Crypto Tax AMA: Ask Our Cofounder Anything

We’ll have our cofounder Zac McClure on live stream for you to ask anything that's on your mind about crypto taxes. Get your questions answered before it's too late!

Friday Mar 6th, 2020 at 3pm EST

Topics in this webinar will include:

  • What you need to know before filing your crypto taxes for the 2019 tax year

  • How the new IRS guidance may affect your crypto tax situation

  • The best practices for doing your crypto taxes the right way

  • Discussion and in-depth answers to any questions asked

The webinar's live chat will be open for any and all crypto tax questions!

Webinar Transcript

Zac McClure: Hey everyone. Welcome to the TokenTax March 2020 AMA. Feel free to post your questions here in our YouTube flow or tweet them at us at TokenTax, or you can post them on our Facebook or on Intercom. I know we got quite a few questions via email as well which Alex here can ask if people don't have questions on our YouTube, so let's jump right in.

I can answer a couple of questions that have already come through, and then that'll probably spark some more questions and then I'd like to spend a little bit of time just running through what's new in 2019, and just some general crypto tax basics for those of you who are less versed or maybe haven't filed before.

First, let me jump right in with the question. Winnifred asked a couple of questions might be a little confusing at the top, but basically, he's asking, "Hey, I purchased crypto in 2018. Is it too late to report that in 2019?" And the answer to that question is a little bit complicated, "Basically Winnifred, it doesn't matter when you purchased crypto, especially if you bought it with dollars what matters is when you sell it. So when you sell it, it has to be reported. Whether you purchased it in 2014, '15, '16, you bought Bitcoin with dollars on Coinbase. When you report it to the IRS is when you sell it because that's when you either have a gain or a loss on the investment you made. 

You bought it in 2018, it's definitely not too late to report it first of all. Second of all, if you traded crypto to crypto or you sold crypto in 2018 and you didn't report it, well, you need to report it and it's not too late. You can go back and amend your returns from as long ago as you want. Some people are amending- I've seen 2009, '10, '11, '12, '13, '14, '15, '16, '17 it depends on why you're being audited and why you're amending, but no, it's definitely not too late." 

One important thing to understand though is if you had crypto transactions in 2017, 2018, 2019, you cannot report all of them just in 2019. A lot of people come and they say, "Well, why can't I just put all my transactions this year for all the past years?" And that's not how it works for the IRS because you have realized gains when you sell or trade those cryptocurrencies. So it might be helpful if I give a little context with a couple of slides.

So just really quickly here, one or two minutes. First of all, what's a taxable event? Just taking a step back and let me run through the four main ones. If you sell crypto for dollars, if you sell Bitcoin, Ethereum, anything for dollars or for euros or for Fiat, that is a taxable event. If you trade crypto to crypto, that's a taxable event.

People might get confused about that. The reason why I think of it as two traits, a sale, and a buy. You sold Bitcoin for Binance coin or whatever, that's a sell of Bitcoin and a buy of Binance coin. It's the first part of that that has to be reported, the sale of Bitcoin. 

Number three is if you've spent crypto for anything if you paid for coffee if you paid for tea if you paid for some Bitcoin socks, whatever with crypto, that is a taxable event and you have to report the gain and loss. Not the total amount spent, that's the proceeds then you have to subtract what you paid for that crypto and you report to the IRS and pay taxes on the gain. The difference between those two. 

And then the fourth thing is if you've paid someone in crypto, that's the same as a spend. It's like you spent crypto equivalent in dollars to get services from someone. You paid a contractor, or you paid someone to do some coding work for you, whatever. 

And then another thing that needs to be reported is if you mined crypto, or if you were paid in crypto if you ever received crypto, it's the same as getting paid in dollars. It's the same as getting paid in an income. You need to have software or figure it out on your own what the U.S dollar equivalent is, and that's one of the things we do at TokenTax and then you report that amount to the IRS as your income. 

Now, if you're mining crypto, if you're running a business and getting paid in crypto, you can also put your expenses in. It's like a mini business. You have all your income converted to dollars, you have your expenses converted to dollars, and then you have your gains and losses and that is what ultimately you end up owing taxes on. So hopefully that makes sense. Let me jump back into some questions here. All right. So Jay- Yeah, we're going to make this available after we finish, it'll be available on the website. 

We have a question from Dave in Canada and he wants to know if there's special instructions. The answer is those of you who are not in the U.S, the rules are different in every single country. If I'm speaking about something and I don't specify it's for Canada or the UK or Australia, And we have clients in maybe 40 or 50 countries now. Last year, it was 30. But basically, every country has their own rules. In the U.S, you can use specific identification. So some types of specific identification are FIFO, LIFO, HIFO, LOFO, TokenTax's Minimization algorithm is a variant of that, where basically we optimize among all accounting methods based on your longterm capital gain rates and your short term capital gain rates. 

In Canada, what's required is a different world of accounting called Average Cost. In other words, in the U.S, if you bought Bitcoin three times and you sold it once, you have to pick which of those Bitcoin purchases you're gonna use for the cost basis. 

In Canada, if you bought Bitcoin three times and sold it once, you would add up all the Canadian dollars you spent and all the Bitcoin you bought and you divide those two numbers. So I bought three Bitcoin, I spent 30,000 Canadian dollars, my average cost is 10,000 Canadian dollars per Bitcoin.

So if I go to sell half a Bitcoin, it's gonna be a cost basis of 5,000 Canadian dollars. It's basically just division. You add it all up and subtract it and that has major implications for tax-loss harvesting at the end of the year, just to let you know. A lot of people in Canada didn't understand at the end of the year tax loss harvesting means what you're holding in an unrealized loss, and we can show some tools or I can show you really quick the tax-loss harvesting dashboard we have at TokenTax. 

Basically here you look and see, I hold some Bitcoin at again, I also hold some Bitcoin at a loss up here. So let me just make sure I can only sell a little bit of Bitcoin at a loss. People in Canada who go to do that they accidentally at times have sold the crypto at a loss, but they had to sell Altcoins for Ethereum for example, and they bought Ethereum at really cheap prices at the end of 2018, we saw this a lot. What that did is bring down the average cost of all their other Ethereum sales throughout the year. So they thought they were gonna get big tax savings, then they actually destroyed earlier tax losses they had from selling Ethereum at a loss. 

