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Patrick the Tax Advisor - Preparing for 2022 Returns and Updated Jungle Accounts
Level 2 - Value Investor
Welcome Avatar! Today we’re bringing in a Tax Professional to talk through 2022 tax rules. Why now? Per usual we try to stay a few months ahead before everyone else panics. The vast majority wait until the last second and learn the hard way (a general theme!).
Part 1 - Patrick the Tax Advisor
Hi Frens: By way of introduction, I’m an Anon account trying to demystify the U.S. tax code and give the best information I know on how to become as tax efficient as possible. I’ve been with the jungle since the days of WSP, with Triangle Investing being the most personally influential ebook I’ve ever read. Much like many of you, I have a 9-5, WiFi income, invest in cryptocurrency long term, and am always saving for the next underpriced asset class.
In addition, I think about taxes every day and how to save them. Today I am going to focus on cryptocurrency taxes, specifically how to close out your year, save some tax, and get ready for a less stressful cryptocurrency tax season this spring.
Note that we live in an age of uncertainty around cryptocurrency taxes. Just last week the IRS decided to change the name “virtual currency” to “digital asset” in its instructions, with various filing implications. The industry has outpaced tax law so fast that in many cases we do not have clear law, but are using analogous law from other types of property as they fit the behavior of cryptocurrency in certain settings.
Before getting deep into filing or planning around your crypto taxes, let’s get clear on the basics of crypto tax law in the U.S.
The term “taxable” means there is a tax consequence, either a gain or a loss. To calculate the tax consequence you have to know the USD value of what you are receiving in the trade and the USD value of your investment (“tax basis”). The difference is your gain or loss. Below are some transaction categories and examples.
Buying crypto with fiat is not taxable.
Example buying 1 BTC with 20k USD
You do need to track that you paid 20k USD.
Trading crypto to fiat is taxable.
Example selling the 1 BTC back for 19,700 USD
Tax basis identification and gain or loss calculation can be complex, but here let’s assume you went in and out of BTC and didn’t own any other crypto. This should be a $300 capital loss.
Trading from one crypto to another is taxable.
Example, trading the BTC you bought for $20k for 15 ETH, which are worth $21k U.S.D at the time.
Assuming no other ETH owned, this should be a $1,000 capital gain. Now your ETH has a basis of $21k.
Spending crypto (even on fees) is taxable.
Example you pay an ETH for some services to another jungle member, when ETH is worth $1,300.
Your basis is $1,400 ($21k / 15 from above) so this should be a $100 capital loss.
Staking rewards are taxable when you have the ability to claim them.
There is a hot debate about this because of a Tennessee court case. The IRS ended up giving the plaintiff the small refund sued for and the case was dismissed, but the IRS did not acquiesce to the plaintiff’s argument that staking rewards are only taxable when sold/traded. The only guidance the IRS has really given on staking is that it is analogous to mining, which is to imply that staking awards should be taxed as ordinary income when earned, rather than sold.
If you take the position that staking rewards are taxable when earned, you would look to when you have the ability to claim them to determine when they are taxable to you and how much taxable income they generate.
Mining is taxable.
Example you mine and receive 6.25 BTC.
Its value when you have the ability to claim it should be taxed to you as ordinary income.
As a miner you have the ability to deduct certain costs and expenses. Think of the BTC reward as your revenue in a Profit & Loss statement.
Borrowing against your crypto may or may not be taxable depending on the situation. This gets complicated, but can be a very important liquidity tool.
Example, you own 10 BTC that you bought during the Obama administration.
During 2023 beach houses go on sale and you want to make a down payment with your BTC, but don’t want a huge tax bill.
You find a DeFi platform that lets you borrow $50k against your 10 BTC.
If the loan qualifies as a loan for tax purposes, you shouldn’t trigger any tax. This qualification usually includes:
An unconditional promise to repay
A market rate of interest
A set maturity date
No transfer of ownership of collateral
Repay in “money”
If the loan does not qualify for a loan for tax purposes, you might trip that whole $50k less the $10 you paid for the BTC and have a capital gain.
If the loan qualifies, but you get liquidated, this can become a taxable event.
Beyond the scope of this document, you should also track any other ways you receive or disburse cryptocurrency as they may or may not create taxable events now or in the future: air drops, forks, ICOs, gifts, donations, etc.
If you are going to DIY, get tracking software. There are several. They range in price from approx. $100 - $1,000. None are perfect. Several are decent.
Make a list of all the blockchains and wallets you have used (and have ever used). Try to pick a software that can handle all (or most and the ability for manual inputs).
I personally use CoinTracking at https://cointracking.info/. It is one of the oldest, it covers many blockchains, has a lot of support articles, seems to have a decent contemplation of U.S. tax law, and has good customer service. Is it perfect? No, it struggled hard on Arbitrum and Stacks for most of tax season last year, but we got it figured out.
There might be better options. I like a lot of what TaxBit is trying to do, but they couldn’t automatically handle as many blockchains as CoinTracking so I switched. I have also heard good things about TokenTax, but have never used it.
The hard part if you are DIY is it is really hard to know if the software is doing what it is supposed to. I pour one out for any of you trying to do this on your own unless your activity was incredibly simple and you somehow have a good grasp on crypto tax law (which most tax people don’t).
So yes, big surprise, I recommend hiring someone, especially if your transactions are material and have any complexity.
How to find a Crypto Tax expert
None of this may be necessary if your transactions are few and/or small, but if you think you have material tax risk, an expert makes a lot of sense. …but hiring some is hard for multiple reasons:
A lot of tax people don’t know anything about crypto.
Some refuse to do the work.
Some are learning, but may not be able to help you.
The ones that know it already have too much work to do.
Some charge $750/hour.
