Crypto 01: A Crash Course in the Taxation of Cryptocurrencies & NFTs, and How Real Estate Can Help!
November 30, 2021
161. Taking Over the Family Hotel Business, Why STRs are Awesome, & Crypto with Naitik Patel, CPA
December 14, 2021

December 7, 2021

Crypto 02: Answering Crypto Tax Questions from Tax Smart Investors

In this episode, Brandon and Thomas answer questions that are frequently asked by clients and members of the Tax Smart Crypto Investors Facebook group.

This episode is sponsored by Landlord Studio and Tax Smart Investors.

Full Transcript:
This podcast has been transcribed using AI, please excuse spelling, grammatical, and other errors.

Thomas Castelli 0:00
You’re now listening to the real estate CPA podcast.

Brandon Hall 0:05
Your source for all things real estate, accounting and tax. Here we reveal our secrets that can save you 1000s in taxes, streamline your accounting process and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors and current clients on what strategies they use to grow their business, and how they steer clear of Uncle Sam.

Thomas Castelli 0:30
Hey, everyone, thanks for tuning in to this episode of The Real Estate CPA podcast. We’re back to talk about crypto for a second time in a row. And this time, we’re gonna answer some questions that we frequently get from clients and members of our new tax smart crypto currency group. If you have not already joined that, feel free to go to Smart crypto investors or search for tax smart crypto investors on Facebook, and you’ll be able to find us right there.

Brandon Hall 0:57
Did you see the the big price drop? Like yesterday? Yeah.

Thomas Castelli 1:01
I did. Yeah.

Brandon Hall 1:03
So as I was like, looking that up, and I saw that it was primarily from the feds tapering policy to fight inflation, which is interesting.

Thomas Castelli 1:11
Yeah, there’s a lot of people who are scared that the rising interest rates and the lack of liquidity, the availability to get money is going to hurt, you know, things like stocks and crypto. And you’ve seen it drop significantly. It was going back and forth between like 53, and like 56 Over the last two or three weeks. And now it’s dropped. I think this morning, I checked, it’s dropped down to about 47 or 48. And I think it went a little bit lower than that this morning. So it is definitely a very volatile market. But the funny part is that El Salvador, they bought the dip. They bought the dip, so we bought the dip the country of El Salvador.

Brandon Hall 1:51
Oh, wow. Interesting.

Thomas Castelli 1:52
They’re really that’s interesting. Yeah, they built they’re building a crypto city, excuse me, a Bitcoin city right near volcano, and they’re going to use the thermal energy from the volcano to provide the power to mine cryptocurrency so you know, El Salvador is going he’s going in on cryptocurrency for sure.

Brandon Hall 2:12
Wow. That is, that is incredible. I had no idea. I also learned this past week, thanks to Larry Shaw in our Facebook group made me aware of helium mining. So you can you can set up a like a 5g network device in your window in your office, you just you buy it, you plug it in, and it minds helium, you’re you get rewarded helium when you pass certain authentication tests that are essentially pinged to you by other people around you that are doing the same thing. And the whole idea is to create a decentralized 5g cellular network is my understanding of a very rudimentary understanding of because I just learned about it a few days ago. But that was amazing. So I looked up that they have a map online. If you were to Google helium mining, I think it will take you right to the this website that I’m talking about. But it has a map that shows you people around you that have this this device set up and it shows you how much they’re earning every month or you can like see all their earnings, I think for the past like year or something like that. So that’s pretty incredible to lots of cool opportunities in the crypto space. If you start paying attention and you get the metaverse to. We were talking about the metaverse all week last week with our team and that’s some crazy concepts there. You got land sales going for 2.5 mil there’s a there’s virtual land $2.5 million. Right, so so everybody here is all about real estate, real hard assets and all that stuff, but you’re missing this entire world. That’s transacting land in the metaverse is virtually virtual land. And there was one for $2.5 million. Last week there was a virtual yacht sold $650,000 last week to me, it still is happening all around you folks. So you got to pay attention.

Thomas Castelli 3:57
Yeah, just interesting to see how it’s all gonna play out in terms of what the real utility of all that is right now. It’s just it seems like a wild wild west. But I’m interested to see how that actually plays out in terms I was gonna say plays out in real life, but it’s gonna be the metaverse so the real life Metaverse like what does that yacht actually going to mean to the person who bought it on the in the metaverse, but we’ll see.

