Tax Trolls Episode 5- Crypto Currency Taxes | CPA for Startups

Disclaimer- This podcast is for entertainment purposes only. If you have any questions about taxes or any financial matters please consultant a professional accountant.

Transcription:

Lenard: Hello everybody, this is Lenard de Guzman and Argel Sabillo. We are the tax trolls.

Argel: Coming here together for a special episode.

Lenard: Like the two Avengers.

Argel: Well, let's cheers first since this is like rare.

Lenard: In this episode of Tax Troll we are going to go over the IRS's new crypto form under schedule 1040, right. It's a draft they put up. So we'll go over that and we'll go over more crypto things, see what we have to pay taxes on. So to start, a quick disclaimer, anything you hear on this podcast is just for entertainment purposes only, if you have any issues please contact a CPA or a professional. Okay, so let's get into it. So the IRS right created a draft for the1040. Let's show the audience real quick what we're talking about. Share my desktop with the audience.

Argel: Okay there we go.

Lenard: Alright this is your schedule and1040.

Argel: So this is going to be for this upcoming year April 15. It's going to be 1040 where on the schedule 1 the first thing that the IRS is asking is right here on the yellow box at any time during 2019.

Lernard: [inaudible 01:49-01:58]

Argel: So at any time during 2019, did you receive, sell, send, exchange or otherwise acquire any virtual currency aka crypto, right. That's huge.

Lenard: So you check in like, yes okay and then that's it?

Argel: That's it but that has a lot of big implication because every year I mean, if you don't know crypto like get some crypto 101 but this podcast is more for like people who already.

Lenard: So like Bitcoin, Ethereum, Litecoin, whatever.

Argel: Yes, so it's been five years that people are holding Bitcoin but like the IRS I think three years ago released the guidance. And this year they updated the guidance reiterating that crypto is still an asset like property. But here, for example, the implication here is that if you're holding crypto this year, right? You say yes now they can look back and see if I mean moving forward. If you say no here next year they're going to ask you again. So the idea that they can now track whether or not you're using crypto and in the future, they are able to track your you know your wallet and see historically whether or not you're paying taxes on your crypto exchanges.

Lenard: So right now you don't have to share your key right, like your bitcoins key? [inaudible] track it on the blockchain right and so it's like considered something like I guess a stock right like if you got like Google stock.

Argel: Yes.

Lenard: You would as far as like long-term capital gain or short-term capital gain and then you'd be adjusted on your basis on what you buy. Let's say like right now I think at the moment because we don't know like tomorrow we might jump up or go down. So it's like eight thousand US dollars.

Argel: Yes

Lenard: Let's say you buy it right now, right because it's right now it's October 2019 right and then let's say you sell it six months from now and it goes up to 10,000. Let's say you buy one Bitcoin you made $2,000 let's say meds right, so on that $2,000 is what you would be taxed on.

Argel: Yes, so capital gains just like if you're buying a stock or if you're buying I think a good one would be if you compare virtual currency to like a house. If you buy a house you acquire it for say, in LA over 250,000. That's your base, right. If it appreciates and you sold it then you pay capital gains on that difference or if you sold it and the market crashed then you get capital loss, right.

The difference is that capital gains is always taxable capital loss is like limited meaning that every year you can only take up to $3,000, the rest you carry forward indefinitely right so it's very important it's like you track your bases whether it's a house, stock. But if your grandparents gifted you stock that gift is not taxable but you need to know what their bases is so that when you sell that stock then you can to recognize the gain so you know how much gain or loss you have.

Lenard: okay.

Argel: So yes, just to simplify things, for IRS purposes crypto is a property, it's like stock or a house. And then you would have to track your bases and recognize capital gains and losses based on fair market [inaudible 05:53], like when you sold them. [inaudible 05:56].

Lenard: So like people who bought Bitcoin I don't know ten years ago when it first started and they just like they somehow accidentally throw away the hard drive because back then there was no like a clean base right. So like how does that work? You get, I don't know, like ten million dollars with a hard drive and you throw it, I don't know where it goes, like a junkyard. How does that work if you said like on that questionnaire yes, right? And you've lost it. How's the IRS going to track it? Are you terrible for announcing that?

Argel: There's no taxable event right, so yes anything that you transfer like, for example, you're transferring between wallets that's not a taxable event.

Lenard: Okay.

Argel: Right, but then sometimes the exchanges they'll send you an information return.

Lenard: Right.

Argel: Meaning because they're required to1099.

