International Crypto Tax Competition – Stephan Livera Podcast: Part Four

Learn from tax experts about international crypto tax competition and determine if making a move is worthwhile.

Dennis Wohlfarth of Accointing and Clinton Donnelly of Donnelly Tax Law join Stephan Livera to talk about Bitcoin tax recordkeeping, and strategies to minimize tax. In the full podcast, we chat about:

  • Current Bitcoin tax treatment
  • Capital gains Bitcoin tax treatment
  • Bitcoin tax recordkeeping
  • Bitcoin tax strategies locally
  • Bitcoin tax strategies for those willing to go overseas
  • International crypto tax competition

In part one, we talked about Bitcoin tax treatment and Austrian economics on Stephan Livera Podcast, episode 183, and our guests were from the company Accointing and Donnelly Tax Law

In part two, we talked about Bitcoin tax recordkeeping.

In part three, we talked about how various crypto tax situations should be treated locally and internationally from a crypto tax law perspective.  

Today, our podcast show notes are about international crypto tax competition and determining if moving is worthwhile.

International Crypto Tax Competition

international crypto tax

What are the ways that people could explore if moving is worthwhile?

Clinton Donnelly: Let’s take the situation with someone who’s not an American.  

I’d propose that the best place for your money is to invest in the United States. 

It is the largest tax Haven in the world because the financial industry is an essential part of the US economy, and they’ve created powerful incentives to attract foreign money. 

Notably, there are zero capital gains on your crypto assets in the US if you’re a foreigner.

If you go to Bank of America, Citibank, or Wells Fargo, or any of these major banks as a foreigner, you can easily open up a bank account. But you’ll have to go there physically and open one up. 

It’s not going to be a question as to why somebody from Australia or Switzerland is coming to the US to open up a bank account because the US wants to be the world’s marketplace.

Opening a bank is not going to be a problem, and you’ll want to do it with these major banks because they’re accustomed to international wire transfers. 

Suppose you have an account at a US bank. In that case, nobody will question it from an anti-money laundering perspective if you are trying to transfer money back to Australia. As you know, it’s widely respected as opposed to a BVI (British Virgin Islands) bank or credit card. 

The US does information sharing between countries regarding how much money citizens have in foreign bank accounts.  

The US has FATCA Law. 

All the world’s banks have to tell the US (the IRS) twice a year about American bank accounts in foreign countries. In response to that, the OACD countries created common reporting standards, CRS

I think about a hundred countries have signed up to where once a year, they will report back the total amount of each citizen’s bank account to their home country.

And the US didn’t sign that. The US did not sign the common reporting standards. 

What that means if you have a bank account in the US, the US doesn’t tell any other country about it. So, it’s kind of ironic. 

I guess maybe that’s like being the bully. 

The U.S. demands that everybody gives information to them, but they won’t share it with anyone else. This is because the US is the most prominent financial player out there. 

So they can have this, and whereas it is considered a bit of a tax haven or a low tax jurisdiction, but for everybody who’s not a United States citizen.  Thus making it a great place to put your money because it’s a rich investment area. 

You can move your money out of cryptos when you want to put it into some of the world’s safest banks and invest in some of the best real estate in the country and Wall Street. 

There’s a lot of affluent financial areas with powerful incentives. 

You’ve just got to use a US credit card, like a Bank of America credit card that you can use buying things all over the world for the rest of your life, and your local jurisdiction would have no visibility to it unless you disclosed it to them. So that’s a very attractive thing to do without having to change residents.

Stephan Livera: That could be one idea if you don’t even want to become a US citizen. All of that by just opening an account in the US.

Then there are the other options for moving or getting residents in BVI (British Virgin Islands) or multiple places. I presume that’s also an option that some of your clients might explore.  For some of them it might be worthwhile to consider that.

Clinton Donnelly: I do a lot of consulting in this area. For virtually every country, the principle of taxation is that you’re subject to taxation if you’re in the country for more than six months. 

Typically, you’re subject to taxation on your worldwide income in that jurisdiction where you’ve lived for six months. 

Now, the US has a different tax law. They tax their citizens on their worldwide income, regardless of where they live in the world. So it’s a little different wrinkle for Americans, but a common underlying theme in international taxation is that it is based on residency. 

Residency is typically defined six-months or approximately 183 or 185 days. It varies how you define it, but roughly the six-month thing. 

This creates a massive international tax loophole, which I would call a three-country shuffle, where if you’re never more than six months in one country in a given period, you can keep moving around. It’s kind of like the digital nomad strategy. 

You keep moving around, and you’re not going to have to report taxes to anyone. So, again that’s not for a US citizen. It is assuming you’re not a US citizen. 

Now US citizens have a different problem. US citizens are taxed under income worldwide. However, two massive tax breaks are given to US citizens:

One is, for every dollar they pay in taxes to a foreign country. They get about a dollar to dollar credit back on their tax bill, which is nice. 

The US taxes are lower than most other developed countries. I have clients living in Germany, and their German tax bill is higher than their US tax bill. We still do a US return. They take the German credit, and then they don’t owe anything back to the US. 

That’s if you’re an American citizen living in a low jurisdiction where you are still going to have to report back to the US, and you’ll probably end up paying taxes back to the US.

Now for American citizens, there is a fantastic loophole called Puerto Rico. Puerto Rico is a little country South of Florida next to Cuba, and this area is a possession of the United States. It’s not a state, although there’s always talk about statehood. It’s a possession now in the US tax law. 

Puerto Rico is treated as a possession, kind of like as though you’re living in a foreign country of all of US possessions, and they’ve negotiated the right to tax their citizens. 

If you’re a Puerto Rican citizen, all your income comes from being in Puerto Rico. You do not file a US tax return. Puerto Rico pays its share to the US government on your behalf. So this creates an interesting loophole. Puerto Rico is a Caribbean country, not a lot of indigenous resources. Earthquakes, tsunamis, hurricanes have crushed them.

I mean, the country is bankrupt. However, they created an incentive called act 60 formerly, act 22, where it’s a 0% tax on your capital gains. 

So if you’re an American whale and want to do this, you can move to Puerto Rico, which does mean actually moving there. 

It’s not like, visit for a day and then go back to California. No, you are moving to Puerto Rico for at least six months of the year, in which case, 0% tax on your capital gains on the Bitcoin that you sell when you’re in Puerto Rico. This is a fantastic thing. 

Now, there are some costs.  You have to make a $10,000 donation to Puerto Rican charities. There’s a $5,000 annual fee you pay. And you’ve got to buy a house or apartment in Puerto Rico, and you can’t rent it out. There are some serious out-of-pocket costs, but it’s probably worth it for that extra 15% savings. If you were a whale Bitcoin holder in the US, that’d be the movement for you.

Stephan Livera: Fantastic. So that’s a very nice breakdown there. 

So if you’re a non-US person, it might make sense for you to do this whole three different countries, different residencies, etc. But if you’re in the US potentially, one idea is moving to Puerto Rico. 

One other idea I was interested in discussing related to what we were just saying is what it takes to break your nexus with your home country. 

So, as I understand, it’s like you have to break that six months or 180 days aspect.  

Are there any other things there that people have to think about when breaking that connection so that they can access the lower tax rate?

Clinton Donnelly: Usually, getting a divorce helps. 

I’m just being silly. 

Usually, it is the “Let me go back to visit mother” and that sort of thing, you know.  There is a bit of travel to it. If you take that strategy, you’re at least saying I’m going to be outside. 

Depending on which country you’re from, staying outside that home country for, you know, 9 to 11 months of the year, at least to break the connection.

A couple of things to think about are think of the cost of living. 

You can think about creating awareness of other cultures for your family and speaking other languages. 

There are several websites where you plug in two cities, and they’ll tell you the comparative cost of living. 

And I will tell you, it’s the cost of living that changes a lot between different countries. I just think it’s a great thing to do is once you start traveling, you get the bug. 

What I find is I’ve worked with digital nomads as they travel a bit, and then they decided to have a home base, and they stay there, you know, five months a year, and then they move around or that sort of thing.

If you are not a US citizen, if you're willing to do a three-country shuffle, put your investments in US crypto exchanges, have crypto or at least in wallets, and then use US banks. You can move towards a pretty close to zero tax situation and see the world simultaneously.

