Official Deloitte Tax Partner Shares 4 2019 Cryptocurrency Tax Tips for All Investors
With the uncertain regulatory environment, one doesn't expect Deloitte and crypto to be in the same sentence, just yet. However, according to Deloitte tax partner, Jim Calvin things have been changing recently. Talking about cryptos, he says questions are on the rise, especially around the time when annual tax returns need to be filed.
While living in Asia, in 2014, his clientele had begun asking questions about Bitcoin. This was his first foray into the world of the blockchain. Since then he has gained a personal interest in the field. Asian financial hubs such as Hong Kong and Singapore were abuzz with things like AML and KYC and this got financial institutions and individuals alike into crypto. Thus he felt he wanted to be involved at both a personal as well as professional level.
As a result, today, the tax consultant finds that more than half his time is spent working on crypto and its related topics. Apart from questions about how to treat “chain splits” ( which he feels should be treated the same as receiving a free sample in the mail) he regularly looks after clients with a sizable portfolio of digital assets. Thus he has come up with a few tricks to maximize profits at tax time.
Wash Sales: Selling something and then just buying it back doesn't look like smart business. Claiming losses on that transaction looks even shadier. Thus it just can't be done when trading stocks. However, with crypto assets, this is possible. According to Calvin,
“There should be some daylight between the trades. An hour is probably okay. But you can take that loss. You can’t do that with stocks, but you should with Bitcoin and most other cryptos that are treated as a commodity.”
He further points out that while losses can be carried forward, they can’t be carried back.
Theft: Coins getting stolen is not unheard of issue. While these lost funds may not be deductible per se they are still a loss.
“It wouldn’t be deductible if it’s a personal asset. If it’s on an exchange, it’s very unlikely to be considered a personal asset. Then it should be deductible if you can show that it was in fact stolen.”
The other caveat in the rules is that if one is managing their own private keys, that complicates matter in trying to prove such a loss.
Chainsplits and airdrop: While neither are taxable until an income is made on them, Calvin suggests claiming them only when the values actually appreciate; this allows one to offset the ordinary income tax.
“While 99% of chain splits are junk. The bad news is probably it would be ordinary income. Because there’s no sale or exchange of an asset to get them.”
Claiming them upon appreciation of value allows one to offset the ordinary income tax when sold at a profit. And the profit is only taxed at capital gains on the said profits.
“I think they are a risk. The IRS will probably go along with that as you don’t have a choice about receiving it,”
Using the highest cost basis: A favorite strategy that Calvin uses for tax accounting is to use the highest possible cost basis. He highlights the importance of keeping track of one's coins while using standing instructions.
“Anything I sell is going to use my highest cost coin. So the first thing I sell is always going to be the most costly. And therefore, it minimizes any gain I might have, or maximizes losses.”
Its a rule he has pinched from stocks and bonds and therefore feels there is a legal precedent.
“Have a standing instruction, write an e-mail to your CPA or anybody else that can verify that you definitely said anything you sell is going to be from the highest cost basis lot. When you sell it, it could be for say $4,000. But when you’re selling, you can base it on coins you bought at $20,000.”
This allows someone to sell using the maximum cost basis, based on how much was purchased. It should come as a welcome relief, particularly to those who had purchased their assets at the time of the previous bull run.
IT should be noted that all these tax tricks have yet to be tested in the true sense. Ther have been no court cases or IRS challenges that will attest to the veracity of these ideas. However, as Calvin notes, he has been suggesting this to his clients for some time now and the fact that these methods are suggested by Deloitte, one of the largest tax accounting firms in the world, gives them a certain gravitas that might otherwise not hold.