If you missed live webinar “Paying crypto taxes: best practices”, we are publishing the webinar transcript, as well as questions and answers. You can also watch the full webinar recording here, or by filling out the form on the right.
About the speakers:
Pat Larsen, CEO and Co-Founder of ZenLedger, an MBA from the University of Chicago and used to work in tech and investment banking
Andrew Gordon, JD/CPA, President of Gordon Law Group, practice focused heavily on cryptocurrency, and specifically in techs of cryptocurrency. He has been working in this space since 2013 – 2014, back even before the IRS defined crypto as property, his practice was trying to figure out how to deal with it.
Pat Larsen. Let’s start with reviewing the rules around paying crypto taxes, what things to consider, what are smart moves, what are conservative versus aggressive interpretations. We’ll talk about what’s new in 2020 and what the IRS is doing, the letters they send out, best practices how to keep your transactions current and clean and make good decisions from them, how ZenLedger can help you, how Andrew Gordon’s firm can help you and then answer your questions. So Andrew, would you like talk about 2014-21?
Andrew Gordon: Sure. So 2014-2, as the name suggests, was issued in 2014. It was the IRS guidance that finally said that cryptocurrency would be treated as property and not as a currency. So up until this time, there’s a lot of debate and discussion about how crypto would be taxed. Would it be like currency, so when you use it or exchange it, there’s no tax, or would it be more like property, like a stock where every time you sell it there’s a gain or a loss? The IRS back then said that it will be treated like property. They didn’t specify if it was a security or anything like that, but just in general, it was to be property. So with that, you have to calculate the gain or the loss on every sale, exchange or conversion of your crypto, and you do this by looking at the sales price and subtracting off your cost basis or what you purchased it for, and the net difference, the gain or loss, is the amount that’s taxable.
Pat Larsen: Cool. So it’s interesting. This picture is actually of the IRS. It’s in the Washington DC building, and I was there last week for the IRS Virtual Currency Summit. I’ll tell you that they’re still trying to figure things out. It’s a mess with our legislators. So Congress and Senate having to pass a bill, president having to sign it, and then our regulators like the IRS and SEC taking that law and enforcing policy and then lawsuits happen and then the court system has to rule on those. So you’re seeing things stay in the gray with, is virtual currency a commodity, a security, is it property? How are we going to tax it? What are the proper accounting treatments, how does a fork or a narrow drop get treated?
These things are all going to be very fluid. A bill could pass next week or next month that will change these things, or a court case, or we’ll just stay in a gray area for another three, six, nine, twelve, twenty four months. That’s the state of things. We don’t have a very rigorous crypto and blockchain taxation regulation policy in place in the United States, where some countries in the world do now. So what’s new for the 2020 tax season, 2019 calendar year? So the IRS sent out a bunch of warning letters, and the IRS issued its first guidance for the last five years which updated hard forks. It shows that Congress and Senate in the States are engaged. They’re paying attention to this, they are thinking about this from a securities regulation standpoint and then also at taxation standpoint. Andrew, do you want to talk about the warning letters and how to think about those?
Andrew Gordon: Yeah. So the IRS, towards the end of 2019, sent out over 10,000 letters to people, and these letters took a few different forms. But overall, these letters were sent to people that the IRS suspected had crypto transactions that didn’t either report at all or report fully on their tax return, these transactions. So these letters differed in severity. Some of them were simply warnings or encouragement that if you didn’t report crypto and you had crypto, that you should amend or file original returns, and some of the letters were more severe and actually required a response and you to sign a statement if you think that your tax returns were filed correctly, that they were filed correctly.
But again, there were many of these letters sent out. But it’s only, in my view, the tip of the iceberg and the beginning of the IRS’s further action in crypto enforcement. So as the year progressed, after the letters were sent out, the IRS also issued guidance, which Pat mentioned too. So first time in five years, we just talked about how the IRS issued guidance originally in 2014, and thereafter they were very quiet. They issued little to nothing in that meantime except finally in 2019 when they issued some further clarification and also a number of FAQs that answered a number of questions, or hopefully answered a number of questions about different tax things such as forks, airdrops, charitable deductions and things like that.
Pat Larsen: Cool. Did you want to mention the letters specifically and how to react to different ones and in a different way?