Stephan Livera: That’s very impressive.

Exploring The Dynamic Between Different Countries Of The World And International Crypto Tax

Stephan Livera: I think another area that you were touching on as well, Clinton was just around the dynamic between the different countries of the world.

So as you said, it’s almost like there are specific pressures where some countries try to push reporting taxation levels onto others. 

But then there’s also this dynamic where you said that it’s almost like the richer countries allow individual nations to keep lower taxes and have relatively fewer rules around that. 

Could you explain that dynamic a little for us?

Do richer countries allow individual nations to keep lower taxes?

Clinton Donnelly: There was a real concern right before globalization in the eighties.  

Starting in the eighties, we had issues with international drug trafficking. We had, people like Ferdinand Marcos in the Philippines, who pretty much alluded his own country and took the proceeds and took them to Swiss and Lichtenstein banks and trusts. 

The creation of anti-money laundering laws through FATF

The international community got together and said, we have to stop this. So they created anti-money laundering laws coordinated through the financial action task force (FATF).  

The International Monetary Fund (IMF) and the (OECD) are the Organization of Economic Co-operation and Development of about 34 countries that did not like tax havens. 

For example, tax havens, like Seychelles and the British Virgin Islands (BVI), believed these little countries were siphoning off a lot of money and bringing no value to their area. So they clamped down on those using the same anti-money laundering laws, and what that ended up doing was it forced people back to the OECD countries that made it a club of the halves.

The OECD countries treat themselves as plus countries. So, that crushed the small island tax haven network. 

But at the same time, in Europe, we have rich countries like Germany and France, and we also have tiny countries, Luxembourg, Netherlands, who have tiny revenue streams. They need to allow them to have more latitude to have incentives or lower tax options to bring business there. 

The EU is excellent about that, but other countries of the world have to fend for themselves. 

This is a massive issue, by which countries compete with each other. There’s massive competition. 

The US used to have some of the highest corporate tax rates.

It was at 35%; I think France was higher. But then, the UK and Ireland slashed their corporate tax rates significantly. The UK slashed down to 20% on a phase method. Ireland brought it down for foreign countries working in Ireland down to 12.5% corporate tax. This is a big incentive and part of why Google, Facebook, and Apple all move their call centers to Ireland. 

So what the US did to change its international competitiveness is they slashed their corporate tax rates down to 21% and made it exceptionally aggressive. So it is designed to bring big companies who might have been in other countries back home to the US. There is a real war going on for multinational corporations’ tax revenues by countries that are lowering their tax rates to bring them in.

So this will only get more competitive, as people in countries start to do that, they’re going to have to fund it by putting more of the tax burden back on the individual. 

In the US, I looked at a pie chart, and individuals pay roughly 80% of all the US taxes to the IRS. The rest of it is corporate taxes. 

The argument would be, if they put a tax on companies that make sure you buy a shirt in Australia, then your shirt will be more expensive because you’re paying the company’s tax, right? 

Company taxes are indirectly taxed back on the individual. As individuals, we can vote with our feet and move just as I talked about with the three-country shuffle and keep our assets in the US. 

We see the same struggle in the US. 

We have some high tax states like California, New York, and because of remote offices and this sort of thing, people are starting to flee from big states like New York and California.

They’re not willing to pay high property taxes, high sales taxes, high-income taxes anymore.

We're in a period of transition where we as individuals have a lot of power to change our life's tax dimension and make sure we're getting as much value as we can out of the money we have to pay.

Stephan Livera: That was an incredible breakdown. Great information there, Clinton. One of the exciting things there is that dynamic that you were teasing out: there’s this kind of competition between different countries, and for some smaller ones, like say the BVI or Vanuatu, part of the way they compete is they have low tax, etc. 

And for some of them, the offshore investment or the citizenship by investment programs that they offer a part of a good part of their taxation is part of their revenue, that’s part of how they kind of make money.

Clinton Donnelly: An interesting country in South America is a country called Panama. It’s still country, but everybody knows that if anything gets unstable, the US will invade it in a heartbeat because of the Panama Canal. 

Now, what happened is Panama has a tax regime where if a company or an individual drives their income from outside of Panama, then it’s not taxed in Panama. Okay. So it’s a true territorial system. 

What’s happened is that multinationals who want to do business all over Latin America set up their headquarters in Panama. They take all their money in Latin America back to Panama, Panama doesn’t tax it because it’s a drive from outside of Panama.

This is just a unique arrangement that has enabled Panama to attract incredible amounts of business because almost all the Latin American countries are unstable Argentina, Brazil, Colombia, and Venezuela. 

I mean, it’s a volatile mess there, but Panama has the most reliable banking system in all of Latin America. The problem is it was a bit of a shady tax haven and was blacklisted once. It’s got many issues, but it’s moving to progress and improve things, so I would keep an eye on it. 

If you were an individual living in Panama, you’re not American citizens.

So any other country, they’re not going to tax your income. 

If you’re a remote worker, because you’re getting your income from outside of Panama. It’s a lovely tropical country where they speak Spanish and a bit of English, and it’s got a great airport.

Stephan Livera: Right. And, so I guess the other thing there is, the question of getting residency, citizenship and so on. You might not necessarily need citizenship, but you might need the right to live and work there. 

Clinton Donnelly: It is easy. Go to Panama. You put down money, and you open up a bank account. 

You put $20,000 in the bank account and, you get a lawyer about $3,000. 

They can get you, what’s called a friendly nations visa, and this would be 45 countries that Panama likes. Australia is one of them, you know, all of Europe, pretty much, you get a friendly nation visa. You are now a permanent resident of Panama. 

You need to visit for two weeks every two years. But otherwise, you can set up bank accounts, and you have residency there, and you can travel all the world, still say your Panama citizen, keep your business operating out of Panama. You know, so you’re not going to be taxed cause it comes from outside of Panama. 

Stephan Livera: Yeah. It’s interesting because I’m thinking back through Bitcoin people or people who’ve famously attacked Bitcoin people like Peter Schiff, he’s in Puerto Rico, as I understand.

I think even Eric Vorhees has talked about it and went to. I think, but I’m not sure. Correct me if I’m wrong, but I think he might’ve gone to Panama. But the other point I wanted to raise is everyone’s got their different view on the justice of taxation and AML laws. 

You might be against them, but I think one factor that is potentially playing in favor of the individual.  A typical book a lot of people read is called The Sovereign Individual

And part of that is this idea of going to better countries or going to better jurisdictions for better tax laws or other laws. 

I think most people grow up and have this inertia– I grew up here, so I’m going to live here, and I’m going to die here. But perhaps we’re moving more into a world where people can work remotely. 

They can then start accessing some of these overseas tax planning and overseas tax structuring to improve the level of competition between the different countries. And ideally, keep it a bit lower for the individual. What do you guys think?

Dennis Wohlfarth: Yeah. I think that’s one big part. Clinton also said you have to think about where you want to spend like the next years, right? 

I moved to Zug, Switzerland, to the Crypto Valley or at least what they call it because we started our company there. 

It’s a tax Haven for people from Europe because you can easily move there. It’s just; you have to think about all the consequences, right? 

For example, you’re not allowed to keep a key to your parents’ home when they live in Germany, because you’re just not allowed to have a residence in another country. 

If so, the other country would tax you on your group to income, and there are also the 185 days you have to be there in this other country. 

So you need to be aware of the cultural differences. You need to be aware if you speak a different language. You need to think about the costs of living, especially in Switzerland.

And Switzerland, for example, is entirely different from area to area. So it’s not just, I moved to the border of Switzerland. If you come from France or Italy or Germany, you have different areas, and they are small, like Zug, and have excellent taxation law on crypto because you don’t pay any crypto taxes. 

You just pay a wealth tax at the end of the year. It would be easy for a European citizen to move there. You just have to keep in mind that you kind of give up your home or where you grew up. 

You can move back in the future pretty quickly. It depends on your situation. If you have a family, it’s maybe even harder to move there.

“As Clinton said before, the future of all these taxation laws, especially for crypto, will be another five or ten years until they figure out the correct regulations there.”

