Transcript
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Ralph: So the question today is, do you own any cryptocurrency?
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Like Bitcoin or Ethereum.
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And have you been confused about how to report it on your taxes?
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We'll stay tuned today, folks, because we're going to demystify crypto taxation.
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And give you clear and actionable steps.
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to stay compliant.
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And optimize your tax liability.
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Welcome back to the show today on our technology Tuesday.
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Tuesday's a day.
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We like to dive into something that's tech related.
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I am truly excited about today's topic Today, we're diving into the complex world of cryptocurrency taxation.
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this morning, I was out walking as I do in the morning.
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Take the dogs for a nice walk around the farm.
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And one of the things I like to do while I'm out walking is listening to podcasts.
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So today I'm going to make a recommendation.
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This is a must.
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Listen to folks.
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The name of this podcast is called practical prepping.
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It's a great podcast that offers practical advice.
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And the hosts Krista and Mark are fellow believers who truly have a heart for Jesus.
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And they provide practical advice for not living in fear, but preparing yourself.
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For those things that happen in life, like they say, stuff happens such as ice storms, tornadoes, and other disasters.
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It's a great podcast and you can find them at practicalprepping.info.
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So take a listen today, and if you have a chance to reach out to them, Tell them ask Ralph sent you.
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don't forget to subscribe to our show.
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You can join our email list.
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That's at askralphpodcast.com because you don't want to miss tomorrow's episode.
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Tomorrow's our wacky Wednesday.
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And we're going to talk about business ads that missed their mark.
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And let me tell you folks, they really, truly did miss their mark it's going to be a great episode.
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So let's get into today's topic.
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Cryptocurrencies like Bitcoin and Eurethreum them have exploded in popularity in recent years.
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You see this everywhere.
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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.
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So you ask yourself, Ralph, how does the IRS look at this?
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I'm going to answer that right now.
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The IRS treats cryptocurrencies as property for tax purposes.
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So they're like stocks or other investments that you own.
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This means that they are subject to capital gains taxes.
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There's that ugly word, capital gains.
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But reporting crypto transactions can be tricky.
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And that's because it gets a little complicated from there, folks.
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There's trades there swaps there's things called hard forks.
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And these aren't the forks you eat with.
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And more than that happen in that ecosystem.
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So in this episode, we're going to break down the key concepts.
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You need to know.
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A lot of people are getting into this and I'm getting more questions about it.
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So today you learn how to accurately report your crypto activity.
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Reduce your tax liability.
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And at the same time, stay compliant with IRS regulations.
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We're also going to discuss specific crypto tax tools that can help simplify that process.
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And that's what we're all looking for.
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Simplification.
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So my goal today is pretty simple.
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I want to equip you with the actionable information to master crypto taxation from a Christian ethics perspective.
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The truth is folks paying your taxes is the right thing to do.
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And the Bible calls us to submit to governing authorities so let's dive in.
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First let's get some key definitions out of the way.
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Your cost basis is how much you paid to acquire a cryptocurrency.
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Initially, for example, let's say you bought one Bitcoin.
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And let's say you paid $10,000 for that.
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Then your cost basis is $10,000.
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Pretty simple concept.
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So capital gains.
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Refers to the difference between your cost basis, that $10,000 and the sales price.
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So let's look at a practical example.
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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.
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And that's what you would report on your tax return.
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Now here's the difference with capital gains.
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There are two types, there are short-term and their long-term.
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Guess how that's figured out.
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It's pretty straightforward folks.
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It's how long you've held that asset before selling.
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So if you held it for under a year, That's considered a short-term gain.
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And those are taxed as just regular ordinary income.
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They're added to your adjusted gross income.
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If you've held it for over a year.
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They're taxed as preferential long-term capital gains.
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And those are more beneficial because they effectively are going to be at a lower rate.
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The answer to the capital gains question.
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Is, if you have the ability to hold things for more than a year, you're going to pay less tax.
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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.
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So let's walk through the key events that can trigger crypto taxes.
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A lot of people don't understand this.
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Any time you sell or trade crypto for cash.
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Or other assets, you trigger a taxable event in capital gains taxes.
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What does that include Ralph?
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This includes using crypto to buy goods or services.
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If you exchange one crypto for another, like trading Bitcoin for Eurethreum and also triggers taxes.
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The IRS views this as selling one asset for cash.
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And using that cash to buy a new asset.
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Just like if you bought.
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A share of Exxon stock.
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And then you sold that share of Exxon stock to buy some, I don't know, pick another stock.
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Walmart stock.
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The IRS is going to see that as a capital gain because you've moved from one stock to another day.
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they look at cryptocurrency the exact same way.
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There are also ways to earn crypto income from mining, staking airdrops and other activities, and that constitutes regular taxable income.
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So if you're one of these people that's into this crypto mining or staking, our airdrops.
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That is also a trigger for a tax event and a fair market value.
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The crypto received is reported.
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So if you do those activities, And you received those crypto currencies.
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For those activities, that's taxable income to you.
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Also spending crypto is a taxable event.
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Like I had a client in a couple of weeks ago that actually use cryptocurrency to buy a car.
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So you have to calculate gains or losses because your cost base at the value.
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At the time of the transaction is what the IRS is going to look at.
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Now here's an event that doesn't trigger a tax issue, transferring crypto to another person.
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Or a wallet you control Does not trigger a taxable event.
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As long as you have the private keys in both places.
