Dave Cain: Welcome to unsuitable on Rea Radio, the award winning financial services and business advisory podcast that challenges your old school business practices and their traditional business suit culture. Our guests are industry professionals and experts who will challenge you to think beyond the suit and tie while offering you meaningful, modern solutions to help enhance your company’s growth.
Dave: I’m your host, Dave Cain. Last week we were joined here in the Rea Radio studio by Dr. Anonymous, a cryptocurrency minor who is able to explain to us not only what cryptocurrency is, but how it’s mined and how it’s valued.
Dave: Well this week on the podcast we’re going to talk about the other side of cryptocurrency, more specifically how the IRS is looking at it and how it’s taxed, because as you know if there’s money to be made they’re taxes to be paid. Our guests today are Melane Howell, from Rea’s Dublin, Ohio office and Tim Dimitroff, from our Wooster, Ohio office. They’re both super accountants here at Rea and Associates. And we’ll take a break here while the crowd, security please.
Dave: Both Melane and Tim are accountants here at Rea and Associates and they have invested some serious time and energy researching cryptocurrency and the tax implications associated with this intangible asset. Today they will be talking about the guidance that currently exists, how it’s actually viewed by Uncle Sam, and what other reporting requirements are out there for cryptocurrency minors like our friend Dr. Anonymous. Welcome to unsuitable Melane and Tim.
Melane Howell: Hi there.
Tim Dimitroff: Afternoon.
Dave: Yeah, there you go. So we need to get a little bit of bookkeeping out of the way as we talk in this industry. We have two of you, somebody’s got to be the skipper, the captain of the ship today, and somebody’s got to be the first mate.
Melane:That would be Tim. He’s definitely the captain.
Dave: He’s the captain? I thought you were the one with the boat. Aren’t you the boat?
Melane:Oh, well yeah but…yes I do have a boat.
Dave: You forgot about the boat, huh? I have a question there about your boat.
Melane: Oh no, go ahead.
Dave:As the boat owner, are you in charge of the music?
Melane: Well, sometimes I get kicked off, as what happened to me earlier with you, remember? We were at that event and the music I was playing, wasn’t quite crowd pleasing, so Dave kindly kicked me off pretty quick.
Tim: Kicked you off?
Melane: Yeah, and took over with his playlist. But no, so yeah, most of the time I’m in charge of the music early on in the day, but as the party gets started and gets a little bit more active, others usually are playing more party music after.
Dave:There you go.
Melane: So, yeah.
Dave: And Tim I believe a congratulations is in order as you’re newly married.
Tim: I sure am.
Dave: Now same question, who’s the captain of that marriage? Have you learned that thus far?
Tim: Well, I’ve learned that quite a while ago and it’s not me.
Dave: It’s not you. Well keep that going. So last week on unsuitable on Rea Radio we had Dr. Anonymous talk to us about cryptomining and throughout that conversation, and folks I encourage you to go back and listen to that episode, but it almost sounded as we went through that, that was an illegal operation going on in the basement. Kind of like Breaking Bad, as they ran the lab in the basement, but there’s nothing illegal about cryptocurrency and mining, as far as you guys know?
Tim: No. As far as the IRS is concerned there’s nothing illegal about it.
Dave: Good. Okay, well now that we got that out of the way, we like to stay above the rules here on unsuitable. Melane, why don’t you take this next question, because you have your hand in the hair waving wildly, do you play Twister?
Melane: Only on the weekends on my boat.
Tim: With the music.
Melane:With the music.
Dave: Now folks we’ll get to cryptocurrency here shortly, hang on. Melane, what is cryptocurrency?
Melane: Cryptocurrency as we like to think of it, or the general population, is a digital or virtual currency. Meaning you can’t hold it like you can a dollar bill, but it does have value, and you can spend it online or with other people in a peer to peer group just like currency. However, the IRS views it very differently, they view it as property. And we can get into that a little bit later. Also, when we were talking about it being legal or illegal, it is perfectly legal, but the attraction of quite some time ago to this cryptocurrency is that it’s not regulated. Meaning it’s not federally insured, you can’t keep it in, it’s not stored like traditional currencies in a bank.
