353: Updates from the Wild West of Crypto

Catch the full episode: https://www.wealthformula.com/podcast/353-updates-from-the-wild-west-of-crypto/

Buck: Welcome back to the show, everyone. Today, my guest on Wealth from your podcast is Andie Kramer. Andie Kramer is a global authority on regulatory tax, Commercial governance matters that arise in trading environments and in digital asset transactions. She is sort of the you know, she is the person to go to. If you have a question about cryptocurrency and the law right now, as she is an attorney, went to my medical school alma mater, although she was in the law school, which I used to get kicked out of the library all the time.She also has a certifications of financial accounting from Harvard Business School and leading with finance, also from Harvard Business School. Andie, welcome to you all from your podcast.

Andie: Thank you very much. Glad to be here.

Buck: So I want to start out kind of, you know, obviously we can get into taxes and all that stuff later on, but, you know, that’s been kind of a rough ride for cryptocurrency digital assets in the last several months. And I just wanted, you know, for people who are really kind of hearing things in the news a little bit but don’t really understand the implications, would you mind kind of giving your perspective of sort of, you know, the meltdown in in sort of a summary of the meltdown that occurred?

Andie:

Well, that’s a tall order. But the meltdown.

Buck: Started with terror.

Andie: In bite-sized pieces, right? Perfect. Well, what happened is if we compare 2020 to the end of 2022, to the end of 2020, the markets are still ahead of where they were previously. But in 20 in 2022, the market had been maybe it was a bubble. Who knows? But we started to have problems when first Terra, which was one of the stablecoins, fell apart and it brought down with it a number of other companies, or at least its demise is attributed to problems at other companies in the cryptocurrency space have had last year.

And so it was almost as if there was the proverbial run on the bank where one company goes down and then the customers of the next one are looking at it and saying, Holy smokes, I really probably got to get my money out of here. And so it sort of became a domino effect where it went from one to the next to the next referred to as contagion. And what we saw at the end of the year was a lot of people who had invested when the expectation was that the market was going to go to the moon forever, found that they were now forced to either sell their positions or their positions were liquidated out from underneath them. And so as the market has been improving the beginning of this year, we’ve already seen just the last week the market’s gone up almost 20% for many of the popular coins and tokens. But for the people who were driven out of the market last year, they’re still out of the market. They’re not going to be able to they have losses that they’re not going to be able to just hold it and wait till the market goes up. And so one of the issues we have is who’s still in the market. And I can tell you, there are a lot of investment funds and venture capital funds and others that are still very interested in so well in the market.

Buck: If we can back up real quick, the big you know, probably it’s important to kind of talk about FTX and Sam Bankman-Fried and what exactly happened there and what the implications for the crypto sphere was for that.

Andie:

Well, if we look at FTX and its bankruptcy, there’s a lot of arguments that can be made that that is is an exception to the rule. Because when the company was filed for bankruptcy, the new CEO that was appointed for the bank for the bankruptcy proceedings is a man who had put taken Enron out of bankruptcy. And he his first filing with the bankruptcy court was basically I’ve never seen anything that has been such a mess as this. And so the reports are and I have no direct information other than the what we’re all hearing in the in the press. But the reports are that either they were.

Buck: Sort of essentially where they were, they were using customer funds to invest or to lend to other businesses. Is that right?

Andie: And to themselves.

Buck: And to themselves.

Andie: And it was to themselves first through another one of their entities. They had a related entity. And so customers thought that their money was secure, their tokens were secure, and signed out, that they’re gone. It’s as if they went poof. And so another sort of piece about that, though, is I was I was trying to to to explain and I wasn’t very hurtful is the fact that there may have been fraud involved in those situations. That’s a different kind of a situation than the market itself. That’s right.

Buck: Serious problems. Right. Well, I mean, I guess there to me, it seems like they’re kind of part and parcel, Right? I mean, now there’s a lot of fallout from FTX. And because of, you know, some of the involvement of other major cryptocurrency oriented institutions, you know, for example, you know, I think the latest I’m hearing is some potential solvency issues with regard to the Bitcoin trust, the Gbtc trust that allows people to trade effectively in a trust Bitcoin on the on the New York Stock Exchange. So could you could you talk about how that happens because of FTX? Like what what what I’m trying to get at is what are these ripple effects? How how come there are so many ripple effects from that?

