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Episode 1816th June 2022 • Business By The Numbers • LSTN Media LLC
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This week Hunt discusses the different ways that crypto is taxed and what to be aware of if you are buying and selling or accepting crypto as payment.

• How does buying and selling crypto get taxed?

• Are my losses deductible?

• What happens when you trade one coin for another or if you are mining them yourself?

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Hunt Demarest, CPA

Paar Melis and Associates – Accountants Specializing in Automotive Repair

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Welcome to another episode of business by the numbers. I'm your host Hunt Demarest CPA with Paar Melis and associates. So today we're going to be disgusting cryptocurrency, not specifically what it is and what it's used for, but really taxation. And as it gets kind of recognized for most of the people that I see if you've been watching the news cryptocurrency, just like the stock market is plummeting and I've had a decent amount of people kind of asked me about the taxation.

If they can get some of those. How is treated as compared to stocks. So we're going to get into all that stuff today, probably more than you'd ever want to know about crypto taxation, but here it is. Before we get into that, I want to have a quick word from our partners who make business by the numbers possible to gauge your day's profit at a glance.

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Please visit All right. So when we first started with cryptocurrency, you know, and really the taxation of about it, we didn't really see it from a practical standpoint for most of our client. As some of you are all of you guys know my firms specialize in automotive repair shops dealing with about 600 repair shops on a monthly basis, all across the country, all different kinds of shops, but it just really wasn't that common.

Now I know I had some clients that were invested in crypto, but when the early years of this started, there was no real official reporting. All this. It was a lot of the honor system. And really from the IRS has point of view. They didn't really know what to do with. How do you tax something that, you know, by definition is decentralized and is supposed to not be able to be tracked?

Essentially what they've done is most of the exchanges now, most people have given up that decentralized. As in the anonymity side of it, you know, the early days of crypto, no one knew who had a Bitcoin, you could physically hold that. No one would ever know about it. You know, there were other exchanges that you could use on.

There were 100% anonymous, no social security numbers, anything like that. Now, you know, probably the big one out there is Coinbase. We've got FTX. There's a lot of other exchanges out there. Now, almost all of these are requiring you to put your social security. Now when this first started happening, a lot of the early adapters of this cryptocurrencies were very apprehensive to this.

Obviously, you know, the decentralized and non-famous aspect of crypto was very appealing for them. Also, there was plenty of people that were getting paid for goods services or whatever, and did not necessarily want people to know about that. Let alone pay tax on that. Then probably about three or four years ago, we started to see some people start reporting this, right?

These exchanges not only had your social security numbers, that kind of started to figure out how to report this. Just like, um, you know, a stockbroker would start reporting the gains and losses on these transactions. The first couple of years that we got those, it was really hit or miss. Some of them were incomplete information.

A great example of that would be, they would tell us how much it was sold for, but they had no idea how much it was actually purchased for, you know, if you have something like 12 million random crypto coins of a, you know, not Bitcoin, obviously that's a lot of money, but some of these alt coins. It might be very hard to even figure out what your original basis is in that, you know, bought it a number of years.

Maybe it's split very similar to if you sold an apple stock that you had no idea when you bought it, because you bought it over a number of days over a number of years. Without the backup reporting on this, the taxation side of this was extremely tricky. And in most situations we just had to make our best guess in all actuality, a lot of these reports were so bad that they wouldn't even sending this stuff to the IRS because they really couldn't back it up.

If you went and questioned saying, Hey, why are my sales? This. They would pretty much say we don't really know. Those days are pretty much behind us now, you know, right now, if you're on one of the major exchanges, they give you an end of year tax report, just like a brokerage account, would it looks very similar.

It's got all the dates of purchase sale and it makes our life a lot easier. Now, if you don't have a ton of crypto, then this is probably all that you'll get very straight. Some of my clients mind crypto. So my clients trade different types of cryptocurrencies, you know, and the taxation behind some of this stuff gets very murky and want to kind of, we're not going to go super deep into this stuff, but just one to kind of give you some tips on this.

out and I bought a Bitcoin in:

And then just, you know, yesterday I turned around and I sold that Bitcoin. So as a quick aside here, the reason I thought about doing this episode is I saw an article that came out today that said Bitcoin was at $20,000. Which might seem like a lot if you haven't been following it recently, but it's about 70% down from what its height was, you know, maybe less than a year ago.

