As more people and businesses use cryptocurrency, it’s important to keep up-to-date on trends, rules and tax issues. We turned to Shehan Chandraskera, head of tax strategy at CoinTracker, to provide a crypto update – non-fungible tokens, tax issues, recordkeeping requirements and more – as well as predictions for the remainder of 2021.
Sean Stein Smith: Welcome to the NJCPA TechTalk Podcast brought to you by the Emerging Technologies Interest Group. I'm your host, Sean Stein Smith. And I am back here today for episode five and I have an awesome guest talking some really timely, really intense topics, trying to merge tech, tax and all of that awesome stuff to do with Bitcoin also. But before we get into that, just a quick background on me. I'm Dr. Sean Stein Smith, your host, and I'm very hands-on in the blockchain/crypto/emerging technology space that has to do with accounting, finance, markets, all the rest. I have a column at Forbes every single week. So always be sure to check that out, but that's enough about me. I'm joined here today by Shehan Chandraskera who is the head of tax strategy at CoinTracker. I'll come back to that. He’s also a Forbes crypto/blockchain columnist and is also a rock climber, which I found out from actually tuning into your episode onto the Green Apple Podcast. And you're a Twitter master. Shehan, welcome to the show.
Shehan Chandraskera: Yeah, thanks for having me.
Sean Stein Smith: So just a quick sort of background of you and your firm: What does CoinTracker do actually?
Shehan Chandraskera: Yeah, so CoinTracker is pretty much a tool that helps you reconcile your crypto capital gains and losses by connecting your wallets and exchanges into it through an API.
Sean Stein Smith: Okay. So it's basically a sort of accounting/tax back-office tool to help us get a handle on their potential tax obligations?
Shehan Chandraskera: Correct. Like, for example, say that you do stock trading in FRDM or JP Morgan. Things are easy because at the end of the year, you get this Form 1099 listing your sales price, cost basis and the gains and losses, and that goes directly into your tax return. However, if you work in crypto, it becomes your responsibility to figure out the cost basis because none of the exchanges are giving you that cost basis information that is vital to figure out your taxes. So CoinTracker is a tool that helps you reconcile all your transactions between hundreds of wallets and exchanges, and then it just generates all the tax reports that you need, so you can file your taxes.
Sean Stein Smith: So, it would strike me that you're probably pretty busy right now, right?
Shehan Chandraskera: Yeah. Yeah. I mean, I'm still practicing in a little bit in the public accounting, the serious side of things, so that is busy. The software companies are busy as well right now because most of their users are coming right now because, for most of the people, taxes is something that you focus on only from January to April, but this year it's an exception, it got extended to May 17. So there's a huge amount of traffic that goes to all these software companies, between these, three, four months period.
Sean Stein Smith: Sure. All right. So with that introduction out there… To add some context to any folks tuning in who aren't as intimate with the blockchain/crypto space and all that. Now we can actually dive into some of the questions that I had drawn up that I think really are going to add some real value to our folks tuning in here. So in terms of the update as to the trends, the hot topics that are going on out there in terms of crypto assets, are there any trends that are ultra-high profile outside of the buzz around Bitcoin, obviously?
Shehan Chandraskera: Yeah, I think in 2021, I think we saw a huge interest that was building around NFTs, non-fungible tokens. There was a record sale, this artist named Beeple sold his NFT for $69 million, and there were some other very noteworthy sales and they were like New York columnist, he sold one of his New York newspaper columns, I think $650,000. So yeah, NFTs are pretty hot, and that market is continuing to grow with a lot of celebrities coming in and people are trying to talk nice things in this virtual world and assign value to it. So NFT, I would say that's the most-hot topic right now.
Sean Stein Smith: So, what exactly is a NFT and how's it different from other cryptocurrencies like Bitcoin, Litecoin, Ether?
Shehan Chandraskera: Yeah. Yeah, NFT by the way, it stands for non-fungible tokens. So it's pretty much a digital representation of something with limited supply or it could be an art piece. So, if I have this art piece or like a classic car or something like that, I can convert that to an NFT and somebody can have ownership of that asset virtually, and there's only one of that kind of asset. So that's pretty much an NFT.
Sean Stein Smith: So, and I know that the two of us have all written on this topic previously, but a question that I've been asked quite a bit is, well, if all that I have is a virtual copy of an image, of a picture, of an entertainment clip, how do I actually prove that I own that? And then actually part two, what do we actually own?
Shehan Chandraskera: Yeah, those questions are still there and I think are still in the beginning. I think for me the idea here is that once you can earn these very rare and scarce assets digitally, you can actually figure out ways to monetize them. Like say, for example, you could collect these NFT art pieces. And in 10 years from today, you could have these virtual art libraries where people can come in to see these artwork, and then you charge an entrance fee. There could be another situation where you collect these NFTs, I don't know, game characters, and then you put them into some type of virtual environment. And then again, you create value through that.
