In the latest episode of Money 3.0, we got a chance to catch up with David Kemmerer, a co-founder and CEO of CryptoTrader.tax.
The episode covers recent crypto tax issues, new IRS tax guidance, and how to best prepare for the upcoming tax season.
You can listen to the episode, or find a full transcript of the show below.
Before jumping in, remember, the information presented in this podcast is provided for informational purposes only and should not be construed or used as an offer to sell or a solicitation of an offer to buy any of the financial assets discussed. Any opinions expressed herein are subject to change. Neither Abra nor any of the participants in this podcast make any representation as to the suitability or appropriateness of these financial assets for individual investors. And with that out of way, on to the show.
Daniel McGlynn: So David, thank you so much and welcome to the Abra Money 3.0 show.
David Kemmerer: Yeah, no, it’s awesome to be here. Thanks for having me on, Daniel.
DM: So the goal of the show is really to talk about emerging trends and technologies so we can kind of all figure out what the future of finance and money is going to look like. And I think part of that conversation really, when you start talking about investing and buying and selling and using cryptocurrencies, part of that conversation really has to be about taxes, how to manage taxes and kind of like what’s going on in the tax side of crypto. And so I’m really excited to have you on today just to kind of unpack that a little bit, especially in light of the IRS issuing some new crypto tax guidance.
DK: I mean, for us, it’s been one of the busiest two weeks since we started the company two-and-a-half years ago, just with the IRS kind of putting another stamp on how crypto should be handled from a tax perspective. So there’s a lot to go through and, yeah, no, happy to be here. It’ll be good to chat things through.
DM: So I think a good starting point, especially for people just kind of coming to crypto and just starting with their crypto investments, is that maybe we can start with how crypto is considered in terms of tax. Like what does that look like?
DK: Yeah, good question. And it’s kind of an oxymoron for a lot of people who get involved in crypto. A lot of the attraction is it’s this form of money, and when we think of transacting with US dollar or whatever fiat currency we’re traditionally using, that type of thing isn’t taxable. I’m not being taxed on spending my US dollars on something.
DK: But the reality is that cryptocurrency is a lot of things. It can be used as this new digital money that can be used around the world, but it’s also very much being used as this speculative asset that people are investing in looking for a return. And so as we get and unpack how this is classified, the best way to look at it is, so in 2014 the IRS officially announced that cryptocurrencies like Bitcoin, they’re treated as a form of property. And so other forms of property would be stocks, bonds, real estate. And so from an investing perspective, capital gains and capital losses rules apply to cryptocurrency just like they apply to trading stocks.
DK: And so kind of unpacking that a little bit more, I think it would just be helpful at a high level just to run through an example. And so I think throughout this podcast we’ll kind of go back and forth between stocks and crypto just because from a tax perspective they are treated very similarly. So I think it would just be helpful for everyone listening.
DK: So let’s say I sign up with Charles Schwab or E-Trade or any of these online stock brokerages, and I invest $100 into Apple stock because I think, “Hey, Apple’s a good company. I like what they’re doing. I think that investment will appreciate.” So I put $100 in Apple stock, maybe it buys me, I don’t know, two shares, let’s say, of Apple stock. And so over the course of two, three, four months, years, whatever it may be, let’s say that investment appreciates now to $200. I put in 100, now it’s valued at $200, those same two shares of Apple stock. And if I sell that, I have a $100 capital gain on that investment.
DK: From a tax perspective, capital gains, that’s taxable income, and so I would report that $100 gain from the sale of my Apple stock onto my tax return. And depending on what income tax bracket I fall under, let’s say I make $80,000 or whatever it might be during the year, I would pay that depending on if it was a short term or a long term gain.
DK: So that’s kind of how it works in stocks. It’s kind of dependent on how long you held that, but the gain itself is taxable, and you have to file that. And so the same applies to cryptocurrency. So Bitcoin, Ethereum, everything is classified as a form of property. So if I invest $100 into Bitcoin through Coinbase, and two months later, I sell that for $500, that $400 gain is a capital gain. It needs to be reported on your tax return, and you pay a certain percentage of tax on the gain depending on your income tax bracket. So at a high level, that’s how it works.
DM: And then the other wrinkle in that is how long you’re holding the crypto, right? So that’s kind of a factor. As a general rule of thumb, if it’s less than a year, that’s a short term gain, and so it’s generally taxed at the same rate as say your income. And then if it’s longer than a year, it’s considered a long term gain, so it’s taxed at a lower rate. Is that accurate?
