Knowing What Counts Podcast

Crypto & Taxes: What You Need to Know

• Tim Provost, CPA • Episode 16

Share episode

Send us a text

Digital Assets, Real Taxes: The Tax Implications of Trading Cryptocurrency – Jack Labranche Tax Senior

Trading cryptocurrency might feel like digital magic, but the tax consequences are very real. In this essential episode of Knowing What Counts, senior tax associate Jack LaBranche demystifies the complex world of digital asset taxation.

The conversation begins with a clear distinction between digital assets (anything digital with value) and cryptocurrency (a specific type of digital asset functioning as digital money). Jack expertly breaks down the five key activities that trigger tax events: selling crypto, exchanging between different cryptocurrencies, using crypto to purchase goods, earning crypto through mining or staking, and receiving crypto as payment for services. Each scenario carries distinct tax implications that traders need to understand.

Most crucially, Jack explains that the IRS considers cryptocurrency as property rather than currency, subjecting it to capital gains rules similar to stocks. However, crypto enjoys a significant advantage over traditional securities – it currently isn't subject to the "wash sale rule," allowing traders to sell at a loss, immediately repurchase, and still claim the tax loss. This creates a powerful tax planning opportunity, though Jack cautions this loophole may close in the future. Other digital assets like NFTs face specialized treatment, potentially being taxed as collectibles at rates up to 28%.

The conversation also covers practical considerations: the critical difference between crypto wallets (digital safes for your keys) and exchanges (trading platforms with no FDIC protection), essential record-keeping practices, and upcoming regulatory changes like the new Form 1099-DA arriving in 2025. Jack's final advice emphasizes education, meticulous record-keeping from day one, and working with tax professionals who understand the rapidly evolving digital asset landscape.

Whether you're a crypto novice or experienced trader, this episode delivers actionable insights to help you protect your digital investments from unexpected tax surprises. Listen now and ensure your crypto strategy accounts for what truly counts – keeping more of your gains through proper tax planning.

To learn more about MP CPAs visit:
https://thempgroupcpa.com/
MP CPAs
413-739-1800

Speaker 1:

Welcome to the Knowing what Counts podcast, the place where expert guidance meets smart financial decisions. Whether you're a high net worth individual or a thriving business, the experts at MPCPAs are here to help you protect and optimize your wealth. Let's get started, because success begins with Knowing what Counts. Because success begins with knowing what counts.

Speaker 2:

Trading crypto might feel like digital magic, but the IRS definitely wants to peek behind the curtain. Jack breaks down how digital asset activity triggers very real tax consequences and what smart traders should know before year ends. Welcome back everyone. I'm Sofia Yvette, co-host and producer, back in the studio today with Jack LaBranch, Senior Associate at MPCPAs. Jack, how are you today?

Speaker 3:

I'm doing good. How are you?

Speaker 2:

I'm also doing good. Now, before we get started, why don't you introduce yourself to our listeners today?

Speaker 3:

Yes, my name is Jack LaBranch. I'm a senior associate here at MPCPAs. I've been here for four years now. I work with a wide range of tax returns individuals, corporate fiduciaries, estate returns and we also assist clients with proactive tax planning strategies.

Speaker 2:

Wow, Jack, it sounds like you have quite the experience. Let's get started with the basics. What is considered a digital asset and how is that different than cryptocurrency?

Speaker 3:

So that's a great question. So digital assets are anything that exists in digital form and have value. So this includes cryptocurrency, which I real world assets which are on a blockchain, and even some digital securities, which are regulated investment assets issued and traded using blockchain technology as well. So cryptocurrency is a type of digital asset, but it's a more specific digital asset. It's like digital money in a way, If you think of Bitcoin or Ethereum and those type of cryptocurrencies. So they are digital assets, but they're not all digital assets. It's just a type of digital asset.

Speaker 2:

Understood Now what creates a taxable event when dealing with these digital assets that people should be aware of when dealing with these digital assets that people should be aware of.