Dave: So you can lose it, quickly.
Melane: Oh, you can.
Dave:Risk is high.
Melane:Yes. Yes, the risk is very high if you do not keep it secured along with your keys or your pass codes to your currency.
Dave:Tim, whenever cryptocurrency is being discussed, the public generally hears about bitcoin as probably the most popular cryptocurrency but are there other currency items other than bitcoin?
Tim: Yeah, there’s bitcoin, there’s Ethereum, there’s lite coin and a couple other, by a couple other I mean about…
Dave: Hundreds.
Tim: Sixteen hundred.
Dave: Yeah, okay.
Tim:There’s new ones coming out every day, there’s regulations on ICO’s which are initial coin offering that are coming out, and it’s just developing at a very rapid pace.
Dave: Right. Right. I want to back up just a bit, you guys, both of you have taken this on as a very strong interest within the firm as far as the taxation and what it is, so we’ll dive into that shortly. But I wanted to get that out there on your resume, that the two of you are very unique in the accounting and tax industry that there’s not a lot of people doing this, and the two of you dove right in.
Melane: So I think I like to look into new, this is so new, right? We call it kind of like, I think Dr. Anonymous referred to it as the wild, wild west, right? So, because it is so new there is an interest. Tim, I don’t know. I really don’t know, you want to give me your thoughts on how it became an interest to you?
Tim: Well, it was brought to us by a client, and then I’ve been slowly following it through just being on the internet and following the news. It’s just a very interesting and…
Dave: Just became a big interest for you.
Tim: Yeah.
Dave: Just curiosity and you started studying it. I found out yesterday at lunch that Melane, you not only know this but you’re an investor in cryptocurrency.
Melane: I am. I took the plunge back when the market dropped quite a bit and bought a little bit. And then my kids were somewhat making fun of me, like oh what’s this about? What are you doing? So I said you know what? That’s fine. I’m going to invest a little bit for you too. And so now what’s happened is that they ask me about it. Like every week.
Dave:Is it up? Is it down?
Melane: Yeah, how’s our investments doing? It’s gaining interest even in my family which is wonderful. We’re talking about cryptocurrency but the other end of that spectrum is blockchain and they talk about how those two things together are really going to revolutionize certain industries as we know it, such as the audit industry, such as the title industry, such as the trust, forming trusts and wills. That’s obviously a separate subject but I think overall the takeaway here is that it’s here to stay.
Melane: And because it is so new, there’s not a lot out there on how to report things. The IRS has been somewhat silent, meaning they came out with something in 2014, there’s not a lot of guidance. However, this is just really barreling forward in our economy and in communities throughout the world, and that the IRS at some point is going to have to step up and give some more guidance on some of these areas where there’s holes. The technology is developing faster than the rules, right?
Dave: Well do you have your phone with you?
Melane: I do.
Dave: Yeah well I’m going to throw a question to Tim while you’ve got your phone with you.
Melane: Okay.
Dave: Why don’t you look up what bitcoin is trading at today and then we’ll get back to you in about a half hour okay?
Melane: Okay.
Dave: We’ll get back to you. Tim, this crypto, again you can’t touch it, you can’t see it. Where is actually crypto stored?
Tim: So cryptocurrencies are typically stored on different exchanges. There’s tens, hundreds of exchanges out there, like Coinbase, which Melane will show you on her phone. There’s Crackin, there’s Gemini, there’s foreign exchanges and domestic exchanges which require different sorts of reporting for the IRS to be happy.
Dave: Well we got to keep the IRS happy don’t we?
Tim: Of course.
Dave: We’re holding that out to the very end but there’s some very, very specific tax traps awaiting the cryptocurrency industry. Alright Melane, you got your phone up.
Melane: Alright my Coinbase is up.
Dave: Alright. Tell me what we’re trading at.
Melane: Alright, bitcoin, one bitcoin currently is $6,500, and oh, it was $67 about two seconds ago, it just changed. Which as you can see, the market changes within minutes. It’s $6,575.