Lenard: 1099

Argel: Because what the IRS said is that even if the exchange gives it to you at 1099, its not a taxable event because you own the wallet. Now if it's not your wallet and you give it to somebody else right then that is like a taxable event.

Lenard: Okay.

Argel: Right and so if it's just sitting somewhere and you lost it you don't have to report that. What you have to report though is, say that money is sitting somewhere in like [inaudible 07:30].

Lenard: Somewhere.

Argel: There is a financial banking reporting.

Lenard: Yes.

Argel: Which for the longest time used to catch fraud and to catch like people 'funneling' money in the US. So if you have over ten thousand dollars there's like a f bar reporting that you would have to do every year, meaning that, you're just disclosing for IRS that I have foreign accounts and you know it's basically the way that they can trace whether or not you're, can't remember that word but when you're trying to funnel money in different countries.

Lenard: Laundering, money laundering.

Argel: Money laundering is the reason the IRS has that. Yes, if it's just sitting in a wallet somewhere there's no transaction and in fact if you can never get it back.

Lenard: Yes.

Argel: You can actually report the loss.

Lenard: I mean if it’s something like a painting or an asset burned in a fire you'd have like some insurance you could claim, some causality.

Argel: Yes, exactly.

Lenard: Okay so then is this is only for the US, right? Like other countries, have you heard or read about any like other because we deal sometimes internationally because we are global.

Argel: Yes.

Lenard: Have you heard of let's say other countries having to like tax you on crypto but it's coming but it's for the moment, is this just the U.S.?

Argel: Well I think IRS sets the precedence worldwide. So one thing to know about IRS is that if you have more offshore accounts they're [inaudible 09:26] because most activities happen in the U.S. You might hide it somewhere else. The way that other countries are kind of tax. The thing, yes.

Lenard: The thing. Google and Facebook.

Argel: Yes, they all want to get their cut too especially because in this digital world. Facebook has customers in like France but all their income is being taxed in the U.S. even though they're making money from the French nationals. [inaudible 09:59].So that article you sent is interesting because that's basically taxing it on like gross revenue and not on their profits. Yes, going back to crypto, let me see.

Lenard: You did some notes okay?

Argel: I have a little bit of notes here just to kind of talk about, okay, so crypto virtual currencies they're treated as property. If you sold or exchange them it's taxable event meaning that you have to recognize what your capital gains or loss, right. Just like disposing of your stocks, selling your stock or selling a house. So it's really important to track your bases because I mean you track your bases that's' how you know how much capital gain and loss you have to like recognize, right.

Lenard: So you would have some software to track it?

Argel: There's a lot of start-ups now that are creating that kind of software but for the most part like I think it's still very manual.

Lenard: Like writing on a notebook?

Argel: Yes.

Lenard: Your apple notes.

Argel: Usually your base is like if I put money in an exchange.

Lenard: Oh it will record the transaction right.

Argel: It will record it, yes and so it has to be like translated into US dollars and in whatever fees you pay the exchanges or [inaudible 11:24] or those sort of things. It increases your basis meaning that as you increase your bases and then your gain is higher, then you only recognize not as much gain. Okay, I don't want to get too technical.

Lenard: You're going to put people to sleep.

Argel: Alright so here's the important thing, if you're a business owner and you have crypto right and if you're paying employees with crypto. Which is the thing if you work for a crypto company.

Lenard: Especially global because it's unified value. Okay.

Argel: So now there's tax implications. If you're my contractor and you're based in China and I'm paying you crypto technically I'm supposed to be reporting a 1099 or some sort of, I don't want to over-complicate this. You're in the U.S. I'm paying you to work for me and I'm supposed to give you a1099 every year, right. Based on the fair market value. For you as a contractor, you get to recognize that as an ordinary income right. Just like if you provided services and you get cash right. Now in terms of if you're my employee here in the US and I pay you crypto I'm technically supposed to withhold taxes and send that to the government. In fiat, in cash.

Lenard: Yes, with the payroll and everything.

Argel: Exactly so just like a regular, most people don't know that they just give you your Bitcoin.

Lenard: One Bitcoin for my work.

Argel: Yes, so now whatever I paid you that's going to be what I recognize on my tax return right for my employee payroll expenses. You in the meantime if you receive ten grand from me and then it appreciates in value. Now you recognize payroll, ordinary income and if you sold that crypto then the gain and loss.

Lenard: On my bases when you sent it over?

Argel: Yes.

Lenard: Okay.