Andrew Gordon: Yeah. So overall, if you received any of these letters, I would treat it as a warning from the IRS. While 10,000 letters may sound like a lot, they’re not that much when you look at the number of taxpayers there are overall. So I would view these as a warning that hey, there’s something on the IRS’s system that they think that you’ve got crypto that you haven’t reported. So if you’ve received one of these, you should definitely take a look back at your returns, hire professional or use ZenLedger to re-reconcile your transactions, make sure nothing is missed, because it’s much better to get in front of it, amend your returns if necessary to correct any issues or even report crypto that you haven’t reported than wait for the IRS to come to you. Again, there were a few different letters that came out, and one of them requires a response. But even the ones that don’t, it’s an opportunity for you to come forward.
Pat Larsen: Cool. I think amending is important. Like, again, we mentioned that these rules change, and there may come out a ruling that changes the accounting method and is very beneficial and it’s helpful for you to go ahead and restate the last couple years of taxes or something. Our software can help you do that if you have all your historical trades in there. One of our customers who is the number 30 employee at Coinbase, and I actually flew helicopters with them in Iraq with the Navy, he restated his taxes and saved $235,000. So there’s some significant insights you can gain if you have good software and you have all your trades in there and it’s all cleaned up. So something to think about.
Andrew Gordon: Sorry to stop you there, but I think you brought up a great point and something that people often ask me about, which is, well, what if I had a bunch of losses? Sure, I’ve got hundreds of trades or even I’ve got a couple trades, but they’re losses. Do I need to report those or? I’m saving the government money because I’m not reporting, so I don’t need to worry about it. Pat, I think you would agree that nothing could be further from the truth. That in reality, even if you have losses, it’s more reason to amend your return because the IRS doesn’t know that your transactions are losses.
In many cases, what the IRS is receiving from exchanges or from different companies is information on sales proceeds, not on cost basis. So if you have a loss or losses across many years and you haven’t reported, more reason to report, because hopefully you could avoid what some people have shared with me in their experiences, and we’ve seen as well, getting a tax bill from the IRS because they simply thought that you had a bunch of sales.
Pat Larsen: Yeah. So, the problem that makes cryptocurrency accounting so difficult is that none of the systems talk to each other. They all report in different formats, and there’s often holes in the accounting handoffs. So when you go into Coinbase, you turn your bank account dollars into Bitcoin and then you trade it for Ethereum on Coinbase and then you send that off to your MyEtherWallet and then you get some airdrops there and then you send some off to finance and then it ends up back to Coinbase. None of those guys, none of the APIs or CSV you pull from those will maintain your cost basis, will track your fees, will track your non-taxable self-transfers, how to treat your airdrops. So that’s why we created ZenLedger, to bring your API information in from Coinbase and from Binance to take your MyEtherWallet public address and bring it in and register all the incoming and outgoing transactions there and your airdrops, because it all gets distorted if you try to do it by hand or try to just eyeball it.
So you need to be able to do this, so you can… If you change your accounting method or this is the first year reporting and you’ve been reporting for three years or if you want to amend it, you need this information and you need it to be clean and clear so that you can make good decisions that could free up cash for you or make tax time a little less stressful in the amount of time you have to spend or a tax professional has to spend. So cool. So that’s practice number one, is understanding your obligations, understanding how cryptocurrency is treated right now from a general understanding of most tax professionals. Andrew, do you want to address these?
Andrew Gordon: Yeah. So, one of the biggest misconceptions that people thought of, especially in earlier years and hopefully now in 2020, this misconception has gone, is that crypto to crypto transactions are not taxable. So for example, if you bought Ethereum and then used that Ethereum to purchase an ICO, for a few years, there was some debate, was this taxable or is this what’s referred to as a like kind exchange or 1031 exchange. Although there was some debate, most practitioners viewed that like kind of exchanges didn’t apply to crypto because crypto isn’t actually like kind. If you take any two cryptos, most of them are not comparable. There are significant differences between them.