- Dennis Wohfarth, Accointing Tweet

My team and I are encouraging everyone to accept these regulations because it also brings grip to the next stage, right? 

It’s not just a bad thing. If new regulations are coming in, you have better guidelines. 

You would know exactly how to behave. And with those guidelines, you can find loopholes to go around these taxes. 

If you don’t have any guidelines, it’s tough to decide what to do, because it’s just not defined yet. Right? That’s a big part to consider for the future.

Stephan Livera: Yeah. Clinton, anything to add?

Clinton Donnelly: I talked to a client, from Serbia, and said he had lived through the time when it was broken up, it became very lawless, and there was no real central government. 

And, the criminal element kind of dominated law and order. So there was a real breakdown. 

And when I was talking to him, he said, “I want to pay taxes! I’ve lived in a country where we didn’t pay taxes, and it was chaos. I want to pay taxes, and I want a stable government.” 

And I thought, wow. It was refreshing because so many people think that even paying a dime to a government or some crime is a value that governments give to you. 

And as you were saying Stephan, we should become shoppers to a certain extent. We can make choices about the tax impacts on our lives. The governments generally like you to stay put in one spot and never move, like everybody who has a hand on you can tax you there. They don’t like you moving around because it’s tougher for them, basically changing your residency.

Tax burdens are outrageous, worldwide and it has to do with the number of services we expect governments to give us.

We want the governments to give us social insurance, that if we get old, they’re taking care of us. 

We want the roads to have no potholes. 

We think that the government ought to do stuff to make things better and regulate and define what it means to be organic, all these sorts of things. Let’s have the government do it.

Every time you say the government ought to, you have to rephrase it and say, I want to pay more taxes so that the government ought to do this.

Governments never shrink themselves, so the only way you can sometimes vote is with your feet and move somewhere else, and the grass isn’t always greener on the other side. 

Suppose you have substantial family ties that you love going visit, you know, the big family on Sunday, and having a pasta dinner. In that case, you know, you’re going to miss that if you take off and go live somewhere else.   

But you might replace it with something more exciting and adventurous in your life. So you have to look at the whole picture. It’s not just the tax issue.

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Bitcoin Tax Strategies Locally and Overseas – Stephan Livera Podcast: Part Three

Learn about Bitcoin tax strategies locally and overseas with tax experts Clinton Donnelly and Dennis Wohlfarth on Stephan Livera’s podcast, episode 183.

Dennis Wohlfarth of Accointing and Clinton Donnelly of Donnelly Tax Law join Stephan Livera to talk about Bitcoin tax recordkeeping, and strategies to minimize tax. In the full podcast, we chat about:

  • Current Bitcoin tax treatment
  • Capital gains Bitcoin tax treatment
  • Bitcoin tax recordkeeping
  • Bitcoin tax strategies locally
  • Bitcoin tax strategies for those willing to go overseas
  • International crypto competition

In part one, we talked about Bitcoin tax treatment and Austrian economics on Stephan Livera Podcast, episode 183, and our guests were from the company Accointing and Donnelly Tax Law

In part two, we talked about Bitcoin tax recordkeeping.

Today, our podcast show notes are about how those various crypto tax situations from part two are treated from a crypto tax law perspective locally and internationally.

Bitcoin Tax Strategies Locally

Bitcoin tax strategies

What are some different ways various Bitcoin Tax Recordkeeping situations are treated from a crypto tax law perspective?

Clinton Donnelly:
If I sell Bitcoin and buy a car, I have capital gains when I dispose of that Bitcoin. 

I bought it at a lower price, and I’m selling it at a higher price. That’s equivalent to what I’m paying for the car, that’s the capital gains. 

And we see countries like Portugal are saying, if you pay for Bitcoin, we’re not going to have a VAT tax involved, which is kind of a duplicate tax: a VAT on top of capital gains. 

In the US, it’s just the sales tax, which is the taxes on what is sold, not how you paid for it. So it’s a bit of a different structure.

Cryptocurrencies are turning the tax regimes upside down with blockchain technology, DeFi, and smart contracts.

These exciting innovations are transforming the financial industry and turning our whole notion of currency and property upside down, especially from a tax and accounting perspective.

How do we do accounting when we are no longer trading in Fiat currency, and we’re trading in a Bitcoin? 

It’s an asset that’s continually changing value relative to the Fiat’s in which we have to report our business results to the tax authority. So, everything’s getting very complicated. 

The tax authorities find that defining cryptocurrencies merely as assets or merely as a property is not adequate, because it’s changing so fast. It’s becoming far more than mere property. 

Nor is it adequate to call it currency because it’s not only embraced by one government and everything that is involved with that.

We're seeing that tax authorities are holding back in moving forward with new taxation regimes targeted at cryptocurrencies because they don't know where it's going. They don't want to hamper progress by having tax rules making no sense as technology progresses.

I think we’re going to see taxation rules that are much like property continue, at least for the next five years until there’s a real settling down of this massive finance evolution. That’s frustrating to some people, but I think there will be something newer and better coming out of it.

Stephan Livera:
So for most people who are just holding it’s going to be treated as property, and it’ll just be the capital gains tax (CGT)

I suppose most people are looking for ways to minimize taxes on that legally. I guess one of them is tax-loss harvesting, and another might be moving to a better jurisdiction or things like that might be typical strategies that people are employing. Or the collateralized loan idea is putting out some Bitcoin and getting USD so that you’re not incurring a capital gains event. 

Are these the typical strategies that you see in your experience? Are there any other ones that people are employing?

Clinton Donnelly:
Yes. Lots of those people are putting in trust and then getting payments from the trust. These are all variations. 

There’s a bit of a shell game here. You’re moving the tax to the different places the tax eventually gets paid.  

The thing you mentioned with the collateralized loans: that’s a great strategy. Suppose you want to use a short-term asset’s value until it’s been collateralized long enough to characterize it as a long-term asset and then sell it at the long term capital gains rates. That makes sense. But these are just small micro strategies.

Bitcoin Tax Strategies For Those Willing To Go Overseas

Bitcoin tax strategies

Let’s say you’re a Bitcoin whale, and you have massive positions in Bitcoin. If you see yourself liquidating a lot of this, then the one strategy would be to relocate if you want to improve on the long-term capital gains rate.

Let’s put a framework in place to how you can make that decision.

So you want to ask yourself some questions if you were to relocate. 

But first off, you would be selling where you currently live and moving somewhere else, so you would be incurring new expenses. 

What’s the cost of living there? 

What’s the quality of living? 

Will you find yourself so bored living on an island in the South Pacific that you fly back to Sydney every month to go to an opera show? 

There are some quality of life things. 

You also have issues relative to banking access. 

When liquidating some Bitcoin, you want to put that into a bank and get access to it. 

Ask yourself if you can open up a bank in that foreign jurisdiction?

People may ask why you are coming to Bali to open up a bank account, for example.

They may wonder why you are coming to the British Virgin Islands to open up a bank account if you live in Europe or live in Australia.

These are valid, “know your client” type of due diligence questions that may be difficult for you to open up a bank. If you don’t have a bank, will moving elsewhere be a foolish thing to do? 

Let’s think about the cost of that. 

If your upside is that you have a $100,000 worth of Bitcoin, long-term capital gains rates, let’s use the US rate at 15%. That means your tax is $15,000. 

What can you do? 

That’s going to reduce $15,000 if you move somewhere that you might end up spending. It might be zero tax right there, but you might be spending more than the $15,000 to have moved there.

If you had $100,000 Bitcoin, then we’re talking about a lot of money. 

You might be slowly liquidating your positions over multiple years in this scenario and might be thinking about how much you will liquidate yearly? 

Will it be $100,000? Well, you’d typically be generating a $15,000 tax. Will you do better living somewhere else? 

It’s possible on an ongoing basis if you’re doing that. 

Portugal has an attractive tax regime with zero tax, and it’s also a beautiful cultural area in Europe. That’s an excellent thing.   

The British Virgin Islands, any of the Caribbean countries, and Seychelles, all have an interesting tax regime. The problem with these banks is that if you’re doing something with a Seychelles bank, BVI (British Virgin Islands) bank, or any other bank in the world, it will raise a red flag.