And so we saw really a heyday of Bitcoin, Ethereum, and a lot of other cryptocurrencies that skyrocketed, but just like the stock market, you know, we've been seeing that crypto markets start to get hit pretty hard here. So back to like what we were talking about, let's say I bought that crypto coin. I bought a Bitcoin for $13, 20 years.

And I'm going, I'm going to sell it today. I want to go out and I want to buy a motorcycle or whatever I want to do with that. So hunt, how does this get taxed? What do I get taxed on? When do I have to pay this at what rate? And the way that it works is it's just like a stock, meaning that there's something called unrealized gains and realize gains.

So just like in a stock in this example, crypto is going to work exactly the same. If you buy a stock and it appreciates and share price or number of shares, appreciate and share. You don't pay tax on that the only time that you pay taxes, when you close that position and you sell that stock and you actually collect money for it, cryptocurrency is the exact same situation.

So in my example, I bought a Bitcoin for $13. Over the years, I saw it go from a hundred, a thousand, 10,000, and then ultimately up to $20,000 when I sold it. Now over the years as that was appreciating, obviously my asset was getting more valuable, but as long as I kept it in Bitcoin, I didn't have to pay any tax on it.

So now what's going to happen here. When I sell this, I essentially paid nothing for it. Right. I'm selling it for 20,000. I bought it for 13. I'm going to have just under $20,000 in gain because I'm selling that Bitcoin converting it to cash. Now I have a gain. Now I have a taxable event. So how much, what tax rate are these tax debt?

So anything held over a year is considered long-term gains. So stocks and crypto, exact same situation. You hold it for over a year. You're going to have long-term capital gains. If you sell it in less than a year, you're going to have short term capital. Short term capital gains or ordinary income, just like any other income that you would get so less than a year is just like any other income max tax rate of around 40%.

Now, capital gains are the same as long-term capital gains and you're going to be taxed at capital gains rates there. Now the nice thing about the long-term capital gains is that's going to cap out at 20%. Pretty good. Right? If you are doing the math on it's about half you pay about half the tax rate on long-term capital.

As you do, short-term capital gains. And so this is always something to think about when people are buying stocks or, you know, any sort of assets, really. If you hold it for more than a year, it's really going to help you from a tax standpoint. Now, generally, when we're talking about crypto, when we're talking about stock, are we really any sort of investment on it?

It's a nice idea to be able to say, Hey, I want to keep this for a year. I don't want to sell it to after a year. So I pay a lower tax on it, but generally these markets are swinging up and down. That unless you have a lot of certainties on it, your decisions are usually based, based on value versus the actual tax rates.

The reason I say that though, is if you're at like 11 and a half months, or even just coming up on a year, Then, Hey, what is a week or two? Wait a couple days. And then you'll end up saving a lot years, end up saving a lot of money on it. So when I Bitcoin transaction bought it for 13, sold it for 20,000, you know, rough numbers are gonna probably end up paying about $6,000 in tax on that.

Now, like I talked about before, this is treated just like stocks. So if I do have losses on that, the losses are going to be deductible as well. Just like stocks for long-term capital gains there's limitations. But if you have long-term capital losses, you can use that to offset your long-term capital gains.

So let's use this, for example, that same thing. I sold one that I bought for 13, for $20,000, may $20,000 in game. Now let's take into consideration and think, all right, last year I bought one Bitcoin for $40,000. I'm going to sell that today also. So I'm going to get $40,000 of sale from the Bitcoin. And between the $13 one and a $40,000 ones from last year, I bought it for $40,000 too.

So my losses are going to offset my gains and I'm not going to pay any tax in that situation. All right. So if you're gonna sell it straight up short answer on this one, exactly the same as stocks, you pay, gain on a difference between what you sold it for and what you bought it for. Now, let's get a little bit more in depth here because a lot of times, especially people that are trading.

Are not necessarily trading Bitcoin for cash and then turn around and using that cash to buy other Bitcoins, et cetera. A lot of times what people are doing is trading between different types of crypto. Right. So if you have Bitcoin, you're going to trade it to a theory from maybe go with Ethereum to Bitcoin or other smaller coins, whatever you're doing there.