Speaker 3:

So there's about five taxable events that can occur with digital assets. The first one is just selling a digital asset. This is similar to like selling stocks or real estate. This is what creates a digital or a taxable event. The second one is you can exchange one crypto or digital asset for another. This is the same. This is also a sale, which creates a taxable event. You can also use it to buy something, so some people use crypto to, say, buy coffee. This is pretty much the same as just selling your crypto and then taking the cash and buying the product, so this does create a taxable event. You can also earn crypto through investing, through mining and staking. This creates a taxable event as well. And then you can also receive crypto as a form of payment for your services. So when you receive the crypto or digital asset, it is taxable and it's a taxable event.

Speaker 2:

Now, when one of these events occurs, how is a cryptocurrency transaction treated for tax purposes?

Speaker 3:

So the IRS considers crypto as property, not currency, so it's taxed, just like stocks and real estate are taxed. So if you sell it for more than you paid for, it's considered a capital gain, and then, on the flip side, if you sell it for less, it's considered a capital loss. But there are a few other ways that crypto is treated for tax purposes. So if you buy something with crypto, you recognize a capital gain or loss at the time of the sale. If you exchange the crypto, as I mentioned earlier, you can think of this as sort of exchanging foreign currency. So if you exchange, say, for example, a euro for a US dollar, you could have a gain or loss depending on the exchange rate. This is the same as when you exchange crypto to crypto. And then the last piece of how it's taxed a little differently when you're compensating in crypto is that you take the value of the crypto at the time that you're paid and that's treated as ordinary income, which is important to note. You may be subject to self-employment taxes if you're being compensated in crypto.

Speaker 2:

so usually it's capital gains for the most part, but if you're compensated it's treated as ordinary income now, how are some of these other digital assets treated for tax purposes, some of the other ones you mentioned.

Speaker 3:

So I mentioned so NFTs. These are treated like collectibles, so an NFT is pretty much like selling a piece of art it's just digital art. This means that you could be taxed at a higher rate up to 28% on the gains. I also mentioned earlier staking. So staking rewards is where you lock up your money in a digital asset and it earns money for you at an APY, which is similar to like bonds, for example. These are treated as ordinary income when you receive them.

Speaker 3:

And there's also something called airdrops, which is another type of digital asset, and these are pretty much rewards that are given to you as personal items. So, if you think in the real world, if you sign up at a bank and sometimes they give you a reward for opening a checking account with them, this is similar to how airdrops work as a digital asset and these are also taxed at ordinary income as well. Then there's also something called tokenized securities, which is just often taxed like traditional stocks or bonds as well. So there are different ways that these digital assets are taxed. So it's important to know how you're receiving these digital assets and what they are exactly, and when you trade them, how they may be taxed on your tax return.

Speaker 2:

I've heard of terms like a crypto wallet or crypto exchange. What are the differences between the two of these?

Speaker 3:

Yeah, so a crypto wallet is pretty much like a digital safe, so it stores your private keys and it lets you send and receive crypto. There's sometimes softwares that you can use like certain apps. There's sometimes hardware wallets which can be stored on USB drives and there's even paper wallets, but so pretty much when you have a crypto wallet, you only lose your investments in your wallet if it's hacked or you forget your keys, but on the flip side. So then there's a crypto exchange which is more like a stock brokerage, where you can trade, openly trade all these cryptos. But the difference between a crypto exchange and wallet is that you lose your investments if the exchange goes under. Crypto exchange and wallet is that you lose your investments if the exchange goes under and there's no FDIC protection. So some platforms allow you to also have a crypto wallet on their crypto exchange, but they are different and they both serve different purposes.

Speaker 2:

Now, what are the tax implications when you have losses with cryptocurrency and what planning opportunities are there? Implications when you have losses with cryptocurrency and what planning opportunities are there.

Speaker 3:

Yes, that's a great question because sometimes in the crypto world you can experience losses. So pretty much when you sell a crypto at a loss, you can use those losses to offset any capital gains from other investments that you may have. For example, if you're trading stocks, you can offset your crypto loss with those stock gains, and brokerage companies often use tax loss harvesting to offset gains which you can do with crypto. If your losses are bigger than your gains for the whole year, you can deduct up to $3,000 against your regular income each year and then you can carry forward to $3,000 against your regular income each year and then you can carry forward any capital loss. Carry forwards to future years, just like you can with stocks.