Argel: So that's another one the other one that you want to make sure, so let's say you're donating to charity, right.

Lenard: Okay.

Argel: So, let's say you bought it ten years ago right- your crypto and it has appreciated by a lot when you sell it you have to pay taxes on it. One way you can do is actually sell it or give it away to qualified charity because that charity basically people if you have it more than one year you can have charitable deduction on the fair market value. So bought Bitcoin at $1 for 10 million if you gave it to a charity then you can recognize 10 million in charitable deductions.

Lenard: Okay: Is there a limit on the deductions?

Argel: There is limitation on the deduction but the key point is that instead of paying taxes on that fair market value. I think a lot of like rich people have done something like that for like artwork that they donate.

Lenard: Yes, ok.

Argel: That's why you see those in like museums. They are all donated. Yes, exactly and those are all like charitable deduction. Alright so the other thing, if you get a gift right, say my gift to you crypto. Do you recognize it as taxable?

Lenard: Well no. What is it like a gift? It was ten thousand now it went up, right, cash, is that how it works?

Argel: So you do have some gifting reporting requirement but it's not taxable. meaning that if I gave it to you you just carry over the bases.

Lenard: Okay and later when I sell it that's when.

Argel: Then you recognize gains and loss. Okay, what else? If you are, I'm trying to make sure I cover this quickly. Alright, Hard Fork.

Lenard: Hard Fork, okay so it goes, it's like a derivative anything you're like okay we're going to go.

Argel: Yes, so you're in this chain and then like all of a sudden they want to be in a separate chain or something they kill this like the previous chain it, like we're not Techy so but the idea, we know the tax stuff. So whenever you do a hard fork if you didn't get any kickback, you didn't get any airdrops or any some sort of like

Lenard: Benefit.

Argel: exchange for that, benefit. Then it's not a taxable event, you just carry the bases over but usually in this hard fork they do airdrops.

Lenard: So you get like bonuses.

Argel: Yes, so those bonuses are ordinary income.

Lenard: Oh okay, so does it add to your value?

Argel: No, you recognize it when you receive the airdrop.

Lenard: Okay. So your base is the same and then later when you sell it.

Argel: So your bases on your existing is still the same right, that's separate. That's like tracking your capital gains or losses. On the other end, you get airdrops which is like you have to recognize when you receive it because it's an income. You made money off of it.

Lenard: And it's free, it's like bonus because you held it for whatever.

Argel: Yes, it's zero bases, because you didn't do any work you just got it. So when you get rid of it then you count it as an ordinary income.

Lenard: So what if you screw it up like some airdrops get a little complicated like [inaudible 17:14] you are entitled to it but like you can't access.

Argel: No, if you didn't receive it. You have to receive it and that's why it is an ordinary income because it makes you work.

Lenard: So as long as it is in your crypto wallet, that's when it's like okay I received it.

Argel: Yes.

Lenard: So is that how it works? Is that the IRS's? If I got cash like if you send me money it's in my bank account that's when a transaction happens.

Argel: Yes, so when airdrops happen.

Lenard: It's in the wallet.

Argel: It's whenever it was executed.

Lenard: Yes.

Argel: I don't know, the transit is like seconds but I think it's when, from that company standpoint it's when they left, when they get the airdrop.

Lenard: Okay.

Argel: Yes, I think that covers pretty much.

Lenard: We have everything?

Argel: I mean a lot of these things have been around for five years so I think a lot of people who know about crypto could kind of see it's basically just the IRS reiterating that look this is capital asset, meaning that you have to really track your bases every step of the way and you have to take capital gain or loss. I think that's the big take away and the fact that they're putting in a tax return means that there's a way for them now to see who's carrying crypto and who are they going to audit and who are they going to look at. They could overreach someday and just go show me the trace of all your or give me all your wallet addresses so we can see all the transactions that you've been doing and for those exchanges did you pay taxes or no. So those could be huge taxes [inaudible 19:04]

Lenard: So what do you think of the early days of probably people didn't know how to evaluate or tax stocks like in 1920 or something I don't know when stocks came out okay. So how does it work when, let's say I mine Bitcoin and let's say I somehow get a couple of Bitcoins, are my bases zero? Right now it's selling $8,000 a Bitcoin, where's my bases or like the starting point and then like if I cash it out short-term within a week, how does that work?

Argel: So when you're mining that's ordinary income right.

Lenard: Okay.

