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Douglas C. Borthwick, Chief Business Officer INX.co discusses the confidence in currency, crypto or cash and Finance specialist Mitch Kramer compares the cycles of inflation and the tax and investment opportunities they represent.
Episode Transcript
Intro:
Welcome 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.
Disclaimer:
The information contained in this podcast is based upon information available as of date of recording and will not be updated for changes in law regulation. Any information is not to be considered tax advice or legal advice and does not form an attorney/client relationship. Further, this podcast may be construed as attorney advertising. You should see professional consultation for your individual tax and legal situation.
Chip Franklin:
Welcome to Practical Tax I’m Chip Franklin. That’s Steve Moskowitz. Steve, how are you my friend?
Steve Moskowitz:
Doing great Chip. How you doing?
Chip Franklin:
I’m doing well.
Steve Moskowitz:
We’re talking about taxes and all kinds of things. So of course it’s a happy time.
Chip Franklin:
Yeah. You know what it is interesting, is that it’s really amazing to me how few people understand taxes. I think I read that there’s like three times the number of pages in the tax code that are in the Bible. I mean, it just goes on and on and on. And I mean, you guys must spend a lot of time just keeping up to date?
Steve Moskowitz:
It changes. Congress changes the law, but then the courts interpret what the Congress said. So when Congress says, “You can deduct X?” Well, what’s included in X? And then the next court goes ahead and makes a decision that adds on to that. Then the next court makes a decision, that’s an opposition to that. And what a lot of people don’t realize a lot of times, let’s say you come to me, you come into my office, say, “Steve, I want to deduct X.” And I say, “Well, Chip, there’s a hundred cases on X of equal rank, equal power. And 70 of them say, you can deduct it. And 30 of them say that you can’t.” What do you do? Because, on a tax return, you deduct it or you don’t deduct it. So if we choose to deduct it and the IRS chooses to audit it, the initial lawyer say, “Hey, IRS, doesn’t recognize that, disallowed.” But when you take the case up higher, usually what’ll happen is the appeals officer will offer you something called hazards of litigation.
So let’s assume what you did, that you deducted 100,000 and 70 cases say that’s a good deduction and 30 cases say, can’t deduct it. Normally the settlement officer say, “Okay, I’ll offer you the 70% and you can see it on the 30%.” And then your choice is, do you want to go for all of it in tax court? Or do you want to say, “Hey, 70 is pretty good and let’s end it here.” [inaudible 00:02:26] hazards of litigation. See that’s why with an audit, an auditor is more like a light switch. Yes or no. The switch is either on or it’s off. Once you go above the audit level, it’s more of, there’s a dimmer switch and it’s well, are we maximum brightness or are we off? But usually we’re somewhere in between.
Chip Franklin:
Life is a dimmer switch, that’s for sure. One of the things, about three or four years ago, you and I were talking about cryptocurrency. And it’s funny, because I have friends that dismiss it out of hand, they go, “Ah, I don’t have any confidence in that.” And well you trust money. Actually my great grandmother, before she passed, had some Confederate currency and I have to laugh, because it’s just paper. And you ask yourself about cryptocurrency and where that’s headed and this blockchain technology, all this. What it means, is that I think most people just don’t know what it is. And obviously you have to know what it, is because it’s subject to all the same tax regulations that money is. So joining us right now is Douglas Borthwick. He is a chief business officer at INX.co. And he’s nice enough to be with us here to try to get to the bottom of this. Douglas, say hi to Steve.
Steve Moskowitz:
Hi, how you doing?
Douglas Borthwick:
Hey guys.
Chip Franklin:
Great to meet you. So let me just ask you this. If cryptocurrency was a person after this last year, how would you characterize his health?
Douglas Borthwick:
I’d say he is got a little bit of COVID. I think [inaudible 00:04:09]
Chip Franklin:
[inaudible 00:04:11] This is an opportunity too, right?
