doing it but the exchanges right now don't have the functionality to let you pick the tax Lots in some cases and so in our system you can actually see in real time all right if I sell these tax Lots this is what my tax liability will be and so in other words all of these are just variations of specific shares accounting FIFO LIFO minimization all of these are tracking the tax Lots and selling a specific one that's like one category of accounting one category of cost basis on the other side you have average cost which is what's required in Canada in the UK in some other countries and isn't really allowed in the US if you can track at the tax lot level it's only for things that are untrackable at the tax lot level basically and so a lot of people filed average cost in the past and then maybe they have to figure out all right should I amend or whatever or back then I wasn't able to track tax Lots I only knew I bought 20 Bitcoin and I spent you know two thousand dollars and that's all I knew and you know what if that's the case it is what it is but now with tracking software you absolutely should know all your cost basis all your tax lots and you should use an accounting method like FIFO whatever and you know what minimization does takes into account your long term capital gain rate your short term capital gain rate so we know you have to tell us what your income estimated income is where you file your filing status from that we know your exact long term short-term capital gains rates and we can say all right does Jose in California prefer $1,000 long-term gain or a $500 short-term gain before you make the trade you can actually see this and and you know the answer is different if you lived in Texas probably where in California they have a really high long-term capital gain rate on people making over a million dollars which I'm sure you do Jose know but you know in it's different every state and that's why this is so interesting and so difficult you know you probably see there's like a hundred crypto tax platforms out there but no one else has this because it's it's not as straightforward and as easy as people think it is to create this you know a lot of talented software engineers are like oh I could make a better system for filing my crypto taxes but there's a lot of accounting that goes into this it's not just being a great software engineer and that's kind of yeah what's different about us but you know people have more questions about cost basis it's incredibly complicated at that once you have a lot of trades so please come talk to us about it I can't do it justice in two minutes but basically in a nutshell there you go yeah I think one of the you mentioned the tools that are available in with regular stocks I think one of the the things that makes it difficult about cryptocurrencies is that they are fractional so you you not just keeping track of one to one you have to keep track of decimals of different types of cryptocurrencies I think that's that's exactly and you know you're trading crypto to crypto so people you know people might know the price and Satoshi's they have no clue the price in dollars a lot of times people lost money in Bitcoin but made money in dollars and it's sort of it's sort of mind-bending but that's what happens when you have a third conversion that has to happen in the background and you know stocks you also trade fractional stocks like if you have a retirement account in quick PSA for all this you know put money in a retirement account buying stocks buying other investments having a diversified portfolio not just crypto is extremely smart and you know you can just have it reinvest so you buy you know people say oh I'll never be able to buy a share of Google it's $1,000 each well no you can buy one-tenth of a share of Google just like Bitcoin this is another very common misconception about crypto and stocks is that you have to buy an entire one and you're exactly right you don't you can buy a fraction of any of them just so you know great and let's jump into the these taxable events in the US I'm sure we can knock out the first couple of them since we already talked about it so selling crypto for fiha selling yeah selling crypto for Fiat I think that's one of the most simplest taxable events out there so if you sell your crypto for fear then that is the most basic taxable event and then I'm sorry go ahead and then I'll just move on to the next one which is trading for crypto but we're gonna add on to that o as yeah just gonna run through them really quick I mean yeah selling crypto for fiat I'm happy to run through them or let you run through yeah yeah crypto crypto – Krypto is obviously a taxable event if you buy goods or services with crypto like we said coffee if you pay for a meal a lot of people bought a subscription online or they bought a videogame or bought something on overstock that's all of those are taxable events selling goods and services for crypto and so those first three are taxable events and have to be reported on an 8949 a gain loss report which and sorry for the technical accounting but just to give you a run and those flow up to a Schedule D and then other important crypto forms are bit like this one selling goods and/or services for crypto so selling goods or services for crypto in other words you're getting paid in crypto for stuff you're selling or for your time like you're working and your salary is getting paid in crypto now that is like that's like mining that you have to get you're getting paid income and so that would be like self-employment income on a Schedule C you might have expenses to offset against it but it's a different tax form and what's interesting about that is let's say you got paid Bitcoin you got paid $10,000 a month in Bitcoin you received it and then when you so that is all reportable on a Schedule C as as income then like self-employment income let's say if you're a contractor and someone hired you to work on their website whatever and then when you go to sell that Bitcoin the income you reported is the cost basis going back to this topic earlier and the