It isn't easy to work with any country in the gray area when it comes to anti-money laundering laws. An option in the US would be in Puerto Rico. It’s an exciting option for Europeans and non-Europeans (Americans).

I’d be happy to dig into those some more if you’d like.

Stephan Livera:
Sure. Let’s talk a little about some good places around the world, as you mentioned. 

I know Portugal, Singapore, and Switzerland all have no capital gains tax and Germany, as Dennis mentioned. 

I think if you hold for more than one year, there’s no capital gains tax. Depending on where you look around the world, some places might be a little better and others, not so much. 

You can find out more about International crypto competition and the ways people should explore options to determine if it were worthwhile for them to consider moving in part four of the Bitcoin Tax Strategies Podcast notes.

READ MORE: Puerto Rico For Crypto Traders

Final Part Of The Bitcoin Tax Strategies Podcast

Stay tuned for the final part of the Bitcoin Tax Strategies Podcast with our host Stephan Livera. 

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Bitcoin Tax Recordkeeping – Stephan Livera Podcast: Part Two

Learn about Bitcoin tax recordkeeping with tax experts Clinton Donnelly and Dennis Wohlfarth on Stephan Livera’s podcast, episode 183.

Dennis Wohlfarth of Accointing and Clinton Donnelly of Donnelly Tax Law join Stephan Livera to talk about Bitcoin tax recordkeeping, and strategies to employ to minimize tax. In the full podcast, we chat about:

  • Current Bitcoin tax treatment
  • Capital gains Bitcoin tax treatment
  • Bitcoin tax recordkeeping
  • Bitcoin tax strategies locally
  • Bitcoin tax strategies for those willing to go overseas
  • International crypto competition

In part one, we talked about Bitcoin tax treatment and Austrian economics on Stephan Livera Podcast, episode 183, and our guests were from the company Accointing and Donnelly Tax Law

We talked about Bitcoin and tax strategy.

Today, our podcast show notes are about Bitcoin tax recordkeeping with our two crypto tax experts. 

In part one, we left off curious about how people typically deal with having multiple wallets or multiple exchange accounts.

Bitcoin Tax Recordkeeping: Dealing With Multiple Wallets Or Exchange Accounts

Bitcoin tax recordkeeping

What’s the typical way that you and your customers usually deal with multiple wallets or multiple exchange accounts?

Dennis Wohlfarth:
At Accointing, we allow our customers to directly connect their exchanges with either an API or a direct connection if the exchange offers that. For Bitcoin and auto blockchains, we import all the historical data through an xPub and yPub, or standard Bitcoin addresses. 

You can then combine all that into one portfolio, and we keep track of the entire money flow in your system. 

That means if you send something from your first exchange to your Bitcoin wallet, Accointing handles that connection through the transaction ID, and we create a so-called “internal transaction.” These internal transactions are not a taxable event. They even create a fee because of the transfer fee that you can use later as a cost that you spend to transfer those Bitcoin.

Tracking Your Money Flow

Use the internal transaction through Accointing to transfer the cost basis from the first wallet to your second wallet, and it is always kept with that Bitcoin. This internal transaction is excellent because you can go back and dive into your money flow, and you have everything completely tracked.

It’s nice to have for tax purposes and to prove to your bank where you got the funds. If you trade with higher amounts, banks want to know where you got that investment from because it could be some money laundering activity. If you can track the entire history, it makes it more accessible.

Bitcoin Tax Recordkeeping: Self-Spending Is Not Taxed

Bitcoin tax recordkeeping

Stephan Livera:
I see. Yeah. That’s one way to aggregate across all of your wallets and all of your exchanges into one thing. 

The other part is when you sell. That’s a capital gains event, typically, and you want to have the record to say this wasn’t a sale, this wasn’t me spending. It was me, self-spending. And so that’s not treated as a capital gain, etc., and therefore not taxed.

Bitcoin Tax Recordkeeping: Taxable Events

Bitcoin tax recordkeeping

Dennis Wohlfarth:
Exactly. Or you even use it when you send a gift or did some other activity with it so you can prove where. 

For example, in Germany, we are currently suing the government, and are in court because we don’t agree with the government on the tax regulations. 

We don’t agree that payment should be a taxable event. We believe that people who report their taxes in Germany are being truthful. These truthful people report some gains and, in theory, have to pay taxes, but it’s unfair. The government can’t prove that other people don’t report taxes or are guilty of tax fraud. They don’t have a way to go into the blockchain point or different exchanges because they are all over the world.

Therefore, they cannot prove that you traded, but they want forthright people to pay taxes, which is not legal in Germany. That’s why we’re currently suing the government there and fighting the tax regulation. To make it clear to them that they can do that for everyone, which is highly unlikely, or they’re not allowed to file taxes on crypto investments or crypto trading. 

That’s one part that we try to do for the German community. Clinton knows more about the US part. Some inspiring things are happening in the future. I mean, a few exciting discussions are starting where they are trying not to treat payments as a taxable event, which would be nice. Considering everything happening in the market regarding Lightning and Defi coming in, I don’t know how they want to do it.

Bitcoin Tax Recordkeeping: Taxation From A Capital Gains Point Of View

Stephan Livera:
Let’s talk a bit about that. This idea of payments and the taxation that occurs on them, theoretically from the capital gains tax point of view. 

So I guess what you’re getting here is for example’s sake, let’s say you buy $100 worth of Bitcoin, and then it’s $200 worth of Bitcoin. If you spent a portion of that, the point you’re getting out there is theoretically a capital gain on which the government wants their pound of flesh.

What are some different ways those situations are treated from a taxation law perspective?

You can find out more about how different situations are treated from a tax law perspective in our upcoming post along with Bitcoin tax strategies locally and overseas.

Stay tuned for Part Three of the Bitcoin Tax Strategies Podcast with our host Stephan Livera. 

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Bitcoin Tax Treatment – Stephan Livera Podcast: Part One

Learn about Bitcoin tax treatment strategies with tax experts Clinton Donnelly and Dennis Wohlfarth on Stephan Livera’s podcast, episode 183.

Dennis Wohlfarth of Accointing and Clinton Donnelly of Donnelly Tax Law join Stephan Livera to talk about Bitcoin tax treatment, and strategies to employ to minimize tax. In the full podcast, we chat about:

  • Current Bitcoin tax treatment
  • Capital gains Bitcoin tax treatment
  • Bitcoin tax record keeping
  • Bitcoin tax strategies locally
  • Bitcoin tax strategies for those willing to go overseas
  • International crypto competition

These podcast show notes are about Bitcoin tax treatment and Austrian economics today for episode 183, and Stephan Livera’s guests are from the company Accointing and Donnelly Tax Law. 

We’re going to talk about Bitcoin and tax strategy.

Tax is not something people want to discuss. At the same time, it’s one of those things where a lot of listeners may be interested in understanding some of these different issues and some tax strategies they could employ.

Introducing Bitcoin Tax Strategy Experts: Dennis Wohlfarth and Clinton Donnelly

Bitcoin tax

Dennis Wohlfarth:
My name is Dennis. I officially co-founded Accointing in 2018. We had a system running before that as a group of investors in the market for many years. At some point, we faced the problem of keeping track of all our investments. Especially back in the days of (Initial Coin Offerings) ICOs and all the things that were happening back then. So we decided to build a tracking tool for ourselves, as a backend tool. In 2018, we went public to support the crypto market in keeping track of everything and creating tax reports for different countries. And we’re now at the point where we support the US, Austria, Switzerland, UK, and Germany for specific tax reports and other countries with general health performance. 

Clinton Donnelly:
My name is Clinton Donnelly, with Donnelly tax law. We do tax preparation and defend people with tax audits of their cryptos. I do tax preparation in the United States, but I have a very international experience. I have an advanced law degree in international financial regulation, including taxation, from the University of Liverpool in the UK.  

I have clients in 48 different countries who are mainly:

  • Americans exploring crypto tax implications of doing business with the US 
  • Americans living outside the US.  

I have a practice focusing on cryptocurrencies, cryptocurrency return preparation, and tax amnesty (related to crypto). 

I have authored four books in cryptocurrency, and I do a lot of speaking about it.