Shehan Chandraskera: So I think it's we're still in the beginning phases of NFTs, although NFTs is nothing completely new. I think it started with CryptoKitties in 2017 where you could create your own type of Cryptokitty, and then it died off. But in 2021, it just sparked again out of nowhere. Again, it's not perfect yet, but I see a lot of future there. It's really hard for us to understand what it could be because we are so early. And it's the same thing. If you ask me, "Okay, what would Bitcoin be doing in 2020?" And we wouldn't know the answer if you asked that question of me in 2011 or 2012.
Taxes and Recordkeeping
Sean Stein Smith: And excellent point there, right? This whole conversation is still in the very early parts right now. But in terms of an area that is more sort of up your alley, what's going on with the crypto taxes, because there's been a whole bunch of conversation. I would say really since going back to, I guess the end of 2019, and then all the way in 2020, and then into 2021, there were some updates from the IRS that had answered some questions and created other ones. And then there was that whole thing about now having to ask every single taxpayer did they transact in crypto, but it's not quite as clear as it might seem, right?
Shehan Chandraskera: Yeah. I think the biggest highlight in terms of tax was that it will start in 2020. IRS put that virtual currency question on page one of Form 1040. So pretty much everybody in the U.S. who is filing a Form 1040 has to answer that question. There were a lot of questions surrounding that universal currency question, because the IRS didn't provide a lot of instructions. In Q1 2020, the IRS informally came in and released some guidance saying that if you only purchase cryptocurrencies using U.S. dollars, you don't have to check yes on that box. That itself is kind of self-contradictory because the question is asking, did you acquire any financial interests? But again, you could say no if you just purchase cryptocurrency using U.S. dollars, according to the newest guidelines.
Shehan Chandraskera: So yeah, that question is there again, it's pretty much there to signal to taxpayers that IRS is thinking about this issue very seriously, because the compliance in this space is super low. So that was a major highlight and then from the information reporting point of view. I know that the IRS is working on introducing a more robust information reporting system for exchanges, because right now, these exchanges issue different types of forms ranging from Form 1099-K to Bs to 1099-MISC. And that actually confused the taxpayers, and taxpayers get one form this year, another form next year, they don't know what to do with it. So hopefully 2021, meaning in the 2022 tax season, we will see more robust information reporting system in this space as well.
Sean Stein Smith: So wait, so it kind of strikes me as there is still quite a bit of ambiguity and uncertainty almost as to what types of data you as an individual crypto trader are going to have to actually file taxes, correct?
Shehan Chandraskera: Yeah. I mean, I think the data is there, but then a lot of taxpayers don't know if that's their responsibility to gather all that information, because if you trade in stocks and securities on your traditional finance form, it's not your responsibility to keep books and records of what you're trading. At the end of the year, as I mentioned earlier, you get this Form 1099-B from the brokerage service, and you just put that into the return. But in the crypto world, it doesn't happen. So some taxpayers don't know that it's their responsibility to keep track of it. And some taxpayers do know, but then they cannot do it accurately because these transactions are very frequent and highly complex. And at the same time, some taxpayers are trying to evade taxes because there's no robust 1099 system. So there's sort of ambiguity and inside that ambiguity, some people are trying to exploit that. But yeah, I mean, again, it's a new space, so yeah we're all evolving.
Sean Stein Smith: Yeah. And I mean it is really changing extremely fast. So are there any common pitfalls, common errors that are being made in terms of having to prep taxes, like the 1031 option for crypto which isn't really a option, actually. But are there any top, maybe two or three errors or areas that are still tripping up taxpayers now, even in prepped 2020 taxes?
Shehan Chandraskera: Yeah. I think the biggest pitfall that I see among some taxpayers, I know, tax practitioners, is that they get overwhelmed with these transaction history reports that are issued by the exchanges because they had to go line by line and kind of figure out the transfers, what's taxable and what's not. They had to assign the five for life or high for tax or ID method, but just know that there are tools like contractor that helps you automate that. So don't think that just because you have a crypto client, you had to assign a team of associates to reconcile those transactions and generate a Form 8949 and Schedule D, there are tools that can handle it. So that's one thing that I see.
Shehan Chandraskera: The other thing among taxpayers is that some taxpayers think that I didn't realize any cash, therefore I don't have to pay any taxes. That's not the case. Like you mentioned, when you go from one cryptocurrency to another, say that you were spending Ethereum to buy Bitcoin or vice versa, that creates a taxable event. And IRS doesn't really care whether you receive cash or not. So that's a huge misconception that's still going on right now. And that 1031, property-to-property exchange is no longer applicable to crypto. So I would say those are the two big misconceptions that I'm seeing today.
Sean Stein Smith: So to be fair to... If you were trying to have a conversation with a firm or an external client who was kind of new to this whole space, it would be to treat crypto transactions as if you were trading equity. Could that be fair?
Shehan Chandraskera: Yeah. I think that if you're new to this space, and I tell this throughout my webinars, if you don't know anything about crypto, I think the cheat sheet for you to remember is that crypto is treated very, very similar to stocks and securities. You have a purchase price, you have a sales price, the gain or loss is capital in nature. And then that goes to Form 8949 and Schedule D. So at a very high level, it works very similar to stocks.