If you’re to look at an analogy, stocks, you can’t do a like kind exchange with Apple and IBM stock. So similarly, most practitioners, even years ago, would argue that like kind exchanges didn’t apply to crypto. Then Congress in late 2017, for the 2018 tax year, it’s part of all of these sweeping tax changes, actually said that 1031 like kind exchanges will only apply to real property going forward. So while Congress didn’t mention crypto explicitly, the impact was that like kind exchange absolutely cannot be used in 2018 forward. This is not saying that it is allowable in 2017 and earlier, there hasn’t really been any cases to test it. But most practitioners would say that it’s not applicable. It would be a very aggressive argument to take in any of those earlier years.
Pat Larsen: Cool. And then, again, with crypto being anonymous, I just realized that the vast majority of people are going through KYC AML now when you work with cryptocurrency exchanges, and it looks like, at this point, all the US based cryptocurrency exchanges are turning over a 1099-Ks or some other aggregate trading activity to the IRS for compliance purposes. So if it’s happening on exchange, if it’s happening somewhere centralized, then it’s probably being reported. If you’re trading on chain, then all those transactions are happening on the chain, and it’s just your own decision on how you’re going to I think about that.
Andrew Gordon: I think it’s just a big misconception that crypto is anonymous. In actuality, it’s probably the opposite. While there are some privacy coins where the blockchain does have anonymous aspects to it, even with those privacy coins, there’s usually exchanges into them or exchanges out of them, which are traceable. And then you have the blockchain, which, again, is really the opposite of being anonymous. It’s a history of everything that occurred. So, first of all, everyone that’s a US person, citizen, resident has an obligation to report their taxes, even if it was anonymous, even if the IRS had no way to trace it, which I’m suggesting it’s very easy for them to do. Even if that was the case, you have an obligation to do it.
But the fact of the matter is the IRS is getting better and better at it. Candidly, we can do a lot of the work in our office. You could even do it as an individual. So to think that the IRS can’t take these same steps is foolish. So even though some coins may be anonymous, you should definitely report everything. Even those anonymous coins, I would suggest we could identify a lot of that activity.
Pat Larsen: Yeah. I think another thing is IRS sees the holes too. They may not see the transaction, but they’ll see the holes in the accounting record where someone jumped into a privacy coin and then into a mixer, but then eventually they came back out to another exchange and then they’ll subpoena that information or they’ll hold you accountable for it anyway. They won’t just kind of hold up their hands back, well, we can’t see it, guess didn’t happen.
Andrew Gordon: Yeah. I think a good analogy is Swiss banks. For decades, if I had my money in those accounts, the IRS would never know about, I don’t have to report it. What actually happened was the IRS went after a lot of these people very aggressively, and number of people even served prison time. Famously, Ty Warner, the Beanie Baby founder, narrowly avoided prison time, but paid tens of millions in fines because he failed to disclose foreign bank accounts. So we see now a lot of analogies with crypto. So not trying to scare people, but just trying to say that things, even if you perceive them to be anonymous, times change, information changes, and you don’t want to be in a situation where the IRS has information on your activities.
Pat Larsen: Yup. I’ve flown helicopters and ridden motorcycles and invested in crypto. Take risks, it’s fine, just know the risks you’re taking. Be accurate with the amount of risk you’re taking. Cool. Okay. Two, thinking about tax optimization: how to keep the maximum amount of cash in your trading accounts or in your bank account rather than paying an excessive amount of taxes because you don’t have accurate records. That’s something to think about. One big thing to consider is long versus short term capital gains. So the amount of income you report is going to, in some way, influence the capital gains brackets that you’re in. But regardless of that, there’s always a zero days to 365 days short term capital gains, which is a higher, and then a long term capital gains rate, which is when you’ve held a security for more than one year.
Pat Larsen: So say that you want to free up $5,000 today to free up cash to buy more Bitcoin, you want to look at the crypto that you’ve been holding long term first that’s at a gain to sell rather than what you’ve been holding short term at a gain to sell it. You’ll pay a higher tax rate on short versus long term gains. If you have a bunch of losses, that’s different, that’s tax loss harvesting, and we can go into that as well. Andrew, this is like basically your wheelhouse. You want to talk through it?