DK: Exactly, exactly. And it works the exact same with stocks. Same thing if you’re holding less than a year, then you’re going to be taxed at your marginal income tax bracket. If you’re holding longer than a year, that rate will be reduced. And it’s still dependent on what income tax bracket you fall under, but it will be significantly less than your marginal tax bracket. So yeah, you hit it on the head. That’s kind of how it works.
DM: Great. So that’s generally how crypto is taxed, but there’s also an added wrinkle, I guess, that makes crypto a little bit more complicated in terms of taxing. And that comes down to, I guess, this problem, we could call it the problem of documentation because using our examples of crypto like stocks, with stocks, there’s a little bit clearer documentation usually because you’re kind of going through one broker, and you have these tried and true forms that the IRS accepts. So could you just talk about the sort of crypto tax problem?
DK: Yeah, absolutely. So this is where things get a little bit hairier in the world of cryptocurrency just because cryptocurrency itself operates very differently than traditional investments like stocks. Quick, before jumping in, I do think we should quick just run through taxable events just because that is important for cryptocurrency.
DK: So at a high level, a taxable event is just an event that triggers that capital gain or a capital loss. So in our stock example, it was the moment I sold my Apple stock. That triggers what’s called a taxable event. And that’s when you realize your capital gain. And it’s that point, you recognize the gain and then you report it and you owe tax on it. But for example, if I just bought and held my Apple stock or my Bitcoin, that’s not taxable until I incur some type of taxable event and realize the actual gain or loss in the investment.
DK: And so I think it’s helpful to unpack it because in the world of cryptocurrency, these taxable events apply to different scenarios, and I think it would be helpful just to quickly run through them. So cashing out like from Bitcoin to fiat like US dollars, so selling my Bitcoin, that’s a taxable event. I’ve realized my gain or loss in the asset. If I invested $100 in Bitcoin and ended up selling for $50, well, I have realized my $50 loss, and that goes on my tax return.
DK: Other forms of taxable events and this is where the controversy starts, is that exchanging one cryptocurrency for another if I trade Bitcoin into Ethereum, that triggers a taxable event. And so again, if I invested $100 into Bitcoin, and I exchanged it for X amount of Ethereum, well, my gain or loss in Bitcoin is whatever it was trading for on the date, time that I exchanged it for the Ethereum. So again, that is a taxable event.
DK: And then outside of that, like mining cryptocurrencies, that triggers a taxable event is a form of income. And then the other big one is if I use my Bitcoin to buy goods or services, that also is a taxable event, and so it realizes my gain or loss in my Bitcoin or other cryptocurrencies. Might be good to run through a quick example there, so let’s say again, I bought $100 of Bitcoin on Coinbase, and a few months go by and now that Bitcoin is worth $150, and I use that to, let’s say, go buy a television that was $150 it costed. So that realizes the gain in my Bitcoin investment, and you’d recognize that $50 gain on your taxes.
DK: So again, you can quickly see how it does kind of get a little hairy, just because cryptocurrency is used for so many different things outside of pure speculation. And then other things that aren’t taxable events. So just buying and holding crypto, if you’re a hodler, it’s not taxable. You only incur gain or loss once you trigger a taxable event. And so, yeah, at a high level, that’s how those types of taxable events work.
DM: Cool. And one thing I thought that was really interesting that I had just learned is that if you donate your cryptocurrency, it’s not a taxable event. Is that true?
DK: Yeah, yeah. And the IRS outlines that in their updated FAQ and guidance. And so that’s a great approach for some folks who maybe have some very large gains in crypto, and they don’t necessarily want to realize that. And they instead want to donate it to a charitable organization. You’re dead on, that’s not taxable. So it’s a great option for giving back and spreading crypto to other places in the world.
DK: Donate your Bitcoin.
DM: Yeah. And another interesting thing just to clear up the taxable versus nontaxable event is this idea that you can move your crypto from different exchanges or use different wallets, and as long as you are just moving that crypto but not exchanging it for another cryptocurrency or another fiat, then that’s also a nontaxable event. Is that right?
DK: Yes. And shame on me for leaving that out because we get asked that all the time. You’re exactly right. Sending crypto from one wallet to another, that does not trigger a taxable event. You haven’t sold, you haven’t exchanged it. It’s just at a different place essentially. And so you’re exactly right. That’s not taxable. Me pulling my Bitcoin off my Coinbase wallet or my finance wallet into some cold storage, not a taxable event. You’re still just holding the asset.
