Taxation of Cryptocurrency

0:00 Ralph: So the question today is, do you own any cryptocurrency? Like Bitcoin or Ethereum. And have you been confused about how to report it on your taxes? We'll stay tuned today, folks, because we're going to demystify crypto taxation. And give you clear and actionable steps. to stay compliant. And optimize your tax liability.

0:51 Welcome back to the show today on our technology Tuesday. Tuesday's a day. We like to dive into something that's tech related. I am truly excited about today's topic Today, we're diving into the complex world of cryptocurrency taxation. this morning, I was out walking as I do in the morning. Take the dogs for a nice walk around the farm. And one of the things I like to do while I'm out walking is listening to podcasts. So today I'm going to make a recommendation. This is a must. Listen to folks. The name of this podcast is called practical prepping. It's a great podcast that offers practical advice. And the hosts Krista and Mark are fellow believers who truly have a heart for Jesus. And they provide practical advice for not living in fear, but preparing yourself.

1:34 For those things that happen in life, like they say, stuff happens such as ice storms, tornadoes, and other disasters. It's a great podcast and you can find them at practicalprepping.info. So take a listen today, and if you have a chance to reach out to them, Tell them ask Ralph sent you. don't forget to subscribe to our show. You can join our email list. That's at askralphpodcast.com because you don't want to miss tomorrow's episode. Tomorrow's our wacky Wednesday. And we're going to talk about business ads that missed their mark. And let me tell you folks, they really, truly did miss their mark it's going to be a great episode. So let's get into today's topic. Cryptocurrencies like Bitcoin and Eurethreum them have exploded in popularity in recent years.

2:16 You see this everywhere. And with more people buying and selling and trading these digital assets questions about how to report these activities on your taxes have also started to grow. So you ask yourself, Ralph, how does the IRS look at this? I'm going to answer that right now. The IRS treats cryptocurrencies as property for tax purposes. So they're like stocks or other investments that you own. This means that they are subject to capital gains taxes. There's that ugly word, capital gains. But reporting crypto transactions can be tricky. And that's because it gets a little complicated from there, folks. There's trades there swaps there's things called hard forks.

2:58 And these aren't the forks you eat with. And more than that happen in that ecosystem. So in this episode, we're going to break down the key concepts. You need to know. A lot of people are getting into this and I'm getting more questions about it. So today you learn how to accurately report your crypto activity. Reduce your tax liability. And at the same time, stay compliant with IRS regulations. We're also going to discuss specific crypto tax tools that can help simplify that process. And that's what we're all looking for. Simplification. So my goal today is pretty simple. I want to equip you with the actionable information to master crypto taxation from a Christian ethics perspective. The truth is folks paying your taxes is the right thing to do.

3:39 And the Bible calls us to submit to governing authorities so let's dive in. First let's get some key definitions out of the way. Your cost basis is how much you paid to acquire a cryptocurrency. Initially, for example, let's say you bought one Bitcoin. And let's say you paid $10,000 for that. Then your cost basis is $10,000. Pretty simple concept. So capital gains. Refers to the difference between your cost basis, that $10,000 and the sales price. So let's look at a practical example. So if you sold that one Bitcoin for $15,000, when the price went up, you would have a $5,000 capital gain, pretty simple 15,000 sales price minus a $10,000 basis.

4:22 And that's what you would report on your tax return. Now here's the difference with capital gains. There are two types, there are short-term and their long-term. Guess how that's figured out. It's pretty straightforward folks. It's how long you've held that asset before selling. So if you held it for under a year, That's considered a short-term gain. And those are taxed as just regular ordinary income. They're added to your adjusted gross income. If you've held it for over a year. They're taxed as preferential long-term capital gains. And those are more beneficial because they effectively are going to be at a lower rate. The answer to the capital gains question. Is, if you have the ability to hold things for more than a year, you're going to pay less tax.

5:03 Now that's a whole discussion we can get into for another episode about why you may or may not want to hold up for a year because of the volatility of it. So let's walk through the key events that can trigger crypto taxes. A lot of people don't understand this. Any time you sell or trade crypto for cash. Or other assets, you trigger a taxable event in capital gains taxes. What does that include Ralph? This includes using crypto to buy goods or services. If you exchange one crypto for another, like trading Bitcoin for Eurethreum and also triggers taxes. The IRS views this as selling one asset for cash. And using that cash to buy a new asset.

5:44 Just like if you bought. A share of Exxon stock. And then you sold that share of Exxon stock to buy some, I don't know, pick another stock. Walmart stock. The IRS is going to see that as a capital gain because you've moved from one stock to another day. they look at cryptocurrency the exact same way. There are also ways to earn crypto income from mining, staking airdrops and other activities, and that constitutes regular taxable income. So if you're one of these people that's into this crypto mining or staking, our airdrops. That is also a trigger for a tax event and a fair market value. The crypto received is reported. So if you do those activities, And you received those crypto currencies.

6:25 For those activities, that's taxable income to you. Also spending crypto is a taxable event. Like I had a client in a couple of weeks ago that actually use cryptocurrency to buy a car. So you have to calculate gains or losses because your cost base at the value. At the time of the transaction is what the IRS is going to look at. Now here's an event that doesn't trigger a tax issue, transferring crypto to another person. Or a wallet you control Does not trigger a taxable event. As long as you have the private keys in both places. And that gets a little deep and I'm not even going to go into the whole private key discussion. Trading one crypto for a newer version due to a hard fork. And then we talked about that, a hard fork that's when this crypto thing sort of split.