Argel: And so it's just like a Schedule C. You have your ordinary income coming in and then all your expenses for mining Bitcoin. All your utility fees and any other fees that are associated with making mining. Yes, you just recognize this under Schedule C.

Lenard: Okay.

Argel: But yes, it's when you receive it and the fair market value of that.

Lenard: Damn so.

Argel: So there's a lot of work basically. So when you receive it right, let's say it's one Bitcoin and you receive it today and then you use some sort of exchange to see, and you have to be consistent with the exchange are you following. So today when you receive it it's worth $10,000 right, so that is ordinary gain. Now, if you sold the stock or if you sold Bitcoin or exchange it or purchase or whatever and Bitcoin went up then on the difference you pay capital gains. It's insane.

Lenard: Yes, it's insane.

Argel: But it's really just like buying and selling so many houses or so many stocks at the same time. They'll be tracking one day that would simplify the process. But the reason I think that the IRS continues to say it is this capital asset it's just because like I mean we have all the forms and returns already this is the simplest way to track it. It kind of kills the whole idea.

Lenard: Yes, because it was intended as a currency like to replace, I don't know the US dollar. Let's make a bold prediction. What do you think in ten years what Bitcoin will be and then like does it replace currency because it's like so convenient to pay somebody in Bitcoin if I have to pay somebody Australia's as you do find value so what's your take on this?

Argel: So my prediction for this is that it's going to be one of the many things that will change the landscape of how we do business how we do our day-to-day lifestyle. I think that in the near future we're going to have like autonomous cars, let's say I need a haircut but I have to go all the way to the Westside today to commute I'm going to call myself an autonomous car that has pick up.

Lenard: Like Teslas you could summon if I'm parked in the lot. Right now it's like a pain to go, you can summon. Well, this is October 2019, in some, you can summon it. So you think it'll just be like [inaudible 22:29].

Argel: No, it's just like getting an uber, instead there's no driver in the car. You need to prepare your tax returns so you would just get an uber that has like a tax preparation service in there and when you get to the Westside I already did my taxes. And so you pay with your phone and like crypto, it's always going to be powered in the background because it's always just going to be digital exchanges right. So you don't even need to know that it's running on crypto, your bank may be running crypto. Or I predict that we're going to have our bank, through our phone. Like they are a middle man, you go to the bank and put your money there.

No, you don't need to that you put it in your wallet. You pay me and put it in my wallet. Maybe you'll have one only one wallet one day but that's your bank right. You want to do your taxes, the IRS, they're already on blockchain look up your wallet they see your transaction and hopefully, they can just tax you and then we don't have to prepare tax return someday right. You're not just working with one job now you can be a contractor and do different things that you enjoy and you're passionate about and then get paid for it.

Lenard: Because by then it's like whatever.

Argel: Because it's just easy to get paid and then you can have your lifestyle just like set your own schedule, kind of like the 1099 freelance kind of future. Freelance economy. That's what I foresee.

Lenard: So what's Bitcoin going to be in ten years?

Argel: Oh price, I don't know.

Lenard: Give a number, is it under, so right now it's eight thousand would it go to a hundred thousand? Is that realistic?

Argel: But the reason why I don't want to predict that is because to me.

Lenard: Come on make a prediction.

Argel: The reason I don't want to predict is now you're treating Bitcoin as a speculative stock but I think in the future it is just going to be a utility. It's stupid to just like track how much I get paid in and now at the track appreciation. It needs to be used as a utility not as a prediction. Not as a speculative stock.

Lenard: So it wasn't intended for that but because it may be supply and demand. May be because there's no more Bitcoin. the supply is already, there's just no more Bitcoin. It's like gold, I don't know how they mine gold but if there's no more gold of course if I have like gold coin then that value goes up because there's the demand so high and there's no supply.

Argel: Well I think Bitcoin and all the way that it is, my understanding is that the way that these coins are created there's a limited supply. And that would create supply and demand right because you know the less supply the higher the demand is and the higher the value Bitcoins are. I think a few years ago it was like the prediction was by, I don't it was this grab, may have been active with crypto because the exchange is down by a lot for last year. Bitcoin is like, you know you'd do mining?

Lenard: Yes.

Argel: So before when you mine you get a lot.

Lenard: Yes.

Argel: Now, it gets smaller and smaller. All the coins are distributed already and so would that create some sort of demand for Bitcoin? Like whatever maybe Bitcoin is worth ten million dollars but there will be many transactions would you hold your Bitcoin to see if they go up. Like I'm hoping that that's not where your mind is that you just use it as an exchange in everything.