DM: Awesome. Okay, so now that we’re kind of clear on this sort of how crypto is taxed like another form of property, and we’re sort of clear on these different events, taxable events and nontaxable events, maybe just like let’s walk through like a high level of the IRS guidance on crypto. Because that’s been in the news lately, people are talking about it. But maybe we could just paint a picture starting several years ago, cryptocurrency trading wasn’t even really on the IRS’s radar at all because it was this new technology and people were buying and selling on, at the time, only a couple of exchanges existed. And then maybe you could just walk us through a sort of like a brief history of tax guidance, I guess.
DK: Yeah, yeah, no you’re exactly right. So the Bitcoin white paper launches, 2008, and then slowly gain momentum and this whole movement comes, and Ethereum launches, I believe it’s 2014, and all this crazy stuff starts happening. And that’s really when governments, the IRS included, started taking notice. And so they released their first official guidance on virtual currency, cryptocurrencies like Bitcoin in 2014. That’s available online. You can search that, and read it. So that was really the first time they’d put their flag in the ground. And really that revenue ruling that they put out then provides the fundamentals for everything. And it’s very clear that they’re treating as property kind of like what we’ve hit on, taxable capital gains, losses apply.
DK: But as the world evolves, and so much more happens every day, like you and I see in this space, hard forks, things splitting off, assets being used for different things, the ICO craze of 2017, all these different things bring about new nuances that maybe don’t apply that well with that initial guidance that the IRS put out in 2014. So a lot of people in the cryptocurrency tax world, which again sounds kind of like a strange world, but there’s a lot of people there, had a lot of questions on specifics around hard forks, around what cost basis method you can use. Without diving too technical, but just on very specific use cases and how it should be applied to the revenue ruling that was released in 2014.
DK: And so five years later now, we’ve seen the IRS release a much more in-depth FAQ piece of content that’s 43 questions along. That’s much more for like your average layman. You can go read this FAQ and get a better understanding of how the IRS is classifying all this stuff. And then they released another revenue ruling. And in this they did specify things around how hard forks should be treated from a tax perspective, what cost basis methods are appropriate when you’re doing capital gains losses across numbers of transactions, as well as a few other things.
DK: And so now we’re here in the fall of 2019, and the IRS is still saying, “Hey, we’re going to keep watching this and continue releasing guidance.” And so yeah, I mean, it’s good to keep watching it. My company’s very closely aligned and keeping a very close eye obviously on all of this stuff. But that’s kind of the history and what we’ve seen, which also kind of ties back to the cryptocurrency tax problem, which is a term we’ve dubbed here. And it’s this fundamental issue with cryptocurrency as you could relate it to like stocks.
DK: The reason it’s such a problem is that user expectations do not match reality in this space. And so I love comparing to stock, again, it’s treated very similarly from a tax perspective. But if I go and invest in stocks through, again, a Charles Schwab, an E-Trade, a Scottrade, or whatever brokerage I’m doing, at the end of the year, everyone who uses these services, anyone who is investing in this type of stuff, is very accustomed to receiving their tax forms at the end of the year that they can then go give to their accountant, plug into their Turbo Tax account. And these forms detail everything that’s needed for capital gains and capital losses calculations.
DK: And so that’s kind of like the user expectation in this space is like, oh, yeah, the platform I use will just send me my tax forms at the end of the year, and then I’ll be good. And so the fundamental issue and what we call the cryptocurrency tax problem is that exchanges and platforms fundamentally do not have the ability to provide their users with tax reports that detail everything for capital gains and losses reported.
DK: So it’s like this massive problem in this space that no one really has a handle on, but it’s because I can transfer Bitcoin from an outside wallet into Coinbase, exchange it for some Ethereum, send that Ethereum over to Binance to trade on these different assets that aren’t offered, send it over to Abra. And so it’s because of the transferrable nature that the exchanges do not have the ability to give these types of forms. Again, comparing it to stocks, I can’t go to Charles Schwab and buy a piece of Apple stock and then send it to some other place to capture some arbitrage opportunity. Everything happens in Charles Schwab, so they can give these tax reports.
DK: And so this fundamental tax problem that exists for the exchanges and these platforms that when their users come to them at the end of the year and are like, “Hey, like I need my tax documents.” And the exchanges are like, “Well, we can’t really do that because everything’s fragmented across all these different places. Sorry.” So there’s this problem.