In Canada, be very careful about your tax-loss harvesting trading, if possible, always sell for dollars. When you trade crypto to crypto, weird things happen to your gains and losses in Canada, way more so than in the U.S. But yeah, we're gonna focus mainly on U.S here. This is the U.S AMA, but if you have other Canadian questions ask away. 

Okay. So, people ask what's new in 2019, scorero. The big thing that changed on the 2019 tax return- let me show my screen here if possible. Okay. So the IRS added a question to the tax return. In fact, at the very top of the other income part of the tax return question zero, if you will. And it says, "At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?" There's a very comprehensive catchall that almost anybody who's on this AMA or has done anything in crypto at all, probably asked to check yes to. 

Even if you did all your trading back in 2017, '18, you haven't even bought anything in 2019, it's very possible you received an airdrop. You might not even know about it and that's a whole 'nother complication that we'll maybe get into with other questions.

But basically, you don't own any taxes for checking this box, but you don't wanna say anything incorrect on your tax return. So that's the big thing that's changed. You need to answer this question and then the IRS is gonna know, "Hey, who should we be double-clicking into to make sure they actually reported crypto, or if they didn't, that was proper." As in the only people who should check this and not report anything are the people that bought crypto in the past or bought crypto with dollars in 2019 and didn't sell anything. So just so you understand. Some people do check this and then have no gains and losses, no FATCA, nothing on their tax return related to crypto, although that is somewhat rare. 

Okay. So let's see. Question from James Ozborn. "When you stake or get interest, do we have to report when we get it or when we sell it?" This is an interesting question about staking. In general, the IRS did clarify that mining and also likely staking- When you receive crypto, you should report it as other income. The IRS clarified. 

Now there's a whole group of people in the industry, including the executives of staking companies, AON is a company that we know pretty well. There's a nonprofit Alliance called POSA and someone named Abe Sutherland, a professor down in Virginia wrote a great paper, basically arguing that staking should not be taxes other income, and for many reasons, he wrote a great paper. I won't get into all of them now, but basically, it has to do with the number of people participating, but the idea is that instead of reporting it as income when you receive it, you can report all of the gains when you sell it as if it had a zero-cost basis. 

Now there's basically a group of people in the industry trying to lobby that with the IRS. I'm sure some people will file their tax returns and then claim for a refund back based on these ideas that they're putting forward, but in general, to be safe and what the IRS has given guidance on is that when you receive crypto from staking or from baking rewards, you should report it as other income. And let me explain how that works. Let's say I'm staking Cosmos Adams, I get some throughout the year and it adds up to $200 over the course of the year. So I report that as other income. And then let's say in 2020, I sell that exact amount of Cosmos for $600, and I reported 200 in other income, now I have $400 in gains and in total, the amount I sold was 600. So all the math adds up. You owe taxes on the other income, and then you owe taxes on the capital gain whenever you sell it.

Now, what can happen though, is you pay taxes on that other income and what if the value goes down a lot? And that's where people get themselves into trouble. They get a lot of crypto, they have income, they don't sell the crypto and then they owe taxes on it. And this is another reason why the group is arguing that staking rewards should be taxed only when you sell it and actually get U.S dollars for it, as opposed to when you're getting these tokens, but not actually monetizing it in dollars and selling you're staking rewards into something that can actually be used to pay the taxes.

So it's a really compelling argument. I hope the IRS engages in the discussion and this is just one of the many areas that we wanna drive common sense, reform, and guidance in the crypto tax space. There's so many gray areas and so many things that need clarification and simplification, unfortunately. It's a fantastic puzzle and very fun, but I know very stressful for those of you out there so that's why we built the TokenTax platform to try to know all these rules for you. You just upload your data, we handle it all for you, you download your forms and you're good, but I know that a lot of people like to understand how the sausage is made and that's why we want to do this AMA type thing or answer anyone's question on Intercom, which is on the bottom right of our screen at 

All right. Let me look at the next one. So Suvin, "I've got crypto in Binance global and Binance U.S. Does TokenTax support both?" "Yes. We support both of those automatically via API, which is where you get the key and the secret for those of you who are tech-savvy or via CSV, which is like an Excel template, Comma-Separated Values  (CSV)  and then we also support hundreds of other exchanges. Basically every single exchange out there we support. And if it's a new exchange, we're trying to work with them so they use our template. So you'll just be supported automatically outside the box. But even if you've got a strange exchange that won't even give you your data, you had to track it yourself and Excel will help you get your data into the TokenTax system so you can calculate your gains and losses and report your taxable income or loss and pay your taxes and just be in compliance with the IRS. I know it's stressful when every single different exchange has different data format, Binance U.S, Binance global... there's so many different exchanges and it's really hard to track your cost basis from place to place, from wallet to wallet. So again, that's what the software's for."

Let's see, Suvin follow up. "Do you have to report if you transfer from one platform to another?" This is a great question, Suvin. Here's what happened to a lot of people in 2018. They bought crypto on Coinbase. They bought Bitcoin with dollars, let's say. So that is not a taxable event. Then they transfer that Bitcoin to Binance, that's not a taxable event. Then they traded on Binance, they sold Bitcoin for other coins that is a taxable event and you have to report the sale of Bitcoin for whatever the dollar amount was that you've got worth of the other coin. That's what's weird. You traded crypto to crypto, but you need to know the U.S dollar equivalent of what you did.

Now let me point something out though. Coinbase's tax reports and other tax platforms out there, they call these withdrawals taxable events. They basically say, "Hey, we don't know where that crypto went. We're gonna call it a sale and our customers can pay taxes to the IRS. If they're using our tax form, they have to figure it out for themselves and figure out that that was not a taxable event and back that out." But by default, it's gonna say it was a taxable event. So because of that, I'm sure hundreds of thousands of people probably overpaid their taxes a bit. The good thing is that eventually, it should all wash out when they overpay their taxes earlier. Hopefully, they figure it out in the future and can pay less in taxes so it all cancels out in the end. But yeah, this is exactly why we kind of created our software to even help people who are just on one exchange. Just on Coinbase, even those tax reports, like I said, maybe difficult to understand because of withdrawal from your wallet to another wallet you control is not a taxable event, but a lot of tax forms by default are calling it that way. So, TokenTax doesn't, but be very careful and double-check all the tax forms you're downloading or that you're submitting to the IRS. 