Dave: Is it down or up for the day?
Melane: It’s actually up today by 5.13 percent.
Dave: And I think yesterday when you were finishing your third martini, it was down about 28 percent.
Melane: It was. This week overall it looks like it’s down by about 14 percent. And if you go out on the web and listen to what’s out there, they are predicting it even to drop further. However, because this is so new, you just never know.
Dave: What’s interesting is you can make a trade right there on your phone right now. You can buy and then by the end of the show here you can sell it.
Melane: Oh right. It links right to your bank account. You can sell or buy bitcoin with cash. You can buy and sell coin to coin. And depending on how it’s categorized, if there’s a gain, then the IRS wants a piece of that.
Dave: Right. Tim I want to throw this question back to you. We’re going to go through some terminology for the cryptocurrency. But there’s a term being tossed out there, hot wallet. What is a hot wallet? I want one of those I think. Anybody want a hot wallet?
Tim: Well first you remove your wallet from your pocket, and you stick it in the oven at about 450 degrees. And then, no, it’s exactly what Melane’s using, is you have your currency stored and it’s connected to an exchange via the internet. So that’s different from a cold storage, which would be disconnected from the internet. So it’d be like putting your coin on an external USB.
Dave: Okay.
Tim: Your desktop, or you could even write the hash out on your paper and that’s the same thing as what’s on the internet.
Dave: So Tim while you’re talking about the hot wallet and the cold storage, it sounds like the hot wallet could have a little bit more risk than the cold storage? Is that your question or Melane’s or you want to punt? Call a friend? Alexa, what’s a hot wallet?
Tim: So it is more vulnerable because it’s connected to the internet. And anything connected to the internet can be accessed from outside of your domain, being your computer.
Dave: Okay, so those are pretty good definitions thanks for that clarification. Let’s talk about some things that the IRS is doing or hasn’t done, and I think Tim and Melane you both shared with me that, was it Coinbase that, along with some other exchanges, recently been over the past couple of years subpoena by the IRS. Let’s talk about that. What happened with these subpoenas? The best you can tell. Melane?
Melane: So, obviously Coinbase contested it at first. They did lose. What happened was the IRS subpoenaed Coinbase to reveal the identities of anyone that had over the equivalent of $20,000 invested within their digital crypto wallet. Or, I think it was over two hundred trades.
Dave: Two hundred trades?
Melane: Meaning what they’re looking for is, they’re looking for the identity of those folks that have invested over a threshold of a certain amount of money, or had quite a bit of trading activity. Because when you get into trading activity, there may be some gains, and then there may be some losses, but overall, in today’s market there’s probably going to be some gains that weren’t reported. And so the message here is that they’re looking. If you’re a small investor like myself, they technically were not, they didn’t have to review my name, however, they were looking for some bigger players in the market.
Dave: Right. Let’s clarify that just for our audience. I believe it happened sometime in 2017, Coinbase was ordered or subpoenaed to turn over their records. And again they weren’t the only exchange that went that direction by the IRS. So the IRS knows that and that was I believe started in 2017. Tim, let’s talk about that for a second. If I’ve been holding crypto and trading crypto and now I know the IRS has potentially my name and my trades, what should I do?
Tim: With any sort of securities or property that you sell you need to show what your basis is and what your gain is and you need to report that to the IRS for your federal tax return.
Dave: So would I have to amend a return or whatever? You’re an auditor, why aren’t you answering tax questions by the way? But that’s okay, you can do that, you can go, but what do you guys think about that? I know you both maybe have different opinions on that but what should we do? Not file?
Melane: So currently, obviously we would suggest that you amend your return in order to recognize the gains and or losses as a result of your trading and or mining activity. And then there has been some speculation that in the future the IRS may come out with a voluntary disclosure program.
Dave: Amnesty?
Melane: Yeah, similar to what they did with the foreign reporting requirements quite some time ago. Again it’s just speculation but there’s a lot of it out there.