Douglas Borthwick:
It’s a flu. It’s a little bit of achy arms and legs, but I think that it’s something that is going to come through, 99% of the time and even more than that. And this is a passing phase. We’ve seen this so far twice, where you see prices come off significantly. This is a very, very early technology. If you were to look at the price of Amazon in the first, let’s say three years of its existence, the price is going to look very similar. It goes all the way up and it collapsed and it went all the way up and it collapsed. But in the end, it came through, it’s shown through. If you look at cell phones and their adoption in the United States, same thing for 10 years up and down, adoption collapses. Everyone’s talking about how it’s going to give you brain cancer. And now there’s 2.4 cell devices per person in America. So what I’m saying is, new technology, it gets [inaudible 00:05:06]. It gets pushed around, but this one is certainly here to stay.
Steve Moskowitz:
And if you saw Jeff Bezos’s first office.
Douglas Borthwick:
Oh I did. Yeah.
Steve Moskowitz:
[inaudible 00:05:15] that tells the story. I saw a picture of it. It was a rinky dink little thing. Well, he did okay.
Chip Franklin:
Well the same with the internet. I mean, when the internet was coming along, nobody envisioned how it would control commerce the way it does today, speaking of Bezos.
Douglas Borthwick:
On March 10th, I think it was in 2000. When you saw the absolute collapse of the.com era. People said, “Internet’s over, it’s done.” That was the newspaper headlines. Now, it wasn’t done. I mean, the way that I look at cryptocurrency right now, or the crypto space, I’m driving an I95 and I’m in Connecticut. Now, there’s been a car crash down in Florida. Yeah, there is, but it doesn’t affect me and how I’m doing. And that’s the net of it. You can’t point to one big company going under and saying, “They’re all stuffed.” Because, everyone’s got a completely different business. My company doesn’t do any lending or borrowing. We don’t do rehypothecation of client assets. And it’s the guys that did that and use leverage, they’re the ones that are in trouble.
Chip Franklin:
What percentage Steve, do you think of the people watching us right now, have no idea what we’re talking about?
Steve Moskowitz:
A large percentage. And part of it is based on age group. And I’ve seen people make incredible amounts of money and I’ve seen lots and lots of clients where let’s say their kids are into crypto and they start using terms. It’s almost like the kid has broken into another language. He hears about something drop, “What you drop?” The parents looking off, “No, no, no, not that kind of drop.” Or, “What do you mean blockchain? What do you mean a fork?” “Go in the kitchen if you want a fork.” “No, no, it’s not that kind of fork.”
What is a currency? A currency, is something that somebody has faith in. So if I took anything, if I said, “Chip, I’m going to hand you this tissue and this tissue, the next time you need a tax return, done, I’ll accept that in payment.” And then you to the grocery store. And you say, “Well, I need to buy some groceries right now. And I don’t have any currency with me, but I have this tissue and you see, Steve will accept this tissue as payment for the tax return.” The grocer says, “Oh, well, I need my tax returned on. I’ll accept the tissue. And I’ll give you the groceries.” This tissue has become currency.
Chip Franklin:
Yeah. Sure. [inaudible 00:07:45]. Go back real quick. And the history of currency, you used to trade a cow for some wheat. And then you got to a point where, all right, we’re going to have paper currency, but it’s got to be backed by something. It was backed by gold and then silver. And then when Nixon took the Dollar off the silver standard. Then it became all about confidence. So Douglas help us here. And I do want to get to the taxable part of this too with losses, Steve, because there were some losses incurred this past 12 months. And we’ll get into that in a second. But please explain to just a little bit about blockchain technology in a way that people are kind of a 101 for people that are trying to understand this.
Steve Moskowitz:
Use some of the secret words.