Andie: Well, what we see is that when the market is not predictable, the the talk had been for years that somehow the crypto market moved opposite to the to the to the stock market. Right. But when the stock market took a hit in 2022, the crypto market followed along with it so that there weren’t asset classes that were distinct from each other in in your reference to these Bitcoin trusts. What happens is that the market price varies so quickly, but the investors in these trusts are not buying Bitcoin directly. They’re buying an investment in a vehicle that holds Bitcoin. And in fact, a number of those trusts actually been trading below the value of Bitcoin itself. So that people might look at it and say, well, maybe that’s time to, you know, make an investment. But if you have all sorts of other expenses because you’re not just holding the Bitcoin directly and so your share, it’s a pooled investment. And what we see is that those kinds of investment vehicles are distorting the prices. They also very often have a need to buy futures contracts. Many of them are in invest in futures contracts and they have to buy futures contracts for the closest months to try to make it as close to a a physical position.

And so there’s all sorts of distortions in the markets themselves. Mm hmm. So what’s happened is people are concerned about the market, concerned about the 9000 different kinds of cryptocurrencies and tokens that are prices are reported on. And so everybody that was sort of chasing the next big deal are now afraid that could it be another situation? Could it be that there could be fraud or that there could be a self-dealing or other things that that obviously hurt regular investors?

Buck: The irony of this whole thing, in my view, is that the the fraud that occurred occurred in a centralized you know, it centralized company and FTX and essentially took down, you know, the the entire decentralized world. And I guess that kind of gets me to talking about regulations, which is, you know, something obviously, you know a fair amount about. wWhat do you expect the fallout from this to be? Because obviously it’s a big deal. There’s a lot of money lost. There is a lot of a lot of companies that went out of business quality companies like Blockfi was, you know, filing for bankruptcy. And there’s got to be some sort of legislative fallout from this. And do you think that that’s correct?

Andie: Absolutely. The way that the the regulatory world that applies to crypto has been pretty unclear. And the reason for that is that the Securities and Exchange Commission has the ability to regulate securities, and the Commodity Futures Trading Commission has the ability to regulate interests in commodities. And so what are crypto currencies? What is what is Bitcoin, what is it theory and what is avalanche? You know, pick your pick. You’re one of 9000. And so the FCC has been very vocal saying that Bitcoin might be a commodity and that could be subject to the CFTC jurisdiction. But they’re not prepared to say that any other one is anything other than a security. And so what does that mean? Well, what that means is that if you’re buying and selling these tokens, mostly tokens on various sorts of digital tokens, have you registered with the FCC to be an issuer of these tokens?

No, people have not done that. Yeah. And so it throws into you know, it throws into question the whole validity of the market is the SEC’s going to be able to say this is a security and you violated the securities laws by not registering as an issuance of securities and they just recently went are going after the CEO of Genesis which is one of the crypto lending firms where people thought that they were putting their crypto and just letting Genesis lend the crypto to somebody else and they get a big return Yeah, but it turns out that if they carefully read the documents, their crypto was being pulled with everybody else’s crypto. So now it’s more like an investment vehicle. And so the FCC has gone after the CEO saying you issued unregistered securities.

Buck: Right. Right. So all of the things that you’re saying, though, are are kind of you know, they’re not actually terribly new. Right. I mean, this issue has been of securities, you know, has come up over and over again. You know, XRP Ripple has been on a lawsuit for a long time. Right. And I don’t know if that’s resolved itself yet or not, but do you feel like there’s an acceleration of that coming or what do you anticipate the actual, you know, true repercussions of of what’s going to happen next in the near future to be?

Andie: Well, I think that one of the key things is who’s going to be on first base for for being the regulator. And there were some bills introduced last year and some talk that the CFTC would be the primary regulator of various cryptocurrencies. And the FCC, which is a much bigger agency and has a lot more resources behind it, digging its heels in and saying, no, no, no, it’s it’s our job to regulate.

Andie: And so I think that it’s quite possible that we’re going to see some legislation that’s going to tell us if anything happens in Washington. And in 2023, you know, there may be some legislation that’s going to have to clarify this.

Buck: Let’s switch a little bit over to the topic of cryptocurrency, taxation and that kind of thing. One of the things that you were you were talking about was how the SEC may or may try to, you know, look at look at these digital currencies as a securities. Does that in any way change how cryptocurrency would would be handled tax wise? Because right now one of the major benefits is that it’s not really considered, you know, portfolio income. It’s like personal property, right. And so cryptocurrency is not subject to the wash rules and things like that that are tremendous advantages. Does that potentially change if if there is changes to the definition of cryptocurrency via the SEC?

Andie: Well, it turns out that all of the regulators have their own definitions and so the SCC definition of a security includes investment contracts and things where people are pooling or sharing or the risk is spread out. The way that the tax code works is each Internal revenue code section that addresses the security, defines it and stock and securities is is R is a term that goes throughout the Internal Revenue Code where stock is meant to be, you know, shares in a company and a security typically means that instruments borrowings. And so we don’t have the same broad definition of a security that there is in the securities laws in the tax world. There were some efforts to amend the war sale rules to include digital assets as assets that would be. So instead of it, would it be expanding it, not saying that they’re securities, but saying, oh, by the way, we’re going to stick those in as well.