DK: And so the solution naturally, and you can see maybe where I’m going, is to aggregate everything into one place so then you can generate your necessary forms. And so that’s the problem that we saw at CryptoTrader.tax. We’ve built integrations with all of the major platforms, and we can suck in all of your trade data so that you can with the click of a button generate these forms that you need. And so that’s kind of the problem that really underlies the space.
DM: Previously it was kind of like individual investors and traders would basically need to be tracking all of their trades, maybe managing their own spreadsheets, or tracking profit and loss. But now with products like CryptoTrader.tax, you can actually just sort of automate some of that. And I think the biggest functionality is doing it across platforms too, which you’re not doing all your own calculations.
DK: Yeah, exactly. You can do this by hand, 100% you can, but it just gets very challenging when you’re across these multiple different platforms and when other things are quoted in other cryptocurrencies, but for tax purposes, it needs to be in US dollars. So all of these challenges, the platform that we’ve spent years developing solve. We suck in your trades. You don’t need to know the US dollar value of what your Bitcoin to Ethereum trade was on July 15th, 2016. We have the database to go and pull all that in, assign cost basis and fair market value to everything. So it takes away any of that spreadsheet gymnastics from the user and just presents them with an easier solution.
DM: And so back to the guidance, I think, without diving into the weeds of it, there was sort of this mixed reaction, I guess, from the crypto community about the IRS new guidance. Some objection to the way that maybe forks are handled and other issues with the guidance. But I think your perspective, and I think it’s an interesting one, is that this is actually like a net positive for the crypto space. That the IRS is writing and updating this guidance, and it allows people some clarity, some individual investors clarity, also companies that are building services in this space. So what’s your take on that?
DK: Yeah. You hit it on the head, I mean, there’s obviously two ways to look at it. One, yes, is the IRS by any means perfect? No. No matter what, you’re going to have angry people and things aren’t going to be ideal when we look at hard forks treatment from a tax perspective and all these nuanced things. But I think it’s important to step back and be like, “Hey, at the end of the day, the tax-collecting agency of the United States of America is essentially validating this industry by passing this guidance and making it a point of emphasis for them to tackle,” whether you agree with some of the specifics of how they approach it. I know my team has a lot of questions for them. But it does provide validity to the space.
DK: And if you look at crypto and its future, if we in the crypto community want it to get real mainstream traction and mainstream use cases, there has to be clarity around the rules, the regulatory environment surrounding it, compliance. And so this is a step forward in that direction. The IRS is coming out and saying… Now, they have a tough job because they have to go out and educate themselves, and I promise you a lot of graduates of MIT, Stanford, they’re not going to work at the IRS.
DK: So they have this challenge to pass guidance that’s going to be beneficial for people in this space. You could argue, obviously, whether they’ve done a good job of that or not. But just the fact that they are providing clarity, they are trying to address it, is good for crypto as a whole. If we want to get mainstream traction and mainstream use cases and applications, common day investors aren’t going to get involved if the rules aren’t clear. And so that’s kind of my opinion. It can be taken two ways, but I think it’s good. It’s going to bring more adoption.
DM: Right, and yeah, it generally just kind of raises awareness like as you’re starting to see when you’re looking at your tax forms, and it’s like have you invested in real estate or stocks or cryptocurrencies? It kind of just, I guess, at that very high level, raises awareness of, okay, this is an investible asset. This is a real asset class.
DK: Yeah. And actually a fun fact there, so after this ruling just came out last week, or two weeks ago now, the day after the IRS sent out a new draft of form 1040, which is just your standard income tax form that every tax filer fills out, and on schedule one of that form, the very first question now is have you ever bought, sold, transacted or obtained any financial interest in any virtual currency? That form will be filled out by more than 150 million taxpayers in the United States.
DK: And so just by virtue of that, that’s mainstream adoption. 150 million taxpayers have to answer that question, yes or no. So again, it can leave a bad taste in your mouth that the government’s coming into what started as this anti-state movement. But if you’re on the flip-side and you just want to see use cases and the asset class further verified and accepted by mainstream people, this is a huge step forward.
DM: Mass adoption paved by better IRS forms, I guess.
DK: Yeah, maybe not, but awareness.
DM: Right, right, right. Cool. Yeah, and one thing I wanted to make sure we kind of address, since we are sort of coming to the tail end of 2019 and tax season is on the near horizon, are there like specific tips or tactics or tricks, I guess, that you see from your vantage point of talking through people that are investing in cryptocurrencies and working with cryptocurrencies, what are some kind of takeaways that we can give our listeners here?