Douglas Borthwick:
Well, first I’d say, when you talk currency and you’re talking about your hanky, you’re really talking there about national currency. Rather, the cryptocurrencies are currencies that could be used for specific uses on the blockchain. Now, what is the blockchain? I think of the blockchain as being, there’s lots of different train tracks. And I remember when trains came to America, there was different gauges. You’d have one line using the lines this wide apart, another one this wide apart, we all had train sets when we were kids. And there’s lots of different train tracks that are out there. These are called blockchains. There’s the Bitcoin one. There’s Ethereum, there’s Avalanche. There’s a Algorand, all kinds of these names. Now, if you want to put a train on that track and for that, I mean, let’s say a security token or a digital security or you want to put some information on that track, you have to pay a currency. And that currency, if it’s on the Bitcoin train track, you have to use Bitcoin. If it’s on the Ethereum line, you have to use Ethereum, that’s your gas fee. And so [inaudible 00:09:27]
Chip Franklin:
But I don’t hold them Douglas. I don’t hold a Bitcoin perse
Douglas Borthwick:
Well, you could certainly hold a Bitcoin. [inaudible 00:09:33] fractions of a Bitcoin. Now, the way that I look at Bitcoin specifically, is I’m a currency trader. That certainly was my background. I did 20 odd years of doing that at Morgan Stanley and other companies. I ran proprietary trading desk at Merrill Lynch. And I was behind a lot of devaluations around the world. And at some point I realized that the Dollar is getting weaker and there’s nothing for me to buy. Now, if I was very wealthy, I could buy fine arts or I could buy real estate in the city. And that would appreciate with inflation, but the Dollar doesn’t, rather, it goes down. When I got my first job on Wall Street, it was $35,000 in 1992. Today, if you want to get a guy out of a good school, maybe it’s $180,000.
Now, it’s not that person’s a lot smarter than me. It’s because the value of the Dollar has gone down. Townhouses in Manhattan in the seventies during the fire sale were selling for well $15,000. Today, they’re $20 million. It’s not that the price of real estate’s gone up. It’s that the Dollar’s gone down. Now, as a currency guy, I could say, “Well, I think the Dollar’s going down, so I’ll buy the Euro, but Europe’s printing money just as fast as the US. Bitcoin was a way for me to be able to buy something of finite value and essentially take my wealth and put on it. And I managed to do that a number of years ago and it’s worked out well. For me, college education and Bitcoin has absolutely collapsed in price. Now, remember sure Bitcoin looks like it’s in trouble at 20,000, but a year ago it was around 30,000.
The year before that maybe it was at 10,000. So it has it preserved my wealth over time since I’ve held it, from like the prices of a $1000 per Bitcoin, of course it has. It’s done very well. It’s up 20 times. So really, a lot of the time I think what we do, is it depends on where you look at something on the chart. Are you looking at it over the short term? Because, townhouses look like a terrible investment in the seventies in Manhattan, or you’re looking at it in the long term where real estate looks absolutely spectacular.
Chip Franklin:
That was a great explanation. Steve, how do people know the profit they’ve made when the year closes with Bitcoin? Is it easy to track?
Steve Moskowitz:
Here we go back, and before I was a tax attorney, I was a CPA. Here we go back to where the accounting is so important. So typically people have a lot of trades and then when they sell something, it’s like selling a stop. But the important part is what did you sell? Because, suppose you sold something for a $1000, did it cost you 900? A 1000 or 2000? So the bottom line is you can use the different methods. If you don’t do anything, it’s FIFO, first in, first out. But we talk about using specific identification where I’d say, “Well, okay, what I sold was the most expensive one. Therefore, I don’t have any gain. Therefore, I don’t have any tax.”
Now, look at it, physically it’s the same thing. You made a transaction, you sold something for a $1000 of fiat, but tax wise, depending on what you deemed you sold, you could be taxed or not taxed. So that’s, part of it using the appropriate accounting method. That’s one of the things you do. And then also, you have to get into the language. It’s like it’s funny, somebody will call up and say, “I’m a minor.” I say, “Well, does that mean you’re under 21? You dig underground or you’re just doing something with crypto?” And then, well, what are you doing? And then how you treat this particular thing.
Chip Franklin:
This is great. If, people go to inx.com, is there like a primer there for [inaudible 00:13:12]
Douglas Borthwick:
Well it’s inx.co.
Chip Franklin:
Excuse me. I’m sorry. I got it right in front of me. inx.co. Is there a primer there for a learning curve for people that want to learn more about this?
Douglas Borthwick:
Well, I’ll tell you, what we mostly do is we raise capital for companies. We’re a broker dealer, a transfer agent, and we have a cryptocurrency business on the side, but we did an IPO in the blockchain. Now, you talk about age groups. We raised 85 million from 7,250 people in 74 countries. We filed the first ever prospectus with the SEC for a registered security. Now, the average age was 42 years old. Now, that’s a surprising older, I’d say on the scale than I would’ve thought going into the raise. But I think that the older generation and I’m one of them now, I think when we see something we’re interested in, we learn, we learn about the technology. When the VCR came out, we figured out how to do it when we wanted to tape our show that we wanted to watch. And I think that these technologies are certainly very similar to that. People figured out MetaMask wallets when they wanted to buy an NFT, because their kid told them about NFTs. But if you want to learn about it, certainly go to inx.co would love to educate.
