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Steve Moskowitz and managing attorney, Cliff Capdevielle discuss Cryptocurrency and U.S. Taxation as of Spring 2022. Discussion of taxable events, reporting requirements and federal policy updates.
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Episode Transcript
Intro:
You’re listening to the Practical Tax podcast with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz LLP, a tax law firm.
Steve Moskowitz:
Hello everyone. And welcome to our presentation. Thank you for being here. And today we’re gonna be talking about crypto and there’s so much happening in crypto. There’s even a country, that’s now recognized that, as their national currency. And a lot of people are making money, or losing money in crypto. And one of the things that the IRS is doing is something called operation hidden treasure. Now that’s sounds like something from an action invention movie, but the IRS has the belief that a lot of people are engaging in crypto, and forgetting to report their transactions or reporting them improperly.
Another thing is there’s different softwares, that report crypto. And different softwares come up with different answers. That’s why in our firm, we’re using the same software, that the IRS uses. We’ll also talk to you about accounting methods for all these transactions, which is very important, and also determines how you figure something is a profit or a loss. And again, crypto is an area that’s just burgeoning more and more people are getting involved in it. And a lot of people are making good solid earnings. But watch out, we don’t wanna trip up on any tax problems.
And that’s where we come in. Now there’s so much involved here, and I’d like to introduce my friend and colleague the head of our tax department, tax attorney and accountant, Cliff Capdevielle. And also, just so you’ll know Cliff nickname is in the firm is crypto, and Cliff even gave me crypto cuff links. So the bottom line is, Cliff, take it away for us.
Cliff Capdevielle:
Thanks, Steve. So the big news this week , of course is Biden’s executive order March 9th on digital assets. And, he has announced that we are as a country going to explore the idea of a U.S central bank, digital currency. What does that mean? Well, this is an attempt to create the benefits of digital assets like Bitcoin and Ethereum and the other digital assets. With the protection of the us federal government. So that is the goal. That is not the reality of course. And importantly, in addition to that, Biden has announced that the U.S federal government will make an attempt to protect consumers, investors and businesses from the rampant fraud associated with digital assets. And of course, part of this is to create additional security not just for individuals, not just for investors, but for the U.S government, and the United States leadership in this area, of course is important. And the Biden administration recognize the importance of digital assets. And this is an attempt an announcement that the Biden administration is going to make efforts to promote access and to promote security with regard to these digital assets. So that’s the big news, obviously.
Steve Moskowitz:
And along with that, a lot of people trade in crypto and they think, oh, that’s a secret. And the government doesn’t know what they’re doing. In reality, the opposite is the case. There’s such good record keeping that the government has access to all this information. Cliff, you wanna explain that to us please?
Cliff Capdevielle:
Yeah. So as part of the government’s attempt to regulate, and control the reporting of digital assets, there is starting next year, a requirement that the exchanges are going to have to track and report sales of digital assets essentially on 10 99. So they’ll be reported in the way that the brokerage firms, the banks, are all required to do which is to report sales, and to track basis, to the extent possible. So this is really making digital assets more mainstream, and requiring that reporting be essentially the same as you would have with a bank or brokerage firm.
Steve Moskowitz:
And from a historical perspective I don’t think there’s anybody in the audience that would say, well how would the IRS know where they bank because of the 10 99’s, but folks, do you know that the 10 99’s came in long after the banks. At some point the banks were just like the crypto, there was no reporting. And people used to say, how would the bank how would the IRS know what bank they dealt with? Whereas now that is so regulated and controlled and it’s exactly what’s happening with crypto. Again, 10 99’s are not as old as banks and the banks came in and did all that. And that’s what’s happening with crypto now.
Cliff Capdevielle:
Right, Steve. So if the crypto exchanges want the protection of the federal government they’re gonna have to comply with this kind of reporting. And so we will see that rolling out next year. But if you’ve seen your 10 40 this year, it requires you to report whether or not that you used any virtual currencies and then we expect to report to become even more detailed. As these requirements are rolled out. Also new we have the national cryptocurrency enforcement team, which’s part of the department of justice and they will be going after the criminal use of digital assets. And they recently announced their new chief, who is coming from prosecutorial background. The Young Choi who’s the new chief of the national cryptocurrency enforcement team, was part of the silk road prosecution part of the Panama papers prosecution. So, this is an indication that department justice is taking these crimes seriously and they intend to devote substantial resources to cryptocurrency crime.
Steve Moskowitz:
That’s right. And also one of the things I’d like to point out. And the reason I chose this background today is that a lot of this is done overseas, and it doesn’t matter that if it’s done overseas. And then what happens is you actually have additional reporting requirements such as F bar. So the fact that you’re overseas, the fact that you’re in some other country, does it matter? Cliff do you wanna explain the FBO and foreign reporting requirements?
Cliff Capdevielle:
Yeah. Exactly Steve so FinCEN, which is the government agency that regulates formal reporting, is also taking enforcement action against cryptocurrency exchanges. In 2017, we had the BTCE prosecution last or two years ago, we had the Helux prosecution. And now the focus is going after the exchanges, the treasury, the office of foreign asset control is going after the Suex exchange. Those are the levers that will work. In other words we expect to see additional enforcement action against those facilitators of cryptocurrency crimes, including the cyber ransoms, and the other money laundering, and terrorism type crimes. which are funded with cryptocurrency. The way that justice department wants to go after those is to target first, those third party exchanges. We also expect to see accountants, and attorneys, who are involved in facilitating cyber ransom and of those cyber crimes to be targeted, because of course those are people and businesses, a lot easier to get at than those foreign operators who have much looser ties to the United States.
