Transcript:
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Mark Eckerle:
Hello, listeners, welcome to this episode of Cryptonomix. Before we jump into today’s discussion, please keep in mind this recording is for general education and is not intended to constitute investment advice. Any opinions expressed are those of the participants and do not necessarily represent those of Withum. Hello everyone, and welcome back to Cryptonomix, brought to you by Withum. I’m your host, Mark Eckerle, and today our guest is my colleague Ryan Babiak, who is a Tax Partner here in Withum’s emerging technology practice. And I would personally say our resident crypto tax expert within the firm. But that’s just me. That said, welcome to the show today, Ryan.
Ryan Babiak:
Thanks, Mark. You gave a lot to live up to there.
Mark Eckerle:
Just crypto and taxes, nothing to worry about. No. So you and I, Ryan, we work, I would say pretty closely together on a regular basis, even though I am an auditor by trade, you are a tax partner by trade. So different sides of the equation. But when it comes to crypto, I think we work pretty closely, hand in hand. And basically since my first day at Withum here, we’ve been doing webinars, podcasts, all types of marketing materials, just kind of educating the ever evolving landscape that is digital assets, I would say.
Ryan Babiak:
Yeah, that’s a key word there, education, right? Because, uh, you’re right. Since you got here, we’ve been working together and there was a period of time there and we were all
sitting at home that you and I were on how many calls a week together with opportunities companies that were, you know, just formed, you know, the day before, a week before, a month before, would you say? Probably average one a day there for a few months.
Mark Eckerle:
That crypto winter in 2018, 2019, it was new leads every single day, right? We were, and it was always on the tax side, which is a, it’s the right segue into today’s episode because right as we’re rolling into Q4 tax is on the forefront of everyone’s mind, tax planning, tax strategy
Ryan Babiak:
And finishing up compliance for people who get their returns done, you know, closer to the deadline wait on K1s and all that stuff. Yeah, agreed.
Mark Eckerle:
Exactly. Exactly. And, and we really see topics that really run the gambit, right? So questions ranging from the simplest transactions with new users entering the space, right? And I sell crypto, how does that roll up into my 1040 or my 1120? If you’re a company all the way to, Hey, I have some staking income, or I bought NFT this year, what’s the tax consequences there? Do I have a tax liability? So we’re gonna be diving into all of that today, and I really, I don’t wanna steal any of your, your thunder. I would say I know just enough to be dangerous when it comes to taxes, but by no means an expert. So I kind of wanna take it from the top, right? Can you give us the 101 for crypto tax liabilities? What are, what triggers a taxable event? Is it when I purchase crypto with US dollars? Is it when I buy Ethereum with Bitcoin? And how does that ultimately end up on my tax return, right? What is the end result there when I am first entering the space? And what triggers a taxable event?
Ryan Babiak:
Sure. Yeah. Happy to address that. And I mentioned, you know, getting educated on all this before, I’ve told plenty of people when we do our little pitch on a you know a call or just having a conversation at a conference or something like that all accountants had to kind of educate themselves for a while on how this whole landscape worked. But crypto tax one-on-one goes all the way back to it’s IRS notice, 2014 dash 21, which I think even you and many non-tax professionals in this industry know exists by now. It was in a internal revenue bulletin April 14th, 2014. So the day before the tax deadline, I guess that’s topical also happened to be exactly two years before my daughter was born. And that poor kid, you know, has a father who was looking to add some excitement to the world of taxes by having a daughter closely born on dreaded April 15th.
Ryan Babiak:
So what notice 2014 21 did was define a few things, right? Especially, you know, what is a digital asset? What is cryptocurrency? And oddly enough, the IRS uses the term virtual currency, but then explicitly says that this isn’t currency. So it’s, you know, I’ll use that here. Virtual currency is being synonymous with digital assets and crypto. So whenever you hear digital assets, virtual currency, crypto, it’s all considered to, to be the same thing, but essentially the IRS said it, it’s viewed as property, and typically the law is behind technology, right? So I still think that’s the case. And these rules are, they’ve been out there for a while, but they’re, they’re getting a little stale. They don’t seem to represent what the, the crypto world, the blockchain world really is doing. But essentially, here’s the, here’s how this works.