Buck: Meaning that there was an attempt to to make them subject to wash rules. You know, obviously that.

Andie: Was not by calling them securities, by saying that digital assets would also be subject to the wash sale rules that didn’t go any place, but that that was the way of of approaching it. And so I would answer your question by saying that just because the FCC says something is a security does not mean that that would become a security for tax law purposes.

Buck: Right now, you work do you work with individual in taxes as well, or do you work primarily with, you know, in policy and institutions and things like that?

Andie: I work with some individuals as well. I’m a lawyer, not an accountant. So I don’t fill out tax returns. But right when the going gets tough, then the accountants and the individuals want to.

Buck: Got it and they need it. So let’s let’s talk a little bit about tax law. What do you what do you think the people holding cryptocurrency now need to know? What are some of the essential things that you need to understand if you’re going to own this stuff and you know, and report your taxes appropriately?

Andie: Okay. Well, the IRS has gotten really cranky about the fact that the press talks about how there’s, you know, millions and millions of people who own cryptocurrency. And, you know, 11 people reported it as is assets on their tax returns in the, say, 2018. 2019 was the first year that the IRS put a question on the tax return about cryptocurrency. And each year they moved the question closer to closer to the front so that right now if you’re doing a 1040 individual tax return right after your name, rank and serial number basically is a question about whether you have in 2021, the question was whether you held any virtual currency and the draft tax returns for 2022 are out and the draft instructions for 2022 are out.

We don’t know whether the IRS is going to change them between now and when returns are due in April. But right now they have changed it to a digital asset definition and they’ve made it much, much broader so that whether all taxpayers, whether they’ve held cryptocurrency or not in 2022 are specifically asked a question on the very top of the first page, which is do you did you have any of these types of transactions in digital assets in 2022 and you have to either check yes or you check no.

Buck: And that’s kind of a big deal, right? Because lying there is kind of is a big problem.

Andie: Lying is always a big problem. But by submitting your tax return under penalty of perjury, if you check the wrong box, if they can determine that you did that intentionally, there could be criminal tax fraud. That’s you know, that’s not a pretty picture.

Buck: Yeah, And it’s interesting because, you know, I actually I mean, not me, but and, you know, I know of people who hold court who’ve been in the Bitcoin game for a long time, and they have really just been in the shadows and they do not want to report anything. And everything that’s happening is completely decentralized and stuff. And, you know, in talking to people like that, I, I always asked them like, you know, how do you how do you will you know, are you worried about like going to jail?

Like I would be worried about going to jail and they generally say, well, how are they ever going to figure it out? Because I’m just I’m using decentralized platforms. I’m holding everything in cold storage in moving only to, you know, only using these these swaps, you know, these digital swaps that are not involved with central platforms. How do you how do you anticipate that that could be tracked by the IRS?

00:25:34:10 – 00:26:05:05

Andie:

Well, I, I would ask a question back to the people who are taking their position, which is when cryptocurrencies been stolen or ransomware. MM How is it that within a few weeks or whatever, there’s a news report that the that the Department of Justice says seize back you know 80% of the of the, of the, of the coins that had been used in ransomware or had been stolen.

Andie: People think that the market is a anonymous market, but it’s not. And there are very, very sophisticated stated tracking systems that companies use that can actually tell you they don’t know you’re dying, but they know what accounts are related to get together and where they go. And the IRS is using that kind of information to keep track of people who are investing in holding cryptocurrency.

And so I would think that the tax the tax world is not is is opaque and easy to to scam as people think it is. And I would be very concerned that somebody could find themselves with serious criminal tax fraud. Yeah. By not keeping you know, by not properly reporting that. That leads us to another point, though, which is what is proper reporting. Example, the IRS takes the position that mining when you get you know, when you when you get new crypto from a mining activity that you’re mining is taxable when you receive it.

Buck: Well wait a second. So it’s taxable when you receive it, is it not. So what’s the is the price. Okay. So you’re saying as soon as it’s produced, whatever price it is at that point it’s taxable at that.

Andie: Exactly. So let’s assume that you were doing some mining at the beginning of 2022 and you have those $400 million gain because you are very successful and you, you know, and then by the end of the year, it’s not worth 400 million. It’s worth $10. Technically, as far as the IRS is concerned, you have taxable income of $400 million.