Brandon Hall 4:19
You can even host parties, right? It’s the crown jewel of that particular Metaverse, I think so you get your VR goggles, take your little avatar and meet other people on the yacht party.

Thomas Castelli 4:29
That would be interesting. You know, you see societal trends shift towards the metaverse instead of going to some big party in some fancy ballroom, or some fancy place and like New York City or something like that. You go to a very exclusive high end luxury yacht in the metaverse and yeah, I could definitely see you know, the fear of missing out driving a lot of people to to buy into the metaverse for sure.

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Brandon Hall 4:52
I mean, hey, look, if you’re if you’re listening to this and you think there’s no utility for crypto, there’s no utility for the metaverse and all that stuff. I mean, I guess you’d be right, right? I mean, you can’t like physically live on your $650,000 yacht. But that doesn’t mean there’s not value. Right? I mean, I mean value is determined by the people the market. And if somebody is willing to pay you something, then then it has value in theory, so be interesting to see how it all plays out for sure.

Thomas Castelli 5:18
Absolutely. Absolutely. Shall we jump into some of these questions?

Brandon Hall 5:22
Yeah, let’s jump in. This is a tax podcast. So let’s start with some tax questions.

Thomas Castelli 5:26
All right. All right. So one of the questions that a lot of our clients have asked them, a lot of people in general has been focused around applying the tax trader status, also known as TTS to cryptocurrencies. So we’re not going to I’m not gonna give a whole entire in depth overview of what that is, I’ll go over briefly. But basically, when you trade, when you trade assets, like stocks, bonds, etc, you’re considered an investor. And as an investor, you get capital gains tax treatment, long term capital gains, if you hold it for a year, in a day, or short term, do you hold it for less than that, you’re also limited on the amount of expenses that you can deduct. As an investor, however, with a tax trader status allows you to do is it allows you to become a professional tax and basically become a business you enter the business of trading. And when that happens, a number of things happen. A few key highlights is you’re allowed to deduct your business expenses. If you’re doing this, personally, you’re gonna report this on Schedule C. So it’s expenses for accounting fees, expenses for things like courses and, and trainings and advice and all the other things you would see when running a business. So that’s one of the benefits of the tax trader status. Another one is mark to market accounting, and you avoid the wash sale rules. So long story short, as I understand it, instead of saying, Okay, I sold the stock today at a gain and sold at a loss tomorrow or something along those lines, you’re not allowed to take the loss against the game. What they do is they wait till the end of the year, and they value your stocks at the end of the year. First, I think your cost basis if I’m understanding it correctly, and that’s when your gain or losses determine your profit for the year. So it’s very beneficial for people who are high frequency traders. And it’s very common to see people trying to get into that window and trading stocks and other financial instruments. So a lot of people have been asking, you know, can I apply this to crypto? Right? That’s been the question, can I apply TTS to crypto? And the answer that question is as of today, no. So TTS is found under Section 445. And they define basically, securities and commodities are allowed. Basically, when he qualifies for TTS, you can apply this when you trade stocks and commodities. And as of today, cryptocurrency is considered property, and it’s not a security or commodity. And for that reason, you can not use TTS for cryptocurrencies, as of today. We went through the bill by ins bill not too long ago, and there was nothing but the proposed bill Bill back better plan and there’s been nothing in there specifically about section 445 and crypto. However, they do want to add the wash sale rules in for crypto, and we talked about that. And that’s probably likely to come to fruition. But unfortunately, no TTS for now are good stuff.