Stephan Livera:
That’s fantastic. Let’s get started. I think the naive person is first thinking about Bitcoin, but depending on how they’ve acquired that Bitcoin, they might think I am super private. 

What are some things people need to be thinking about in the world of Bitcoin taxation?

Current Bitcoin Tax Treatment

Bitcoin tax

What’s the reality in terms of Bitcoin tax treatment? 

Clinton Donnelly:
The international community has decided that Bitcoin is considered a virtual asset. It’s property. It’s not currency, and it’s not a cryptocurrency from a global perspective.

Taxation occurs when you sell or exchange that Bitcoin. So merely buying a Bitcoin is not going to be a taxable event. If you're hodling that Bitcoin, for a couple of years, there are no taxes involved. When you sell it or exchange it, you are going to incur taxes on the gain.

If Bitcoin hits the moon this year, what sort of thinking would your listeners want to have in terms of taxes? 

The one thing about taxes, it’s usually a percentage of your income. 

On the one hand, I’d wish all your listeners to have incredible tax bills, which means they made incredible amounts of money.

That said, how do we minimize what we have to pay and not give the government or any government more than they need to get legally?

Depending on your jurisdiction, they're going to take 25 to 50% of your hard-earned money toward taxes. So your tax strategy is just as important as your investment strategy.

Stephan Livera:
It’s almost like the tax agents and the tax law of the land encourage people to hodl, right? That’s kind of the encouraged position because it’s only when you sell or spend that Bitcoin that you have to even think about these taxes, right?

Clinton Donnelly:
That’s exactly right. Most countries in the world want to encourage investment.

Capital Gains Bitcoin Tax Treatment

Bitcoin tax

When does investing happen?

Investing can happen:

  • when you buy it and hold it for a long time or
  • when you’re a day trader, you’re in and out, in and out 

But corporations cannot grow a business if they are just day traders investing in their company. They want somebody to invest and leave that money for a year, two years, or “whatever amount” of time. That way, the corporation knows that they can bank on that investment. 

Governments incentivize that by having one or having extra tax tiers for capital gains. Capital gains are what you call selling property.

Which countries have long-term capital gains incentives?

Most countries have long-term capital gains incentives. In the US, your tax rate goes down to 15%. It goes down to zero or some minimal amount or after so many years at zero in certain countries. This holding is an incentive, and that is a significant reward for the hodlr to be aware of and ask if they hit that long-term capital gains mark.

In most countries, the most natural and most legal thing to do is to go for the long-term capital gains incentive on your taxes.

How is crypto income treated from an Australian position?

Stephan Livera:
At least from the Australian position, my understanding is that it matters whether your income is treated as if your business is one of “trading,” or your business is one of “investing and speculating.” 

So if you’re in the trading world, it is seen as if you are trading income like you had one hundred thousand dollars, and that’s your income for the year. But for most people, it’s in the capital gains world of being an asset. And when you made a gain, you’re taxed on the gain. 

Is that mostly a fair way to think about it?

Bitcoin Tax Strategies Vary Country-To-Country

Dennis Wohlfarth:
Yeah, it is. Like Clinton already said, it’s a bit different in every country. For example, after holding it for one year in Germany, you have zero taxable gains, or you don’t have to pay taxes on it because it becomes long-term. So, you need to be careful. 

If you are margin trading or similar trading activities, you need to be careful not to be treated as an investment company because it changes the rules a bit. 

You have to open a business for that, but most investors who may trade a few times per month don’t typically have a problem with that. And based on that holding period, there are also a few good parts that you can use.

If you buy Bitcoin or any other crypto assets at a high price, and the price drops, you can use that and tax plus harvest or sell the loss and use it as a loss for the coming years when you create some gains. It depends on how and when you invested in crypto.

Bitcoin Tax With Accointing

Importing Transactions With Crypto Tax Tool Accointing

One big part that we offer to our clients at Accointing is allowing everyone to import all the transactions and all the trades (for free). We also have different tools to monitor and display holding periods or assets. 

Imagine that you trade on various exchanges, and hold in different Bitcoin wallets, you’d never know which Bitcoin is long-term. That means there is a lower tax rate on the Bitcoin in the short-term gains. 

So you need to be careful here, and Accointing has a way of displaying that. 

There’s also a little more for the optimization part. You can go deep into that, and there are different ways of tracking. 

You can keep track of your investments in one single day depot.  

That means you buy Bitcoin, and in most countries, they use a first-in-first-out (FIFO) method to calculate which Bitcoin or cost basis you have to use when you sell something. 

There’s a single day depot where you put everything into one Excel file. You use the oldest one, like the oldest Bitcoin cost basis that you have and sell that. But in most cases, that’s not what you want to do, especially if you do more day trading. 

A good way of optimizing a bit more of a micro field here is to track everything with multiple depot tracking. That means if you buy something in one exchange and you send it to your wallet. The cost basis gets transferred to the wallet, and when you buy something else, on another exchange in your day trade there with Bitcoin, you just sell the Bitcoin that is really on this exchange, and you don’t touch long-term investments. 

With that strategy, you can trade a few percentages of your portfolio, and the rest you can keep separate and go for the long-term gains. 

If in 2017, you had had an investment of say, ten Bitcoin, and at just six months, you hadn’t sold them, but Bitcoin price crashed, there would be a trade-off.

Would it be better to sell at that high price, or is it better to hold?  

The answer is, it depends on what you expect the market to do in the future.

It’s good to optimize for taxes, but not all the time when you trade. So that’s the trade-off that you have to use in that situation. 

For example, there are countries like Switzerland where you don’t pay any gains on your crypto trades, and it’s just a wealth tax at the end of the year. So, if you’re lucky to live in a country like this and want to day trade, it’s a little easier. But you can make that happen anywhere in the world.

Bitcoin Tax Practices

crypto tax advice

Tax-Loss Harvesting

Stephan Livera:
So the first point you mentioned was regarding tax-loss harvesting. My understanding of that is you purchase at a specific price, but now the price has fallen. And people sell and re-buy to lower their cost basis so that they’ll have a loss that they will be able to use against their future gains in the future. Is that right?

Dennis Wohlfarth:
Yes, that’s correct.  

And if you do that, you always want to sell them in under a year, because you can use more losses for future gains since the tax rate is higher. 

For example, in Germany, if you sell after one year, the tax rate for long-term holdings is zero. You don’t have any losses that you can subtract from your future gains because it’s no longer taxable.

Stephan Livera:
So the other point was regarding what you might call segregation. 

For those people who are traders, they might have a holding amount created, and it is their long-term holding that’s going to get taxed as an asset at a capital gains tax (CGT) sort of style. 

Whereas if they’re trading, that’s a separate portion of their Bitcoins. Let’s say they are a trader, then that is what gets assessed on a different basis because that’s more like regular income, right?

Dennis Wohlfarth:
Yes, exactly. You don’t want to mix those two depots up, and you can use different strategies. 

If you buy Bitcoin every month, you can use different addresses and put the Bitcoin there from the beginning. 

If you mixed them up and traded them over the past few years, you want to use this method.  

You can use a tool that we offer at Accointing, where we tell you which day depot has long-term holdings and which has short-term holdings, and what the trade-off is between them. 

You can go deep into that and analyze it. Then use the correct Bitcoin, maybe from your wallet, number 10, to sell because this would create a loss. 

On the other hand, the Bitcoin that you hold in Coinbase would generate a gain, right? So, in the end, you sell one Bitcoin, but you can sell the correct one to create a loss with that trade.

Stephan Livera:
I’m also curious about how people typically deal with it when they have multiple wallets or multiple exchange accounts.

For More Bitcoin Tax Help

Stay tuned for part two of the Bitcoin Tax Strategies Podcast with our host Stephan Livera. 

You can find out more about multiple wallets and exchange accounts and more in our upcoming post.

Subscribe to our newsletter and get our free download This Deadly Crypto Mistake Could Cost You $10K!.

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Taxes Are Sexy! Transcribed Interview Between Clinton Donnelly and Paul Jordan

Get excited to learn about taxes in this podcast interview between Clinton Donnelly and Paul Jordan. Find out why taxes are sexy!

Taxes. Do they have intrigue? Can they be interesting? Excitingly appealing? Even sexy?  