proceeds are what you get when you sell it so you could actually have a loss when you if you receive ten thousand of crypto for January and when in sold it first week of February for nine thousand well you have income of ten thousand and then you have a capital loss of a thousand so it's like two separate parts of the tax returns just so you understand and that's how mining works alright so going down the list yeah mining is the clearest of this so if you receive it that's like self-employment income and then when you sell it you have a capital gain and loss and then air drops and sort of like the staking and things like that there's an argument to be made that it's passive income which would actually be better for taxpayers because of self-employment tax stuff but it's not clear if that's fine or not it's not definitely not the most conservative position but at the same time are you you know how much work are you doing if you're just receiving an airdrop that you didn't even know about so again this is just this just the beginning of the rabbit hole of how complicated crypto taxes get but in in one sense airdrops could be reported as income and then when you sell them you have a capital gain and loss but if you're doing that make sure to be consistent and report all your air drops then or if you're gonna do it a zero cost basis so when you receive it you don't report income but when you sell it you sell it as if you got it for free for zero cost basis you pay the full gain in other words make sure you do that consistently as well and a lot of people get confused and they say wait a minute I got a fork and so when I sell it I don't have to pay it shouldn't be zero cost basis because you know Bitcoin cash was worth two hundred sixty six dollars when I got it so when I sold it for three hundred I have a gain of three hundred and the answer is that's true if you report the Bitcoin cash fork as income when you received it there's no free lunch you either have to report it as income when you get it and then that's the cost basis when you sell it or if you don't report it as income there's no double dipping and saying oh and then when I sell it the cost basis is 266 no that's not how it works if you didn't report income when you got your fork and it should be zero cost basis when you sell it so that the IRS gets their fair share and this is one of the biggest misconceptions and we've you know we spent many hours explaining this to lawyers to even you know surprisingly accountants and and you know basically the idea that you can keep in mind with crypto taxes is there's pretty much no free lunch so a lot of the questions we get are like wait a minute if I did this in finance I don't have to pay any taxes on it right or wait a minute if I did margin trading since I didn't technically take possession I don't have to pay taxes right and the answer is pretty much always yes you have to pay taxes even though even though it was on Finance or even though you did margin trading which is a short sale alright just finishing up your list working for cryptocurrency yeah basically it's a Schedule C it's like you're a self-employed person getting paid in crypto but remember you can offset your expenses if you had to buy a laptop if you had to buy a coding class to learn how to code in code in some language for that job or whatever it is come talk to an accountant or talk to your own accountant come talk to an accountant it took context we can help you do this you don't have to necessarily report all of the income with no expenses so that's one big thing if you're getting paid in crypto remember this is just like your own self employment business you probably have expenses to offset and we can convert all this stuff to US dollar for you and receiving it as a as a gift now that's complicated a lot of people think oh when I receive it as a gift I can use the cost basis when I received it and that's not really true you need to otherwise I mean not to go too far down the rabbit hole on this but when you receive it you need to figure out what that person paid for it and it inherits the cost basis so if your sister gave you crypto and she bought one Bitcoin for a thousand and when she gave it to you it was worth ten thousand and then you sold it right away you can't say oh when I received it it was a ten thousand when I sold it I have no gain now you need to use her cost basis for it because otherwise you can imagine when you give it away and you mark it up that would cause a big problem no one would ever pay the gained on it but there are rules about gift exclusions 15,000 per year per person and if you're giving someone a gift it's also different and you need to or if you're donating a lot of money to like a church or something you can track the tax Lots and figure out exactly which crypto you're giving away there are different rules if you've had it for over a year versus under a year the answer here is don't give away property that you've had for under a year if it you know you don't get the full value versus something that you've had for a year that's appreciated but yeah again gifts are quite complicated so before you just go giving away crypto definitely talk to an accountant or talk to someone you can even come to intercom and ask us a quick question but you'll be glad you did it before you gave away the crypto before you find out oh wow the crypto I gave away that I bought for ten thousand dollars it went down to two thousand I gave it away and now that eight thousand dollar loss just disappears into the ether and one last thing is hey a lot of money a lot of people lost money investing in crypto or getting paid in crypto but you can get half of that money or or a lot of that money back by reporting your taxes realizing the losses so you can't just buy one Bitcoin for ten thousand and watch it just go all the way down to thirty five hundred and do nothing you have to actually sell it realize the loss and then that capital loss helps you reduce your taxes and save money on your taxes and you can even block your ordinary income as a radio host as a mailman