Episode 10. Crypto Tax Strategies from a Crypto CPA

Crypto Tax Requirements With Cameron Browne

Cryptocurrency has taken the world by storm recently, offering a new and exciting way to invest and manage one’s finances. However, with the rise of digital currencies comes the need to understand and comply with the tax laws surrounding them.

In this episode of Unemployable, host Joshua Lapidus of Opolis talks with crypto tax expert Cameron Browne of Darien Advisors about the various types of taxes associated with cryptocurrency. They provide expert advice on crypto taxes and offer support for individuals and businesses to help them lower their tax liabilities.

Do You Have to File Taxes if You Receive Income in Crypto?

Yes, you must file your taxes if you don’t want to go to jail. Per IRS regulations, any income received in cryptocurrency — no matter how small — must be reported on your tax return.

That’s because the IRS treats cryptocurrency as property for tax purposes, and when you sell or trade a cryptocurrency, any gains are taxed like capital gains. If you exclude such data, you are committing perjury, a federal crime.

How Is Crypto Trading Taxed?

Generally, crypto trading is swapping one asset for another. This includes buying and selling coins, staking in liquidity pools, and flipping NFTs. These transactions are property-to-property exchanges subject to capital gains and loss treatment and, therefore, taxable.

In the case of NFT burns or burns to mints, the transactions are like a swap where you essentially trade one for the other. For example, if you had ETH worth $1000, minting a JPEG and then sending it to a burn address will require you to write off that cost base as a loss.

In one way, you’ll have an excessive loss of $1000 but have a new token with a cost base of zero, plus the little gas used to mint it, and then you have an outsized capital gain. So, it’s like burning one to create another without having a substantial outsize loss.

Since this concept can be argued in many ways, the IRS presents a guide on reviewing these returns, but nothing definitive. They point out their position and then allow a flip side where your opinion counts.

If a client disagrees with the IRS’s position and feels that the returns should be treated differently, Darién Advisors will put together the client’s position and present it to the IRS. In stronger cases, a tax attorney puts together the client’s position.

However, there’s a risk in presenting a different position to the IRS. Since your filed position includes an honest report of your crypto income, you risk triggering an audit from the IRS.

How Is Crypto Payroll Taxed?

If an employee is paid in cryptocurrency, it is considered taxable income and reported on the employee’s W-2 form. Therefore, if you get paid in any token, it will be ordinary income at the price of fair market value that day.

It’s important to keep these things in mind as you process your crypto payroll.

  • It’s possible to get double taxation when processing your capital gains. However, processing these capital gains through Opolis can help you avoid them.
  • If you are contributing to a DAO and getting paid using a non-stable asset, it’s more advantageous to organize your employment vehicle as S-Corp rather than C-Corp.
  • If you are trading individually, ensure that you make estimated tax payments.
  • Instead of remitting one hundred percent of your capital gains, you could send over 80% because the capital gains rates are more beneficial than the short-term rates.

Strategies for Minimizing Crypto Taxes

There are several strategies you can use to minimize your crypto taxes.

  • Find good tax software with an algorithm to help determine your cost base. Alternatively, look at different cost-based strategies and find one that works best.
  • Minimize tax evasion and maximize tax avoidance — Find strategies within the legal guidelines to pay the least amount of taxes.
  • Actively work with tax professionals to restate balances and understand nuanced positions in crypto. For example, if you swapped a crypto asset for another, the cost base should be reset.
  • Go for long-term investments that have lower tax rates compared to short-term investments. That includes investments that are held for more than one year.

Tax deductions or Credits Available for Crypto

Credits are available for freelancers who are into research, development, and experimentation, but outside of that, there is none.

However, you could qualify for an income credit if you do not have any income for an entire year.

Top Strategy Around Crypto Taxes

Don’t let a good loss go to waste. Unfortunately, most people do not recognize and document losses as they would with gains. Paper gains are taxable, and it’s difficult to get away from that.

But having paper gains can benefit you tax-wise.

Think of it like this: Since there are no clear guidelines on crypto taxes and the current tax system is unfair, you can easily reset your position and harvest your losses.

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