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And that gets a little deep and I'm not even going to go into the whole private key discussion.
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Trading one crypto for a newer version due to a hard fork.
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And then we talked about that, a hard fork that's when this crypto thing sort of split.
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That also does not trigger taxes.
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So here's a, here's an example.
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Trading your Bitcoin BTC for Bitcoin cash.
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BC H after the 2017 hard fork would not incur taxes.
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Since you are receiving new units of the same underlying assets, like a stock split.
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It works the same way.
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So now that we've talked about what triggers taxes, let's discuss some strategies.
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To minimize your crypto tax liability.
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And this one's pretty simple folks.
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First.
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hold crypto for over a year before selling it so you can qualify for that long-term capital gains tax rate.
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If you sell it before you had a for a year.
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It's going to be ordinary income tax at your regular tax rate.
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Whereas, if you hold it for more than a year, you're going to get that preferential long-term capital gains rate.
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And again, you've got to look at market volatility to make sure that's the right decision to make.
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Another thing you can do is use tax loss, harvesting to offset gains.
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You can sell a crypto at a loss to offset capital gains from other winning investments.
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So for example, Let's say you've got a stock portfolio.
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And you've got a bunch of winners in there.
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You could harvest those gains.
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And sell some of your crypto that you may have lost on to offset those gains.
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another thing you can do to avoid taxation.
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is you can donate crypto to charity.
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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.
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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.
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You can also use a crypto IRA.
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To delay taxation until retirement distributions begin.
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There are actually people who are offering crypto IRAs.
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So you can use that as an investment vehicle, but again, I worry a little bit about the market volatility.
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So you really want to talk to a strong financial advisor and someone who really understands crypto before you jump into that.
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If you own multiple coins of one crypto, you can use specific identification to choose which ones to sell and optimize your cost basis.
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So maybe the value of your cryptocurrency has increased over time.
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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.
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And you can also leverage DeFi products on your read-through to access crypto loans.
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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.
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The key to this is you've got to track your cost basis for each transaction.
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So you have the data needed to calculate gains and losses accurately.
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One of the big problems I see in my practice is people come in after they've done these trades with these cryptocurrencies.
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And they say to me, Ralph.
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I just don't know if I have all the data that you need.
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Which leads us to our next discussion.
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Let's discuss some key tools and strategies for reporting your crypto activity to the IRS.
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And this one is crucial.
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You've got to use some kind of crypto tax software.
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There are things like coin tracker, crypto trader.tax, or Zen ledger.
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These can automatically import your trades calculate capital gains.
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And generate required tax forms.
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A lot of my clients use acorns or there is a Robin hood has a crypto thing.
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This saves tremendous time and effort.
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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.
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Now, all of this gets filed on tax form.
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89 49.
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That's where you report capital gains and losses from crypto sales and trades.
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And then you've got to report these each separately.
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Per taxable event.
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Now, if you want to become a real techno nerd.
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And go read all about this.
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You can go to IRS notice 2014 dash 21.
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As well as revenue ruling 2019 dash 24, to understand the official stance on crypto taxes.
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But I'm going to tell you this.
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It gets complicated.
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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.
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If you need to understand how to apply it better.
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And the key to all of this.
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And I say this routinely.
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I maintain thorough record keeping with transaction dates.
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Cost basis.
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Sales price and other details.
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The truth is folks.
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The burden of proof is on you.
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If you get audited, the IRS is going to say to you, listen, dude, you got to show us the trade information.
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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.
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And here's something you don't want to forget.
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Some states treat crypto differently.
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So you've got to look at your local tax guidance to determine how to do that.
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Now, before we wrap up, I wanna remind our listeners to visit our podcast page.
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You can do that at askralphpodcast.com.
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There you can leave us a review, share your thoughts, or even send a message with questions for future episodes.
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We love hearing from our listeners.
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Tell us what we're doing.
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Well, tell us what we can work better with, give us some ideas for things that you'd like us to cover.
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And while you're there.
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Make sure you sign up for our email list because we're doing a $25 weekly Amazon gift card drawing.
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And guess what?
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If you're not on the list, you can't win.
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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.
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It's askralphpodcast.com/store.
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So let's recap what we've done today.
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While crypto taxation can seem daunting.
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Confusing.
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In other words, you can pick, taking time to understand the key concepts and implement tracking solutions can help you stay compliant.
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And ultimately help you make wiser decisions.
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The Bible instructs us in Romans chapter 13, verse seven, to give to everyone what you owe them.
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If you owe taxes.
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Pay taxes.
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So take advantage of the legal means to minimize what you owe, but pay what you properly should.
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That wraps up today's show on the complex world of cryptocurrency taxation.
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I hope this overview has helped provide more clarity for you, crypto owners out there.
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Paying taxes is the right thing to do.
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Even when the reporting process feels challenging.
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So here are some final key takeaways.
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know your cost basis and calculate capital gains and losses accurately.
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Be aware of which crypto activities trigger taxable events.
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Use long-term holding and tax loss, harvesting to optimize your taxes.
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Leverage crypto tax software and work with professionals and the key folks maintain thorough records in case of an audit.
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Again, I'll remind you to visit our podcast page at askralphpodcast.com.
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Or you can read more about this topic and also listen to a back catalog of over 300 episodes.
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I guarantee you will find information out there that will change the dynamic of your financial life.
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So, as I always say, stay financially savvy, my friends.
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And God bless you abundantly.