as a software engineer or whatever you can take a capital loss from investing in crypto and reduce your ordinary income from whatever your job is so this is a critical critical thing if you lost money in crypto you can actually get some of the money back and so it's just important that you have to realize the loss as in you have to sell it you can't just hold it but yeah hope that was a pretty useful list but again there there are dozens more types of creep events like SAFF sand and gas tokens or whatever and all of them kind of have a different answer depending on how big of a player you are how much influence you have you know four forks for example if you're a if you're a minor and you have huge influence on whether a fork happens well that's probably a different situation than if you're just a guy who bought Bitcoin and had no idea a fork even happened until you logged in six months later to find whatever whatever other crypto in your in your wallet if you're lucky enough to have your wallet supported for that great so that was that's a pretty pretty good run through how pub the guys got to capture all that if you did it you know this is available on replay or to be again or on the podcast app and we're also gonna have a recap on this episode posted later on so I guess receiving crypto or gifting crypto as a gift that that's a bit of a tricky one a tricky one and cost basis is important there yeah exactly I mean when you get a gift you need to know or if you give someone a gift to tell them the cost basis tell them what you paid for it so they can figure out their taxes or if someone gives you a gift make sure they tell you what they paid for it so many times you know three friends have been trading crypt o most of the time we have missing cost basis on our site it's people forgetting oh my brother gave me crypto o my friend gave me some light coin because he wanted to buy something on Finance but he didn't have an account if you do that one time your data is gonna look wrong it's gonna look like you've sold more light coin than you ever bought and then you need to know how much they paid for that light going to get it right and this goes back to the record-keeping you know if you're gonna trade for other people on your account keep really really really good records because I promise you you'll forget in a year and then it takes a lot of searching through clues and a lot of time to figure out oh wait a minute yeah that's from so-and-so who gave me whatever crypto and you know in the end of the day it's probably not a great idea to do it it might be a short term opportunity but try to keep your records and data as clean as possible because you want to make it easy when you report this to the IRS you don't want it to be minefield of where's this what's this because of because you know you can see all the major exchanges are sending 1099s to the IRS there's no hiding in crypto and you know as long as you're doing the right thing paying your fair share you should you don't have to be stressed it's not like they're on the hunt for crypto people just you know pay your fair share and get your get your data tracked and reported properly good and that microphone here we had short-term and long-term gains which I'm pretty sure you cover a little bit earlier and there's not much there yeah long term that's over one year one year in the u.s. common misconception people think it's different amount of time but once you've held something for one year the taxes are dramatically lower so that's sort of them and that's sort of the reason going back to like in stocks when you just open an e trade or a merit trade account they automatically have you do FIFO when you sell you know let's say you bought 10 shares of Google and then you reinvested the dividend so every dividend you got you bought a little more Google so let's say ten years later you have 20 shares of Google when you go to sell four of them if you haven't selected to do specific shares accounting to do specific tax Lots it defaults you into FIFO so a lot of people are like oh FIFO must be required and the reason why it defaults you into FIFO is because long-term capital gains rates are so much preferable to short-term capital gains rates so if you're deciding between FIFO and LIFO which are equally easy they're gonna default you into FIFO because the goal is you always want all your gains to eventually be long-term capital gains if you do LIFO you can imagine your last three purchases are within one year so if you just sell a couple shares of Google half of its gonna be short-term capital gain half of its gonna be long-term capital gain and that's I think the biggest reason why stock brokerages etc etc safe FIFO is the default and you know some people say it's more conservative well look at 2018 anyone who's using FIFO and only invested in 2018 actually has way lower taxes than someone using LIFO for 2018 so it's not always more conservative to use FIFO to be clear so but yeah at the end of the day what you want to be doing is tracking your tax Lots in real time making the decision before you trade which Bitcoin which aetherium which tax lot you're gonna sell of each crypto that will pay for itself many many many times over and please please come talk to us if that's not clear to you about how to do this okay and then a thanks for clarifying that next is maybe a question that's maybe somebody might have encountered something that's sort of a no-go when it comes to to reporting obviously do report if you're involved with crypto and do you have these gains and losses but next question is what if somebody was new to the crypto space say about a few years back or a year were like they missed a year of the filing what is a sort of a process of somebody to report sort of past history of crypto like say somebody bought it early on and had no idea it was taxable but now they're on this they know about it being taxable events what were they go about filing or correcting at past years yeah great question and first don't be don't be nervous if you are in this situation and you didn't realize you