Buck: Interesting. So for those who are mining, the smart thing really to do is immediately convert, you know, into into U.S. dollars. And then, you know, if you want to if you want to buy cryptocurrency, if you want to buy Bitcoin or whatever after that, then you know, go ahead and buy it. You’re not going to have, you know, at least you get cash, right? Yeah.

Andie: Exactly.

Buck:

Makes good sense. Yeah. What other things should we be aware of?

Andie: Well, staking is another type of. Yeah. So staking instead of, you know, proof of work and the staking side, the IRS takes the position that staking is taxable at the point that you, you know, receive it, if you will.

Buck: Are those considered like dividends or or how are those looked at.

Andie: Well they’re treating it as ordinary income.

Buck: Oh, okay.

Andie: Is income because you’re is if you’ve earned, you know earned income that you’ve earned it. And so there’s a lot of differences of opinion about whether some of the IRS positions are correct. So let’s go back to their 2022 tax return for a minute. I have to check a box which asks if I did any mining staking, if I had any NFT, things like that. I have to check the box. Yes, assuming that that’s true. But now does that mean that I have to report them on my tax return? I may take the position with proper advice from somebody who knows what they’re talking about, you know, the trusted advisor, that maybe it’s not taxable. So I may be checking the box saying I have these transactions, but then not reporting them, because I believe that it’s not legitimately believe that I’m taking a position that it’s not taxable.

And so that’s an open question as to what do you do in those situations. And those issues also apply to crypto lending, because is a lot most of the lending platforms have marketing materials which say this is just like a loan and it’s you don’t pay tax on a loan when you lend money. But the tax law treats lending money as a loan.

But transferring property is not necessarily within the definition of a loan. And so we have situations where it’s very important to figure out if your crypto loan is really a loan for tax purposes or whether you’ve sold it and then bought it back afterwards.

Buck: Oh, interesting.

Andie: And what’s very different, tax results. Yeah.

Buck: Yeah. What are some of the things that that come up most often in your practice with with people who are you know who’ve got significant cryptocurrency holdings.

Andie: Well, people who have significant holdings that are appreciated are very interested in making charitable contributions where they can then get a charitable contribution, an equal to the value of what they’re donating. And so basically they don’t have to pay tax on the appreciation, but they can get a big deduction. And so there are a lot of I work a lot with both donors and charities about cryptocurrency donations in a market that we’ve not talked about, which is an interesting crypto digital asset piece of the world, is the Nonfungible token market the next phase and work with a lot of creators and companies that are creating NFTs for purposes of brand recognition and things along those lines. But a lot of it is tax questions like do I have to pay tax on that $400 million that I have in my staking or my this or that? Yeah, and the answer varies. It’s not always going to be the same answer.

Buck: Yeah, absolutely. Do you see it? Are there any laws that are different for 2023 than they were for 2022 that we should be aware of?

Andie: Well, there was a reporting rule that I believe the IRS just extended. It was going to kick in at the beginning of 2023. So we have an extension. One interesting thing that just happened is that the IRS, the Office of Chief Counsel, is the IRS is internal. They’re their in-house lawyers if you will. And they just came out with a memorandum last week that says that if you’re making a donation of more than $5,000 of a cryptocurrency, you must have a qualified appraisal. And that’s what the rules have said. But a lot of people assumed that that was not necessary, primarily because you could look on Coinbase, you could look on an, you know, you could have worked on. Yeah, all sorts of other places and come up with what’s the value for that moment in time. But the IRS memo that just came out last week says if you don’t have a qualified appraisal, then you cannot get a donation. Wow. Deduction. And the definition of a qualified appraisal requires somebody who has two years of experience in valuing these assets and all sorts of things that make it very difficult for qualified appraisals to exist. So they’re really making and making it difficult.

Buck: Well, very fascinating stuff here. Any if you tell us a little bit about it, a little bit more about your practice, what kind of you know, what what kind of clients you have and how to get in touch with you.

Andie: Well, I started my own law firm, so I left a big firm where I’d been for 30 years. And I now have ASKramerLaw.com And the website just went up last week.

Buck: And is it ASKramerLaw.com.

Andie: ASKramerLaw.com. And so yeah, I work with people, individuals and businesses that are trying to solve really complex problems in the markets regulation, tax, energy products, renewables, ESG issues. And so that I’m not the garden variety wills and trusts type lawyer, but I do work with venture funds, multi multinational corporations, and basically I’m doing the same type of work now that I did at the big firm. It’s just that I’m doing it on a separate, you know, for my in my own practice where I feel that I can devote more meet my client’s needs as well as play to my professional strengths.

Buck: So great. Well fantastic. Andie, thank you so much for being on Wealth Formula podcast and giving us a little update on the crypto market and taxes.

Andie: Well thank you so much. I appreciate it talking with you.

Buck: We’ll be right back.