Alright. Next question, Scorero. "If you receive some tokens as income and then sold them into Bitcoin into ETH, but not USD. Do you count the USD equivalent at the time of receipt and at the time of sale?" "Yes, you do. So when you received whatever coin, you figure out the U.S dollar equivalent, that's income. Whatever the coins were you need to have the price or you need to use like a third party pricing database, like what we have and then you upload all your income to our system, we calculate all the income and dollars and give you the total. That all has to be reported. And then yes, no matter what you sell it for, whether it's Bitcoin, ETH, U.S dollars it's, all the same, it doesn't matter. Once you sell it, it's completely indifferent to what you sold it for, that is a taxable event. You sold it for some value in dollars. Whether you actually got dollars or you got Bitcoin, or you got a house or a car or shoes or coffee, it's totally irrelevant. So yes, you have to report that U.S dollar equivalent when you sold it. It's like each transaction where you traded a good for another good or property for another property like this, split it into two transactions in your mind. It will be much simpler to follow."

"Can tax credits be used to pay down tax liabilities?" It depends what you mean tax liabilities, but "Yes, tax loss carry forwards, cancel out, gains in the future. So if you lost... Let's say you have a $50,000 capital loss in 2019, that rolls forward into the future and shields capital gains in 2020 or 2021, whenever you sell it, they never expire. Solar tax credits it depends on exactly how it's done. They can offset tax liability dollar for dollar at times they can reduce income. There's different types of solar tax credits in different states for example. But in general, usually types of income and different types of losses, don't always cancel each other out. A really big example of this is that mining income can not be canceled out by capital losses or by casualty losses. So if you mine a bunch of crypto and then it gets stolen, you still owe taxes on the mining income, even though you don't even have anything. That's one of the biggest issues with 2018 tax law changes, casualty losses like that are not deductible for individuals only for businesses. And so that's why so many of our clients... that's a lot of people upgrade to VIP with us so that we can set up a business for them and S-Corp a C-Corp, whatever it is so that they can do their crypto activity, then it's like insurance. If they have a theft, if they get hacked, if they lose the passcode to their wallet, they can still offset that income they have." 

Okay. Eric asked, "How are margin trade gains and losses reported?" So margin gains and losses, regular trading gains it's all the same to the IRS. Now margin is extremely complicated because of how the data comes into the crypto tax platforms like us. The exchanges all have different formats, even for regular trades, let alone the margin data. Some exchanges only give daily P & L's. Most exchanges make it impossible with margin trades to link up the opening of a position with the closing. That's what like the CME does like the formal registered brokerages do a much better job of actually telling you, "Literally on that trade, on that position opening and closing that's linked, you made that much money." So it's way easier to figure out. 

With margin, it's just like you have all these positions open, you've closed some, you open more, you close some, here's your daily P & L's. And that's why we as crypto accountants have to take all that data, figure out economically what happened. So it's manual and that's why we have to charge more. So those of you have been on our site, you know, we have basic, premium, those are automated platforms. You just upload your own data, you get your tax forms, people that have margin many times it requires literally, me and someone on my team, one of our crypto tax accountants to take your data, figure out what happened, economically package that into the tax forms so you can report it to the IRS and accurately pay what you owe. We kind of have to bend backward to fit their data into what happened. And so in other words, margin trades, they do have to be reported. 

We get this question almost every day. "Does margin actually have to be reported to the IRS?" "Yes. Anything you do in crypto has to be reported to the IRS. Any income, any gains, whether it's margin or not, whether it's on BitMax, whether it's on an exchange that U.S people are welcome on or not. All of your gains, all of your income has to be reported. So if your question is along those lines, the answer will be yes, unfortunately."

Okay, Brendan again. "How do you report crypto that was a gift and how do you report crypto that is held in trust for you?" That's a really complicated question. "It depends on the type of trust. Depends on how it's done. Gift is also like a very complicated question. Are you talking about, you gave a gift, you received a gift, was it over the gift tax amount? Basically long story short there's an exemption for gift income. So if you give someone a gift up to $15,000, you don't have to report that on your tax return. If you give someone like a $50,000 gift, you actually have to report it on your tax return. There's gonna be income tax that's owed by the recipient. 

In general, that's not usually a very good way to give gifts. If parents give their kids a gift, there's an exemption. So you get like a lifetime exemption for inheritance. And you have to report those big gifts over 15,000 per person, per year, and it goes against that $11 million lifetime exemption or whatever the cap was raised to. All that to say, if you have a gift specific question, you should probably be talking to an accountant or come speak to us individually."

Now here's the most common situation. Someone bought crypto gave it to their family members, gave a little crypto under the 15,000, it's fine. But they gave them these gifts and then their family members sold it. Now they come to TokenTax, they plug in their data and it says, "Hey, I had an $8,000 gain." And they say, "Wait, that makes no sense. I sold 8,000 of Ethereum, but my sister paid 10,000 for it. And then she gave it to me. So why do I have an $8,000 gain? It should be a $2,000 loss. Like the system's broken what's going on." And the problem is we don't have your sister's purchase data. So when you receive a gift the most important thing is you get the purchase data, you get the transaction data that actually informs what was paid for those gifts. And again, gifts are a difficult rabbit hole we could get into it, but in general, the most difficult part of gifts is tracking what the...