Andrew Gordon: Yeah, sure. So tax loss harvesting is one of the best opportunities for crypto traders to minimize their taxes. Crypto tax gets a bad rap overall. People hate it, they think the taxes… especially the tax law, things like kind exchanges are very negative towards crypto. But utilizing tax loss harvesting in a lot of ways can be very beneficial to you and can reduce your tax significantly if you use it appropriately. So what in the world am I talking about? Tax loss harvesting refers to realizing losses. So today, for instance, Bitcoin is hovering around $6,000, down 30% or so for the day. Say you bought it a month ago. So even during 2020, you got into crypto and you bought it, let’s call it at 9,000 or 10,000, 10,000 to make things simple, but today it’s at six. If you sell it today, you will realize a $4,000 loss. Then you’ll say to me, “Well, I like crypto, I want to be in crypto.” Well, then you can buy it again.
So you can buy then Bitcoin, for instance, tomorrow. While there might be a slight price fluctuation, you could get in, and even perhaps sooner than tomorrow, you may even want to buy. So we’ve now realized, we’ve harvested this loss, the $4,000 loss, and now we’ve bought back in. So we’re still holding. Now when we sell it in the future, if we have a gain, we can use that loss to offset that gain. If we have other crypto that we have gains with that lost that we just harvested could be used towards that. So in my example, I just talked about one Bitcoin, but imagine you had a bunch of other gains from other trades by selling today and realizing that loss and harvesting that loss, you could offset those gains.
Further, even if you don’t have crypto gains, you could take up to 3,000 a year against ordinary income. So things like wages, you could reduce 3,000 a year from your crypto losses. So there are a number of advantages to selling crypto, harvesting those losses. As the year approaches the end, you can take those losses to offset gains and then starting to new years. So there’s different opportunities when we get closer to December in the year end as well. But even now, you can take a look at your position and see if there’s any losses that you should realize. Again, this is only from a tax perspective, so you should make your own investment decisions, but this is a great opportunity to realize losses.
Pat Larsen: Cool. Do you want to talk through the different accounting methods?
Andrew Gordon: Sure, sure. So when you’re buying and selling crypto, if you bought one Bitcoin, for instance, then you sold one Bitcoin, it’s very simple; the one Bitcoin that you just sold was the one that you bought. But most traders or investors don’t act that simply. For instance, they buy 0.1, they buy 0.1, they buy 0.5, they buy one, then they sell 0.2. Then the question is, well, if I just sold 0.2, which 0.2 Bitcoin did I sell? Did I sell the first 0.1 and 0.1 that I bought? Did I sell the last, I think it was 0.5 that I said, that I bought? Was it the first, was it the last, was one in the middle? Is that the highest one? This is where the accounting method becomes important.
The IRS recently issued some guidance on this, and this was in their 2019 guidance. They said that essentially FIFO or first in first out is the default method, unless you can make a identification of your crypto, meaning that you can identify which crypto you’re selling, the cost basis that you bought it for, its volume, currency, sales price, then you can pick out which ones you want to sell. So that opens the door to use accounting methods such as HIFO, highest in first out where you use the highest cost basis. In essence, what you can do is look at your crypto and pick the ones that you want to sell or use different accounting methods.
Before you do that, you should consult a professional and just talk through different record keeping things you should do to document your specific identification. But overall, it allows you to decide or pick the crypto that you want to sell and therefore dictate whether you have a gain or loss and how much. For instance, if you are buying and accumulating Bitcoin over time and the price was going up, if you sell the first Bitcoin first, or the first Bitcoin that you bought, then you would have a larger gain than if you sold the last Bitcoin if prices are going up, all things considered. Inversely, if you sold the last one, you would have a smaller gain, potentially a larger loss because the prices were higher in those last purchased ones. So by picking out different crypto, you can determine which cost basis you want to sell and impact your gains and losses.
Pat Larsen: Cool, thanks. All right. And then I know a number of people who are pretty tech savvy and they will go ahead and use IRAs or other tax shelters like LLCs. Those are all valid. You can structure special IRAs to accept this. They’re few and far between and there are a number of service providers that will allow you to do that. So that’s something to consider as well if you want to hold on to your crypto for quite a long time but still actively trade in that account. Just realize that there’ll only be very specific circumstances where you’ll be able to take your profits out of that account and back into the real world for like paying for medical bills or I think some home purchases or things like that. Otherwise, you’ll just have to pay taxes and a penalty and no that’ll kind of like erase the whole logic of putting your crypto in the IRA to begin with. Okay, cool.