Dave: Wait let’s back this up for a minute. Crypto, I mean this is currency, when I trade my hundred dollar bill to you for two fifty dollar bills that’s an even exchange. I don’t have to report that. So crypto is currency is that correct?
Tim: We treat it like currency as far as if you want to purchase goods. But in the eyes of the IRS it is a property that has a basis and gains on it when sold. Gains and losses.
Dave: So just like I would sell a piece of equipment if I was in business. That’s an asset, or I sell a stock, that’s an asset, so every trade of crypto I have to report or track and report on my tax return?
Tim: Yes, so every time you make a trade, whether it be coin for coin or coin for currency, or coin for a good, like this bottle of water that I’m holding that you can definitely see.
Dave: Sure.
Tim: It’s a taxable event that you need to record your gains and losses on based on what you received.
Dave: Yeah. So let’s forget the specifics and the dirty details, it’s a taxable event. Any time like Melane has been on her phone three times making a trade and looking on her bitcoin, and so she has three transactions she has to report on her tax return. Is that the way I see it?
Melane: Oh I was going to say, yup, that’s correct, three trades that I have to report on my tax return depending on just because it’s short term, obviously I’ve held it for under a year. It would be subject to short term gains if I had any gains, which is really in all language it’s ordinary income rates.
Dave: So let me make sure we got this right. Exchanging currency for currency is a non taxable event, but crypto is not currency, it’s property. Intangible property and sales and exchanges can produce gains and losses that must be reported on your tax return.
Melane: You got it.
Dave: Do I have that right?
Melane: Yup, you got it.
Dave: So again, how do I value this crypto currency? Is it fair market value, what is it?
Melane: It is.
Dave: Is there a GASB?
Melane: No, no. So it’s fair market value on when you receive it. The next question that we always ask, okay so, what’s fair market value? So, the IRS says, you basically have to be consistent, meaning you have to use something that’s reliable and you have to use something that’s consistent. So, obviously a large exchange is Coinbase, and I probably would, if I consistently use that over the course of the year that probably would be considered a good resource to use as far as what is fair market value.
Dave: Am I going to get a 1099 or a broker statement with my crypto transactions?
Melane: Well, you know, there are some companies out there that provide that service. Off the top of my head I couldn’t name one but I know that there are companies out there doing that.
Dave: Some that do that.
Melane: Right, that summarize your transactions. Just because, I mean, we have clients that are dealing in that space and they have hundreds of thousands of transactions a year.
Dave: Yeah.
Melane: Tracking that obviously is somewhat cumbersome.
Dave: Now let’s be honest here I see you looking at your phone all the time in the last couple of weeks, I thought you were looking at Facebook. But actually you’re doing trades.
Melane: Something way more exciting.
Dave: Yeah, you’re a day trader. So how’s the IRS going to find out if you don’t report these transactions? Tim, any idea?
Tim: Originally, before the subpoena, they would not know about these transactions. But now with the subpoena they can find obviously.
Dave: They know where you’re at.
Tim: They know where you live now, yes.
Dave: Okay. Let’s dig into this a little bit deeper because here comes some pretty significant issues if you don’t know the rules, which ignorance is not a defense. But what happens if this crypto is stored in an exchange that is outside the USA?
Melane: We all know that there are foreign reporting requirements, meaning if you have investments or dollars that are held in an organization outside of the US, while you don’t necessarily pay tax on that money, the United States wants to know about that. And so, there’s some foreign reporting requirements that you go through and report it on your tax return. The IRS has not come out and specifically said if this intangible property as they’ve said it, qualifies for foreign reporting requirements. However, because the penalties are so steep for not reporting, the general consensus is, in order to remain conservative is to go ahead and report. The threshold currently is $10,000 in any one day throughout the year.
Dave: You have to file?
Melane: Yeah, and just because of the volatile market today.
Dave: Right.
Melane: It’s very likely that if you’ve been investing that the value of a wallet if you’re holding your wallet in an exchange outside of the US did reach that dollar amount. So it’s always good just to keep track, record keeping is key.
Dave: And the penalties for not reporting foreign assets on your tax return, they are significant.