Zac McClure: Okay, sorry. Okay, sorry about that. Anyway, the gifts were... a very long answer, but the long story short is you need to know the cost basis of the person who bought it when you sell it. So I was basically saying- Look, in my example, you have Alice. She bought Ethereum a thousand dollars worth of Ethereum and went up to 10,000. She gave it to Mark when it was worth 10,000 and then he sold it a couple months later for 8,000. So now Mark comes to us, he puts in his data and all that he has is a sale of 8,000 because he doesn't have that purchase so he needs to go get that from her. It's gonna look like he had an $8,000 gain. That's not right, but what actually is also commonly messed up is that you can't use the value when someone gave it to you, you have to use their original purchase cause the cost basis goes with the gifts. Okay? So the cost basis of that crypto is actually a thousand. People mess this up all the time. They're like, "No, I'm gonna use the value when I got the crypto cause that's what I know." And no, you can't do that unless you received it as inheritance. 

Otherwise, look what happens. Mark says, "Oh, my cost basis is 10,000 that's what the crypto is worth when I got it. Now I have a $2,000 loss. Now I'm gonna get some money back from the IRS." Meanwhile, Alice bought something for a thousand and now you're getting money back from the IRS. You're getting 800 back plus you got $8,000 worth when you sold the crypto. That's why that doesn't work. You have to use the original purchase amount for gifts.

Like I said, gifts are very complicated. Cause you give them, you receive them. If you have a gift specific question, you're probably gonna be like in a VIP level category and that's probably the most commonly messed up thing I've seen even amongst CPAs, lawyers, attorneys, so come talk to us if you have a complicated situation where a family member gave you a gift or whatever or go see a tax professional or your own attorney.

Okay. Next one, from James. "Just to clarify, should crypto airdrop be claimed less than $5? I did not perform any buys, sells, or trades. Do I need to inform the IRS or leave it blank?" So, James, this is the most frustrating question based on the guidance the IRS gave in October 2019. Take a step back. The IRS gave guidance in 2014, a little bit. They said, "Hey, crypto is not currency, it's property. There's no $200 De minimis exclusion like with dollars and euros and whatever it's property in 2014.

You definitely have to report that. Technically by the rule of the law with the IRS, even if your airdrop was worth 5 cents or 10 cents, you have to report it as income, pay taxes on it, then when you sell it, you could have a loss equal to whatever you paid minus what you sold it for. Cause almost inevitably, these airdrops were almost worthless. 

Now you have the question of materiality, James and I agree. So do you- you made no transactions in 2019. Now, do you have to check yes on that box? By the letter of the law prop. Yeah, you probably do. And so again, this is like one of the things that the accounting societies, the professional associations have reached out to the IRS and said, "Hey, I get what you're trying to say everybody should pay taxes on any income they have. We totally agree. But it's kind of overkill on this airdrop and fork thing because what about people like James, who did nothing got $5 of income. He makes 80K a year. Is it even material?" Technically you do have to report it. You could argue, "Hey, it's not material. It's not a large enough percentage of my income or a lot of people just don't even know about these airdrops at all. And so they accidentally didn't report them and so what happens with that?" But I agree. This is one of the most frustrating questions facing us, facing accounting professionals, because people have spent hundreds of hours digging through their data, trying to find these airdrops only to do it all and figure out, "All right, that added up to $8 and how let me report that." And now I have to check this box and now I have to have a more complicated tax return and pay an accountant extra and all this stuff. 

Okay. Sorry about the audio issues. So James asked, "Does TokenTax calculator if I buy a gift card on Bitrefill with crypto, from my exchange wallet and sell on Binance, for instance." "Yeah. No matter what you do with crypto, we calculate what that was. So if you pay for a gift card with crypto, that's a sale for a U.S dollar equivalent. You bought an $80 gift card that's like proceeds of $80. Whatever you paid for that crypto, let's say you paid $50 for it, that's your cost basis, your gains $30. We calculate your taxes on that." 

Brendan asked the Canadian question again. I went over this a little bit in the beginning. Every country has totally different rules. The U.S specific identification is allowed. So all the different accounting methods. The subset of specific identification means you can identify which Bitcoin or Ethereum purchase you're using to calculate the cost basis.

So FIFO, LIFO, TokenTaxs Minimization, HIFO, LOFO, minimization is where we take your long-term capital gain rate. We say, "James lives in California, San Francisco, his longterm capital gain rate is 28%, short term capital gain rates 54%, we'll look at his tax lots and help him figure out every time he made a trade, which tax lot is he gonna..." And he can do this in real-time as he's trading and say, "I'm gonna use this tax lot." And he's gonna use the ones that minimize taxes is maybe he prefers an $800 longterm gain over a $500 short term capital gain. Everyone has a slightly different mix of what they should do with their tax lots. And this is what every hedge fund or private wealth manager... If you have people who are rich enough to have someone at Morgan Stanley, Merrill Lynch managing their money, this is the type of thing they do with their stocks. You go to sell Google shares and they pick the ones that are gonna sell.

In Canada, you use something called average cost. You add up all the purchases over the period and all the dollars you spent, divide those two that gives you your average cost that you have to use for the cost basis every time you sell, regardless of when you sold it during the year, you're gonna have the same exact average cost basis. 

People in Canada often get very confused about that. They're like, "How can I have a big loss on something I bought and sold five minutes later or a big gain?" And it's like, "Well, because you have to use the average cost and you paid a lot of money for that." Like when you bought earlier in the year, I get it. I get what you're saying in the U.S, you could have a very small gain because you bought it and sold it right away. And you'll pick that tax lot in Canada. No, it's a much more complicated question. The biggest thing about Canada. That I would warn people and UK is when you're selling stuff at the end of the year for tax-loss harvesting and you're doing crypto to crypto trades, there's major unintended consequences. You think you're selling all coins at a big loss, but you're selling all coins for Ethereum, sometimes buying Ethereum at cheap prices, which is actually causing you to have bigger gains on all your earlier Ethereum trades retroactively. So you see this retroactive interference in their tax liability and so people get really confused about that. Long story short, talk to an accounting professional, or only trade crypto to Fiat if you're doing tax-loss harvesting in Canada or the UK. 