All right. I think we hit up most of these tax loss harvesting rules. You can do it December 31st, you can do it today. We’re not really sure if you sell today, if you can buy it back in five seconds or five days or if you need to wait 30 days. Again, that’s an open question because crypto hasn’t been decreed as a security in the same way that public stocks trading on US registered stock exchanges are. Public securities are subject to the wash rule. I think Andrew hit up everything else. ZenLedger has a very detailed tax loss harvesting output for you. we’ll show you your current holdings, we’ll show you if you use LIFO or FIFO or HIFO, what your current holdings are, what the trenches are, what price point you bought in at.
So say I own 20 Ethereum, but I bought each five at different price points, it’ll tell me like, hey, these first five Ethereum you sell, you’ll get a $500 tax loss harvest, the next five Ethereum you sell, you’ll actually have a $300 gain. So you might only want to sell the first five rather than all 10. But if you need to free up the cash, then you’ll just know what the implications are by looking at the different accounting methods. Just be wary, like, you can’t just flip between accounting methods each tax year, you have to stay consistent over time or have a very solid justification for why you’re switching.
Cool. Okay. Best practice number three, remember to identify non-taxable events. So a lot of exchanges are pretty uncharitable with this. If you move crypto off of Coinbase, they’ll register that as a sale and taxable event, and you’ll need to back that out yourself because it’s almost always a non-taxable self-transfer. So if you send Bitcoin from Coinbase to Binance, Coinbase will say, that was the sale, and it wasn’t. So if you don’t clean those up, you’ll have a lot more taxable events in your transaction history than you want or that is fair. Andrew, do you want to talk about a nontaxable events and hard forks?
Andrew Gordon: Yeah, for sure. Just to echo what you said, that’s really a big strength of ZenLedger, is going through the withdrawals and deposits, to identify them as non-taxable or taxable, because transfers, as Pat said, are not taxable. If you transfer from your one exchange to another personal wallet, so forth, that’s not a taxable event. It’s like transferring between bank accounts. You never report to the IRS if you transfer money between bank accounts. But if you receive, if money is deposited into your account that’s payment to you, for instance, then that’s income and you do have to report it.
So similarly, a deposit into your account may be taxable if it’s income, and we’ll talk a little bit about forks next, but it may also be non-taxable. A gift is not taxable to the recipient, and typically you don’t have to do anything if you’re just receiving a gift, except there’s some information that you should get from whoever gave you the gift, but it’s not taxable to you. So just making sure that you keep track of those different events, because the exchanges will not do this for you. So using ZenLedger and keeping track of it is crucial to do.
So hard forks, let’s talk about that. So it was a gray area for a while. There was a lot of debate on this point as well, and there were really two different camps. The first group said that any time that there was a hard fork or an airdrop, that it was income to you that had a fair market value at the time of receipt. Another group argued, no, it’s just zero cost basis and you only pay tax when you sell the hard fork or the airdrop. This is what people would like, it’s a much more ideal situation. Our firm and many other firms, for several years, took the former position, the more conservative position that it was income to you at the time of receipt.
The IRS finally, in 2019, issued some guidance on this point on both hard forks and airdrops. What the IRS basically said is that if there was a hard fork, which is followed by an airdrop, and I know that’s not technically correct, but basically if there was some sort of split and you received something and you actually have of it, then that is income to you at that time. So let’s talk about Coinbase, for instance. Coinbase and Bitcoin Cash, initially, Coinbase said, “We’re not going to support it. If you want Bitcoin Cash, get your Bitcoin off because we’re not going to support it. You’re not going to get Bitcoin Cash.” A few months later, they changed their tune. So a few months after the fork occurred, Coinbase decided, “Well, we’re going to give our users who had Bitcoin their share of Bitcoin Cash.” So they distributed that Bitcoin Cash months later.
So the IRS, while they didn’t refer to Coinbase, addressed this question and basically said that you report income not at the time of the fork necessarily, but the time that you actually have the new coins or you received the new clients. So with Bitcoin Cash and any of the other forks, if you have a wallet or you’re on an exchange, and then all of a sudden there’s new tokens in your wallet, that is income to you at the time that you received it at the fair market value. Some people say, “Well, I don’t want the fork, I don’t want the token.” The IRS really never… did not address this in their guidance, and arguably it’s still income to you. You could sell it and incur a loss, but otherwise it’s reportable, both as income and as a loss when you sell it, but it should be reported on your tax return.