We think so! At Donnelly Tax Law, we believe taxes are sexy because the knowledge that can save you big money on your taxes is desirable. 

In this interview on Life, Love, and Coffee with Paul Jordan, we provide clarity on how you can get your taxes right because of how quickly everything is changing moment by moment. 

Paul says, you’ve got to make sure you stay on top of those types of things, so he wanted to talk about where we are now and where we should be when it comes to taxes.

What makes crypto taxes complicated?

taxes

Clinton Donnelly: Well, Paul, I talk to a lot of crypto traders. A lot of crypto traders are unique because this is the only time they’ve ever invested.

Until getting involved with cryptos, their tax lives had been simple. 

They took their documents to a tax professional, or they used Turbo Tax, plugged in the numbers, and filed a return. 

But once they started trading cryptos, they moved into the echelon of a complex tax return. 

It’s a complicated tax return because:

  • the accountants don’t know what to do with a crypto tax return
  • the tax software packages like TurboTax and TaxAct don’t know what to do with a crypto tax return

So crypto traders wind up on their own. And it’s scary for everybody. 

What hit me in these last couple of months is that most people don’t know how to do a tax return in general. 

Before using tax software, you went down to the post office, and they would have racks of tax forms. 

You’d go home, fill out the forms, sign it, and mail it in. You had a basic familiarity with these things.  

But now, people have no idea how to read them.

By relying on high volume tax preparer companies and depending on tax software packages, we’ve made ourselves ignorant about how taxes work and how they operate. 

That’s why many younger crypto traders are overwhelmed by the impact of their crypto trading on their taxes.

Getting Back To Basics With Your Taxes

I’ve developed some educational things, and this is my passion. I realized I don’t need to teach people how to do crypto taxes; I want to teach people how to do taxes in general. Nobody’s ever done that.

We’re creating courses at DonnellyTaxLaw.com to help you overcome your fear of the IRS and learn to do your taxes. 

Paul Jordan: Oh yeah, say more.

Clinton Donnelly: There are a lot of topics to cover. One is, what is tax? Is it our income? Is it our profit? What are those things? And then we move into what are the forms? And then, how do you submit the documents? Do I use a preparer or do it myself? And then what happens if I get a letter from the IRS? 

I’m excited about teaching people to do their taxes and taking control of their lives so that taxes are not a thing that makes you terrified before the taxes are due in April.

When I was growing up, nobody ever taught me about the most significant expense I’d have in my entire life: taxes. Or how to fill out my tax form. The forms that are the most considerable interaction I’d ever have with the U.S. government.

And today, my issue with the accounting profession is that they’ve entirely abandoned crypto owners. Most accountants will not accept any responsibility for your crypto tax return.

Taxes Fall Into Three Categories

Clinton Donnelly: The first category would be an income tax. You’re taxed on income that you make. Many people hate this tax, but I would rather make a million dollars and pay $200,000 in taxes than make $20,000 and pay no taxes. So taxing my income, that’s not bad. I can swim faster than they can come after me.

The second tax category is a consumption tax. This would be a sales tax, or licenses and things like that, or excise tax. They consume you with buying things. When we think of the Boston Tea Party, there was a 2% excise tax placed on the sale of tea, and they decided to protest on that 2%.

The third category of taxes is a wealth tax. Now, this is a very harsh tax, in my opinion. It taxes you every year because you own something. You didn’t earn money; you didn’t consume it; you just have it. This would be property taxes. For example, your home in the United States.

Crypto Traders and Taxes

Bitcoin halving

My mini-courses will teach you to think differently about taxes, about retirement, about your assets, and how to report cryptocurrencies. 

Education can help you overcome your fears, and most people are just afraid of taxes.

There are a couple of things that crypto traders need to understand: when you trade with cryptocurrencies, every time you trade from coin one to coin two, that’s a taxable event. 

Now, what do I mean by a taxable event? Well, if you made money on that coin. 

If you bought the original coin in U.S. dollar terms, and you bought it for $1,000 and you sold it for $2,000,then that’s a $1,000 gain, right? 

Let’s say you flip it around the other way. You bought it at $2,000 and it went down to $1,000 when you sold it. That’s a negative gain. That’s a negative $1,000 gain, or we might call it a loss. There’s a positive gain or there’s a negative gain.

Now, I’m not saying taking the cash out. I’m just saying that if I jump from coin A to coin B. When I do that conversion, I’m selling coin A. I have to look at what I bought coin A for, and that’s the gain. Every single one of those, every single gain, is a taxable event, positive and negative. 

We add them all up, you net it out at the end of the year, and you have to pay taxes on the gain. It does not matter whether you took those profits out in cash to your bank account. That is not relevant because it is a gain nonetheless. 

Many crypto traders are starting to become aware of the fact, “Oh yeah, well, if I have gains, I’ve got to pay taxes on the gain.” But guess what? If you had a loss, those losses are negative gains. Those negative gains reduce how much you have to pay on the positive gains because you add them all together. You want negatives to offset your positives.

I helped a guy reduce his taxable gains by $15,000 last week by claiming all his losses. That’s about $4,000 that he cut off his tax bill from losses.

Paul Jordan: Wow. Wow.

Most Americans Still Need To File Their Taxes

I did a poll recently, and about 70% of Americans haven’t done their taxes. I encourage Americans to give it a try on their own.

Taxes are the most significant expense that you’re ever going to have in your life. One-third of everything you earn is going to go to taxes. It’s time to start thinking about it.

If you need a consultation, if you want us to do your taxes, or you have a question, sign up for a consultation, and we will talk. My website is donnellytaxlaw.com. 

I have an advanced law degree in international financial regulation, including taxation. I’m an enrolled agent. I’ve specialized in complex tax returns, particularly crypto tax returns and tax returns for ex-pats, people living outside the U.S. We also specialize in doing foreign corporation reporting. 

Cryptocurrencies have a lot in common with people outside the United States because you’re investing in crypto exchanges outside the United States. You start to run afoul of a whole slew of U.S. anti-money laundering laws, so really focus on the anti-money laundering compliance because this is the easiest way for the IRS to crush anybody on their crypto taxes.

I’ve done over 1,000 tax amnesty returns and about 800 crypto returns. My largest trader is up into like 200,000 transactions a year, that type of thing. So we will never reach a point of being paralyzed.

Tax Returns That Are Bulletproof Against The IRS

taxes

An excellent tax preparer pays for themselves. 

You can have a bulletproof crypto tax return, a tax return that keeps you safe from the IRS when they shoot their bullets, which is my focus. Not only do we do tax returns, but I defend crypto tax returns before the IRS.

We have one going on right now where we’re protecting them. We’re on top of the research, the legal analysis, and all that stuff. You might be surprised to hear this, but 98% of all tax preparers have never defended a tax return before the IRS. That’s like getting in the car with a taxi driver who just got his license yesterday.

Paul Jordan: Right.

Clinton Donnelly: So that’s the difference in our company: we love what we do, we love helping people. My biggest passion right now is to help as many people as possible, so I’m creating these tools to empower people to build their own crypto bulletproof tax returns.

So that’s a bit about me and Donnelly Tax Law. Love to help anybody, set up a call if you have a question.

Paul Jordan: That’s fantastic. Well, I think that’s an excellent jumping-off point. I want to thank you so much for coming on the podcast today, educating us, and getting us to move forward on taking care of our tax responsibilities.

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How The IRS Will Use Anti-Money Laundering Forms To Come After Crypto – Part 2 of Charlie Shrem Interview Video (Transcribed)

Crypto tax expert Clinton Donnelly and crypto influencer Charlie Shrem discuss how the IRS uses anti-money laundering forms to come after crypto traders.

In part 2 of our multi-transcription series with Charlie Shrem, Clinton and Charlie discuss the accuracy of a crypto tax return and how the IRS will use anti-money laundering forms to come after crypto traders.  

Read my e-book, the Basics of Crypto Taxes, to learn how cryptos need to be reported on anti-money laundering forms.

Can your crypto tax return ever be 100% perfect and accurate?

[Charlie Shrem]: Is that physically possible?  Can your crypto tax return ever be 100% perfect and accurate?

[Clinton Donnelly]: A tax return is not like your high school math test where you’re trying to get a 100.