A lot of people have the misinformation that you don't actually get taxed on that. Now, you know, this was something that was argued a lot in, is still is kind of a tricky area on it. And there was a couple other facts. Right. So that's kind of a disclaimer on all this stuff on cryptocurrency. I'm going to get into the base level stuff in practice.

This stuff gets extremely complicated and there's usually a little bit more qualifying information, but if you're going in, you're exchanging one coin for another coin, a lot of people, and still to this day, do not think that it has any tax. Well, I didn't get any money for it. I just took Bitcoin and bought the same amount of theory.

However, the IRS would argue with that one. They say just like, if you were to do that with any other asset, you know, stocks, et cetera, you essentially get taxed. You're going to get taxed just like you got that money. So even though you said, all right, I got Bitcoin. I'm going to trade that for a theorem.

Essentially. You're going to get taxed the same way as if you sold that Bitcoin. Got. And then turned around and bought a theory and with it. So at the end of the day, you still sold the Bitcoin. Right? And so that's the argument behind on the IRS is point of view. However, one big thing that you have to keep in mind if you're investing is if you turn around and reinvested all of that money and ignored the tax.

You might have a tax bill where you don't actually have the cash for it, and you would have to end up selling some of those coins later down the road to pull some of that out. Right? So just like the example I talked about before, so if I turn around and I sell this for $20,000, but instead of getting that money, I exchange it for $20,000 a theory, I'm going to have a $6,000 tax.

But I'm not going to have that 6,000 of that $20,000 in cash. Cause I've turned it around and bought another coin with it. All right. So if you're exchanging one coin to another coin, you're going to get taxed the same exact way as if you took cash and then turned around and bought some more coin as well.

So let's go on to the next one that we see here is crypto mining. So crypto mining is the process of actually creating crypto. This is a very oversimplification of it, but essentially you have a really souped up computer, uh, specifically a couple of key components and solves very hard math problems and different puzzles.

And in reward, a computer gets paid in coins, Bitcoins, Ethereum, whatnot. Now what's your ended up doing is you're using that computing power to essentially work. And then once you get paid for that work is those coins. Now, obviously Bitcoin, Ethereum, all this stuff has valued. So essentially what you're doing is you're mining just like you would gold or silver or diamonds or whatever.

You're getting stuff out of there that actually has a tangible value. And so what the IRS says in this situation is however much you mine in a year is going to be treated as your sales or your earned income or taxable. So let's say that I was mining, you know, all throughout the year. And I mind for Bitcoins at the end of the year, they're going to say that I have $80,000 of taxable income.

Now, obviously there's a lot of costs associated with mine. So you would then be able to deduct your electricity costs, different things associated with running your mining operation. But essentially whatever you've mind is going to be, what you pay tax at the end of the year. Now, a tricky thing about this is for those of you that understand this, you don't mind just a single coin on a single day and keep it clean.

What's going on is these computers are running 24 7 all throughout the year. And you're slowly mining, very small amounts of coins throughout the day. And so just like I mentioned before on the surface, it's very simple. Hey, however many coins you get multiply it times of the value of that coin. That's what you pay tax on.

However, the real answer on it is you usually have to do some sort of averaging costs. To value how many coins you earned on each day and the corresponding price of the coins on that day? Because if you have a day where you mind one crypto coin, if the market is at $60,000 that day, you're going to have a lot more taxable income than if you minded on a day like today, where that number is at like 20,000.

So essentially whatever you mine is, what you end up paying tax on. The value of that is very true. And this is probably one area that does not get reported because this part is completely anonymous. If you do it correctly, you've set up a computer. You set it up to go to a certain wallet. Maybe if it's even, you know, offline.

No, one's going to have any idea that you're actually going on now. Obviously just like under-reporting any sort of business income. If you're running crypto mining or cryptocurrency mining, and you're not reporting income, then the IRS could get nasty. Just like if you were running. Business a cash business and not reporting that income as well.

So I know it's kind of, a lot of people say it's, you know, it could be nefarious. You know, it could be some dark stuff going on there, which is true. Of course, you know, anything new and know anonymous. Like this is going to have that area of availability, but it's not the wild west, right. The IRS has a pretty hard and fast stance on.