All right, next question. "If I didn't keep records in 2018, I reported an estimate in... How should I supplement missing cost basis from previous years?" Brendan, this isn't a simple question, but basically long story short, you better have a very good justification for your estimate. You can't just say, "Eh, the average price of Bitcoin was this, the average price of Ethereum was this." Cause that probably is not gonna fly. The IRS is gonna look at it and be like, "Okay, well, you said you used $12,000 per Bitcoin for this." And you're like, "Well, I bought it in 2017. I looked at a chart and I figured I bought... I saw the price was 12,000..." They're gonna be like, "No." The lowest price in 2017 was $950 or $1000, you're gonna use that price. And so this is like what we do. Like I said, we have these VIP packages, gold pack. This is one of the things we- It requires an accountant's time, but we create synthetic trays to replace missing cost basis data or missing data. And so this is what you would wanna do for yourself as well.

Let's say you traded on Cryptopia, you traded Bitcoin for Litecoin in March 2018. Well, what you do is you go and you look at the prices of Bitcoin and Litecoin and you figure out what's the minimum exchange so that... 

Here's another example. Like we have clients who show up, "Oh, I bought these 30 Bitcoin on Mt. Gox. I have some records, but I don't know exactly when." We'll say, "In 2013, the minimum price that you could have paid on Mt. Gox was $310." So we'll just use that as the price for your cost basis. So at least you get something for it. It's better than zero, but if the IRS audits you, or if they inevitably send you another letter saying, "Explain how you got this cost basis?" All we have to do is reply and say, "Hey, we can search the blockchain, we can dig deeper, we can spend a lot of your time and our time digging into this, but you're only gonna owe our client more money cause we've already been as conservative as possible." Follow those IRS maximums of conservatism in situations like this.

Estimates are okay, but be strategic or you got to understand what you're doing. So if you're not an accounting professional, I suggest talk to a CPA, talk to us, talk to an attorney, make sure you're doing it in a conservative way. Otherwise, you could get yourself into a situation that you don't really understand in an unintended way. 

Alright. So Nelem Naru. "What should I do if I did some bot trading, hundreds of transactions with amounts totally less than 2000 on an exchange that closed down and I have no records?" So yeah, it's a tough situation. You are supposed to report every transaction you made, so let's start there.

Now, you don't have any of the data. Next best thing figure out the economic implications of what happened. You transferred crypto worth 2000 and then you transferred something out, you sold it for 2,500. You don't have time, you can't figure out all the transactions. Maybe you had a longterm, you don't know, but what you can safely do is say, "Hey, I took something I paid $2,000 for, I got $2,500 for it. I'm gonna report that as again, pay taxes on that and go from there. I'm gonna pay short term capital gains taxes because those rates are higher to be conservative and go from there." And then if the IRS somehow gets that data from the exchange and says, "Hey, your data doesn't match up with what we expected. This is what we've seen. We've seen several of these letters this week."

People who got 1099s from Coinbase. A 1099-K that said, "Hey, you had six and a half million in volume." Now the client had like $30,000 in income, whatever, and they just use Coinbase. They tried to do it on their own, they reported 6.6 million, whatever it's less than 1% off, but it's 50,000, 80,000 higher or lower than what Coinbase reported. Sorry. So now the IRS just sent them a bill, "Hey, Coinbase told us you had 80,000 more in volume than you reported. Please pay us the taxes on that, plus interest, plus penalties, plus a non-filing fee, whatever. And so please send us $40,000 right now or explain why not." And then you have to kind of prove why not. And that's where not having your data can really hurt you and why these 1099-Ks are gonna be causing so many problems for people. Like I said, we've just seen these letters start to come in for people who got 1099-Ks in 2017 and now they need to hire us to figure out forensically, why did what I reported not match with what Coinbase reported? We didn't do their 2017 returns so now it's like two moving pieces. We got to take the raw data, align it with Coinbase, align it with what [inaudible] they somehow report on what their accountant reported, who may or may not have known about crypto or whatever. So it's getting into a complicated situation. Save all your data best practices every quarter, at least every year, right? At the end of the year, log into your accounts, get all your data, connect APIs in the TokenTax. 

We rescued so many people's data from Poloniex, Quadriga, Cryptopia. When these exchanges go down, we know right away, we pull all the APIs we have, get all the data, all the latest data to the minute and our customers who had API keys in there were saved this process of having to spend tons of time creating synthetic trades or hiring an accountant to do it or whatever and running the risk that the IRS says no and all that. 

Next question. Scorero, "What happens if a client didn't file a 1099 on their side for tokens paid, only for the dollar payment portion?" "Yeah, they should have filed a 1099 that included all of your compensation in dollars. So if you've got 40,000 from them in tokens and 60,000 in dollars, they're 1099 should have said 100,000."

Now, if they mess that up, whatever that's on them. You report the income you got, like the most important thing here is not that the records of whatever, whoever, right? Is that you pay the tax on what you owe. Don't be like, "Oh, bank error in my favor. I only have to report what they put on the 1099." "No." Don't play those games. Report the income you got that's what's going to match your assets. Someday if the IRS was looking at your bank account, looking at your crypto holdings and you had 40,000 of crypto, you sold and they're like, "Where'd you get that? Where'd you buy it from?" You're like, "Oh, I got it from..." And you never reported the income.

So the answer is, if your employer makes a mistake on your 1099, that's your responsibility to fix it, unfortunately. That's just the world that we live in. And so be very careful about that. Tell your employer, they should amend their 1099. They may not do it, they may have been like a random company that disappeared, whatever it is, they may not have even given you a 1099. You need to put your taxes and your income incorrectly regardless. 

Next one. "Crypto to Fiat equals crypto to Stablecoin." "Yeah. Crypto to anything is the same, okay? No matter what you sold it for, you have to calculate the proceeds in dollars in Fiat, okay? If you're in another country in Canadian dollars in Australian dollars. If you traded it for a Stablecoin, it's easier because you could just assume it's the same value. So a lot of people- I trade a Bitcoin for 1400 of U.S dollar tether. How do I know what to put? Should I put like 1400? Should I put like... I know it changed, it went from like 99cents all the way to 95 cents on the dollar, whatever it doesn't. You can assume for simplicity. It's the same as the dollar. You can put U.S dollar tether is always worth a dollar. If that's easier for your own records if you're trying to do this in Excel yourself. That's why we have TokenTax Software. You upload your data and we actually know, "Oh, at that time it was 99 cents on the dollar or whatever it is, but in general, a proxy for a Stablecoin as a proxy for dollars is fine usually if you're trying to do this on your own. 