had to pay crypto taxes you're now it's becoming a more mainstream topic you're listening to a podcast about you realize oh wow I owe tax returns I need to amend my tax returns for the last year or the last couple years and the answer is just get ahead of this and you know you can you can amend your return in TurboTax it's pretty inexpensive we do it for a couple hundred dollars just as kind of a service for the community because I know this really stresses people out but let's say you know if you made money in 2017 didn't report your crypto taxes because you didn't realize you had to and then you've lost money in 2018 what you really don't want to do is only report the loss in 2018 because that just looks really bad to the IRS when you realize you haven't repaid your taxes inexpensive ways to do you know will help you amend your return so you can just do it on your own or do it for you for you know a couple hundred dollars where just to pay for the CPAs time and you can go back and amend as many returns as you need to now if you have losses you can only go back three years so there is a little bit of a time constraint there where hey if you lost money in twenty twenty sixteen the clock is ticking to go back and claim that loss but if you O games like let and you know most people only had a few hundred dollars in gains in previous years and it's not that big of a deal to go back and amend your return so you know people are intimidated by amending in TurboTax it probably will take you thirty minutes and we're happy to walk you through how to do it you go into your account you pull up your return you click amend return you add a new capital gain and loss report of the crypto and then you submit the amended return it all flows through it's really not that scary and you know I was just say get ahead of this before the IRS starts sending you a letter saying hey coinbase told us that you had crypto sales in 2015 2016 2017 twenty and we only heard from you for 2018 and 2017 or whatever and you know it's kind of just for peace of mind as well because you know these crypto exchanges are trying to do the right thing they want to be regulated they're not trying to fight with authorities and regulators and go you know that's not a hill they want to die on so you got to know they're they're going to report all the data to the IRS so you already know what the IRS is gonna know so just report your amend your return it's way simpler than it sounds trust me and yeah just get ahead of this I would say great and good to know that there's a amending available for not you know not so much of a great hassle someone should now as for an amended return you know there's no need to pay that so next up is something that might be people might be overwhelmed about is how accurate does a reporting have to be earlier you mentioned that you'll have to sort of fill in missing cost basis so what whereabouts or should somebody be in regards to accuracy yeah great question so you know you want it to be as accurate as possible at the end of the day sometimes there are situations like well I lost access to my account on Finance on hit BTC whatever we just have a void of data so basically the number one I mean you have to give your best effort that's what the IRS wants is like hey I hired someone to help me I did my best to fill in the missing data it's not perfect but I got it as good as I could possibly get it and you know it if in the worst case scenario they decide to audit you or take a closer look they'll see that effort and will help you make it clear but at the end of the day yet you want it to be perfect but if you have tens of thousands of trades over many years and missing data of course it would it's hard to make it perfect just some key rules of thumb here are you know crypto – crypto data being missing crypto – crypto data is not as damaging as missing a trade from crypto to fiat because long story short if you're doing the prices correctly which not all crypto tax software do just as a heads up but assuming that hey if I spend $10,000 of aetherium to buy ZRX when I go to sell that ZRX the cost basis should be $10,000 let's say sell the ZRX for some other al-quwain and then I sell that all coin for some other out coin as long as you have the trade that gets it back into US dollars the middle trades should theoretically cancel each other out as long as you've sold everything by the end of the year or whatever where you end up having issues there's like oh this happened over the course of several years so it's a timing issue of when the gains happen but bottom line here is crypto – fiat trades are are really critical crypto Decrypter trades are very important but there are ways to make sure that it kind of all cancels out if you can plan ahead and kind of sell to fiat or whatever before the end of the year and then you can prove to the IRS look I'm missing this data but here's the fiat I put in here's the fiat I have at the end and here's a snapshot of what's there the more data you're missing the more professional help you should probably get or the more you should you should invest time trying to recreate that but don't just rule of thumb oh I think the average is this the average price of Bitcoin this month was whatever and let me just put in a buy of Bitcoin for dollars like if you don't know if you don't understand cost basis and don't know what you're doing don't try to do stuff like that because you end up causing more problems for yourself then then the benefit is worth the you know you need to be conservative you need to have tools that say all right the minimum price of Bitcoin in this period was $300 so I know no matter what I had to pay at least 300 and that way if the IRS ever wants a closer look or wants to see where you got that purchase from you can say well no matter what I paid at least 300 so you know if you want to look closer I'll just end up owing you less money because I was as conservative as I could be and that's exactly what you want the IRS to realize when they start to look closer at your data and you know so that's the key thing just