Ryan Babiak:
So, virtual currency, it’s property. It’s not terribly different than considering it’s something like, like stocks or bonds, right? So every time I have a sale or exchange of that virtual currency of that crypto, I have a tax event. The purchase is not a taxable event. All it is doing by itself is not a taxable event. All it’s doing is establish what your basis is in whatever that underlying asset is. It costs me a, you know, a couple thousand dollars. You know, then, okay, that, that’s my basis, right? If there’s any purchasing cost to acquire that through an exchange, which, you know, may or may not be, that would add to my basis as well. But anytime there’s a settlement or sorry, a sale or exchange of that crypto is when you have the taxable event. You know, we got a little bit more clarity on the law at the end of 2019.
Ryan Babiak:
The I RS finally came out with some frequently asked questions. They put these FAQs on their website. I think there was 48 or almost 50 of them covering a bunch of different topics, how to determine basis. How do you know, what methods are available to be used when you sell to crypto? Can you use specific identification? Do you have to use the first in first out method? Do you have to use last in first out? And there were also some rulings out there for airdrops and, and hard forks, and those were actually in the form of revenue ruling. So there’s a little bit more authoritative guidance on both of those. Now, where these taxable events end up on a tax return depends on how that digital asset is being used. So most people, right, if we’re looking at people forget businesses for a moment.
Ryan Babiak:
You and me, right? We purchase crypto, we go through an exchange, we buy it, we hold it there, we have a sale. Those are capital assets to us. We are buying into those for the purposes of investment because we wanna make money on it, right? We wanna return no different than when we invest in regular stocks, bonds, and other vehicles through our brokerage accounts. So those get reported on a personal tax return through as a capital asset through Schedule D, which then is supported by the detail of the transactions underneath and on what’s called form 8949. And the split on those forms, it could be four different ways. You’ve got short term and long term gains and losses. And then each of those is split one more time between basis that’s been reported to the IRS and basis. That hasn’t been reported to the IRS.
Ryan Babiak:
Well, because there’s no 1099 requirement for exchanges to issue, you know, those forms, at the end of the year, you’re gonna wind up on 89 49, checking that the basis was not reported to the IRS. On the business side, it ultimately, and it could be an individual that operates their own business, they can have a mining business, but on the business side, if you’re entering into a business for profit, those transactions could be capital in nature. But also, depending on how you’re using the crypto, it could be ordinary. So, something I remember getting very popular going back probably about, let’s say five or six years ago and I’m sure it happened before that is companies in this space paying their employees in crypto, that’s not different than paying them in cash. It’s just a different metric to determine the value. That’s a business deduction. That business deduction is an ordinary deduction. It’s a hundred percent deductible on that business’s tax return. So it’s important to understand how the crypto is being used. If it isn’t in a, in a business, whether that’s an LLC A corporation or just, you know, you or I, you know, having a mining business, you know, at home, it doesn’t make a difference.
Mark Eckerle:
You touched on quickly when you’re filling out your 80, your, was it your 8949 Yep. The short term and long term difference. Can you kind of go into that? I know it’s obviously a 12 month holding period, one versus the other for short-term versus long-term. What is the tax impact there is, like the percentage wise of capital tax or ordinary income? What would the distinction be there? Because I would think a lot of users are maybe around year end, they’re gonna decipher which buckets they’re going to be selling, and maybe they’re gonna decide not to sell because it’s in that short term bucket. It’ll be more advantageous to push that a couple months and move that into long term for a future tax period. Can you kind of go into that component just a little bit?
Ryan Babiak:
Yeah, you can, and you can certainly do that. That’s all part of good tax planning. Again, and you’ll hear me say the word generally a lot, that’s just the tax person trained into me for the last 15 years. It’s the tax person’s way of hedging their bets, I suppose, a little bit. But generally speaking, right, you would offset your long-term gains and losses first, your short-term gains and losses second, and then you would net them together, right? If you come out with a net you could have net short-term and net long-term gains. You can have the same on losses or they, you know, depending on the makeup, it could wind up with one net result. The long-term gains are gonna be taxed generally at a 20% rate for most people with the potential to have 3.8%. On top of that, under the net investment income tax, short term gains are gonna be treated like ordinary income.