7:07 That also does not trigger taxes. So here's a, here's an example. Trading your Bitcoin BTC for Bitcoin cash. BC H after the 2017 hard fork would not incur taxes. Since you are receiving new units of the same underlying assets, like a stock split. It works the same way. So now that we've talked about what triggers taxes, let's discuss some strategies. To minimize your crypto tax liability. And this one's pretty simple folks. First. hold crypto for over a year before selling it so you can qualify for that long-term capital gains tax rate. If you sell it before you had a for a year. It's going to be ordinary income tax at your regular tax rate.

7:48 Whereas, if you hold it for more than a year, you're going to get that preferential long-term capital gains rate. And again, you've got to look at market volatility to make sure that's the right decision to make. Another thing you can do is use tax loss, harvesting to offset gains. You can sell a crypto at a loss to offset capital gains from other winning investments. So for example, Let's say you've got a stock portfolio. And you've got a bunch of winners in there. You could harvest those gains. And sell some of your crypto that you may have lost on to offset those gains. another thing you can do to avoid taxation. is you can donate crypto to charity. This charitable contribution, avoids capital gains taxes and gives you a tax deduction based on the value of the time of donation works just like cash in that regard.

8:34 Or donating stock, whatever that crypto is worth at the time of the donation, you'll be able to take that as a tax deduction on your tax return. You can also use a crypto IRA. To delay taxation until retirement distributions begin. There are actually people who are offering crypto IRAs. So you can use that as an investment vehicle, but again, I worry a little bit about the market volatility. So you really want to talk to a strong financial advisor and someone who really understands crypto before you jump into that. If you own multiple coins of one crypto, you can use specific identification to choose which ones to sell and optimize your cost basis. So maybe the value of your cryptocurrency has increased over time.

9:18 So when you go to sell it, You could use the ones that you, maybe you bought last kind of a last in first out type of discussion. And you can also leverage DeFi products on your read-through to access crypto loans. Interest accounts and trades without triggering taxable events and DeFi is basically direct finance where you work with other people without going through a banking intermediary. The key to this is you've got to track your cost basis for each transaction. So you have the data needed to calculate gains and losses accurately. One of the big problems I see in my practice is people come in after they've done these trades with these cryptocurrencies. And they say to me, Ralph. I just don't know if I have all the data that you need.

10:00 Which leads us to our next discussion. Let's discuss some key tools and strategies for reporting your crypto activity to the IRS. And this one is crucial. You've got to use some kind of crypto tax software. There are things like coin tracker, crypto trader.tax, or Zen ledger. These can automatically import your trades calculate capital gains. And generate required tax forms. A lot of my clients use acorns or there is a Robin hood has a crypto thing. This saves tremendous time and effort. As compared to trying to do it yourself on an Excel spreadsheet, because all of these, like they say hard forks, trades and swaps can get really complicated.

10:41 Now, all of this gets filed on tax form. 89 49. That's where you report capital gains and losses from crypto sales and trades. And then you've got to report these each separately. Per taxable event. Now, if you want to become a real techno nerd. And go read all about this. You can go to IRS notice 2014 dash 21. As well as revenue ruling 2019 dash 24, to understand the official stance on crypto taxes. But I'm going to tell you this. It gets complicated. So this is one of those times where I want to take the off ramp and say consult with a tax professional who understands and works with crypto. If you need to understand how to apply it better.

11:21 And the key to all of this. And I say this routinely. I maintain thorough record keeping with transaction dates. Cost basis. Sales price and other details. The truth is folks. The burden of proof is on you. If you get audited, the IRS is going to say to you, listen, dude, you got to show us the trade information. That's why I say consider working with a crypto savvy accountant or tax attorney who stays up with the latest IRS rules and can advise you on optimization strategies. And here's something you don't want to forget. Some states treat crypto differently. So you've got to look at your local tax guidance to determine how to do that. Now, before we wrap up, I wanna remind our listeners to visit our podcast page.

12:03 You can do that at askralphpodcast.com. There you can leave us a review, share your thoughts, or even send a message with questions for future episodes. We love hearing from our listeners. Tell us what we're doing. Well, tell us what we can work better with, give us some ideas for things that you'd like us to cover. And while you're there. Make sure you sign up for our email list because we're doing a $25 weekly Amazon gift card drawing. And guess what? If you're not on the list, you can't win. And if you have some specific questions or you want to purchase one of my books, you can do that right there from the website as well. It's askralphpodcast.com/store. So let's recap what we've done today. While crypto taxation can seem daunting.

12:43 Confusing. In other words, you can pick, taking time to understand the key concepts and implement tracking solutions can help you stay compliant. And ultimately help you make wiser decisions. The Bible instructs us in Romans chapter 13, verse seven, to give to everyone what you owe them. If you owe taxes. Pay taxes. So take advantage of the legal means to minimize what you owe, but pay what you properly should. That wraps up today's show on the complex world of cryptocurrency taxation. I hope this overview has helped provide more clarity for you, crypto owners out there. Paying taxes is the right thing to do. Even when the reporting process feels challenging.

13:24 So here are some final key takeaways. know your cost basis and calculate capital gains and losses accurately. Be aware of which crypto activities trigger taxable events. Use long-term holding and tax loss, harvesting to optimize your taxes. Leverage crypto tax software and work with professionals and the key folks maintain thorough records in case of an audit. Again, I'll remind you to visit our podcast page at askralphpodcast.com. Or you can read more about this topic and also listen to a back catalog of over 300 episodes. I guarantee you will find information out there that will change the dynamic of your financial life. So, as I always say, stay financially savvy, my friends.

14:08 And God bless you abundantly.