CCN.com spoke to Deloitte tax partner Jim Calvin about the problems and strategies associated with cryptocurrency for his clients, particularly when it comes time for them to submit their annual tax returns.
Calvin got into cryptocurrency in 2014, when he was based in Asia. He says he began to get questions about Bitcoin from clients, and that he gained a personal interest as the first major crypto winter set in.
“In places like Hong Kong, Singapore, and Bangkok, the financial institutions and individuals wanted to know how to report this stuff for AML/KYC in a thing called FATCA, which is basically bank account reporting to the IRS.”
“On foreign bank account reporting, it depended on how they were holding it. If they were holding it themselves, it didn’t have to be reported. But if it was held on an exchange or by a custodian, then it would have to be reported. Most of the work I ended up doing was related to trading, investing, exchanges, and dealers, moreso than things like mining. I’ve never really done ICO work or centralized coin launches.”
Calvin says that most of his clients have had interest in Bitcoin and Bitcoin Cash.
“Mostly it’s Bitcoin. Occasionally we’ll have clients that hold other things like [Ethereum] or Monero. So it’s mostly issues around things like wash trading and tax straddles.”
Calvin says that he presently spends “more than half” of his time working on crypto topics these days. The biggest question that clients have is regarding “chain splits” such as the one that created Bitcoin Cash. What are the liabilities implied when you receive something for free?
Calvin says it’s like “receiving a free sample in the mail.”
“If you talk to a lot of the tax lawyers that don’t understand the technology, they’ll talk about it like buying a cow that’s pregnant. You really have to understand the technology to receive tax advice on it. […] Why should you be taxed on free laundry detergent that you get in the mail? And some of them are worth taking the risk to claim and then sell. The IRS’ long-standing policy is that only if you claim property that it’s taxable.”
According to Calvin, the hardest thing about accounting in cryptocurrency is the transfer from exchange to exchange. This reporter informed him about Node40’s technology, which automates that process for the user, finding the cost-basis at time of transfer and helping to generate an accurate report for tax purposes. Still, Node40’s product isn’t perfect, and for serious traders with large transaction histories, using an accounting firm like Deloitte is potentially still the best route.
Calvin says the top strategy he’s used for tax accounting as regards Bitcoin is using the highest possible cost basis.
“We use what’s called a standing instruction. So anything I sell is going to use my highest cost coin. So the first thing I sell is always going to be the most costly. And therefore, it minimizes any gain I might have, or maximizes losses. It’s not 100% certain that the IRS would accept that. But that’s the rule that you can apply to stocks and bonds, and there’s some precedents that says that can apply to other assets.”
“You need to keep track of what you pay for your coins. Have a standing instruction. You write an e-mail to your CPA or anybody else that can verify that you definitely said anything you sell is going to be from the highest cost basis lot. When you sell it, it could be for say $4,000. But when you’re selling, you can base it on coins you bought at $20,000.”
Calvin says he’s seen this trick work numerous times. He says there is at least one precedent that allows for it. You’re allowed to make sales in this manner using the maximum cost basis based on how much you purchased. Thus, people who bought at the all-time high are not necessarily out of luck, especially given our next trick.
In stock trading, you can’t claim losses when you re-buy a stock right after selling it. In crypto assets, however, you’re able to claim losses even if you buy the asset back. Say you bought Bitcoin at $10,000, and you sold it now at $3,900. If you bought it back right after selling it, you could still claim the loss.
“There should be some daylight between the trades. An hour is probably okay. But you can take that loss. You can’t do that with stocks, but you should with Bitcoin and most other crypto that’s treated as a commodity.”
It’s a method of keeping your holdings and filing your losses. Losses can be carried forward and used against gains, but they can’t be carried back.
Chainsplits and air drops aren’t taxable until you’ve claimed them and made income on them. Unfortunately, they can be taxed as ordinary income.
“The bad news is probably it would be ordinary income. They seem to be ordinary income because there’s no sale or exchange of an asset to get them. You just get them. But you don’t have to get them. 99% of air drops are junk. 99% of chainsplits are junk. […] It depends on many things. You’d have ordinary income and a loss.”
Calvin says you’re better off to claim your air drops and chainsplits when they actually appreciate because the amount you make on the increase can offset the ordinary income tax, and it’s only taxed at capital gains as to the profits. So if you claim your Bitcoin Cash at $150 and wait to sell it at $2,000, you pay ordinary income tax on the $150 and capital gains on $1,850. You make out better in this respect than attempting to sell air drops and chainsplits at a loss.
“I think a lot of institutional traders don’t claim air drops and chainsplits because they are a risk. The IRS will probably go along with that. Because you don’t have a choice about receiving it.”
Unfortunately, cryptocurrency funds lost to theft may not be deductible.
“The better answer is, it’s a theft loss. It wouldn’t be deductible if it’s a personal asset. Say you bought Bitcoin to buy your morning coffee or something like that. But if it’s on an exchange, it’s very unlikley to be a personal asset. Then it should be deductible if you can show that it was in fact stolen. There were some rulings around Madoff’s Ponzi scheme that say, it’s the same sort of thing, if you had your stuff stolen and you should be able to take the loss.”
He says that if you manage your own private keys, however, you’re going to have more trouble proving the loss than you would with something like the QuadrigaCX scandal.
All four of these tax tricks have yet to meet the real test of usability: court cases. However, Calvin says these are methods he uses to advise clients of Deloitte, one of the largest tax accounting firms in the world.