try to be as conservative as possible but fill in what you have and you know obviously some people will never be able to have accurate data if you add quadriga if you had liqui if you didn't get your data off we're about to go through this again for people in 2018 so you know try to keep your data as up-to-date as possible good and I hope the viewers got to learn a little bit about taxable events in crypto and in some of the common misconceptions and common practices for US taxpayers so Zack is there any latest news in regards to crypto tax regulation here in the US I mean there's been some bills floated in the US Congress so basically none of them have really had a great chance to pass what sort of bills that simplify the taxation and give some common-sense guidance maybe like hey if you can put your money into Finance exchange that does it or some exchange now that doesn't have a Fiat on-ramp or a way to cash out to Fiat like dollars or Euros and you do your trading there maybe you shouldn't be taxed until you pull your your crypto out of that exchange I mean I think that would be a a step in the right direction because it's insane how people put money into by Nance in 2017 whatever turned it into a u.s. dollar value enormous gain but they never even had a way to get that out into dollars unless they transferred out of finance but basically you see some common sense legislation and rules getting proposed but none of them are being taken super seriously but it's a great step in the right direction and you know this shutdown just happened for over a day so all the IRS audits everything they were doing got completely paused so all the work probably backed up and so who knows if they were going to do guidance on crypto before April 15th maybe now they're not going to be able to do it I'm I'm still surprised they haven't given any more guidance over the past couple of years since we've been doing this but here's to hoping some new clarifications come out as soon as possible because you know no no one likes to have to try to figure out the rules and you know and follow them you know it'd be just amazing to get more dialogue with the IRS on what they want to see how they want things treated so that we can all do it consistently and just make everyone's life easier in the space okay so so what are some of them yeah what are some of the ways that either you yourself or individual set so context keep up with the latest regulation either you know both here in the US and what everything else going on in the world yeah great question I mean as with everything in crypto most of the news goes pretty viral on Twitter right away and you know we we have contacts we're in accounting groups or whatever that are sort of writing these professional letters to the IRS so there there are different channels there where we can kind of find out hey what's the progress on on this what's the enforcement on this and so basically through professional networks I would say for just individuals try to try to follow you know follow token tacks on twitter follow some of these guys on twitter who are always breaking tax news but you know at the end of the day there are so many things to master in life that it's kind of like unless you're doing this as a job there is gonna be so much random information about crypto taxes you know a lot of people saw those bills proposed in Congress and thought wow that's new rule and then the more you read about it the more you realized well and it was doing pretty much like an empty session they never really had a vote it wasn't taking that seriously but if you're not in the industry it's really hard to sort through what's major news and what's not and what's not to important so I guess you know talk to an expert you know follow our Twitter come talk to us if you hear something and you're not clear we're pretty much always there as I said on intercom on the bottom right of the token taxco website you can always just chat hey I heard this tax breakthrough in Australia or his new rules in Australia or UK and we'll be like oh yeah that that is new because of this or oh yeah that was seven months ago but now it's getting real eyes dit or whatever yeah I wish there was a better answer there that's a great question we'll try to do a better job of curating the important news for taxis out there crypto tax junkies I know we have a lot of those as customers good in and thank you all for watching this live I think this pretty much sums up or wraps up this episode and you know what we covered today might not be like might not be the same things that will be required a year from now or two years from now so it is important to follow up with your own financial professional to see what's what you should do in your own scenario in what the latest regulations are so for all of you that are watching this live thank you so much for joining us I see we have a coin Gama in the chat and ambu gaming thank you guys for joining us on this episode and I'll link down a token tax in Zach I'll link down his info down below if you guys would like to learn more about him and his company and yeah well we'll see you guys on the next episode we'll have a special type of episode of OC live next week we're gonna have the we're gonna have a mic dudas of the block which is a a publication on Krypton news and he's gonna be interviewed by oz TC Oh Jason Goldberg so very exciting episode next week be sure to stay tuned for that other than that Zach thank you so much for joining us on else alive well thank you so much for having me and look forward to hearing Mike Judas is uh pop Mike juices episode next week he's great we know him from here in New York good know for having me and uh we'll see you guys next time

One thought on “OST LIVE #065: Crypto Tax Best Practices in 2019”

  1. Great video. Thank you Jose and Zac. The key highlight for me is that Crypto to Fiat transactions is the main focus, while Crypto to Crypto transactions are less of a focus. This is my primary focus as well, from a tax perspective. Cheers.

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