[Charlie Shrem]: Oh man, this is a great sound bite. That’s the first time I’ve ever heard anyone say that.

[Clinton Donnelly]: You just want to be close.

[Charlie Shrem]: Fuck, brilliant.

[Clinton Donnelly]: You want to be close.

[Charlie Shrem]: Honest, right?

[Clinton Donnelly]: Yeah.

"You want just to be honest, have integrity. That's what I've always tried to do with my tax returns."

- Charlie Shrem, Untold Stories Tweet

[Clinton Donnelly]: Hey look, the IRS auditors are under quotas. 

I had a former IRS auditor work for me, and he said they have monthly quotas that they have to go after. 

They have penalties that help them hit it, but if you’re pretty close, and they know they’re going to lose, they don’t want to waste time on you. They want to move on to the next bigger guy.

“Most people think the IRS is going to audit a tax return by going through that long list of transactions to see if you calculated it right, you know FIFO, LIFO, and all that. That's not at all how they're going to do it."

[Charlie Shrem]: What are they looking for? 

Are they looking for someone who intentionally lied about a holding and then had an exchange account overseas and didn’t report it?

Or are they looking for someone who reported $60,000 in income instead of reporting $100,000 by mistake, and just not going back and fixing it?

Can an auditor read the tax return and say, okay, maybe this guy or girl made a mistake?

Or do they read a tax return and say no, this guy was intentionally dishonest?

[Clinton Donnelly]: The IRS is in the business of compliance. In what we’ve seen in their public statements, they want to go after the criminals okay. They have those blockchain analysis tools because then they can go after who was doing the dealings.

But if you’re just an honest guy, a regular crypto trader who’s a large fish and didn’t know how to do your tax return correctly or your preparer didn’t know, the approach on that is different.  

It comes down to how the IRS can prosecute a law case. 

If they look at your crypto reporting and how you made these trades, there are a whole bunch of  “taxpayer’s rights” procedures in the law, and they have to do appeals and send letters and stuff.

READ MORE: How Are Cryptos Reported On Anti-Money Laundering Forms?

"If they use the anti-money laundering laws, they use a different section of the code. It's not a part of the tax code even though the IRS manages it; it is Title 18 of the Bank Secrecy Act. And from that, they can immediately go to prosecution and penalties. So, it's much easier. That's the way they're going to come after you."

[Charlie Shrem]: What people don’t realize is when I got arrested in 2014, I got arrested by an IRS special agent. 

And, we went on to being on pretty good terms over the years. 

I try to have respect for people that are just doing their job.

So, with the IRS anti-money laundering, there’s a huge overlap there, and so what you’re saying is important. 

What type of things are they looking for? 

For my crime, there was a money transmission, and there was a company that I owned that wasn’t tax-related.

READ MORE: Why Crypto Traders Are Low-Hanging Fruit For The IRS

What are some crypto tax-related things that the IRS is looking for when it comes to anti-money laundering?

crypto tax return

[Charlie Shrem]: Because it seems like that’s something people should look out for at the top.

[Clinton Donnelly]: The first one is the major anti-money laundering law, called the Bank Secrecy Act 1990. 

It created an organization called the Financial Crimes Enforcement Network, lovingly known as FinCEN, and they’re the ones that develop the regulations that all banks, brokerage houses, money lending, money service businesses have to follow.

“And it's the FinCEN violations that got you, Charlie. They applied FinCEN regulations against cryptocurrencies, and it's surprising. I'm shocked how much denial traders have, and even tax preparers have that crypto people have to report anti-money laundering. Some of them don't even think it's cash or that it's a financial asset.”

But for an individual, you have to report FinCEN form 114, which is most commonly endearingly called the FBAR, the Financial Bank Account Report, and you have to report.

"Every crypto trader has to file an FBAR report and file a form 8938, which is an overlapping tax money laundering form. It came from the FATCA law of 2010. These are required unless you're a small fish; if you're a small fish, there's a filing threshold and you don't have to file."

[Charlie Shrem]: What if you never held accounts overseas or even exchange accounts? 

Is this something you have to deal with? 

And what if the exchange has a U.S entity like Binance? And, they are based in Hong Kong, but they have Binance America. Isn’t Binance America required to do the reporting, not you?

[Clinton Donnelly]: None of the U.S exchanges are under full regulation of the SEC, all right. So if they were, then that reporting would be done by them, but since they’re not, you still have to report. 

[Charlie Shrem]: I feel like that would be better. Wouldn’t that be better? If you have a brokerage account, it’s your brokerage that’s required to do all the tax reporting for you. Isn’t that so much easier, or would you rather it be, as an accountant, that traders themselves are reporting it on their own?

[Clinton Donnelly]: Absolutely what you’re saying is right. And that’s where I think we’re headed for a couple of different reasons. 

There’s been international regulation, and the U.S said they’re doing it.

They’re going to force all US crypto exchanges to comply with the all banking and brokerage regulations.  

In the future, you’ll get a 1099B just like you do from a brokerage statement listing all your trades and what you bought it for fully certified; it would be straightforward for your crypto tax returns. 

We’re not there yet.

[Charlie Shrem]: I feel like that would be such a pivotal point for Bitcoin and crypto. If I could tell a friend of mine who wants my Bitcoin, yeah, you go on this exchange, and then don’t worry about it.  

You see all the IRS headlines; you see the government taking people down. 

If you can go to an exchange and know that exchange is going to be sending you that form at the end of the year, I feel like a lot of people would trade more comfortably that way. 

Not everyone wants to be their own bank; not everyone is an anti-statist or whatever. I don’t know what you call the term, but some people want that comfort. And I understand that, and I do get it, especially non-tech people.

[Clinton Donnelly]: We’re definitely headed there. There’s an exchange called Robinhood, where it’s totally insulated. You cannot do transfers in and out of Robinhood, you have to bring cash-in, and only cash-out, any coin stays in Robinhood. As a result, they know what you bought it for, they know what you sold it for, and they could generate a 1099-B

They’re very close to doing that. I think the Uphold exchange is getting close to doing that. 

But as long as we have that you can move coins from this exchange to that exchange, to the other exchange, then the exchanges don’t know the buy and sell prices, and they cannot give you that type of report. It’s a term called covered securities.

[Charlie Shrem]: It’s a good point. If they don’t have that content, then how are they supposed to issue a report?

[Clinton Donnelly]: But I think, trend-wise, what we’re going to see as we have more and more people getting into crypto, is that trading becomes more mainstream. They’re going to demand this. They’re not going to accept anything with the chaos that we have now. 

And as a result, Fidelity is going to have a crypto exchange, Merrill Lynch is going to have a crypto exchange, and it’s going to be all-inclusive.  

How can I say this? It’s all-inclusive like Robinhood is; you cannot trade between exchanges. 

That’s where we’re headed. And in that case, because then those will be SEC-regulated exchanges, it could be very attractive.  

It has to be very mainstream. There’s probably some downsides on that too, but I think from a tax point of view, it’d be very attractive.

[Charlie Shrem]: You know when you don’t understand something, you become hostile to it automatically when you’re constantly trying to understand something over time, and you can’t. That’s why there’s a lot of hostilities still towards crypto because simply people don’t understand it. 

And why I’m telling you this is, if you do a Google search and you type Bitcoin taxes or crypto taxes or IRS Bitcoin, it’s all negative. It’s negative; it’s fear, it’s uncertainty, it’s doubt, it’s scary, there’s no clarity. 

And I think that’s one of the reasons that a lot of people just simply say, “Okay, if I don’t get it and it’s too complicated, how is the IRS supposed to get it and not be too complicated?”

That’s the wrong mentality to have, right? 

Just because something is scary, if you’re in our space, if you’re in our industry, you have to pay attention to your taxes.

READ MORE: Why Your Crypto Taxes Need An Enrolled Agent Specializing in Crypto

What CPAs will handle anti-money laundering forms for crypto traders?

crypto tax

“The problem is that a lot of CPAs that I've gone to, and other people went to, they either say I don't want to touch this, or they make you more scared.”

- Charlie Shrem, Untold Stories Tweet

Do you know what a lot of CPAs are doing now? They’re saying hire our tax firm to do your tax return if it is not a normal return. There’s a word for it, where they have to go deep dive into it. 