A common question that comes up is, well, what do I do if I filed old tax returns with zero cost basis or didn’t report forks at all? If you didn’t report forks at all it’s probably a good idea to amend your tax returns. The term you should certainly look at the quantity of the forks that you received and what was it recorded and speak to a tax professional about your case. Secondly, if you took the zero cost basis, it depends on a number of factors. One of those factors is also if you sold it all in that same year, because forks taxes income or short term sales are typically taxed at the same rate. So one of the factors is, did you sell that hard fork in the same year if you took a zero cost basis approach? But either way, we now have clarity from the IRS on how hard forks and airdrops should be treated. So you should definitely, in years that you receive a hard fork or an airdrop, report it.
Pat Larsen: Yeah. There’s different cases here, right? So Bitcoin Cash was valuable, it was liquid, it was on exchanges, and that’s completely different than an airdrop of ABC Coin that comes in your Mule wallet and instantly goes to zero value. There’s a stronger case you have to report. There was real income and economic value you got, and the other, it’s almost as if it never happened. So just consider that as well. We have some questions here. How do you know if you were involved in hard fork and airdrop? Our software will tell you. We’ll show that you have incoming coins that just came in. You didn’t buy them, you didn’t exchange for anything, they just popped in because you’ve got Bitcoin Gold now because you’re holding Bitcoin, you have ABC Coin because you’re upholding Ethereum or EOS or whatever.
So it’s basically anytime you look in your exchange records and there’s a zero cost basis or there’s coins there that you know you never purchased that are now existing on your wallet or in your exchange, those are forks or airdrops. It doesn’t really matter how you characterize them from a tax perspective. If you say this was airdrop, this was fork, this was… It’s the same thing. You acquired an asset because you were already holding a different asset, which is different from staking and mining. Well, I guess staking would basically be the same.
So, staking and mining are different too in that meaning, you might be running a small business, you have some business expenditure like electricity or mining gear, which is different. And then staking is, again, you’re just receiving an asset because you hold an asset. Like, hey, I receive one EOS a month because I hold 1,000 EOS per se. Like, say you have some staking arrangement for that. That one EOS that comes in per month is staking income, but it’s just treated like any other kind of income that EOS has value when it comes in your possession, and that’s income, and then you have a holding period between when you sell that EOS. You might sell it for no profit, you might sell for profit, or you might sell for a loss.
Andrew Gordon: Yeah. Just to quickly add to that point, a common question that comes up is, am I going to be double taxed when I sell it? Will I pay tax again when I sell it? The short answer is, there will be two different taxes. You first pay tax on it as income, and then you pay a second tax potentially if there’s a gain. But you have to record the gain or loss on that transaction. But the good news is whatever income you pick up, that’s also your cost basis. So say you got a fork and it’s worth 100 and you pick up that $100 of income and then you sell it when it’s 120, you’ll only have a $20 gain because of that cost basis.
Pat Larsen: Cool. Okay. So more on forks and airdrops. I think we’ve basically covered everything here, but just in case you didn’t catch that, it’s basically free money that was given to you if it was liquid and had value. You don’t have to claim all their drops that came into you, especially if they just went down to nothing or if he never got control of the asset and its income at time of receipt, and then there’s a capital gain shorter, long term and capital gain or a capital loss. So that’s basically everything there. Okay. Let’s see here. All right. Well, remind me to talk about FATCA and FinCEN 114 and triggers for that and stuff. But we’ll just get through this first.
Pat Larsen: So best practice number five: get your records in order. So now is a great time to get records in order. 2019 is all closed out, so you can go to the exchanges, you can grab your records. Coinbase is pretty comprehensive and pretty easy to get ahold of. You kind of have to get ahold of their customer service to ask for certain files, like your full withdrawal and full deposit history. Binance is notoriously bad if you’re downloading the CSVs. Their API is working right now. Sometimes it does, sometimes it doesn’t.
So it’s good to have a hygiene of every three months going through your exchanges, at least, and getting the information off them. Your wallets, you have your addresses, you have that information on the public blockchain, that generally is pretty clean. If you can keep a running log of things in a Word document or Excel file to let you know the major or important things that are happening. If you happen to lose control of an exchange like Cryptopia or something, then you’ll have to create an accounting plug, and Andrew can talk more to this.