Ryan Babiak:
So they’re at graduated rates, which typically are higher. Although with the net investment income tax having been around for a while now, some of that gets a little bit wiped out that advantage. But it is still better to have it be long term and for planning and considering what to maybe, to sell towards the end of a year for planning purposes. You know, obviously people should work with their accountant, they should work with their finance people, depending on, you know, their situation and what their resources are or themselves, and figure out what’s the best way to harvest some losses, especially with the way the market’s been over the last couple of years, you know, a little bit less than that I suppose we could say. One thing to keep aware of though, is that with an individual, you almost want to end up as close to zero as you possibly can. I mean, you can have a capital loss, it carries forward forever. You never lose it. The problem is we have a very short-term view on capital losses under our tax code. The, you can only take a net capital loss in any one year of $3,000, which, you know, given the volatility of the crypto market, might not be very helpful at all to people.
Mark Eckerle:
So you, you touched on earlier the, the IRS’s definition of what they call virtual currency or digital assets. And we kind of using that interchangeably here. I myself use that interchangeably as well. Sure. Probably don’t use virtual currency all that much. I think that’s a IRS term,
Ryan Babiak:
Which is the term.
Mark Eckerle:
Yeah. It’s the technical term, but I hardly ever use that, but in that bucket, they also mention stable coins and NFTs, non fungible tokens. So, I want hone in on the NFT portion quickly, because I think we covered virtual currency, cryptocurrency, stable coins are pretty straightforward when you think about it. So there’s, I don’t want to spend too much time there. But on the NFT side, how are NFTs taxed if different than anything you previously mentioned? Most people buy NFTs with crypto. I think there are some capabilities, maybe buy it with a credit card, or you can link a bank account depending on who’s selling that NFT. But what are the tax consequences if it’s any different from a standard crypto transaction? And can you go into things such as like, is the creation of an NFT a taxable event if I’m minting NFTs? And does that change the disclosure on any of my tax returns?
Ryan Babiak:
So to date, NFTs have not been, they’re typically not taxed any different than other digital assets. The caveat you mentioned about using crypto, right, to acquire NFTs, right, which is, like you said is pretty standard. And the reason that is, is because now you’ve had two steps to your transaction and may have two steps to settle your transaction, right? I’ve gotta take my hard-earned dollars, I’ve gotta purchase whatever, you know, let’s say I purchase ETH and then go and buy my NFT. Well, let’s say I purchased my ETH and I’m sitting on it and it’s changed value. I may have a gainer loss based on what I’m able to acquire with that NFT from what the purchasing power has changed, right? Over a period of time. So that could be taxable transaction number one. And then selling the NFT could be taxable transaction or would be taxable transaction number two.
Ryan Babiak:
And then again, if you’re not liquidating right away, the third leg of that will be getting yourself back to fiat. So that, that’s the major difference. And I think one of the, the shortcomings I’ve seen on, you know, various software providers is struggling to get that automated somehow for taxpayers to track their gains and losses, right? I mean, what, you know, there’s a hundred different coin tracking types of tools out there, but it does require a lot of organization, good records from the person themselves and regularly going into those accounts and looking at those gain and loss reports and seeing if there are any transactions that were tagged incorrectly or need the input of the person to say like, we didn’t know what this was. Can you fill us in here right now? That’s by no means an official 1099 that, you know, it’s okay, this has been reviewed and the IRS is gonna get this, and it better matchup that doesn’t exist yet.
Ryan Babiak:
We’ll get into that I think a little bit later. We have a couple things to talk about there. There’s a notice that came out in March of this year, 2023 dash 27. The IRS is gonna consider NFTs to be collectible. So that’s a separate category within the capital asset rules and gains from those NFTs would be subject to a higher rate, which is 28% flat at least as the grades currently sit today, but there’s another layer to this too, because that designation isn’t gonna cover all NFTs. You essentially have to look through at what the property is that the NFT is representing. So if, you know, if you’re in the, the metaverse and that NFT represents a piece of land in the metaverse, then it’s not covered under the collectibles rule, which actually would be a good answer because you’d have a lower capital gains rate if it’s held long term.
