Common Sense Millionaire
Common Sense Millionaire
EP 21: Handling Cryptocurrency Like a Pro
In this episode of Common Sense Millionaire, I’m going to equip you to handle your cryptocurrency like a pro. We're going to tackle the IRS's classification of crypto as property, and it’s potential for recognition as an investment security by other organizations. Your digital gold is not as anonymous as you might think - and whether you're investing through an investment company or independently, it's crucial to keep your wallet address protected and carefully keep records. I’ll also share an unforgettable story that highlights the cost of misplacing your wallet address… One man's loss of his hard drive resulted in him forfeiting billions in cryptocurrency. Don't learn this lesson the hard way.
Tune in to the discussion today!
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Welcome to the Common Sense Millionaire, where we work to promote your financial advancement in knowledge process and education so that you and your family become financially secure. This is the place I share Common Sense Action Steps that you can take today to assist your financial advancement. So sit back, grab a drink and let's get started. Common Sense Millionaire, here Today we're going to talk about crypto.
Speaker 1:That's all I hear about it's crypto. Oh, I want to get into crypto. I want to do crypto, right? Ah, how do I do crypto? That's the question I never really hear. The question is not just how do I do it. The question is how do I do it properly from a tax perspective?
Speaker 1:Because I can guarantee you, irs is looking for people who have crypto who think that they are invisible from detection. Surprise, you're not Okay. It's very clear that the FBI and other government agencies can track you down a lot easier than you think I know. You all see a lot of these headlines about thefts of crypto 10 million here, 20 million there, 30 million there. What they don't tell you a lot of the time is that most of that money has been recovered. So how this can be, as one of my teachers used to say, if you're getting into crypto because you think that nobody can find you or that nobody can understand what you're doing, okay, that's the falsity and you've got to be careful. So some of the issues are let's start from the tax perspective, because that's where people's risk is in crypto assets. Let's start with who is defining what crypto is from a tax perspective. That's your friends at the IRS your friends, not necessarily my friends. They've published a publication 2014-21 that defines exactly what cryptocurrency is. The IRS has claimed, or has put in its notice, that crypto is to be treated as property not as currency or not as a security, but property. The fight going on in the crypto world right now is the IRS has defined it as property. However, other organizations, especially governmental organizations, are wondering whether or not it should be classified as an investment security. We don't really have time to get into all of the aspects into making that a security, but we should anticipate in the next few years some type of reconciliation as exactly how crypto should be treated from a tax perspective. It may change, it may not, but at this point we just don't know.
Speaker 1:Now, the problem with crypto is people believe that they're anonymous. So when you have the crypto, either you have it in one of two ways. The first way is you're purchasing crypto assets through an investment company One of the big ones, like Goldman Sachs or any of the other investment companies there. When you do that, that folds into their reporting mechanism so that at the end of the year you'll get a 1099, which will specify what you purchased that crypto asset for, what you sold it for, and either you had a gain or a loss. That gain or loss are treated as either a long-term activity or short-term activity. So if it's a long-term activity and you lose money, you get a partially, or you may be eligible for some level of a tax deduction for that loss.
Speaker 1:Now for the purist work with the fantasy that crypto allows them to work in an invisible world. That's not detectable. So when they receive crypto because they may be involved in a mining activity or somebody may have given them crypto for the purchase of an automobile, for example, right, well, when that occurs, that crypto has to go into what is called an individual wallet and that wallet holds the crypto. Okay, but you're in control of that wallet. So if you want to spend the crypto, you can spend it any way you want. If you want to buy a car, boat, house with it, you can do that and transfer it to someone else's wallet and you have an agreement between the two people on what happens when the deposit hits and the other wallet and that person is eligible to get the property. This is where the problem comes in, because if you buy something from that wallet, if that's an asset, then you've got a reporting responsibility. You also have a reporting responsibility if you're mining crypto. Okay, my understanding from my reading of the tax rules is that when you receive your crypto from mining, that counts as revenue to you. So how many people out there who have wallets still are thinking still that their stuff is invisible? No, I think it's very clear that the federal government and its friends in the intelligence agencies have been able to look at the blockchain and break into that and to find what they need to find, because there's too many people who have stolen Bitcoin or other coins, for example, and have gotten caught by the federal government and its affiliates.
Speaker 1:The other thing is you have got to track when things occur. If you are investing in cryptocurrency through an investment company, they will be able to track for you when it was purchased, when it was sold. What was the net gain or loss? If you're doing it from a wallet, you have to do that yourself because, as a registered tax preparer with the federal government, they will have to make sure they're asking you the right questions and getting the information. To properly complete that return, you have to look at all the incomes and gains that you have involved with that cryptocurrency account. You don't want to mess this up because if you do, then you're subject to the wrath of the IRS and potentially other investigative agencies, like the FBI, for instance.
Speaker 1:The other thing is you have a wallet and you have a wallet address. That address is unique to you. If you lose that address, you can't access your wallet and there's nobody who's going to help you because there's no other entity out there that's set up to help you access the wallet if you lose the password. So that's going to just stay there forever and you can't do anything about it. There's really interesting stories. One was a gentleman had a hard drive that had all of his crypto information on it and it got thrown away and the hard drive now based on what the original purchase price of the crypto was. It was in the billions, but there's nothing that he can do. He has no access to his wallets, he doesn't know the address, doesn't know any of the codes or anything like that. Don't forget about anything related to fees and expenses that can be written off on your tax return.
Speaker 1:The other thing is you have got to work with a professional who's tuned into what's going on in the crypto world, and the reason for that is things are changing and a lot of the major investment companies you know who at one time kind of laughed at this are now trying to figure out how to get in. So you've got to know what's going on so that you don't make a mistake or you do something and you just because if it goes wrong, you can't say that you never heard about it, nobody's gonna care, you're in trouble. So it's like really just call a professional check to see if everything is fine. The other thing is make sure that you file your return on time. In this case, a lot of times I tell people well, we need to hold off a bit because we need to see if there's anything else coming down the road. I don't recommend that with this, because you want to make sure that you are informing them up front the status of your Bitcoin or whichever coin investment.
Speaker 1:Okay, and please make sure that the return you could file a little late, but it's got to be accurate. I prefer that it's on time, but the end of the day is got to be accurate. You don't want a letter coming back saying that you made a mistake in a calculation, where this doesn't seem right, because the key is the IRS is focusing on this. So if you're doing something that looks suspicious, you're at the hey. They could call you, have an internal audit, ask you to provide certain information to them and God help you if the thing is wrong.
Speaker 1:So key thing is keep your historical data, make sure that you have your wallet address securely located someplace so that you can get to it, be consistent on what you're doing in reporting all income and gains and please keep thorough records. So, thank you very much. Have a good day. You've been listening to the Common Sense Millionaire, where you can learn how to go from zero to a million using common sense solutions to everyday financial issues. Make sure and subscribe to stay connected for more content, tools and help so you can advance towards your financial goals. If you need assistance or have questions, leave a comment or you can email me at George at commonsensemillionairecom.