What’s the term I’m looking for? Is it forensics? 

We have to do forensics on this now, so it’s more expensive. So now charging more money because someone’s in crypto.

Protect yourself from the IRS with a CryptoTaxAudit membership.

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Video Interview & Transcription: Virtual Currency Owners Have to Confess to the IRS with Charlie Shrem

We delve into the major new tax requirement that affects virtual currency owners. Learn more from part 1 of this interview video with Charlie Shrem.

Crypto Tax Expert, Clinton Donnelly, and Crypto Influencer, Charlie Shrem discuss crypto taxes, the IRS, and why every virtual currency owner has to confess “Yes” or “No” to the IRS.  

In crypto, there are big fish, and there are small fish, find out the difference between the two.

Interview Video with Charlie Shrem (Transcribed): Part 1, Virtual Currency Owners Have to Confess to the IRS

telecommuting

Become a member of CryptoTaxAudit today to protect you from an IRS audit letter. 

In part 1 of our multi-transcription series with Charlie Shrem, Clinton and Charlie discuss why starting in 2020, every owner of virtual currency has to confess “Yes or No” under oath.

[Charlie Shrem] What’s going on starting in 2020 is that every taxpayer has to confess under oath yes or no if they’ve dealt with cryptocurrencies in the past year? 

We have a lot of useful nuggets of information. Honestly, after doing this show, I feel a lot better, and you should, too, when you listen to this show. 

A great return defends you, and a good crypto tax return is one that is not easy to prepare but a guy like Clinton Donnelly can.  When you finish this show you’ll learn how to do it on your own or you’ll be confident enough to give him a call.

He’s got a very, very good attitude about taxes, he wants to work with you, and he wants everyone to do it the right way. But at the same time realizing that you shouldn’t pay the IRS one more cent than you legally are obligated to.

If you’re buying, selling, or holding crypto, you are low-hanging fruit for the IRS. For many years I’ve been waiting for a good solution where I can be proactive in my taxes but more importantly to sleep at night.

Before the IRS picks you for an examination, subscribe to our newest sponsor CryptoTaxAudit

CryptoTaxAudit is an audit protection service designed for the needs of the crypto trader. That’s you, me, and everyone else.

If the IRS examines your crypto reporting on your tax return, the experts at CryptoTaxAudit will provide all the IRS representation and tax law research at no charge.

The statute of limitations on a crypto tax return is six years. 

CryptoTaxAudit covers you regardless of what year the IRS examines. Best of all, you can sleep well, knowing that the best crypto tax gurus are ready to defend you.

CryptoTaxAudit is a service of Donnelly Tax Law. 

While other services are reactive, CryptoTaxAudit is proactive and gives you tools like their crypto tax health check so you can reduce your chances of getting an IRS letter in the first place. 

No one likes that certified letter from the IRS. Donnelly Tax Law specializes in complex crypto tax return preparation. No situation is too complex for them. So check them out at cryptotaxaudit.com and listen, guys, start defending yourself today.

This is the most important episode you’re going to listen to on this show. 

Tax season is coming up.

And why that’s important is because:

"If you're in crypto, if you buy, sell, trade hold, do anything Bitcoin or crypto-related, this episode is extremely important."

- Charlie Shrem, Untold Stories Tweet

We’re going to talk about all the subjects and conversations you’ve been purposely ignoring.

Or that you’ve been dreading with anxiety.

Now, our guest today, Clinton Donnelly.

The New Tax Requirements for Virtual Currency

cryptos reported on anti-money laundering forms

"Clinton, thank you so much for coming on the show. You are the best crypto tax return preparer in the business. You have the cojones to do what every other CPA doesn't. The CPAs that I've talked to have turned me down."

- Charlie Shrem, Untold Stories Tweet

Thank you for coming on the show, and thank you for doing what you’re doing.

[Clinton Donnelly] I am so glad to be here, Charlie.

"I'm passionate about helping people because there's just such a lack of understanding on how to do a great crypto tax return, and it makes every crypto trader vulnerable. So I'm glad we can be talking and letting people know."

[Charlie Shrem] There’s a lot of ambiguity; there’s a lot of mystery, complication when it comes to taxes not related to crypto. So we have a lot to cover, let’s get right into it. 

The first thing on everyone’s mind that they’re thinking about right now is starting in April 2020, as of April 15th, when they have to report taxes. You have to say “Yes or No,” and it’s under oath. 

And that’s such a small question. Yet, my mother-in-law may have to say “yes” because I’ve opened up a wallet for her and given her $100 worth of Bitcoin, right? 

And now she’s going to be added to a list of all crypto holders in the country? How is that legal? How is that constitutionally legal?

[Clinton Donnelly] Well, yes, the IRS has put a question into schedule one, which is a part of Form 1040, where you list your income. 

It’s a question that’s at the top; you can’t miss it. It says, “Did you receive, sell, send, exchange or otherwise acquire any financial interest in virtual currencies during the year?” 

Virtual currencies are their word for cryptos. And this is a sweeping thing, and it’s yes or no.

[Charlie Shrem] Airline miles too.

[Clinton Donnelly] Yeah, that’s true. So there are two things you can do here. 

I think it’s a violation of our first amendment, fifth amendment, and eighth amendment rights, and I’ve written a letter. I sent it to the IRS protesting this, but hey, it’s not going to take the question off.

Once you’ve checked yes, you go on a list of the people who are crypto traders, and guess what? If you were a crypto trader in 2019, the odds are pretty high you were a trader in 2018 and 2017. So now you’ve put yourself on the list that they can go back and look at how you reported in 2017.

Did you report crypto gains? 

Did you report anti-money laundering forms in 2018 and 2017? 

This is about their compliance at the IRS now, and it is getting very sophisticated. 

It’s all data mining driven, artificial intelligence, and it’s just so easy to shake down who the big traders are and go after them. 

People think the IRS is going to go after them by calculating all these capital gains and their transactions. No, no, they take a whole different approach at coming after people, and it’s so crucial for people to protect themselves.

READ MORE: How are Cryptos Reported on Anti-Money Laundering Forms?

In crypto, there are big fish and there are small fish, so let's separate the two.

IRS assessments

[Charlie Shrem] Maybe you want to talk about that first, and then we can hear about what they do?

[Clinton Donnelly] That’s true. Everybody should consider if in the IRS’ eyes you are a small, medium, or large fish? 

A small fish would be if the most you ever had in the markets were say, no more than like $20,000 -$30,000. 

You’re small, and those people are hyper conscientious, and they want to do the right thing. But fixing your tax return is so minor, it’s going to generate such little income to the IRS, that they’re not going to go after you.

"We have a service for small fish called cryptotaxaudit.com. You can get the protection that someone's going to defend you if you ever get that letter from the IRS about how you reported cryptos."

What’s a Big Fish When It Comes to Virtual Currency?

enrolled agent crypto

But if you’re a large fish, you have much more exposure.

"The IRS wants to go after big fish because the rewards are much bigger."

"You're a big fish if you had $100,000 or more at peak at any time in the market and mainly if you are trading on foreign exchanges, which most people did."

It’s easy for the IRS to identify you and come after you. 

They sent out letters to large fish in August of this past year, basically a letter saying, did you report your cryptos? 

They called it an educational letter. I have maybe 15 clients who received these letters, and it’s amazing they all have million-dollar or more holdings.

The IRS knew who the big fish were. A lot of these people, along with one of my clients, did all their trading overseas, so the IRS knew they were big fish overseas.

"I wrote a book about this, Why Crypto Traders Are Low-Hanging Fruit For The IRS, and it gets into a lot of details. But if you're a large fish, it's vital when checking this new question that you have a bulletproof tax return."

You need to be rock solid because the IRS has a long time to come after you. 

Your statute of limitations, if you filed it correctly, is six years. But likely, 95% of people haven’t filed it correctly, and therefore, their statute of limitations is now open forever. 

Protect yourself from the IRS with a CryptoTaxAudit membership.

READ MORE: Introducing Crypto Tax Tools by CryptoTaxAudit

Watch the Video for the Full Interview

Part 2 of this transcription series is coming soon.
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