Brandon Hall 8:15
Now. Next, we have wash sale rule. So last last podcast, we mentioned that I think we mentioned that the Biden tax plan, or we’ve mentioned this in one of our prior podcasts for the past couple weeks. The Biden tax plan that is still going through the Senate right now includes a provision that basically applies the wash sale rules to cryptocurrency. So what are the wash sale rules, the wash sale rules prevent you from tax loss harvesting, essentially. So if I own Bitcoin, and I bought it that 50 to $52,000, and now it’s at 47, like Tom just said, right, so it’s all this large decrease over the past day, I could sell that 52,000, I could sell at 47, even though I bought it at 52. And I could buy it back immediately at 47. Now why would I do that? Well, first, I have to have a long term belief in the in the asset, right? If I were doing this, my assumption would be that I believe that long term bitcoin is increasing in price. So I want to hold it long term. So I sell it at 47. But I buy it right back. And that aligns with my belief, that long term, it’s going to go up, it’s going to appreciate in value. But the reason that I sell it a 47 is because I bought it at 52. So as a decreases, I could sell it and I have a loss, right? I have a $5,000 loss if I sell the asset, but I bought it right back, because I believe long term it’s going to go up right now you can do that with Bitcoin. You can’t so this drop that everybody just experienced you could sell buy right back and you’re able to claim that loss on your tax returns as a capital loss. But if you believe long term, that bitcoins going up, you you you buy it right back and you stay in it, but with the Biden tax plan, they’re implementing wash sale rules for cryptocurrency to essentially prevent you from doing that within the 30 day A period, so I can’t sell at 47 and then immediately buy back, I would have to sell, wait 31 days and then buy back. So you lose some flexibility. If those wash sale rules get applied now, I would expect they would just be aware of that. And if you want to still kind of use the wash sale rules, if you still want to, like capture that tax loss, without necessarily hitting the wash sale rules, what you could do is when it hits 47, you buy more essentially the same amount that you already have in and then 31 days later you sell the original one. But maybe by that point, it’s already back up. So maybe you don’t have to, and maybe you’re you’re winning even more so. So that’s that’s averaging down, you average your cost basis down when you buy more along the way. But you can also sell some of that old value off. And you might be able to claim tax losses as a result of that, at some later point, I didn’t really do a good job of explaining that double down strategy, but it doesn’t work. It does exist. And that’s what people do in the equities markets, right. So from if I’m buying stock trading stock, that’s something that people do a lot in the equities market that double down, they average their cost basis down and they sell some of that original value on the 31 day mark to avoid those wash sale rules, but still capture tax loss.

Thomas Castelli 11:07
Yeah. And that’s that you could still do the wash sales, at least through 2021. We’ll see if the bill back better act finally does go through in its totality, it’s passed in the Senate, then that was likely not going to be allowed anymore in 2022. So just something to keep in mind and keep aware of if you are looking to do some wash sales. So if you want to take advantage of that, just keep in mind, what could happen in 2022.

Brandon Hall 11:31
So I have an interesting question for you. So Larry Shaw, this. So this is coming from our tech smart crypto group, Larry Shaw, as you know, I’ve got this helium mining that I was explaining a few minutes ago got this helium mining going on. Is that earned income is that can be ordinary earned income, because it’s not really I mean, just buying a device, you’re throwing it up in your window. And then you’re earning credits, essentially, that turn into cash.

Thomas Castelli 11:57
Yeah, so So for my understanding right now that mining itself is considered earned income, it’s ordinary income. It’s not a capital gain. But I think it’s going to be whether or not that’s non passive or passive income is going to be dependent on whether or not you materially participate in it. But right now it is ordinary income.

Brandon Hall 12:15
Yeah, I don’t have any, any source documents for that specific question or any sources for that specific question. I would agree, though, it is ordinary, it’s earned income. And the reason is I akin it to like, like investing in ATM machines. You know, ATM machine investing is it’s passive, right by nature, but it’s still ordinary income. And so that that’s the way that I would, I would, I would kind of map this one, I don’t know if it would be such a self employment tax, though.