Chip Franklin:
Well [inaudible 00:14:21]
Steve Moskowitz:
[inaudible 00:14:21] That’s right. You don’t want that VCR flashing midnight at you. [inaudible 00:14:25] what time it is.
Douglas Borthwick:
Yeah. Figure it out.
Chip Franklin:
That’s a learning curve I never caught up to. Douglas, thank you so much. We will send people to you at the end of this broadcast. People can find out. And really, that was a great explanation. You’re good at this. Thank you so much.
Douglas Borthwick:
Thank you very much.
Chip Franklin:
Again. That is Douglas Borthwick, nice enough to join us. inx.co. I got it right. Coming up. What do financial planners have to know about 199A?
Steve Moskowitz:
199A, is great, but it has some quirks. For the first time in American history, it matters what you do for a living, because now depending on your occupation, you may be taxed differently. So financial planners were a group that was singled out and oftentimes financial planners will do a variety of things. So what we want to do is split what they’re doing in the group that is excluded from the 199A and included, and essentially what we do, for example, the difference between selling securities and selling insurance. And we want to use some old tried and true principles, like conveying a building out and then leasing it back. But here under the regulations, we’re told that this works as long as you own 49% or less. So what we do is we look at the power of partnerships and partnerships are good for so many reasons.
And we form the partnership. And then what we do is we split what the company is doing between the included group and the excluded group. And the irony is, these are good business principles. We look at giant corporations when they merge. Oftentimes they say, look, if three companies get together, we don’t need three people doing this function, we only need one. There’s cost savings. There’s efficiency, there’re all kinds of economic benefits, separate and apart from the taxes, which is great for a lot of reasons, tax and non-tax reasons. And then by doing this, when the smoke clears with the multiple entities and the multiple partners, we get to have that 20% deduction from the 199A even though we were in a specified group and the bottom line is, we only pay tax on 80% of our qualified business income, essentially our profit instead of a hundred. This is great. This is powerful. And this is something, when you know it, you’re going to love it.
Chip Franklin:
Everybody in the United States is this whining, moaning, upset, worried about inflation. And it’s being fueled by many things, the cash, the government released into the economy, the post pandemic supply chain issues to name a few. How do we balance our income with rising costs? And also, are there tax strategies for combating inflation? Joining us right now is Mitch Kramer, CEO of Fluent Financial. Nice enough to join us here to try to get to the bottom of this. Mitch. Hi, say hi to Steve.
Mitch Kramer:
Hello, Steve and Chip. Nice to be with you gentlemen.
Chip Franklin:
Thank you for being here. Steve, let me just jump into it. Obviously we pay taxes and we pay and [inaudible 00:17:31].
Steve Moskowitz:
Well, some people do.
Chip Franklin:
Well yeah, we’re supposed to. Inflation attacks our root, the rising costs. Is there any way through the tax law to kind of get around that and Mitch, from your point of view, again, looking at this for investors as well, how do we deal with inflation? How do we save some of our money? Let me start with you, Steve.
Steve Moskowitz:
So Chip it’s about offsets. And when I was saying that not everybody pays taxes, I wasn’t talking about the illegal sector. I was talking about the fortune 500, that some of these companies make billions with a B in profit and they legally don’t pay any taxes. So we’re looking for offsets and that’s why this is so very important, because our last guest was talking about that property in Manhattan that went from 15 grand to 20 million. Well, if you sell that, you are going to have a big tax, but is there any way to get around that? Yes, there’re all kinds of ways, different offsets. I could take a whole show doing that, but I’ll just say yes, there’re ways and you learn about how can you offset this? That’s a major part of tax planning.
Chip Franklin:
Cool. Let me ask you this, if I can Mitch. Please explain to us like when it comes to investing, there seems like there’s two approaches. There’s the suitability and the fiduciary methodology. Can you explain each one of those and maybe kind of as what Steve was talking about too, about where we find ourselves when we’re trying to save money just from the rising costs as well.