Sean Stein Smith: And are all crypto assets treated the exact same way from Bitcoin, NFTs, privately issued coins, token stable coins? Are all the crypto assets treated equally?
Shehan Chandraskera: Yeah. So right now, IRS hasn't made any distinguish between different types of assets because when they first came up with guidelines in 2014, we only had Bitcoin and a couple of other more prominent cryptocurrency. So because of that, right now, according to the IRS, all virtual currencies are treated as some type of property. So that includes coins like Bitcoin, Ethereum, and that also includes stable coin, again, because IRS hasn't said anything specifically about silver coins yet. Now in the case of NFTs, those could be slightly different because, I actually wrote about it in my Forbes as well, so NFTs could be actually treated as collectibles and that does have different tax implications than you were just renting the property because collectible tax rate, the highest tax rate is 28 percent versus a 20 percent that's subject to stocks and securities and regular crypto coins.
Sean Stein Smith: Interesting. And is there any indication, are there any hints that the current White House and current Congress are going to start treating crypto differently going forward? Because I do know that there has been some conversation about changes to the corporate tax code, individual income tax code, but have there been hints or any conversations on how crypto taxes could actually fit into these other conversations?
Shehan Chandraskera: The only conversation that I'm aware of is the introduction of that de minimis rule. In other words, right now, we know even when you spend crypto to buy a cup of coffee, that triggers a taxable event because essentially you are disposing of a property and that property has a cost base and the market value, and you've got to pay taxes. The problem is it just doesn't make any sense. So having some conversations that are introducing a de minimis threshold, I think it was around $600. So in any year, if you made a purchase below 600 bucks, again, we don't know the specifics. I don't know if that 600 bucks is applied per transaction basis or annual basis, but they're talking introducing a threshold, and if your transaction falls below that threshold, you don't have to pay tax. So that transaction is excluded. So that's the only crypto-specific law that I'm aware of.
Predictions for the Rest of 2021
Sean Stein Smith: All right. So it's going to be interesting to watch that going forward. And so are there any crypto forecasts, crypto predictions that you would feel comfortable trying to make for the duration of 2021, in terms of the end year price for Bitcoin, other trends, items like that?
Shehan Chandraskera: Yeah, I think... Again, I'm not somebody who looks at the price every day because I think it's….
Sean Stein Smith: Come on, you do. You do, come on. It's okay-
Shehan Chandraskera: I don't look at the price.
Sean Stein Smith: It's only us here Shehan, no one's going to know.
Shehan Chandraskera: I don't look at the price of Bitcoin, but I do look at my portfolio, so they're two different things.
Sean Stein Smith: Okay, fair enough.
Shehan Chandraskera: But I thin,k based on what we are seeing, I think there's a big likelihood that Bitcoin going to surpass that $100,000, six-figure mark, because right now it's trading at $50,000. So you only had double with all these corporations coming in, all this other brilliant endorsement and then more education. I think we're going to see a new wave of people coming in and driving the prices high, but doesn't mean that it's going to stay at $100,000 for the next 10 years. There could be fluctuations, which is... You should be completely fine if you're coming to this space. But if we zoom out and look at the trajectory, it's an upward-moving trend and it has been the best performing asset class for multiple years, in my opinion, based on some research and especially the best performing asset class in 2021. So yeah, just only invest what you're willing to lose and just know that your upside is unlimited, your downside is always limited to what you invest.
Recommendations for CPAs
Sean Stein Smith: Excellent points there, Shehan. And are there any other tips or tactics or recommendations that you would make to either individuals or firms that are trying to get more involved in blockchain and crypto, but haven't done so quite yet?
Shehan Chandraskera: Yeah. I think this is a question that I get all the time. I mean all of the CPAs who attend my webinars are like, "How do I get to know more about crypto and taxes and everything?" I think the most logical thing that you can do, and this is the best way to learn, is just by investing. You don't have to invest thousands of dollars, just open up a Coinbase account, invest $10, $20 and see how things work. And then once you understand how things work from a non-tax point of view, because you're experienced when it comes to applying other tax rules and doing so many tax returns and et cetera, it becomes easier and easier for you to kind of understand how taxes work with cryptocurrencies. Again, it's not rocket science, it's treated very similar to stocks and securities with some minor exceptions and some complexities. But my recommendation is if you want to have a niche, find out these people who are more tech savvy. And then, as a firm, just invest a little bit of money in crypto and see what happens and learn from it.
Sean Stein Smith: Absolutely. The best way that I find to learn something is to be hands-on. So, excellent tips there, Shehan. All right. And, Shehan, thank you once again for being here today on the podcast. Now, for any of you folks tuning in here right now, you should sign up to the NJCPA TechTalk Podcast in your favorite podcasting app. Watch on YouTube, that's youtube.com/njcpa, watch online at njcpa.org/techtalk. And for NJCPA members, join the Emerging Technologies Interest Group at njcpa.org/groups. Shehan, awesome time having you on. Thank you again.
Shehan Chandraskera: Thank you.