Thomas Castelli 12:43
I’m taking a look at it now. And from the source that I have here, it’s the IRS classifies mining income as self employment income, and taxpayers may be responsible for self employment taxes on the income from mining, it is considered a business activity, I think at this point where it’s like when you’re trading it, or you’re buying stuff that’s already been produced, then it’s kind of like development of real estate, right? You can think of it that way. When you’re developing real estate quite often, if you’re going to sell it right after you buy it, it’s going to be considered ordinary income subject to self employment taxes. So here, you’re kind of developing a cryptocurrency by mining it and say, helium, for example. And then you’re going to sell it on the market. And then basically, people who buy it on the secondary market, it becomes an asset to them, that becomes property capital asset, and then they sell it, and they’re going to get capital gains treatment on their profits, because people will sell it. So this is how it works, right? So you mined the crypto, and your cost basis in the crypto becomes the cost basis at the moment, it’s mined. So if you mined it, and the market price was 250, when you mined it, well, it’s $2.50 Is your cost basis. Now if you go and sell it after that, that’s I think when you’re gonna get capital gains treatment, but when you actually mined in itself the actual creation of the cryptocurrency that’s the ordinary income. Alright, so another major question we get and we kind of touched on this on last week’s episode. And that’s how can you use real estate to kind of offset some of the gains the capital gains tax you might get from your your sales of cryptocurrency you might have bought in at a lower cost basis than you sold it for. And one of the most immediate questions we get about is the real estate professional says can you use the real estate professional status. So if you do qualify as a real estate professional and you go out, you buy property, you generate losses from it, you can use those losses to offset your gains from cryptocurrency but you have to be aware of the excess business loss rules, right? Because crypto, if you’re buying and trading it and you’re not mining it itself, it’s going to be a capital asset. It’s not a business right. And that’s why people want to use a TTS status tax trader status to turn it into a business to avoid the excess business loss limits. So kind of long story short, you could be a real estate professional, go buy rental property, do a course egg generate losses and use them to offset your gains from crypto, which you’re going to be capped at in 2021. If you’re unmarried, so if you’re single, the most you can deduct is going to be 262,000. If you’re married, it could be 524,000 in 2021. Now, it’s going to increase in 2022. But right now, that’s going to be the max losses you can take against other income, like your gains from crypto.

Brandon Hall 15:27
Yeah, crypto and real estate play really nicely together. If you’ve earned a lot of a lot of gain in the crypto markets, and you’re looking for ways to offset that gain, real estate is perfect for you. I mean, you can certainly like roll a lot of your gain into qualified opportunity funds and get real estate exposure that way, you can also buy property right up the road. And there are rules around that we’ve talked about those rules and all of our podcast episodes on what specifically you need to be doing qualifying as a real estate professional, passive versus non passive, that type of stuff. But you can absolutely offset your crypto gains with real estate if you structure it right.

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Thomas Castelli 16:00
Right. And same thing with short term rentals. If you can go back in previous podcast episodes, listen to that and check out your short term rentals, you don’t need to qualify as a real estate professional, it could still be non passive, you materially participate in the business. And you can use short term rentals as well. One of the things that Justin short mentioned, he’s one of our senior advisors here at the firm, he was on a previous podcast episode, he suggested using a qualified Opportunity Fund going ahead and making an investment in one as a way to defer and perhaps reduce the gains you have from crypto. So if you were to invest in the qualified opportunity fund by the end of this year, so that’s 1231 2021, and you hold it for at least five years, you’re going to be able to get a 10% step up in basis. And the way I always describe this is if you have $100,000 gain you invested in the fun you hold five years, that 10% Step up and basis is basically going to reduce your capital gain exposure down to $90,000. So you just save a bit of money. Now if you have very large crypto gains, obviously, this can be quite lucrative. Now if you hold your investment for a totality of 10 years or more in a qualified Opportunity Fund, the actual gain on the qualified opportunity fund itself. The appreciation on the fund is tax exempt. So this could be something worth looking into if you are limited on your options, and what you can do with your crypto. And the last one that I’ll say is CRTs charitable remainder trusts, essentially with a charitable remainder trust you donate the cryptocurrency to the child remainder trust, you get a tax deduction, it pays you out a source of income. And then at the end of the term, the crypto or whatever you would donate to the charitable remainder trust would be donated to a charity. So that’s another option that’s really popular out there right now, if you’re looking to try to avoid some of the capital gains tax. Alright, so that’s about all the questions we have for today. I’m sure we’ll be doing future episodes on crypto as we continually get questions from clients and members of various communities we’re a part of, so if you have any questions you want to post them in the tech smart investor, Facebook group. Again, go to Smart crypto investors, join the group there will love to answer some questions. So see you there. Until next time.

Brandon Hall 18:13
Thanks for listening to today’s show. If you enjoyed the show, please find us on iTunes and leave us a review. You can also email us at contact at the real estate CPA comm with any feedback or topic suggestions, we are always taking on new clients and with the new tax laws in play. You really don’t want to navigate this alone. Let us help you save money on taxes with your accounting and CFO needs. To become a client navigate to our client page at the real estate CPA calm and fill out a webform with as much detail about your situation as possible. Thanks so much for listening. Have a great rest of your week.

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