Ryan Babiak:
You know, if anybody’s going looking for the collectible rules typical of the tax code, they actually sit in an area that is totally not related to where you’d expect them. There’s a definition that that’s, that’s grouped under retirement accounts of retirement accounts of all things, right? So, you know, I can’t knock the tax code too much ’cause it helps us explain complex topics to our clients, lets them plan properly. And to be honest, hey, it puts food on my table. So, but, yeah, that’s the only change that’ll be, be coming up that I think is gonna be significant beyond that. You’ve talked about creation of an NFT as being a taxable. Where does it go on the tax return? So, similar to what we spoke about a few moments earlier, the taxation of those NFTs depend on how they’re used.
Ryan Babiak:
So we do work with several companies that mint or deal on NFTs, and that’s their business, right? So these are typically ordinary business transactions that are not subject to capital gains. So it’s important to understand that too. Creating an NFT itself is not a taxable event. However, if you’re professional who miss NFTs full-time, you’ve gotta report your, your income and business expenses, right? You know, if it’s not a hobby and even gains from hobbies get reported as well, you know, that the creation of NFT itself is not taxable. But what you may have is, you know, through the, the chain there getting it minted and what it will cost to do that you’ll have basis attached to it that you should at least be used to, to track, uh, as an offset to future gains or sales. Right? I guess it could be like a cost of minting if it’s not a capital asset.
Mark Eckerle:
And I think an important distinction that we should just point out quickly for especially any new users in the digital asset space, which I think is, is very prevalent for anyone that is holding an NFT just based on where the industry has gone probably over the last 12 to 18 months, unfortunately, down. I know NFTs were a very hot topic,
Ryan Babiak:
Yeah. I mean, it, I don’t know, you don’t know how much these are clickbait articles, right? But you get all those I’ll put it in quotes if anybody isn’t, can’t see me on this, but these business websites, right? That say it’s possible that 95% of all NFTs are worthless. I’m like, hey, worth depends on what somebody’s willing to pay for it. Until it’s sold. Just a paper loss. Right?
Mark Eckerle:
And that’s what I, that’s the point I was driving at is I don’t if you’re holding that NFT or crypto, right? And you haven’t sold anything but your value from date of purchase to today or year end has gone down, there’s no tax consequence there yet. It’s until a sale is triggered. Because I think you and I get questions all the time, right? I bought this NFT for X dollar amounts, it’s gone down 90%. I want the benefits of that, and how do I get that? There’s none yet. Right? And you can work with your tax professional on how to try to harvest some of those losses and get to where you gotta get to. But I think that’s a good distinction to point out to some users that are especially new in this space.
Ryan Babiak:
Yeah. Try to find some, look, if you really are trying to find a way to make that loss real and have an impact on your taxes, then the best case is that you’ve got some gains that you’re able to, to reduce, right? Because if you just take the losses, we go back to that rule I mentioned around the capital loss limitations for, for a person it’s only $3,000 a year. And again, it carries forward forever, but who knows when the heck you’re gonna use it. I mean, so it’s a tool there for planning. It’s an attribute that you can think about and carry forward almost like an asset, but you don’t know if you’re ever gonna realize it.
Mark Eckerle:
So shifting focus just a little bit, 2023 on the tax front has been a year of clarity. I would say just a little bit. We’re starting to get more and more guidance. I think that helps with the industry maturing.
Ryan Babiak:
Better than other years in the past. I agree. Yeah.
Mark Eckerle:
We’ve been waiting, waiting, waiting. And finally we’re starting to get some clarity from the regulatory bodies. So shifting focus to the, the staking side of the equation, I believe over the summer the IRS issued or published maybe some FAQs or another revenue ruling, I don’t recall around staking rewards and staking income. And I think that it comes at a perfect time where staking has become more prominent in the ecosystem, especially with ether moving from proof of work, consensus mechanism to proof of stake. Obviously a lot of individuals in the space know ether as opposed to some of the more esoteric tokens that are on the proof of stake protocol. So, I’m curious, what kind of impact should users, or let’s say traders like you or I, right, just the individuals expect, and how does that get reported on my tax return if I have staking income now? Is it any different than what we’ve talked about?