Mitch Kramer:
Yeah, really good questions. Suitability, is the standard that our industry is used for decades and think of it as the commission transactional relationship, where a broker will sell a product or service to an end client and they get a commission. A fiduciary rules as a much tougher standard. And as a certified financial planner CFP, we use the fiduciary standard and the fiduciary standard basically states you have to do what’s in the client’s best interest at all times and point out any conflicts of interest. So what happens, is the end client normally will get a much better result.
Chip Franklin:
Is that fee deductible that people pay when they purchase stocks, Steve? If the stock loses money or makes money, is it?
Steve Moskowitz:
So it depends on a variety of factors and that’s one of the things we’re always doing too, looking to see if we can allocate it to the tax deductible portion. So many answers when you ask a lawyer, it depends.
Chip Franklin:
Well, it’s amazing because what you guys do are so closely aligned and I mean obviously, and the government, doesn’t matter what political party is in there, it seems like that it gets harder and harder from everything, from housing, to fuel, to education, you go down the line.
Steve Moskowitz:
Well Chip, when you talk about inflation and I swear I was not in practice at the time, but when our federal taxes, as we know them started, it was in 1913 and the federal income tax was originally designated as a tax on the wealthy. The top tax rate was 6%, which people thought was outrageous and you know how much money you had to be making to be in that top 6% bracket? Half a million Dollars in 1913. Basically the tax was on a few really wealthy individuals at the time. Look what it is today. And you could say, “Well, look what inflation has done to our taxes. Look what taxes have done with the inflation.”
Chip Franklin:
Mitch, let me ask you a question and it’s kind of dovetails off what Steve’s talking about. The idea of investing, Steve tells people and its great advice, “Get a pension.” Because, then your pension money can go into something you’d set up for them. Is that only for people that are not getting a W2, do people who get a W2, can they create a pension and then allocate some of the money into that and avoid that tax for that year?
Mitch Kramer:
Yeah, I think it works well if you’re self-employed or own a number of different businesses. The cash balance defined benefit pension strategy, I think you’re seeing a little bit of an increase of that. What the business owners are making six or seven figure incomes.
Steve Moskowitz:
Those are great plans, because we have clients that do that and they get mega deductions. Those are fantastic.
Chip Franklin:
Steve, how many people… I’m going to ask both of you this, how many people just don’t know that?
Steve Moskowitz:
An awful lot.
Mitch Kramer:
Yeah. A bunch and the advantage, is if you have a business owner, there’s something called affiliated service group rules and control group rules. Those are the two trip bars you have to get over. But if you can do that, you can put away six figures pretax every year. And we’re actually working with a TPA down here in Texas that is basically using a cash balance plan with a cross tested portion that will allow the owner, who’s normally older and highly compensated to include as employees, but only have to pay about 6 or 7% of their income in. And then they can put themselves, that high six figure deduction into the plan of contribution. So that, works extremely well.
Steve Moskowitz:
That saves people. And again, the only thing I can can say about that, is we do those all the time and it’s just the savings are incredible. I have clients that said, “Before I did this, I had all these big tax bills. Now, I have this big account that I’m actually going to spend and enjoy when I retire.” It’s tremendous. And there’s four major benefits. One, you save income taxes. Two, your earnings are not taxed while it’s in the plan. So no brainer. Think about growth. Taxed or not taxed, well obviously going to grow much faster and bigger if it’s not taxed. Three, cash flow. So you see most of the time when you’re talking about tax deductions, you have to write the check by December 31st year one to deduct it year one, with a lot of the pension plans you have up to the time of filing the return plus extension.
So in English, you get about three quarters of the way into year two, you can set up the plan, fund it and still deduct it from year one. And fourth, it has special federal protections. So if you get into trouble and you get sued and the plaintiff wins an amount in excess of your insurance, they can’t touch your pension and the poster boy for this, although I hate to mention his name is OJ Simpson. OJ had that giant judgment against him for such a long time. He’s not lost a penny of his pension. And even if you go bankrupt, it’s even safe there. So that’s, why I’m always preaching about the pensions. They’re just so really good.