Melane: Mm-hmm (affirmative). Absolutely.
Dave: We’re not talking about a couple bucks we’re talking a lot of bitcoin. By the way could I pay my…
Melane: I don’t know if they’ll let you pay in bitcoin.
Dave: Can I pay my taxes, can I use bitcoin to pay my taxes? No?
Melane: Not that I know of currently. I have no idea.
Dave: Can I buy a car?
Melane: You can. You know what? On Craigslist, you can buy a car.
Dave: You can buy a car?
Melane: Yes, yes.
Dave: Okay. Can I buy, if I needed like a big paisley sports jacket clothing, can I buy that?
Melane: That I don’t know. You know what, I just went out to Amazon and I looked a couple days ago and I have not seen where you can buy anything with crypto on Amazon. But I would assume it’s coming and it may be possible. I just don’t know enough.
Dave: Great, great. And the next few minutes we have left, let’s wind this down a little bit, unresolved issues. Tim, what’s out there as far as unresolved, as far as IRS and even from your perspective, Melane’s perspective as a practitioner and advisor. What are some unresolved issues that are on the horizon for us?
Tim: So one thing, and going forward this might not be a problem anymore, is life-kind exchanges, so we discussed that cryptocurrency is a property, and typically property if you exchange for the same type of property, you can do a life-kind of exchange and basically the exchange is tax free.
Dave: And that’s been eliminated?
Tim: It has not been eliminated, well it has been eliminated by the Tax Reforms and Jobs Act.
Dave: Okay. 2018.
Tim: 2018. But if you’re going to amend 2017 there’s no indication or guidance on whether or not you can do a life-kind exchange with cryptocurrency.
Dave: Great. Okay. And Melane I think you hit, I want to hit a key point before we sign off today is record keeping in this is a key, because you’ve got to track basis, you’ve got to track all that stuff just like you were selling stock or any other asset, so that’s a key. As we wind down, Melane, just a couple quick things of advice for our listeners.
Melane: So a big piece of advice is that if you’re investing or mining crypto, you really need a CPA that’s been keeping up with the rules and/or the other guidance that’s out there. The guidance from IRS, it’s coming. Meaning they cannot ignore the market today, and it is coming. I think the IRS is waiting on the SEC to make some decisions regarding crypto and it’s organization and I think some IRS guidance will follow.
Dave: Sure.
Melane: But a tax professional that’s versed in crypto, obviously taking with them about if you need to amend any of your returns, looking to them for guidance as far as if you’re not tracking it, maybe how to track it so they can give you some good advice there. Obviously we’re going to look at on the horizon for if the voluntary disclosure program is going to be put in place.
Dave: Sure. So we got to keep our eyes on the horizon on this and again I understand that you’ve been doing some public speaking on cryptocurrency and will be doing over the next couple of months, so if any of our listeners need a program or a speaker, get a hold of Melane Howell in Dublin, Ohio, Rea’s office and we’ll fix you up. And Tim will also join in that discussion. So there you go. Free speakers.
Melane: Thanks Dave. And the thing is by the time this thing airs, is that some of the rules may change, right?
Dave: And they may change.
Melane: Oh my gosh, this is moving so fast.
Dave: There goes another train. Thanks again for joining us on unsuitable today Melane and Tim. The topic of cryptocurrency continues to generate a lot of buzz. I hope we were able to clear up some of your questions, of course if you want to learn more give us a call or if you’re considering a future in cryptocurrency mining or investing email us at podcast@reacpa.com and we’ll be sure to put you in touch with Melane and Tim.
Dave: Don’t forget to subscribe to unsuitable on iTunes and check out this episode of the podcast on YouTube. If you like what you see give us a thumbs up, leave a comment and share it with your friends and colleagues on social media. Until next time, I’m Dave Cain encouraging you to loosen up your tie and think outside the box.
Disclaimer: The views expressed on unsuitable and Rea Radio are our own and do not necessarily the views of Rea and Associates. The podcast is for informational and educational purposes only and not is intended to replace any professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.