You need to assume that if you are buying or engaging in some way in the world of digital assets all crypto sales and exchanges, conversions, trades, payments, donations, receipts, and income are all reportable on your tax return.
Ric Edelman: Welcome back to The Truth About Your Future. Well, you just finished your taxes, didn't you? Or at least attempted to. Maybe you filed for an extension, which a lot of people increasingly do, and you're finding taxes more complicated, more confusing than ever. Well, guess what? Now that you're investing in crypto, it's about to get even more complicated, as you may have already begun to discover. Crypto is brand new, bitcoin, ethereum, NFTs, Bitcoin Mining, Staking, Lending - there are a lot of people engaging in a lot of different ways in the world of crypto, and you probably haven't been aware of all the tax implications associated with doing this. In fact, the taxation of crypto isn't yet being addressed in a comprehensive way. A lot of it is still new. Now some of the tax rules are known. I mean, you handle crypto in terms of capital gains and gifting, step up in basis, it's all the same as it is for stocks and other assets, but you're not going to get a 1099 most likely so you can't rely on a brokerage firm to do a lot of the tax record keeping for you. So you need to assume that if you are buying or engaging in some way in the world of digital assets, you need to assume that all crypto sales and exchanges, conversions, trades, payments, donations, receipts and income, they are all reportable on your tax return. There are some other aspects that are downright confusing. Is crypto a security? Well, some crypto is, but some crypto isn't. And what about the wash-sale rule? That applies to crypto securities but not to crypto that isn't a security.
Ric Edelman: When you acquire a digital asset, you might have a taxable event at that moment. You might have a taxable event later on. You might have a taxable event now and later, or you might even never have a taxable event. It all depends on whether you are mining your crypto, staking it, minting it, buying it or giving it, or whether you get it from an airdrop or a fork. The result is you might owe ordinary income taxes, you might owe capital gains taxes, you might even owe both. Let me give you an example. Let's say you buy a pair of shoes for $100 and you use a credit card that rewards you with not cash back, but Bitcoin back. This is an increasingly popular type of credit card. You use the credit card to buy your shoes and it gives you 2% in Bitcoin, $2. Well, the IRS says you spent $98 on the shoes, $2 on the Bitcoin. That gives you a $2 cost basis. It means you have an income that you've got to pay today and a capital gain you're going to have to pay later. Many people are playing learn to earn and play to earn video games. You get paid in Bitcoin to play, the Bitcoin you earn as taxable income. Airdrops, they've got a zero basis. Free crypto you get from a hard fork, that's ordinary income. Income that's then your basis, when you sell your crypto, you owe your capital gains tax.
Ric Edelman: Are you following all this? It's crazy, isn't it? We haven't even talked about NFTs. Let's say you create one. Is that a taxable event? Oh, what about selling an NFT you created - is that taxable? And how about charitable contributions? You've got to file Form 8283, the charity's got to sign it, you need an appraisal? That'll cost you a couple of hundred bucks. You can do this through a donor advise fund, a Fidelity or Charles Schwab. I recommend that you use a tax tracker service. This is a company that will manage all of your recordkeeping, that will keep track of all your transactions for you. They'll even, in many cases, fill out the IRS forms for you. You can get a list of these tax tracker services for free at the DACFP Yellow Pages, that's DACFP Yellow Pages. My best recommendation is that you turn to your financial or tax advisor for help. And in fact to help them, I've just launched a new tax module. It's available at my DACFP website. It's at the DACFP Education Center. Financial advisors and tax advisors get to see credits for taking the class.
Ric Edelman: You know, this whole conversation about dealing with taxation and compliance, there are so many professionals in the financial services industry trying to get their arms around crypto. In fact, the Investment Advisors Association has a newsletter that goes out to over 9000 compliance officers, and I'm helping them set their crypto strategy. I've just written an article for their newsletter. I've given a couple of presentations at conferences that they've held teaching compliance officers about this new asset class, helping them figure out how to set a strategy in their firm. If you are a compliance officer, you should go to the Investment Advisors Association, read the newsletter article that I've written, and if I can be of help to you or your company, well, you know where to reach me, AskRic@TheTruthAYF.com.