Chip Franklin:
Can I ask you a question, Mitch? And this is Steve as well and I don’t mean this from a political angle at all. Texas doesn’t have income tax. You’re a big state, not as big as us, but not far behind. Does it work for you guys and Steve, would it work for us? Let me ask you first Mitch.
Mitch Kramer:
Yeah. It does work and what’s interesting, is it costs a lot more to run to U-Haul from California to Texas. I think they probably pay you to take it back, but it’s a function of no state income tax, a low government in regulatory influence. I think one of the biggest issues in our state, because we’re heavy oil and gas is the ESG issue, I don’t know if we will have time to get into that, but that is a huge problem.
Chip Franklin:
Steve, have they ever contemplated it here?
Steve Moskowitz:
In California, what it seems they contemplate is always raising the tax and adding another tax. And that’s why so many people are leaving. Especially, high income people are leaving and the California legislators have not conferred with me, but they didn’t look at the economics 101 books. And what happens is and I look at some foreign countries, because we do some international tax too. And where they have a low tax rate, they have such prosperity and the prosperity there is what goes ahead and fuels everything. And I mean, I’ve been in Texas, it’s a nice state and they’re not afraid to put the lights on and the roads are good and they’re doing quite well. So the bottom line is, before some legislator says, “Well, we’ll just tax more.” And they forget that at some point there’ll be nobody left to tax. Everybody will be in Texas or Florida or Washington or Puerto Rico and take a look at basic economics and if you lower the tax, all the money it brings in.
Chip Franklin:
Texas gets a bad rap from Californians. But it’s a good state and not just Austin.
Steve Moskowitz:
Well, I got an awful lot of clients that are moving… My clients that are moving from California to Texas.
Chip Franklin:
Well, right out this window over here, is the Pacific ocean. So I can look out and see it. So I make sure I do that, because I’m paying a lot for that, I know. And it’s one of those things. Last question here.
Steve Moskowitz:
[inaudible 00:26:59] zoom background with water Chip, I can share that with you?
Chip Franklin:
Yeah right. Mitch, first of all, thank you so much for coming in and please we’d love to get you back again. When we look at this and we talk about lowering income. We talk about great investments and opportunities for people. What are the youngest people you’ve had coming in and looking this? I mean, because I know that my mom taught me really young about balancing checkbooks and all that. Understanding this, you can’t be too young, right?
Mitch Kramer:
No. The biggest asset in the portfolio is time. And the sooner you start and establish that good habit, you can say 15% of your gross income in your twenties, you’d be a millionaire by the time your 50. And the other big thing we recommend our younger clients is maximum fund a Roth IRA, as long as you’re below the income thresholds, because tax rate Dollar in the future is going to be worth significantly more.
Steve Moskowitz:
And I’ll just throw in, you can have multiple pension plans at the same time.
Chip Franklin:
I mean all of us here have been through the ’87, ’01, ’08, ’19 recessions. And it comes [inaudible 00:28:04]/p>
Steve Moskowitz:
I was in kindergarten at the time, but I remember it.
Chip Franklin:
Yeah, exactly. Mitch, thank you so much. We’ll check on the Longhorns here as the football season gets into the summer [inaudible 00:28:16]. Texas Tech. There you go. Well, my nephew is at Texas AM playing golf, loves it and going to relocate, live there. You be well. Thank you so much and you have a great weekend. We’ll talk to you again soon. Thank you so much.
Mitch Kramer:
Thank you.
Steve Moskowitz:
Thanks so much.
Chip Franklin:
Again, it’s Fluent Financial, Mitch Kramer is the CEO. Nice enough to join us here on Practical Tax. Another great edition. Steve, love it.
Steve Moskowitz:
Thanks Chip.
Chip Franklin:
Thank you so much.
Steve Moskowitz:
You were fantastic.
Chip Franklin:
[inaudible 00:28:42]. Check it out. You have any kind of questions at all. They get a lot of smart people there, ready to help you out. We’ll see you next time.
Outro:
Thanks for joining us on the Practical Tax podcast with tax attorney Steve Moskowitz. To hear more and view more podcasts, go to moskowitzllp.com/practicaltax.