Streamed: Tuesday March 29, 2022
Duration: 13 minutes
Language: English
About This Webinar
Learn more about Cryptocurrency Taxation Initiatives for 2022 with this webinar from Moskowitz LLP
Webinar Transcript
Steve Moskowitz:
Welcome, everyone. Thanks for joining us in our cryptocurrency presentation. What a tremendous area crypto is. You have the opportunity to make a tremendous amount of money or lose your shirts. We like the make a tremendous amount of money better but the IRS is really interested in you, so interested they’ve made this their top priority. They even have something and it sounds like an action adventure movie, Operation Hidden Treasure where the government believes that at a lot of people are forgetting to report their crypto or reporting it incorrectly, or have all kinds of problems with it. Not to mention the different accounting problems that go along with it.
What we’re going to do is talk to you about crypto and the accounting and all the choices you have because obviously, we want you to make lots of money. We want you to comply with all the tax laws and we want you to take advantage of all the tax benefits that crypto can provide to you. On that happy note, I’d like to introduce my friend and colleague the head of our tax department tax attorney, and accountant Cliff Capdevielle. Cliff, take it away.
Cliff Capdevielle:
Thanks Steve. The big news, this month Biden announced his executive order on digital assets. And that was announced on March 9th and it contained a number of proposed initiative and we don’t have a lot of guidance here yet but we can see where the administration is going. In general, the executive order is an attempt to kickstart the government’s initiatives around protecting investors with regard to digital assets, mitigating illicit finance, increasing national security, reducing those risks associated with the misuse of digital assets. Promoting safe and affordable ways to use digital assets including potentially a US Central Bank digital currency. That would be a digital asset backed by the full faith and credit of the US federal government. This is big news.
This is the federal government at Biden’s direction getting involved not just in the regulation of digital assets but potentially the creation of digital assets. In addition, last year we had the announcement of a National Cryptocurrency Enforcement Team through the Department of Justice. And the National Cryptocurrency Enforcement Team will be charged with identifying, investigating the Department of Justice cases involving the use of digital assets in criminal cases. And this is a big deal and we’ve all heard the cyber ransom schemes. The DOJ is going to devote considerable time, money, and expertise to coordinate with domestic and international law enforcement partners and other regulatory agencies to combat the criminal use of digital assets.
Steve Moskowitz:
Well, Cliff what happens if a client calls you up and says [inaudible 00:04:08].
Cliff Capdevielle:
Steve, what an investor needs to know is that the assets, the digital assets are being used for legal purpose and that they are… We want to make sure that all of our clients are using well established exchanges and that they’re not doing anything that’s going to make them vulnerable to any kind of criminal activity on the internet.
Steve Moskowitz:
If somebody is heavily invested in crypto and they need tax guidance, what would you tell them?
Cliff Capdevielle:
Yeah. What we do is we will meet with a client or potential client and discuss what sort of businesses and investments they’re making with the cryptocurrency. Are they active traders? Are they mining, staking? Are they running a business that accepts cryptocurrency?
Cliff Capdevielle:
All right. Steve, another major initiative that the Department of Justice is interested in is really misuse of technology for production of fraudulent transactions. And this is something that we’re making sure that all of our clients are monitoring and immediately reporting any breaches particularly, in regard to cryptocurrency but just in terms of their cyber security. In general, we want to make sure that this is something on the radar of all business owners, whether they’re larger or small businesses, that they have some policy and procedure with regard to their data security and also with regard to their digital asset transactions.
Steve Moskowitz:
Now, Cliff, when you talk about data security, I know there’s all types of software around to help with this but what does the IRS use and what software do we use?
Cliff Capdevielle:
Yeah, so we’re using the same software that the IRS is using this year. And that is although there is no requirement currently for digital exchanges, digital wallets to create and report using Form 1099 like your bank or your brokerage that the IRS is moving in that direction. And we use software to essentially match what information the IRS has so we start with that. We also make sure that the investors and businesses accepting cryptocurrency are tracking all of the related expenses, transaction fees, gas fees, et cetera. Make sure that those are all reported correctly on the tax return and that the taxpayers, our clients are not leaving any money on the table when they report the cryptocurrency transactions to the IRS.
Steve Moskowitz:
And Cliff, when you talk about that and here’s where our accounting backgrounds are so vitally important to clients. As we know, the default in crypto is FIFO but why don’t you tell the audience what FIFO is and then how maybe they want to use a specific identification method instead that could save them a lot of taxes.
Cliff Capdevielle:
That’s right, Steve because the IRS treats cryptocurrency as property you have the option with any kind of inventory under property transactions to treat it as specifically identified. For example, if I buy a tranche of Bitcoin and then later in the year I buy another tranche if I specifically identify those, the basis could be different. And it could be to the advantage of that taxpayer to specifically identify the purchase price of that individual Bitcoin when reporting the sale. And sometimes that makes a dramatic difference in the taxes.