Speaker 3:

But the one rule that's different for crypto that doesn't relate to stocks is the wash sale rule. So when you trade stocks, you can't sell a stock at a loss and buy it back within 30 days. This is a unique rule and the IRS treats it like it was never sold and that loss is temporarily disallowed. So the wash rule sale doesn't currently apply to cryptocurrency, which is unique for crypto, and you're able to recognize a loss and then buy back in at any point. So it is a unique planning strategy, but the IRS is constantly updating the rules of crypto, so that rule could change in the future. But it is interesting to note that wash sale rules don't apply to crypto, which you can take advantage of.

Speaker 2:

Crypto transactions sound complicated. What kinds of records should people keep?

Speaker 3:

So it can get complicated and so it's good once right. When you're investing in crypto, from the beginning, you should keep good records. You should track the dates and amounts of all the purchases and sales. You should track your fees that you've paid. You should track the fair market value at the time of every transaction. You should also keep your wallet and exchange history and your logins because, as I mentioned earlier, if you forget your login, you may not be able to access your wallet. And you should also track the purpose of each transaction.

Speaker 3:

So was it an investment? Was it a payment? Was it income that you received for services? So this is all important things that you should track. I would try to look at it as tracking your stock trades or, if you're running a business, tracking your income and expenses. You should do the same thing with crypto, because, although many exchanges often give you reports at the end of the year, it is your responsibility to make sure that everything's correct and that you have the correct cost basis and fair market value. And then one thing is sometimes you can export all your transactions into an Excel spreadsheet, which can make everything easier, but I would say staying on top of your records is the most important thing for accurately reporting on your return.

Speaker 2:

What should someone do if they did not report digital asset transactions in the past or did not know they were supposed to?

Speaker 3:

So if you missed any reporting in prior years, I wouldn't panic, but I also wouldn't wait either. So the IRS is paying close attention to digital assets and cryptocurrency and they're continuing to make improvements on how they can regulate it. I would say you can amend past returns to include this missing info. If it was an honest mistake, I would say fixing it voluntarily always leads to a better outcome than the IRS come knocking at your door for not reporting certain things. So I would say, just bring it up to your tax advisor and we'll look into either amending the return or figuring out how to handle it from there.

Speaker 2:

Final question for you today, Jack what advice would you give to people who are invested in cryptocurrency and other digital assets?

Speaker 3:

So my advice would be just to start small and take the time to educate yourself before you make your first transaction. Just understand the task consequences, because they can sneak up on you pretty quick if you're not prepared. As I mentioned earlier, I would also keep great records from day one. You want to track every dollar in and out and have your correct cost basis when you do report these on your return and, as I mentioned in the previous question, I would just not assume the IRS isn't paying attention.

Speaker 3:

They're constantly looking for ways to better regulate this relatively new area of trading. Actually, starting in 2025, they rolled out a new form, the Form 1099-DA. Da stands for Digital Assets, so this form will be issued by brokers to report your digital asset sales, similar to how you receive a 1099-B for stock trades. While brokers aren't required to report your cost basis yet, they will be reporting the gross. They in fact just passed the Genius Act, which is still in the works, but this is pretty much a bill that is a one-to-one backing with liquid assets, like cash and treasury bills. It requires regular audits and transparency and allows both banks and non-bank issuers to offer stable coins. So this is still in the works, but they're constantly trying to improve how they regulate this area. So, although it can get complicated, I would say it's more important now than ever to work with a tax professional who understands this space, because a little bit of planning now can save you a lot less stress and potentially money later on.

Speaker 2:

Well, thank you for those helpful insights today. Jack, We'll catch you in the next episode. Have a fantastic rest of your day.

Speaker 3:

You too.

Speaker 1:

Thanks for listening to the Knowing what Counts podcast. Ready to optimize your wealth and protect your future, visit TheMPGroupCPAcom or call 413-739-1800 to connect with our team of experts. Remember, success is about knowing what counts.