But basically, you know you sent one Bitcoin in to Cryptopia on January 1st, 2018, and there was a price for one Bitcoin on January 1st, 2018, let’s call it $10,000. And then you lost control of your account in May, 2018. There’s an accounting procedure for accounting for that one last Bitcoin and a plug, because you’re never going to get any records and you’re never going to get any of your Bitcoin back from that defunc exchange. And then there’s also other losses from like say you invested in a scam coin or an ICO and you never got to take possession of that crypto. Your Ethereum is gone, but you didn’t get the ABC Coin back, then you can write that down, and there’s certain things to consider there. Andrew, do you want to talk more about that?
Andrew Gordon: Yeah, sure. This, I would say, is still one of those gray areas, but most practitioners are fairly comfortable with the approach that I’m going to talk about. So say you had crypto and you transferred it, as Pat suggested, to an exchange that then closes down. You can take a, what I would say, more aggressive approach and consider it as sold for zero, that whatever crypto you put in there was basically lost, that you got nothing back for it. The effect there would be you’d have a capital loss in the amount of your cost basis. The reason that I say that this is gray is because it basically relies on the area of tax law that pertains to worthless securities or investments.
Again, crypto hasn’t really been defined by the IRS as a security or an investment, it’s just property. Under the current tax law, if you had personal property that was lost or stolen, this is referred to as a casualty loss. The recent tax changes unfortunately got rid of deductions for casualty losses. So if this was treated like just a… If you had a car stolen, for instance, you wouldn’t be able to deduct that loss. So if crypto was in that basket, it’d be non-deductible. But if it was more akin to a worthless investment, then it would be.
So, our firm and many other practitioners, at least given the current guidance that is out from the IRS, we are comfortable taking the position that lost crypto was essentially sold for zero. But, and a big warning here, is that it must actually be gone for good. There shouldn’t be any possibility that you can reclaim it, because if you can and you later do get it, the tax effects are very negative. You would report it as ordinary income, like a fork or an airdrop, you all of a sudden got new crypto, which is a much worse event than if you had just kept it all along and not picked up the loss.
People are seeing that right now with Mt. Gox. People had reported years earlier losses because they thought their crypto was gone. Although Mt. Gox has yet to settle, we’re seeing people get payouts for their claim, their potential claims. So now all of a sudden they’ve got income too. So just be sure that if you are going to report it as a loss, that you in fact have lost it forever, there is no possibility to get it back.
Pat Larsen: Cool. All right. Just keep collecting your records as you go so it’s cleaner when you get into tax season and you’re ready to file come January 1st or January 5th if you think you have money coming back to you. So IRA mentioned why taxes are so difficult. Your transactions just bounce all over the place on different times zones with different data formats and there’s a lot of different rules. So we try to write as may help articles as we can. We constantly partner with great crypto experts like Andrew Gordon to get you the best information and advice we can get you because we know that it really matters how optimized your taxes are and how you can get the right information to make good decisions for your assets. So that’s what we’re all about here.
As we mentioned, we supply you with huge time savings, you or your CPA, by integrating a ton of exchanges and wallets so that you can ingest that data. We’ll produce a bunch of tax forms for you, schedule D, A949 tax loss, harvesting, FinCEN 114, FATCA forms if you need them, and we’ll be here for you. So we have great customer service, and we’re always ready to chat with you or email or phone to make sure that you’re getting taken care of. Some other questions here were the triggers. So for FinCEN 114 FR, I believe they are not requiring you to file that form right now, because you’re not required to report property overseas on that form. But then that raises the question of if you have to file your FATCA for overseas property and assets. Andrew, do you want to talk about that?
Andrew Gordon: Yeah. I think it’s overall still really a gray area, and maybe, Pat, you learned some new things at the IRS Conference. But yeah, I would agree generally there’s an exception to FR filing for personal property. I haven’t personally had any full clarification on whether or not FRs are required. I know there’s been some discussion, but there hasn’t… So maybe Pat, you know something new. But FATCA, I think, we can agree still remains gray. In both the FR and FATCA form, essentially what you disclose as foreign accounts or assets. FATCA specifically refers to any foreign assets that you have. So if you had stocks or shares of a business that you held in a foreign account or of a foreign business, then you would disclose it on FATCA.