Steve Moskowitz:
But remember, if you’re an American taxpayer green card holder, or subject to American taxes, the big deal here is even though you maybe in a foreign country, that doesn’t save you from any of this reporting. It actually requires you to have more reporting. And when we’re talking about reporting, Cliff, can you tell us the tremendous importance of the accounting system, where we keep track of these sales, whether it’s LIFO, FIFO averages what does that, what does that all mean to yours?
Cliff Capdevielle:
Sure. So, just a little background in terms of the taxation of cryptocurrency the U.S federal government treats cryptocurrency as property. It’s not treated the same as Fiat currency like the U.S dollar, so that we have not a lot of guidance but we have a few notices that notice 2014-21 is the IRS articulation of that policy, that cryptocurrency is being treated as property gain or loss is recognized when the cryptocurrency is sold or if it’s used in the purchase of goods or services that’s also a taxable event.
Steve Moskowitz:
That’s a lot people miss you could do something as simple as go in the grocery store, and do a transaction that could be a taxable transaction. And that has to be kept track of, and if you don’t the IRS is keeping track of it. That’s why it’s so important to use the proper software.
Cliff Capdevielle:
Exactly Steve, and, it is an additional burden for taxpayers. The software is getting better. And what we do, we match the transactions that our clients have recorded, with what has been reported to the IRS. And we also make sure that all of the basis adjustments are taken into account so that you minimize your taxes. We consider the transaction costs, gas fees, and other costs with regard to sale or trade, of the cryptocurrency make sure that you minimize those taxes and pay as little tax as possible.
Steve Moskowitz:
That’s what we’re all about. And that’s why I became a tax attorney. Cliff in dealing with investors in crypto. There’s certain questions we hear over and over again. What are some of the most common questions you hear when you’re preparing their returns?
Cliff Capdevielle:
Sure. Some questions we’re getting there’s a lot of interest in NFTs. There’s these non fungible tokens, and how those are taxed. In general, the creation of NFTs by itself just like created a piece of art. It’s not a taxable event, but when those NFTs are sold on trading platforms, those are taxable events. The creators of NFTs. If they’re selling those, if that’s their main business that is a taxable event when those are sold, and that’s taxed at ordinary income rates just as if somebody created a painting and sold it.
Steve Moskowitz:
And Cliff, here’s another one that comes up all the time. Clients will call up and say, hey, how do you treat an exchange? What do we tell ’em?
Cliff Capdevielle:
Right. So the exchanges of course are getting much better about their reporting next year. They’re gonna be required to essentially issue 10 99’s, just like the brokerage firms and the banks. What we’re seeing from the exchanges now, it’s a variety of reporting. Sometimes the basis is accurate. Sometimes it’s not, sometimes the transaction costs are captured the gas fees, et cetera. Sometimes they’re not. So we are checking those carefully, make sure that clients are paying no more tax than they’re required to, and that all those expenses are tracked and reported.
Yeah. Another issue we’re getting now and more towards the end of the year is, “can I donate my cryptocurrency or NFTs? And am I entitled to a charitable contribution?” and the answer is absolutely yes, these are property just like a Mercedes or a Picasso painting. The donation to any qualified charity is absolutely tax deductible. And that can make a big difference. A lot of people in the crypto space have made a lot of money in the last couple years. They’re looking for tax deductions. So in addition to the pension contribution we are also helping clients with those charitable contributions of cryptocurrency and NFTs. You wanna make sure that the charity is using an institutional crypto account. You wanna make sure that they are a qualified 501C3 charity so that you are entitled to that, deduction.
Steve Moskowitz:
And Cliff, what difference does it make, if any with people that have multiple wallets especially some wallets overseas?
Cliff Capdevielle:
Well, there’s a couple things, especially keep in mind with regard to the overseas account. You might have additional reporting which could be the F bar form 114 or the 8938 attached to your tax return does require for any kind of foreign accounts, or if you’re using foreign exchanges you wanna be careful to report there.
Steve Moskowitz:
And Cliff, let’s go ahead and take a look and say, how would we go ahead? And what parting thought do we want our viewers to know?
Cliff Capdevielle:
Yeah. So I think what to keep in mind is that as we saw with my announcement last week, cryptocurrency is here to stay. We may even have a federal cryptocurrency sooner rather than later. So this is not something that anybody can ignore. If your business owner you should be accepting cryptocurrency, if you are trading or creating NFTs, obviously you should be aware of the tax laws and tax reporting required. And this is the way of the future. The benefits are real, and we can expect to see more use of cryptocurrency in the future.
Steve Moskowitz:
And we are here to help you through all of that. That includes the proper accounting for it, the proper tax reporting, and most importantly, to legally minimize the taxes that you have to pay. You can either call us at 888 TAX DEAL. That’s 8 8 8 T a X D E A L or Moskowitzllp.com. M O S K O W I T Z L L p.com. Thanks for being with us. And we look forward to talking to you next time.
Outro:
You’ve been listening to the Practical Tax podcast with tax attorney Steve Moskowitz. To hear more podcasts, go to moskowitzllp.com/practical-tax The information contained in this podcast is based on information available as obtained at the date of its release. Moskowitz LLP and its affiliates are under no obligation to update this information as changes occur. Applying this information to your specific situation requires careful consideration of all factors which may be applicable. And any information is not to be considered tax advice or legal advice. Further, this is attorney advertising, and the facts and circumstances displayed in this case are dependent entirely on the facts of that particular case. Please consult your tax advisor before acting on any matters discussed.