We spoke to a crypto tax expert and this is what he said...

Author

Logan Cloak
April 08, 2022

GM, and welcome to RollCall by Rollfi! 

We spoke to a crypto tax expert...

Tax season is coming to a close, and although we said we wouldn't, we procrastinated getting our taxes done again. 

With all that's happened in crypto in the past year, it's been really difficult to figure out what we owe (or are owed from) Uncle Sam. That's why we found someone who could break things down so even we could understand.

This week, we spoke to our friend Jaimin Desai. Jaimin is building Reconcile, a tax planning platform that helps accountants and advisors provide proactive guidance for their retail investor clients. Here's what we gathered from the conversation:

On tax treatment of crypto market in general:

Firstly, the IRS treats all cryptocurrencies as property from a taxation perspective. So any time you sell an asset, you are subject to the appropriate capital gains tax.

However, you may be subject to ordinary income (vs. investment income) taxation as well depending on the form or manner in which the crypto is received (i.e. as payment or staking vs. purchasing). More on different scenarios below.

Guidance around the tax on crypto has been lagging. For example, the IRS hasn't given clear guidance on NFTs, but Jaimin thinks they'll be ruled as "collectibles" - particularly those that have some artwork tied to them. 

Generally, he said, the government is somewhere between 2-3 years behind where the market is. And since there are always new things happening in the crypto space, it is often difficult for accountants and software to gather the necessary data for taxation purposes.

On different transactions & scenarios:

What's important for all types of transactions is the following: when you first acquired the asset, how many units/tokens you received and for how much did you sell as well as when you sold the asset, how much did you sell and for how much. 

Jaimin has written a comprehensive tax guide on his Substack where he dives into a ton of different scenarios. He's also built this Crypto Transaction Tracker to help you keep track of your taxable crypto transactions in a single spreadsheet. For now, we'll stick to the common transactions:

  • Buying/Selling tokens with USD: Just like securities, your tax rate depends on how long you held the asset (token). >1 year = long-term capital gains. <1 year = short-term capital gains. This applies to the sale of any asset.

  • Buying/Selling NFTs with crypto: To buy an NFT with ETH (or any other token), you are technically disposing of one asset for another, creating a capital gain/loss taxable event. Then, when the NFT is sold for ETH, that is another taxable event. However, if the IRS deems NFTs as "collectibles", the tax rate is slightly different than the capital gains rate.

  • Bridging or wrapping tokens: Similar to NFTs, this is treated as disposing of one asset for another and therefore creates a taxable event. Be careful wrapping your ETH or BTC if you've held for a long time because you could be subject to significant capital gains tax.

  • Airdrops: Because airdrops generally require participation, they are taxed as ordinary income when claimed. Then, when the tokens from the airdrop are sold, gains are treated as investment income and are therefore subject to capital gains tax.

  • Earning crypto as payment: This is one we hold near and dear to our hearts. Similar to airdrops, there are two different taxable events when receiving crypto as payment. First is the initial ordinary income tax when the crypto is received, and then the capital gain tax when the crypto is sold (if sold at a gain). The danger in receiving crypto as payment is that if the value of the crypto tanks, then it requires a larger share of your holdings to cover the income tax. However, if a payroll provider could withhold those taxes on the front end, you wouldn't have to worry about liquidating.

More thoughts from Jaimin:

  • He doesn't see the government treating crypto as a currency anytime soon.

  • "The rich stay rich because they are great at tax planning"

  • He wants people to enjoy crypto but be aware that the IRS and governments around the world are actively looking for people to slip up when it comes to tax mistakes.

  • He's looking for a crypto exchange to partner with. (If you have any intros, please reach out!)

  • He thinks investors should actively seek guidance from financial advisors and accountants before claiming airdrops or selling positions.

  • On top of using the platform with said advisors, Reconcile can also help investors find the right accountant!

What we read this week:

As always, before we leave, here are the best things we've read this week across the web3 universe. 

At Rollfi, we're building the payroll & HR platform for the modern workforce. Give your employees the power to choose exactly how and where they want to get paid.

We'll keep you updated on our progress as we continue to build. In the meantime, if you haven't already, sign up for early access to our crypto enabled payroll platform at the link below.

Let us know what you thought of this week's email!