So therein lies the question, well, if I used a foreign exchange like Binance, for instance, do I need to disclose it? FATCA, and we keep referring to it is a disclosure, is not a tax, it’s just a form where you have to identify the maximum value in the account or that the asset held at any time during the year. So I would generally advise people to be on the side of caution and disclosed file of FATCA form, because again, there’s no tax. But if you don’t file it and the IRS thinks it’s necessary, the penalties can be severe. Even one of the most basic penalties is $10,000 per year for not filing. So, to be cautious, I would generally advise to file it if you meet the thresholds. Generally, that’s if you’re single and you have at least $50,000 informed assets and account value and aggregate at any time during the year. So if you had two accounts and each of them hit 25,000 at one point, then you’ve hit the threshold and you need to disclose them in any other accounts that you have, foreign accounts.
Pat Larsen: So say you have $25,000 in Binance in January 2019 and then you have $25,000 in Peak Holdings in December of 2019. Together, that makes 50,000, and now you’re required to disclose every account. So say those are your two main accounts, and then you have $1 on five different Ukrainian exchanges. You have to disclose Binance, and the five Ukrainian exchanges now, because you’re over the $50,000 aggregate annual reporting threshold. That’s the same thing with FR. It is peak holdings throughout the year, and you’ll hit different triggers. You can Google that, because I can’t remember the exact numbers off the top of my head.
And then let’s see here. So is it possible for there to be changes in 1099 or tax filings? Well, we’re in the middle of financial crisis right now, and it looks like a lot of reporting standards are changing or being delayed and some taxes are being forgiven. So we live in interesting and exciting times, and it is fully possible for cryptocurrency regulation taxation to change in the next week or a month or a year and for some things to be applied retroactively. They may say, “Hey, thanks for everyone who paid taxes in previous years. We now have this new accounting method that’s probably more favorable to you. You can go ahead and use that, restate all your past taxes, and most of you probably have a refund coming.” That’s totally possible, that’s happened many times before. Or you may have a tax holiday where they say, “Look, just report your current holdings. We won’t prosecute any of you. But then starting the year 2021, we’re going to hold you all accountable.” That happens in corporate taxes from time to time.
So it’s a very fluid environment. We can’t really tell you what the SEC or the IRS or Congress is going to decide to do with taxation reporting standards. You hear a lot of different things, Congressmen are introducing bills currently, but now with coronavirus and then we’re coming up on elections, I think it’s highly unlikely that you’re going to see these financial regulation bills passed. It’ll probably be more like bail out bills and public health funding bills. That’s where we’re at. Let’s see here. Andrew, did you want to hit up any other points?
Andrew Gordon: I think a good final point is, don’t be afraid if you think you’re going to owe the IRS a bunch of money for your crypto taxes. The most important thing to do is to file and report. Believe it or not, the IRS is willing to compromise or give you payment plans. But we’ve seen a lot of clients that just because they are afraid of filing, didn’t know where to start, didn’t know of software like ZenLedger, didn’t file. It’s one of those things that definitely by getting in front of it, you can be in compliance and avoid a lot of headaches.
Pat Larsen: Cool. So anytime you need to get ahold of us, you can email us at firstname.lastname@example.org or ping us in the chat inside the app or on our main website. You can get ahold of Andrew Gordon and his excellent staff anytime at gordonlawltd.com or GLG@gordonlawltd.com. We have a discount code for you if you want to purchase ZenLedger tax reports for one year or multiple years. We give you a 20% off with the code WEBINAR20, and you can redeem that before April 15th.
If you had some other questions and we didn’t answer them in this, please just email us at email@example.com or jump into our chat and we’ll make sure we get specific questions answered if you can’t access your Poloniex files or something like that, or just other questions. But thank you. Lynn, thanks for the kind shout out to our customer service. I know some of you are currently ZenLedger customers or Andrew Gordon’s clients, and we just want to say thank you so much. Thank you for the questions. Please tell your friends and other crypto investors about us, that really helps us out. Hope you’re staying calm and being okay in these trying times, and we’ll talk to you soon.
Andrew Gordon: Thanks, Pat.
Pat Larsen: Thanks.