And I will think that in the coming years we will see more and more kind of people getting looked in for this. So if, to kind of wrap this into the first thing that we talked about, I really, the first two that we talked about, so now that you mind that coin, or now that you minted that coin, however, you ended up got it.

Now you pay tax on that, that becomes your basis for the future. Right? So if I mind one Bitcoin, you know, I paid tax on $20,000 because that's what I. Now that $20,000 is going to be my basis going forward. So if I turn around and I sell that Bitcoin for $20,000, I pay no tax on it because I essentially paid 20,000 for it because I already paid tax on it.

All right. So the last thing I want to touch on. How you get tax on. If you're using cryptocurrency as a form of payment, right? You see this a lot, you know, there's a lot of different places. Now that accept Bitcoin is a transaction and correspondingly. I'm starting to see more and more businesses actually start accepting this themselves also while you see people.

And I think there's a couple of NFL players that actually elected to have part of their salary paid in Bitcoin. Now some of these people looked like heroes because the reason that they did this, as they say, all right, you have to pay me 10. A week now, if you can negotiate that deal at $10,000 per Bitcoin, and it goes up to $20,000 per Bitcoin, by the time you get that payment, you're going to look like a hero because as you've essentially doubled your salary, the team is on the hook for paying it.

And you've negotiated the price in Bitcoin, not dollars. Now, obviously if the money, if the market goes down, you've shot yourself in the foot, which we saw a couple of times last. You know, and I think the most famous example of using Bitcoin to buy something was, you know, very early adopters on this, one of the first people to ever use Bitcoin to buy something.

Now, at this time it had virtually no value. So he used something crazy like 6,000 or 600 Bitcoin to buy a slice of pizza. Um, you know, it was just kind of a novelty thing just to see if it could. Now, looking back on that, you know, it would have been tens of millions of dollars if you would have kept it today.

So it's called the world's most expensive pizza. So how does this get reported hunt? Right. It's money. That's never really there it's money. That's kind of floating around there. How do I pay tax on it? If I receive it from someone else as whether I sold something or maybe for a day's work now, look at this, just like a credit card, right.

You know, a credit card comes in. You don't actually physically. And it just comes into your credit card processing, then turns around and gets bashed into your bank account. And that's when everyone says, all right, you know, it's as good as cash. I'm ultimately receiving cash for it. Bitcoin's essentially the same exact way you sending Bitcoin from one wallet to another wallet.

Now that it's in my wallet, I can turn around. I can withdraw it or transfer it over to my bank account. Just like I would. And that's the reason why this is a tax exactly the same. You receiving money, just like it was for an Amex. And so you're going to pay tax accordingly. If you're, you know, doing casual labor for someone and they send you Bitcoin on it, it doesn't change how that's taxed.

It's essentially the same as if they wrote you a check, you know, different limitations on it, but you could be subject to tax on it again. You know, you have someone that comes out and let's say that you own an NFL team. And one of your players says, Hey, I want you to pay me. You're going to deduct that just like you would, anything else, it's a cash expense.

Your employee is going to treat that just like wages, like anything else going to pay taxes accordingly doesn't matter that it was transmitted in crypto. It's going to be treated the exact same as cash or credit card. So I hope this has been helpful for you. I hope this has been enlightening and maybe kind of clarify some things that you didn't understand or didn't even know that you had to.

So as always, if you found this helpful, please share with a friend that you think could get something out of this, whether a business owner non-business owner, maybe they're just involved in crypto, and this might be kind of a good little refresher on them of things to be aware. Like to talk about before though, we just touched the base surface of this.

I think this is about as much crypto and even taxation in general is most people want to hear, but if you're doing these kinds of things, talk to your accountant, you know, ask the right questions because everyone's situation is going to be a little bit different. And I don't want to think that this is the end all be all.

And there's not exceptions or different kinds of examples that could come around. If you have any questions about anything that we talked about, comments, or maybe ideas for a future. Please shoot me an The link for it is in the show notes. So thanks again for listening on the aftermarket radio network.

Find all shows on aftermarket radio and on your favorite podcast listening app until next time. Thanks again for joining me on business by the numbers stay safe, and I will talk to you all soon.