Ryan Babiak:
Yeah, it’s typically not different than what we’ve talked about. So you’re right that there was some guidance on this. It was put out through a revenue ruling, which carries some substantial authority there that taxpayers can rely on. So revenue ruling, 2023 dash 14 came out the end of July. So you’re right on it. When you said it was in the summer, it basically says that stake in rewards for cash method taxpayers, which is, you know, the overwhelming majority of people are cash method taxpayers. Those rewards are included in taxable income when that that person acquires possession of the reward under what’s called the, the Dominion and Control standard. Without getting into the history on that, basically when somebody is able to sell or otherwise transfer their asset, they have the right to it. I often deal with this, ’cause you and I both work in the technology space when we work with early stage companies too, in their stock and how they can sell that. And doesn’t have to do with the market being there, it has to do with whether that person is the right or ability to transfer that asset. So once that happens, you have your taxable event and it’s the value of whatever that reward was at that point in time that you recognize into your income. You know, and, and this applies to both, you know, whether it’s a proof of stake chain or if it’s, you know, just additional tokens acquired through, like staking on an exchange. There’s no difference.
Mark Eckerle:
And, and how would that parlay while staying in the consensus mechanism model? Right. So we discussed proof of stake in the, how your income would get reported in the tax rates. What would that look like? If I’m mining Bitcoin, right? So on a proof of work and I have ordinary income, right? Because I believe that’s how mining rewards. Different terminology from staking words, but I think it’s similar conceptually. Is that accurate?
Ryan Babiak:
Agreed. Yeah, agreed. You know, in my head for a long time I used to think of staking as, uh, being a little similar to interest. It’s, it’s not in the way it’s reported, but it kind of feels that way, right? It’s like using what you have to make more of something. It’s, it kind of feels like, like in how interest would work in a way, but it’s usually that staking reward is typically not a capital asset.
Mark Eckerle:
A common question. You and I would say receive on a pretty frequent basis, right? Especially as we’re rolling into Q four, right around year end, where people are starting to scramble as they’re trying to figure out potential tax liabilities, tax consequences, and just doing some early planning, well, we say early planning, we try it’s early planning, and we’re not waiting till the last two weeks of December. But as it relates to digital asset industry, it’s pretty common when you have some investors, they invested in a very new token or new NFT, the asset itself appreciated significantly. So a user came into a lot of money very quickly, unexpectedly. What are some ways I or individuals can potentially reduce their tax burden, right? So if I, if there were certain tips or tricks you’d recommend to anyone, obviously being proactive and planning and having good records, I would say are 1, 2, 3. Yeah. Is there anything else that could help a user when they’re thinking about their tax liability end?
Ryan Babiak:
Yeah, I think to add, I think to add to one, two, and three, it’s, you know, having a, a tracking tool software, and there’s, like I said, there’s plenty of ’em out there. Always happy to give recommendations individually to people when they ask, depending on their situation. But using that to the best of its abilities, right? So that you can look at what you hold and hey, if I decide to sell, or if I decide to report my sales using, you know, highest in value first out, or FIFO or specific identification that may help move that, that answer, right? That result, you may be able to defer some gains potentially because you hold on to some of those assets a little bit longer if you’re using a different method. Another one could be, you know, um, using crypto for donations.
Ryan Babiak:
I’ll say this about charitable donations. It’s always been a very important and popular part of the tax code, especially for, I would think more high income earners, right? It’s the people that are able to itemize their tax deductions, which I’m not gonna get into all the details of that, but basically there’s a whole group of different kinds of deductions. If you add up everything you have under those categories, and it’s more than what the free deduction is that the government gives you, which is indexed every year. It’s usually, I think we’re at almost, gosh, $13,000, if you’re married, $12,000 and change half of that, if you’re single, those charity donations will be valuable because generally charity donations, the deduction is based on the value of what you’ve donated as opposed to the basis. Now there’s some, again, this isn’t the charity podcast.
Ryan Babiak:
I don’t even think I’m the right person to get into that detail, um, if we ever wanna talk about it. But there are rules around, you know, appraisals depending on what the value is of that crypto that you’ve donated, getting the right records together and so forth. Most of us are probably doing our donations the traditional way, which is we donate to some type of cause right when it’s, and it’s an organization, they, they give you a letter that says, okay, we recognize your donation for X amount or it’s, you know, you’re donating clothes. I can’t tell you how many times Mark, you have one kid, you know, I’ve got three. I’m sure one day, you know, we’ll, we’ll talk about this a little more, but I can’t tell you how many times I stuffed bags into the back of my car with clothes that the kids no longer fit into.