Okay. Next question. So Chris, "How does it work that your software can accurately track questions on closed downs exchanges and still come out with gain and loss report?" Great question, Chris. That's what we do. We pull data from exchanges that may or may not exist. There are hundreds of exchanges that disappeared from out there. We gather the bits and pieces of the data, we reconcile it, we look at all the Fiat you put in, we look at the Fiat you took out, we look at your coin balances now, we make sure that the math makes sense with all your realized gains, realized losses. 

It's like an algebra equation with 20 different inputs in other words. And so if there's anything missing, the more you're missing, the harder it is to identify the value of each individual missing piece, but we could always identify what the aggregate missing is because if we have enough of the variables, including all your balances, and the U.S dollars you've taken out and the U.S dollars you put in, we can figure anything out if that makes sense. But yeah, so many people in the crypto community are in this space and how do we do it? Because somebody is gotta do it. And they come to us, they have difficult situations and that's why we started this company because it's fun for us. We love messing around in Excel. We love solving these problems and we love when someone comes to us and says, "Hey, I tried to do some whatever software. I did it myself in Excel and it says, I owe 300,000, but I know actually I lost money in crypto, help me figure it out." We basically fill in those gaps and it's called forensic analysis, the same way an auditor looks at a company's books and finds gaps, finds discrepancies, and fills in what the story is, even though they don't have every single page in the book if that makes sense.

All right. Next question. "How do you figure out your cost basis if you sold something from, for example, Ripple into Bitcoin, but the Ripple was purchased years ago across multiple transactions. Can you use specific lots?" "Yes. This is exactly what our software does. This is why we designed it. People had the opportunity to use specific tax lots and I was doing this in 2017 and said, "Bitcoin went from a thousand and nineteen thousand this year. People are trading crypto to crypto. They bought crypto all over the place. They don't even realize how big the capital gains that they're incurring are and everyone's accountant is just using like FIFO and Excel cause it's easier. You line up all your transactions and you just go right down the list of date. But you don't have to do that, stock, secure... you can pick your tax lots. And so I was doing that. I met Alex, my co-founder, and he was building the original TokenTax platform and we just had this idea. Let's teach people how to track tax lots. 

My background was personal finance, teaching finance accounting before this. And so that's like a big foundation of TokenTax, but yeah, it could be really complicated. Could have Ripple from all over the place and you need to figure out exactly how much you paid for each piece, and you need to know when you bought it so you can get longterm capital gain treatment and if you know all that, it can save you thousands, hundreds of thousands, millions of dollars, depending on the scale. And so that's exactly what the software does. And you can imagine it's very hard to do in Excel. I built the original minimization algorithm in Excel, but the engineers have improved it so much and now it can handle tens of thousands, hundreds of thousands of trades. This is what hedge funds do as well. And so even if the exchange is closed, if you have your data, we can do it. And if you're missing your data, we can make those assumptions like I told you, but in a conservative way. We can't just use whatever price we want and that's why you kind of need a professional to do this. 

A lot of people come to us and they say, "Well, whatever, I'm only missing data on one exchange. Why is it so expensive to have you recreate the data?" And the answer is, "We're sending this to the IRS and we're saying that we did it in a conservative as possible way. We know that this is the maximum amount of loss you could have had or whatever. And we're proving it to them based on the prices, the minimum price is like, it's quite a bit of time and quite a bit of number of moving variables to get this right." I hope that makes sense, but you can see how much of a difference that makes if you're missing data and we can fill in that gap, even at a conservative 80% of what it actually was just because we know the minimums, it pays for itself. Our services pay for themselves many times over. And so that's our big thing is just, we want to create value for all of our customers. And we track internally the number of people, our customers who pay us, who we actually create more value for them in terms of finding missing cost basis, filling in gaps, teaching them about different accounting methods, tracking their tax lots, tax-loss harvesting savings and it's something like 98 or 97% of our customers make more in value than they actually pay us. Like they're literally worth more money because they signed up for us and paid us than if they had just tried to do it on their own or whatever. 

Okay. Next question, Canada again. "If those are the rules in Canada, I'm kind of freaked out. I have no idea what my cost basis is or my average costs." Yeah. That's crypto taxes in a nutshell, and I hear you and I get why you're so stressed and that's why we have TokenTax. Start with the basic plan, if you need more help, if you need an accountant, if you're missing data, you can always upgrade. But basically, the system does it for you. I know it seems really scary, but if you have your data and you don't have thousands of trades, it will do it all for you. We're here on Intercom to help you through the process, spend a couple hundred dollars, you'll be sorted out, but I hear you. It's really complicated, it's way more complicated than you'd imagine that's just accounting in a nutshell that's why it's actually quite fun to accounting nerds like me. That's why some people love accounting, but I hear you and we wanna let people use this as a tool, as a weapon to help them as opposed to like a lightsaber floating around them they're not even aware of, they're just walking into like, "Oh wow. I traded crypto to crypto in 2017." I didn't even realize I bought an Altcoin that did amazing, it actually doubled, but because Ethereum also doubled and I traded, I actually destroyed a ton of value because the coin I bought needed to do twice as well as if I just held Ethereum and didn't have to pay the taxes on the short term capital gain I had on selling that Ethereum.

So people just do not understand a lot of times the implications from attacks and from a friction and transaction cost perspective of the trading they're doing. We're trying to teach people to do this things with their eyes open, so it's kind of like an ounce of prevention saves a pound of cure. That's why we're teaching people about personal finance, tax-loss harvesting, retirement accounts, shout out to IHS Capital, a great company out there helping people invest their crypto and retirement accounts, and charging only 1% fee. I love what you guys are doing if everyone's from there, out here today.

All right. Next question. Ripple Smith. "I received a 1099-B from Robinhood for my sale of Bitcoin. None of the other exchanges have sent me a 1099-B not even Coinbase. Should I expect this form from the other exchanges?" Great question, we expected those 1099-Bs years ago. I don't know. The answer is the IRS hasn't made them send it, I think it's interesting. In a perfect world, I would love for the TokenTax Software to be dropped into every exchange in the world, generate 1099-Bs link your transactions from exchange to exchange. We have that technology essentially what we're making our 1099 Bs for all of our customers. And so maybe we can put ourselves out of business by being in every exchange.