Steve Moskowitz:
Yes, folks. Let’s explain how much of a difference that would make. The typical crypto transaction you have many, many transactions. And the default FIFO first-in and first-out is where you match up your first buy as the first sell and the second buy as second sell and so on. Suppose for example, you sold some crypto for 1,000 and you bought it at 100 well, there would be a 900 gain. But suppose you bought a million different transactions and you had one of the areas where you spent a thousand, you’d say well, okay that’s the one I sold. I sold the one that cost me [inaudible 00:10:38].
Cliff Capdevielle:
Yeah, Steve okay you sound fine now, Steve but you keep cutting out. Okay. Another important initiative, the federal government is they are targeting in particular, the cryptocurrency cyber ransom. This has received a lot of press coverage and the US government Department of Justice is applying its anti-money laundering and anti-terrorism team to fight cyber ransom. And in addition to the treasury FinCEN enforcement has begun a significant number of investigations. We saw the BTC-e investigation in 2017 and the helix investigation in 2020. The US government in general, is taking steps to improve the transparency with regard to the cryptocurrency transactions in general. And this is potentially an important way to fight these cyber ransom activities.
They’re also looking at third parties so in the SUEX investigation that an exchange was targeted for facilitating ransomware attacks. We expect that the US government is going after third parties, exchanges, the wallets, probably also accountants and attorneys that are potentially facilitating, making easier these cyber ransom attacks. A little bit about taxation of cryptocurrency in general, we have not a lot of guidance we have some. The first bit of guidance we received was in 2014. That’s where we first learned that the US federal government would treat cryptocurrency transactions as property transactions.
What does that mean? Well, as opposed to Fiat currency transactions like those with the US dollar. Instead, the cryptocurrency is taxed. Gainer loss is recognized every time a cryptocurrency is sold or used to purchase any goods and services. It’s very different from a transaction with the US dollar. Obviously you don’t have to report a purchase with a US dollar but you do have to report that as a taxable transaction with cryptocurrency.
Steve Moskowitz:
And I think that’s something that will confuse an awful lot of people, Cliff. They don’t realize when they make that transaction that can be a taxable event.
Cliff Capdevielle:
Absolutely. Of course, if cryptocurrency is settled for cash, it’s fairly easy. If the cryptocurrency has been held for more than the year, it’s taxed at long-term capital gain rates. In less than a year, it’s taxed at ordinary rates just like other property sales. If you sell cryptocurrency at a loss, you’re limited to netting that loss against your capital gain or you can carry over $3,000 of that capital loss year to year in the future. What was surprising to many people and what many users of cryptocurrency don’t realize is that whenever you purchase or pay for goods or service is with cryptocurrency, you are required to report that transaction on your tax return. That’s a taxable event.
A lot has been made of the forks that had taxation of forks and splits. In general, the way this works is that if new crypto is created, it’s going to be considered a hard fork and that’s going to be a taxable event. And if there’s no crypto created, then that’s not going to be a taxable event. But you want to look at those transactions make sure that those are reported properly on the tax return. In addition to income tax reporting, if you own cryptocurrency in a foreign account you are also required to report those holdings on form 114 and report those to the IRS on form 8938. And that is something that we can help you with identify which accounts are required to be reported to FinCEN and which are required to be reported to the IRS accounts.
We got a lot of questions about NFTs and how those are taxed. The creation of an NFT by itself is not a taxable event just like any work of art at its creation is not taxed to the creator but a sale of an NFT is a taxable event. And for the most part, NFT creators are going to be taxed at ordinary income rates when those NFTs are sold. Good news for the NFT creators is all of their associated expenses are also deductible. And we can help you if you’re an NFT creator set up an entity and make sure that you’re capturing all of your deductible expenses to minimize your tax. We’re also getting questions had a lot of people made a lot of money from crypto in the last few years, they want to reduce their tax bill by making charitable contributions.
Cryptocurrencies are eligible for donations and if you’ve held that cryptocurrency more than the year, you’re entitled to a deduction of its fair market value and that can create tremendous tax savings as can be part of it. Estate planning, part of a charitable gifting programming can result in a lot of tax deductions for those who need those tax deductions.
Couple new reporting requirements with regard to cryptocurrency. As I mentioned starting next year in 2023, exchanges are going to be required to essentially issue equivalents to 1099. They’re going to report to the IRS the name and address and phone number of all their customers, the gross proceeds they received from any sales, and whether or not those were short term or long term. For the exchanges, if they don’t report there’s potential penalties involved 250 per client and up to a $3 million penalty for each exchange for failure to properly report cryptocurrency transactions to the IRS. And it’s similar to other currency transactions beginning next year. Any cryptocurrency transaction in a cash payment more than $10,000 will be reported to the IRS. And with that, we invite you to contact Moskowitz LLP with any questions, call us for free consultation and we’ll be happy to answer all of your questions with regard to your cryptocurrency transactions.
Steve Moskowitz:
Thanks very much. And folks call us at 888 tax deal. That’s 8-8-8 T-A-X D-E-A-L. 888 tax deal or moskowitzllp.com and Cliff or myself or our other colleagues will be happy to talk to you. And like so many other things, this is an opportunity where there’s so many tax advantages but you have to know about it. Thanks for listening to us and we look forward to seeing you next time.