DK: Yeah, no, it’s a great question. Every spring we talk to literally thousands and thousands of folks investing in this to help them kind of automate their tax reporting, so our customer support team sees a lot of the common mistakes. And so if we can just highlight a few of these, I think it’d be helpful for people listening in, just give them kind of some tips about, hey, this will just make reporting easier.
DK: And so number one is just keeping good records. So that’s of the exchanges you use. That’s important to have records of just which exchanges I’m using. You’d be surprised. So many people are literally using just dozens and dozens of different exchanges, and very quickly they forget which ones they’ve used. It becomes hard for them to track down transaction history data from that exchange. And if you’re missing that, it makes reporting tougher. And for software like ours, if you can’t import your transaction history from some exchanges because you just don’t remember all the ones that you’ve used, that’s tough. So number one, I’d say keep a good record of all the exchanges that you’re using. It’s fine if you’re using a bunch of them. That’s no problem, just keep a record of them.
DK: Two, you want to be keeping a record of any time you’re receiving a form of income. So if you’re mining cryptocurrency, if you’re in a staking pool and you’re receiving staking rewards, if you received cryptocurrency as a gift from a friend, keep records of that. Because again, from a tax reporting’s perspective, if you’re missing that data, you’re going to run into just not like compliance issues or whatnot, but just more like things aren’t accounting and all adding up. And so just have a record of that stuff as well. A lot of the platforms out there, the NiceHashes of the world that help with mining, staking, whatever it may be, they’ll oftentimes give you a transaction history file. So that’s great, keep that for your records.
DK: What else? Those are two of the big ones. And then, yeah, just records exchanges, make sure the exchange you use does have an option to give you a transaction history file. The vast majority of them have this feature. They allow you just to export a CSV file, or if you’re using CryptoTrader.tax, we can integrate with them and you can just suck in your trades essentially.
DK: But those are the big tips. Keep good records, kind of know, have a sense of what you’re doing and make sure you’re not going to forget what you’re doing, and then keep a record of any form of income, mining, staking, getting something as a gift, or whatever it may be. Those are the big ones.
DM: And then in some senses, it’s important to keep these records. A lot of tax situations kind of close every year. But for longterm holders of cryptocurrency, it’s just kind of important to think about that, I guess. If it is a longterm play for you, then you kind of need longterm records. So I guess just keeping tabs on all that stuff over time.
DK: Yeah, that’s another good one. A lot of folks come to us, and they are like, “Oh, I just want to do my 2018 taxes.” And it’s like, “That’s fine, but we actually need all of your data from 2014, 2015, 2016, whenever you first started because that’s when you first established cost basis.” So that’s a great point. Make sure you have records from all years kind of from the dawn of time that you got into crypto. It’s just good to keep records. You don’t have to have the most amazing spreadsheet that does all this stuff, but just keep a record. Alternately platforms like CryptoTrader.tax can automate the entire thing, so just have records.
DM: So David, thank you very much for joining us today on the Abra Money 3.0 show. I appreciate your time, and I appreciate your input and guidance on looking at these tax issues. I know for a lot of people coming to the crypto space, the crypto tax issue can be a little bit stressful and sometimes overwhelming. But hopefully, by using different tools out there like a CryptoTrader.tax and other tools out there, we can all realize it doesn’t actually need to be stressful, and it definitely is something that should not keep people from checking out cryptocurrencies, experimenting, investing, and starting to use them more regularly. So thanks again for your time. I think this was great, and I really appreciate it.
DK: Yeah, no thanks for having me on. It was awesome. I hope we made this a little bit more digestible for the average user. Like you said, it doesn’t have to be this black cloud of scariness. It can be straightforward. That’s our goal is to help people so they can stay in crypto and help spread adoption that way. So thanks for having us on.
DM: Yeah, yeah. And one thing I did want to mention that I didn’t mention yet in the show is that you do have a great crypto tax guide on your website. And so I found that really useful. I’m sure some of our listeners will. So if you are out there looking for more tax guidance about crypto, then that guide is a great place to start. And we’ll put a link to that in the show notes.
DK: Yeah, if you’re looking for that, it’s just the 2019 Guide to Cryptocurrency Taxes. And yeah, we’ve spent a lot of time trying to educate and just provide digestible content for our users. And if anyone just has any questions at all, my team would be more than happy to help out, so feel free to reach out to us just at CryptoTrader.tax and happy to help.
DM: Great. Well, thanks again, and hopefully we can talk again soon.
DK: Great. Thank you, Daniel.
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