Lenard: Yes, so like if I go get a coffee.

Argel: Yes, so let's say that Chase says that if you put your $10,000 money in our account where it will be saving. need to be saving. Oh yes, saving is perfect if you earn interest in that savings but I'm going to transact on my money every day. I'm not going to wait for it to appreciate and hold onto it. So I think that's the same idea in the future I don't care how much bitcoin is worth. At least the people that are building.

Lenard: Use other crypto.

Argel: I mean right now they're being used as speculative because if you're new, if you want to have a coin out there if you want to do an ICO, right and this is where now we're not talking about capital asset. we're talking about securities.

Lenard: Okay right

Argel: Because now I'm going to go and do an ICO just like an IPO and I'm going like release ten thousand points and if you're the first one to get in you'll get it at this price and yes you know it's going to be a lot by the time, it's just like if you go on IPO, right.

Lenard: Argel points.

Argel: Yes and so when you treat it that way then now it becomes security right. Now there's more stringent rules and regulations that you have to follow because it's highly regulated, right. So you can treat this as like a speculative stock and that's fine, there are people that are doing that but the idea is if I'm a founder of a crypto company I need to go ICO because I need more money from the community. I need these coins to be in the hands of people so that they can use it as utility because ultimately what am I trying to do I'm trying to change the world and the way we transact today, right. It's stupid the way we transact today.

To get there I need the backing of the community and to get the community I have to incentivize them. So that's what they're trying to do. I see why they're going that path because you need the network effects on this. At the same time in the physical world, you have IRS, you have all these government bodies who are like how can we tax this? Where do you sit in all of this right? Yes, I don't know. I'm going on a tangent here.

Lenard: Yes, that's a deep conversation.

Argel: I just want to say we are not experts on crypto. Our practice is actually mostly on like non-crypto stuff. We know enough, we know the taxation of it. We understand it enough that we can say it makes sense why it's being tax this way. I think what's dangerous is if you have CPAs who think they know what they're doing.

Lenard: But they don't. They know the financials of the stock market and that's even so volatile that they can't .

Argel: I mean it's very specialized and I admit that I'm not specialized in it. I know enough of it to get through. I probably said a lot of things here that maybe not as accurate but like you know we did a disclosure that this is something that is for entertainment purposes only.

Lenard: So only half the things are right?

Argel: Well I mean, if we consult with you then we can be because every tax situation is different. Here we analyze

Lenard: Different scenario

Argel: Yes, your specific scenario we're going to research it and we write our position on it and then we claim it this way or that way. That's the way you should approach your CPA not like it's just by listening to this.

Lenard: Yes, they said it would go to 10 million dollars.

Argel: I think there's a takeaway in his podcast that's basically that just know that if you are dealing with cryptocurrency this year know that when a tax preparer files your return next year they're going to look at this box and they either check yes or no. And most often these tax preparers are not asking the taxpayer did you have crypto transaction this year.

Lenard: Oh.

Argel: So there will automatically check it? No, so you have to be proactive in letting your accountant know right because if you check the wrong box the IRS can audit you right. So let's say five years from now you finally said yes. You came to us and like oh you should check yes because you have this year. If I'm the IRS I look at that form, they check yes let me check the other four years they check no let me check out there. Let me audit his guy, show me that this year you have crypto and then you see the wallet. Now show me this wallet in the prior three years.

Lenard: Because you can go back, right?

Argel: Yes, they have a three-year statute of limitations and if three years ago you didn't pay tax or you didn't report yes and you get audited now all the penalty and interest is going to be tacked on on top of the how much you owe the IRS. And they're very good at waiting till close to three years to audit you because all the interests and penalty is accumulated. So that's why this has huge implications on checking that box. This is the first year this is happening so you need to do it right the first time because otherwise you're getting audited.

Lenard: Alright got anything last thing.

Argel: I mean, maybe someday we'll talk about the security tokens and the way that it is being taxed, the way that you could actually there are companies that in the U.S. It's so stringent they do their ICOs outside of the US and what are the implications of that when you try to bring that money in the US. There's a lot of like tax money involved when it comes to like playing the worldwide tax game and doing your rates in other countries. So that gets super technical and it's for people who are thinking about running a company on block chain right. So maybe we'll visit that but for now capital asset.

Lenard: Capital asset. Alright so everyone got that? so I'm ending the episode here. We'll see you all the next episode of Tax Rolls alright.

Argel: Alright, bye guys.