Ryan Babiak:
And take that down to one of those boxes, you know, outside of Lowe’s or Home Depot and drop that thing off. And then I go do my taxes. And there’s a guide that you can download with TurboTax and other software that basically says, Hey, is this shirt in good shape, bad shape, you know, is it a man shirt? It goes, and next thing you know, you’ve got some, some charity donations without having to do a lot of extra reporting. I think that’s where most people are taking advantage of it for crypto. I think it’s, I don’t see it as frequently, but that doesn’t mean it’s not a tool that’s available to people to help reduce their tax burden.
Mark Eckerle:
Yeah. And I, I think consulting, right? I think it’s there’s definitely benefits and ways to limit your tax liability through that means, but I think planning out ahead of time right before year end is, is key there. Absolutely. So turning the page slightly, unfortunately to probably a, a topic that many people have been scarred by, but I think it’s important to know as it has impacted the digital asset industry, and I wanna dive into it because people have probably some impact as a result of the FTX situation, BlockFi, Voyager, Celsius, some of these platforms that have declared bankruptcy, and now my assets are tied up, they’re frozen. I no longer have access to them. What can I do? Is there, I don’t wanna say the word benefit, but is there any tax benefit there around some of those assets that I frankly no longer have, don’t have title to?
Mark Eckerle:
Maybe I’ll get some back during the bankruptcy proceedings, who knows when that will happen? But what can you go into that quickly around what users would have if they have assets tied up, and particularly from your point of view as a tax professional, what records would you need to see to help get that onto a 1040? Right? You don’t want people just throwing around arbitrary figures. Sure. FTX went belly up, I lost a hundred thousand dollars. So I’m gonna take that. Like what would you need to see that would hold up almost under an IRS audit?
Mark Eckerle:
So just curious what the impact would there be?
Ryan Babiak:
I think of that, you know, there’s technical and then also kind of the practical solution to this too. But, so I would say it’s tough to claim in a worthless security if you’re not sure if you’re going to get that back, right? So if things are frozen or locked up, it’s tough to say it’s worthless because we’re still in the process of this all sorting out depending on the situation, of course. So it may not be worthless yet. If that’s the case, and you know, you’ve got paperwork that, that comes from the exchange that says, hey, none of your assets are recoverable, that’s, that may be good enough. On the other side, you know, you could claim an abandonment from that property where, hey, I believe this is without value. So I am relinquishing all rights to this asset in the future. So even if for some reason it did have some residual value, it’s no longer mine.
Ryan Babiak:
So I’ve discarded it, right? And there’s no future trades attached to it. So I’ve now cemented that loss, right? You know, when you’re reporting this on your return, again, not many exchanges will voluntarily issue 1099B’s because typically they don’t have to. So you’re gonna claim the loss on your return, it’s generally gonna be a capital loss. It’s generally gonna be subject to that $3,000 limitation. So they’re still planning that has to go into this stuff. But if you didn’t get a 1099B that clearly showed this, right? So here’s some of the things you can do. Keep a record, the date you acquired, whatever that crypto is, what it was, how much it cost you the unit, you know, the amount of units you acquired. I said the, you know, the cost basis, of course, the date that you dispose or considered it abandoned. And then the amount that you, you sold it for, which pre be zero, because you’re saying that it’s worthless right?
Mark Eckerle:
Now when I’m thinking of filling out my 1040, right? There’s a lot of different inputs, especially from a digital asset component. I believe it was two, three years ago. I forget when the IRS added that explicit question at the top of your 1040 at any time during the year did you receive, which receive can be multiple terminology, right? It was a reward income payment for services, etcetera. Or did you sell any digital assets? Now many people come to us like I, myself included, I’m a long-term holder, believe in the industry, I’m not really selling. So if I’m just purchasing during the year, do I need to say yes to this? And then do conversely, what are some of the, I guess, penalties from the IRS? If people were to say no, then they get discovered as actually, yes, you did have digital asset activity, which I’m sure many, many people do in this space, right? They don’t wanna let the IRS know I’m not in crypto. No, they don’t. How are they gonna find out? Well, the IRS will find out somewhere or another they typically do just a matter of time.