But yeah. Great question. Shout out to Robinhood for doing that. It is a little bit complicated though, when they're the only one because then their data has to be firewalled and it causes additional complications just because it's like Ancient Rome, every municipality, every town had different widths for the roads.

So like when a road from whatever town met another town, it didn't make sense. That's why we actually have measurements in general. That's why they had miles. A lot of people wonder why are there like a metric system and a miles and foot system and it's because every part of the world had to invent their own measurement system. And that's kinda what's happening with crypto exchanges when they all have different data, and then some are doing a 1099-Bs some are using the metric system, right now, just one as you pointed out, but yeah.

Let's see if we have a few more questions. I know we're running a little short on time, but yeah, the answer is- Ripple Smith, hopefully, more in the future, but none that I know of right now. Okay. So, yeah, and just talking about UK and Canada a little bit more, like I said, let me show you the... can you show my screen please, Alex? 

Again, this is a tax-loss harvesting tool that we have. So for Canadian viewers who were asking, "Hey, I'm scared about what you're talking about tax-loss starving." In the U.S you could come here and say, "I've got 8,000 in gains, before the end of the year, let me take a look at what I'm holding. I've got 2,500 in crypto. I'm holding out a loss. Right now I could sell 700 BCAP .31 Binance .58 Bitcoin. 

Now the important thing here is a lot of portfolio trackers, they'll just show you, "Hey, you've got 8.1 Bitcoin at a total unrealized gain of 27,000. It doesn't split it out between losses and gains." And so in other words, in the U.S you go, you sell your crypto and you have your loss that offsets taxes, [inaudible] rules may apply in Canada, it's a moving function that could retroactively mess up your gains on other trades because the average cost functionality, but that's if you trade crypto to crypto. All that to say, if you're gonna do tax-loss harvesting, and you have to sell losing positions, like all coins for Ethereum or for Bitcoin or something like that, definitely make sure you understand what you're doing. We actually have a mock trade tool that you can use to do that and you can basically say, "Plan a trade tadada. I'm in Canada, and you can put in the trade it will tell you actually what your taxable gain or loss will be before you make the trade. So hopefully that's helpful. 

Next question. Tax implications. Hey Josh. "Tax implications on Stablecoin to Stablecoin arbitrage on Dexs/DeFi products?" The answer is, "There are a lot of different Dex and DeFi products." It's a complicated situation. Like I kind of said with the margin data, in a perfect world, we'd be able to link exactly what position was opened and what position was closed, and the economic change would be a gain or a loss. And the amount of time that position would open would determine whether it's long term or short term, or if it was like a future or forward it has specialist 60, 40 tax rules, things like that. Because of the data coming in, doesn't always allow us to link that. A lot of times we have to aggregate pools of data and get the aggregate economic implications of what happened and report to get. 

The most important thing for our clients is they report all the income or all the loss they have to the IRS and they pay the taxes or they claim the loss based on that. That's more important than just like, "Oh, I'm just gonna throw in a bunch of random data, I don't know if the results are right, but this is what the exchange told me. So I'm just gonna send it in to the IRS." No, we're gonna send in all the data, but it's gonna be shown to the IRS in a way that your gains and losses add up to what they actually were. Because we can see what your crypto is worth after you did something and that's why we use these periods like a calendar year. It has other drawbacks for example, in the U.S the calendar, your drawback is- in 2017, crypto shot up. People made a lot of money. I've seen people made a million dollars. They started with 5,000 on a credit card in January 2017, by end of 2017, they had a million dollars of random Altcoins. They bought Ethereum, it shot up, they bought Bitcoin, it shot up, they traded, traded, traded, they traded into Altcoins December 2017. So they've literally locked in almost a million dollars in capital gains, all short term capital gains. 

Then in 2018, market started dropping and they had no idea about taxes, not even on their radar. By March, by April, they realized, "Oh God, I have to pay taxes." They come to TokenTax, their crypto is worth 200,000 at this point. They've lost 80%. Now they're still up. They went from 5,000 to 200,000 in like 15 months, which is crazy, but now they actually owe the IRS 500,000 in taxes for the short term capital gains. Their crypto is only worth 200,000. So literally they could sell everything, they'd still owe 300,000 of the IRS. They're potentially insolvent. Some people had to take savings, some people at other assets, they were the most devastated. They had to like liquidate other assets to pay the taxes or to try to pay the taxes and then they might be triggering more capital gains, they're selling their stock portfolios that have run up for 10 years to try to pay the capital gains. So it's a devastating situation. 

Unfortunately, the loss is the 800,000 in losses don't carry back. So now the clients, let's say they sell all the crypto for 200K, they've got an $800,000 capital loss because of the calendar year and this is how we batch all the decks and different deFi product stuff too, is like capturing the economic impact. But the $800,000 loss just rolls forward being used up at $3,000 per year to offset ordinary income and it also offsets any capital gains until it's burned up. So it could be rolling forward for hundreds of years, hopefully, we all live that long. 

We've been working with compound front with the maker die, guys. We love the DeFi community, the DeFi projects, it's a big point of emphasis at TokenTax to try to make tools that make it as easy as possible to use our tools, personal favorite internally as unit swap, love those guys and the product they're creating and basically, the long story short is every one of them had kind of have different data models. If we could become kind of a clearinghouse for these types of transactions, we could actually have a standardized data format that makes it really easy and also like an open dialogue with the IRS. So it's like, "Hey, you use TokenTax to do your taxes." I know you have a really complicated situation, but we trust them. They're a trusted partner. We've audited dozens of their clients and they all look good. That's basically the model that we're striving for, what we're aiming for, and why we're trying to open dialogues with all the DeFi products out there and kind of just help you. An ounce of prevention saves a pound of cure for all of us. It's way easier for us to deal with data that makes sense than trying to retroactively figure out the data that you've been creating that wasn't ever meant for tax purposes. 