Here is what I recommend. Start trying to line this up now. The old joke is in tax is if you wait until April to find help, you are too late. With crypto tax, if you wait until January you are too late. Start with your current tax person and ask some questions like the ones below:
How many Walkers have you…?” Sorry, wrong question…
What is your comfort level with cryptocurrency? Here you want to find out if possible if they hold any, have staked, etc. Yes, it’s technically none of your business, but I would prefer someone with skin in the game.
What is your comfort level with cryptocurrency taxes? Have you prepared several client returns? Been through 100,000s of lines of transactions?
Ask specifically about the blockchains you use and if they have worked with those blockchains in doing other clients’ taxes.
Do you have a software you use or would I need my own? If they don’t have a strong preference, push harder and figure out if that is because they know several well or they don’t know any.
What methods can I use for determining tax basis?
After talking to them a bit about your situation, ask if any of your crypto activity doesn’t have clear law and how they recommend you report. If you aren’t feeling confident in your tax person after talking through questions like the above, you can ask your crypto friends who they use, ask on social media, Google, whatever. Here is a thread I wrote on finding a tax person - you can generalize it to finding a crypto tax person (probably drop the local piece).
So: 1) decide if you are DIY or not and 2a) if you are DIY, find a software, 2b) if you are not DIY, find someone good to help you and 3)…
…3) The best way to plan for your tax year is to track your transactions in real time. Start now. As I write this, I’m two mouse clicks away from knowing the net total of all my crypto transactions in 2022 as well as any unrealized positions. You don’t have to be real time like me, but you can keep this up quarterly or monthly. The beauty of a lot of the crypto tracking software is you get a 12-month license and they aren’t specific to a given year so you can keep current as you go.
Why do I keep mine real time? I don’t have time to work on my own taxes during tax season, but really it is for planning purposes.
At the end of the year, I like to know all of my transactions (not just crypto) so I can tell if I am sitting on gains or losses. I like to understand if I have loss positions that I can or need to harvest. I am all for rebalancing by addition, but in a year like this with potentially more loss positions, I like the option of knowing my unrealized positions for potential tax-free rebalances.
I also like being ready for opportunities. Maybe a coin moons and if I decide to take some off the table, I know my tax hit in real time (because if you don’t, you are celebrating early). Sometimes the market has a down day, but I can see I’ve already harvested enough losses, that I don’t need any more or maybe I do and I’m ready to pull the trigger.
So in short, if you are DIY, get your software and start sorting now. If you are not going to be DIY, line up your crypto tax person as quickly as you can. Get them to sort all of your transactions to date before January when they have no time. Have them also sort out any of your other capital gains transactions and positions so you can make year-end decisions to save some tax in April.
U.S. taxes on crypto transactions are complex and changing. Doing it yourself is possible, but not encouraged unless your risk is small. Get moving this week finding someone to help you (now is the time to lock them in) and/or getting your transactions into the right tracking software. If you can get caught up before year end, you might even have time to make some moves that save you tax in April. Regardless, you will have a good chance of filing on time when all your degen frens are still looking for someone to help them.
This post does not constitute or imply a consulting engagement or any other agreement between you and Patrick the Tax Advisor or any affiliate. Please consult your paid tax advisor before attempting anything found in this post. The views found in this post do not constitute paid tax advice. Numbers and examples are for illustrative purposes only. All views are opinions of the author, as of the date written, and subject to error. Always file for and pay the tax you legally owe.
Part 2 - Some Jungle Updates
The last 48 hours were incredibly fun. Some of the smart people who got conned by various schemes have now learned that the majority of the stuff they bought was really just repackaged old stuff we wrote from Efficiency/Triangle Investing (all old books free for all subscribers). So with that said, thank you to all the new readers!
Incredible that this many people are able to recognize they got scammed with watered down old re-packaged content. Welcome!
Some Bad News
The bad news about the 48 hours was how dismal a lot of interactions were. Engagement went vertical but man a lot of people are in denial about reality and how life works (both men and women).
Some even argued against the following statement “Don’t take life advice from someone who has it easier than you”. This was mind boggling and crazy. It seems that poor parenting and media resulted in everyone thinking they are “equal” to movie stars, billionaire investors and pro-athletes. Absolutely absurd.
The “in-between” is if there is enough interest we might put together a quick 30 page pdf on social dynamics in the USA. Most won’t read it and those that do will try to argue against it. It has been about 7 years since we wrote anything like that and would be fun… *If* we have the time. We’ll judge based on engagement, DMs and emails if it’s worth doing.
Autist Note: yes everything you need to know can be summarized in about 30 pages. The main reason people need constant new information is because *they don’t put in the work*. That’s why they sign up for all these crazy classes and coaching. Praying a magic spell will lead to instant 10/10 models hitting them up every five seconds. Doesn’t happen.
Some Good News
While Ox is probably the second most well known BowTied, the sales team is working on some crazy new stuff and it has been impressive to watch. If you’re no following BowTiedSalesGuy on Twitter you’re missing out big time. Quick Summary:
Entry Level: It looks like Cocoon has decided to focus on entry level sales.
Systems: This is a sleeper account and the anon already is making a living wage online! Incredible and congrats. We’re not sure exactly where it goes but he has a ton of info on setting up various sales systems.
Bonus: don’t want to gas the anon up too much but *already* has major F500 companies asking for help! Impressive.
Credit Card Churning: There is an account that has found a way for you to make $10,000+ with next to no risk (but likely a lot of button clicking). This is a brand new account so read it carefully and decide if it’s for you. This is a “grey” market area so please read carefully when reading their content. You’re in the grey here.
Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are *opinions* written by an anonymous group of Ex-Wall Street Tech Bankers and software engineers who moved into affiliate marketing and e-commerce. We’re an advisor for Synapse Protocol and on the JPEG team.