Ryan Babiak:
Yeah. Through John Doe summons and other ways to try to extract data from exchanges and get people’s information. They’ve, they’ve been able to do some of that. And they’ve also, you know, they went through a campaign where they were issuing letters to people they believe were involved in crypto. Some of them more harsh than others. Some of them were, hey, we think you might be others said, we have information that says, you know, you’ve been involved in cryptocurrency, please respond to this letter within 30 days. Right? So those are a little bit more serious. So there’s two parts to what you said there I wanna address. So first is, you know, the question at the top of that, of your 1040, right? Did you receive as a reward or payment for property, etcetera, or sell a digital asset?
Ryan Babiak:
You know, if you’re just having a year where you hold and haven’t done any type of transactions, I guess technically you don’t have to check that off, but if you’ve already done it in the past, what’s the harm in doing it for that year? Right? I don’t, there’s no, there’s, I personally, I’m not saying that is the, you know, the technically correct answer, but what is the harm and just, and just being above board and report and just checking that box. Even if you held, you know, crypto for the year and you know, you’re not somebody that is trying to skate around the rules. Now if you do skate around the rules and you check no, and it’s later determined that you did have crypto activity during the year that would’ve impacted your tax return, well, you run into a whole host of issues, right?
Ryan Babiak:
So, you know, underreporting penalties, willful neglect, fraud, there’s a lot of different issues that can come from just having an incorrect tax return and then owing tax to the IRS via audit or notice another issue could come about, you think you’re in good shape all this time. You know, hey, it’s been four years since I said no to this box, even though I knew it was yes, depending on the magnitude of the understatement of income that you have, the statute of limitations, which generally is three years from the later date of filing a tax return or when it’s due, could be replaced by six years. So as professionals, we have to say, you know, look, even though it may, people don’t wanna pay taxes, it’s certainly going to be a bigger issue if you do not. And from ours perspective as professionals, I mean, ethically, if I know that you’ve lied to me, I mean I don’t have to do the level of diligence, maybe let’s say as some other regulatory bodies might have to do, but I’m not gonna sign that tax return. So now you gotta go find somebody that’s gonna help you. And that might be difficult to do.
Mark Eckerle:
Yeah. And and to your earlier point about why say yes if you have done it in the past, right? I, I was thinking more so on the opposite side of that is if I said yes in the past, because I did have a sale, so I wanted to report that, and maybe this year just a long-term holder, does it raise a red flag if I say yes and I didn’t have any transactions and don’t report anything? And the IRS is like, these two stars don’t align here. You’re saying you had virtual currency transactions, but there’s nothing here.
Ryan Babiak:
Yeah, it could, it could. I’ve seen that kind of like the proving a negative, I guess. I don’t know how to put that. .
Ryan Babiak:
Yeah. I mean, I yeah. And what I meant was, if it’s consistently where you’ve had transactions, I, you know, I’m okay with being above board and continuing to check that box. It’s certainly better than the opposite scenario. But it is a good point. You’re right. If you’ve been doing the right thing all along and then you have a year where it doesn’t apply personally as a taxpayer, I’d feel more comfortable if I, you know, either filed my own returns that way or told or asked if I could do that with my tax preparer.
Mark Eckerle:
Yeah. Okay. And then I think to really put a button on today’s episode, one thing that I don’t know if we’ve seen much traction on, obviously it’s been a good year for, for taxes from an IRS point of view and getting some clarity. One thing we’re still waiting on is a lot of users, your, your, your common mainstream users of digital assets that are holding on a third party custodian on an exchange or a brokerage account. As we’re getting more and more larger institutions in the space like Fidelity, Charles Schwab’s entering, etcetera, and you can’t really take those assets off platform. Do they have any, are there any requirements from any exchanges right now to issue any 1099? Is that expected to come out in the future? Um, what should users expect? Because right record keeping is number one, we wanna make sure we’re keeping our own records. While if I’m stock trading, I just rely on whatever my brokerage tells me, right? I’s what I’m reporting on my 1099, I don’t have to do the manual work myself. Has that changed with crypto? Is that expected to change? What’s the future there?