Alright, so we have time for like couple more questions. James Ozborn. "I understand the FIFO and LIFO on your system. What does minimization mean and do?" So FIFO for those of you that don't know "first-in, first-out." So I bought Bitcoin 30 times, I sell it once, you line up all your purchases and you just go right down the list, using the cost basis of what you paid for the first one and then the second one. LIFO is the opposite. You line up all the dates, you sell some, you use the most recent buy till it's used up. 

Minimization what we do, we figure out your longterm capital gain rate, short term capital gains. You tell us, "I live in Tennessee, I'm married, I make 200K other than crypto." We figure out exactly what your tax rates are, what your break-even is between longterm short term capital gains, and we help you optimize your tax liability and figure out your trading. 

And again, hedge funds. A lot of our largest most important clients, even people with $100, $200 in crypto, they use these tools in real-time, put in a mock trade, figure out what your tax liability is gonna be with FIFO, LIFO minimization. 

I've seen YouTube webinars, people talking about who don't really know what they're kind of making a mistake and saying, "Oh yeah, we have like a tax-loss harvesting tool, but we only have FIFO and LIFO."  Well, that's not how it works. Minimization, what that means is you're picking your specific tax lots, we're helping you do it in the most strategic way. That's how I invest my own stock, my own crypto. I always sell the one that minimizes tax, unless I have a specific situation where it's like, "Oh, I have a capital loss carryforward from last year. Well, let me sell the ones that maximize my gain because I wanna use up my longterm capital loss to shield a short term capital gain."

Some people have special situations, but we actually have that functionality where you can sort of take and customize exactly which tax lots you want picked. And again, that doesn't really matter for most people, but if you do have a situation like that, or you wanna understand it, or you run a hedge fund, it can be valuable that's like what we call the Holy Grail of Tax Savings. You have a longterm capital loss, as in you made a poor investment, you held it for a long time... Longterm capital losses are worse than short term capital losses in general, but you could take a long term capital loss and actually use it to shield a short term capital gain. So something you'd be paying 50% tax on you could actually use a longterm capital loss to block it. The way it works is longterm capital losses in longterm capital gains are added up and combined. Short term capital losses in short term capital gains are added up and then the net amounts, if there are different signs are then aggregated. And so that's basically probably more detailed than you need about how the system works, but yet it's- We're the only ones, this minimization, it's a proprietary, really proud of it and we love teaching people, "Hey, be strategic about your investments. This will empower you, not just in crypto, but with your stock portfolios, with that." We wanna teach people how to build wealth so they can free up their time to do whatever it is they wanna do. That's like one of my biggest passions. I spent years, New York City, public schools, even teaching math, making it about personal finance, about the stock market game, about entrepreneurship. We just love empowering people with this knowledge and hopefully, that makes sense. Apologies for the long explanation. 

Let's see, James Ozborn, "Is it good or bad to take a loan on crypto?" It's an interesting question. You can actually create a lot of value for yourself. Like I said, about that situation, the guy who made a million, lost almost all of it, didn't have enough to pay his taxes, didn't wanna sell other assets because he was gonna trigger gains. But a person who is about to sell appreciated property and have a big capital gain just to pay a tax bill, those are the people that could really use a loan product. Where you just put your crypto in as collateral for a loan, take out a loan that's not a taxable event. Use those loan proceeds to pay your crypto taxes, then you don't trigger a capital gain, but in general, have a good reason for taking a loan, make sure that it's net present value positive. Make sure your interest rate that you're paying on the loan doesn't exceed the return on what you're doing because otherwise, you're just destroying value for yourself. But if you're gonna pay 30% taxes on selling something that's appreciated and instead you could pay 6% on a loan, that's a great win. And so if you have a situation like that, these are like the types of consulting projects we do. We try to do with everyone, but we have time to do it with our VIP clients. You get like two 30 minute sessions where we will do the research beforehand and walk you through the strategy. Like, "Hey, you've got a $200,000 tax bill, here's how we recommend you. You can get a payment plan, you could do a crypto loan with these assets that are collateralized that you hold that a huge gain."

A lot of people who are early into Ethereum, Ethereum developers, maker developers, they have a big opportunity to use our assets, collateralize them, take a loan, pay their tax bills and not trigger massive capital gains. If you're sitting on big capital gains, that alone products could be a huge win for you.

Okay. Running out of time but, "What about hacks? Is stolen crypto right off. What about Fiat that was stolen that you got it back? Can you write off the time spent on sorting it out on theft and identity theft?" If you got your money stolen and got it back, don't get greedy. Be happy that you got it back. Don't try to write off your time. 

Maybe if your business is you're a forensic auditor that traces these things, but no. Don't be greedy. But if you have your crypto stolen, long story short, casualty losses are not deductible for individuals anymore. Like if you get your truck stolen back in 2017, you could actually deduct that against your taxes as long as it was over a certain amount of your income. 

Now that's not deductible unless it's related to a federally mandated natural disaster. This is one of the changes in 2018, they cut the tax rate on corporations, but the laws require that you have to get rid of other parts of other tax savings to balance that. So that's why they got rid of like property tax, Maxing out in California, New York, they capped the salt deductions, they got rid of casualty losses. So long story short, your stolen crypto might not be deductible it depends. There's different ways you could do it. It could be, schedule like property held for investment could be worthless to get... it depends what happened with the cryptocurrency or what was stolen. Long story short talk to a tax professional, talk to an accountant, talk to an attorney. There are options, but it's possible you may not get something for it. It depends what the intent of the property is. And this is why people create businesses for their crypto activity, for their mining. Cause then it's like insurance, you know. Okay. I made 80,000 in capital gains trading, then it all got stolen. Well, that can be an expense in my business. So I at least have zero income. If you're just an individual in a worst-case scenario, you could still owe taxes on the 80,000 in gains. All that you made got stolen and you still owe taxes. So it can be a crazy situation.

All right, let me cut it off. And... So if you guys have any other questions, feel free to come to Bottom right of the screen we have Intercom, you can ask us whatever, we're here. We seriously love teaching everyone, these things.

Thank you so much for your time and thank you everyone for attending. See you soon and good luck with tax season five weeks left. Let's get it done.