Ryan Babiak:
As a tax professional, I’d love it to change because it would make our lives a little bit easier to be able to help people not only make sure we’re reporting things correctly, but also be able to understand, you know, like there’s records of this. You said your basis was this, but guess what? Now I know for sure it is that it also might put a little bit of a not a little bit. I I take that back. It will reduce the time that a investor or taxpayer has to spend managing all this themselves. So, you know, right now there are typically no requirements for exchanges to issue 1099Bs. I think the opposite happened in the past where some exchanges were trying to do that proactively and just did not have the right records to make it accurate. And then there was a whole situation with a few exchanges and people listening to this may have gotten them where they’re issuing 1099Ks, which just report the gross value of all transactions.
Ryan Babiak:
And that’s problematic because the IRS is gonna get that. And especially with the volatility over the last couple years, both up and down might say, wow, you had a million dollars in transactions. Like, how, how come I don’t see this in your tax return? Well, we both know that I could have spent a million and a half and had a half a million dollar loss. I could have spent a million dollars and had no gain or loss. So, you know, I’ve seen less and less of this happening. I think most exchanges have stopped doing any 1099 reporting. And you’ve even seen some that, even the tracking software’s a great example of it. Many of them will have the ability to pay for an add-on feature, and then they can give you a tax report, a gain loss report. They don’t put Schedule D or 8949 or 1099 into the language, or very, they seem to be very calculated and careful in doing that.
Ryan Babiak:
All that being said, we had the infrastructure bill come out. God, I can’t remember when it was the last three years feel like they blended together into one year for me and for most people, but I think it was in 2021, the infrastructure bill came out where there’s proposed regulations coming to lay out groundwork for exchanges, brokers to have to issue what will be called a 1099DA for digital assets. It was supposed to come out, I believe, next year, and now it looks to be pushed to the 2026 year, which would cover the 2025 tax reporting period. So there’s gotta be mountains and mountains of obstacles that have to be overcome to get this done correctly, which why pushing it a few years makes a lot of sense, but if it’s rolled out effectively, it could be very valuable and help. It’ll get the government, the proper reporting, but it’ll also help me and other tax professionals and investors get the information that they may just not know. So, you know, we’ll see where that goes. And that may be a topic for a future podcast, a presentation, a speaking engagement or something because it’ll be here before we know it.
Mark Eckerle:
Yeah. And I think we’ll be appreciative once it comes out, assuming it’s rolled out effectively. I think that’s the goal, right? And it, it continues as the industry is maturing, we’re moving in the right direction, which is all I can ask for.
Ryan Babiak:
I think so, yeah. I also think too, some of the volatility over the last couple years may just be all of the supply and demand, right? All of the options, coins, tokens out there. What’s valuable, what’s not. I place value in a bored ape, you don’t place value in a bored ape. It goes, it’s super expensive than the ones that, what was the news the other day? Justin Bieber’s bored ape or whatever’s got no value to it. It’s just, so I think there’s, in the future we’ll get to that spot where there’s less players involved and more legitimacy like the public views for just blockchain and crypto as a whole.
Mark Eckerle:
Awesome. Well, I think the, the key takeaway here, we covered a lot today for any users in the space, individuals, companies, what have you. Record keeping is key. I think keeping good records, keeping documentation over your wallet, your transactions, using a software to assist you in this is paramount and tax planning, tax strategy get on top of that sooner rather than later for everyone because there, there are certainly benefits that users can reap from that. So Ryan, I thank you for joining us on today’s episode, bringing your expertise and insight to a very complex and pretty constantly changing environment and industry. I know from your perspective, I’m sure it’s not easy to stay on top of all these changes. The industry as a whole is, is constantly evolving. You mentioned there’s a million tokens, right? It’s, it’s every day there’s something new popping up. So, um, it keeps our jobs interesting. That’s for sure. So I, I definitely appreciate you taking the time and sharing your insight.
Ryan Babiak:
Thanks for having me, mark. And I’m sure we’ll talk to each other many more times before even the weekends. <laugh>.
Mark Eckerle:
Awesome. Thank you.
Ryan Babiak:
Alright, Mark. Bye.
Mark Eckerle:
All views expressed in this podcast by Mark Eckerle or his guests are solely their opinions and do not reflect the opinion of Withum. This podcast is for informational purposes only.
