Hardly a day goes by now without a flurry of excitement over crypto. First, there was the rollercoaster of bitcoin’s rally, landing in a record high. Then digital coin Shiba Inu, a sort of knock-off to the meme-inspired Dogecoin, catapulted seemingly out of nowhere from near-worthlessness to a total valuation of $40 billion (creating some overnight millionaires and at least one billionaire).
Inevitably, the buzz hasn’t gone unheeded. More than ever before, people with no prior experience in crypto are diving in headfirst, loading up on digital assets they might have scoffed at just a year or two ago. This is creating some interesting situations for taxpayers as the year draws to a close, and they have to start thinking about what needs to be reported to the IRS.
Wendy Barlin, a Los Angeles-based certified public accountant, is starting to see trends play out as her largely business-owner clientele comes forward with questions about crypto. For instance, many jumped into the pool without realizing that they would likely be on their own for recording their realized gains and losses.
While a traditional investment advisor will probably send you a 1099 at the end of the year to show you what you need to put down on your tax forms, a crypto exchange might not.
“I think this surprises a lot of average Americans who are dabbling in crypto, that they need to keep track of their money,” Barlin said.
This year, it’s especially important to keep track and make sure tax forms are accurate, Barlin told us. With the dramatic surge in crypto assets over the past year, regulators are cracking down on anything that looks amiss. That means the IRS is definitely going to be looking out for any potential crypto-related tax dodges.
We chatted with Barlin to learn more about crypto and taxes, and how best to avoid end-of-the-year headaches and stay out of trouble.
This interview has been edited for length and clarity.
Business of Business: Can you explain who you are and what you do?
Wendy Barlin: I’m a CPA. I have 25 years of experience advising small business owners across the United States on income tax strategies, cash flow, how best to save money, where to spend money, how to make more money, and then of course, how to minimize their taxes. So we do all of that. And crypto is more and more becoming part of the discussion.
What are you noticing recently with crypto?
What I’m noticing is it’s becoming more and more commonplace. I would say a few years ago, it was really only something a few people did, right? It was like a fringe thing. An aggressive risk-taker, someone who was on the cutting edge of technology, that’s who was interested in doing crypto. Today, it’s business owners, people with manufacturing plants, all sorts of people are now getting into crypto.
I think my concern with that is that there’s not a lot of knowledge or information around to educate people about what they’re getting into. And so I’m trying to get ahead of that, so that I don’t hear about it when it’s kind of too late, and they’ve already invested their life savings.
So when it comes to filing taxes, what are you running into?
I’m finding that when it comes to filing taxes, a lot of clients don’t have any real records. Because crypto, the agencies or managers that people use to buy and sell this online currency, they are not required to send you any documentation. It’s not like the bank or an investment house where they send you 1099s and statements every month. Most clients have nothing.
So when I say to them, “How much have you bought and sold?” They’re like, “Um, well, I’d have to look.” And so the onus is on you to keep good records. How much have you invested? How much have you sold? How much have you made? I think this surprises a lot of average Americans who are dabbling in crypto, that they need to keep track of their money. That’s why I’m doing a lot of educating. Use an Excel spreadsheet, use a notebook, that’s okay. But keep track of what you’re putting in, and then what you’re pulling out.
And just to recap — I think people will have a general idea — but when do you need to put it on your taxes?
Righ, so taxes actually close Dec. 31. I know we always say, “Oh tax filing isn’t isn’t until March, April.” But that’s when you file your taxes. The actual earned income and expenses that you use, the numbers that you use to put on your tax return, are generated the calendar year, Jan. 1 through Dec. 31. You have until Dec. 31 this year to make strategic decisions about whether you hold your cryptocurrency into 2022, or whether you sell. Because if you don't sell and you just hold it, the gains that you have made are not taxable. This is really important to understand because just this week, I got an email from a client saying, “I’m going to owe so much in taxes. My cryptocurrency has gained so much in value.” But he hasn’t sold it, he’s still holding it.
Even though he’s gained all of this value, none of that value is taxable until you sell. And if you sell between now and Dec. 31, yes, that’s going to be a 2021 gain that you will declare on your tax return when we file in March and April. But if you don’t sell until after Dec. 31, then those gains are not taxable [this year].
So like any other investment?
Correct, but I think in terms of many investments, people rely on their brokerage houses to do it for them. They rely on those 1099s to come in the spring and tell them what the gains are. A lot of people are doing crypto themselves and so they don’t have someone helping them with strategy and in the planning of when to sell and when to hold.
Now, you may not know the answer to this question, but would you be concerned about or be anticipating that the IRS would be cracking down more this year?
I mean, there have been rumblings of it. Right now, Congress is so busy with whatever’s going on that they have bigger issues. But they’ve definitely been rumbling about more regulations, more regulations. I think at some level, it’s coming. And truth be told, at some point, they need to protect the individual investor, or at least offer some level of education about what they’re getting or not getting. It’s a volatile market. When it’s high, everybody’s super excited and bragging to their friends and bringing their friends into the fold. And then it crashes, or dips, and all of a sudden people are devastated. And they’ve lost investment dollars. So I think there definitely needs to be some level of education if not regulation.
You make a good point about the lack of investor statements.
That’s what we rely on, right? Because they tell us, we don’t have to scratch around ourselves and find out what our cost basis is. Most people don’t even understand the term “cost basis.” When I say to them, “What’s your cost basis in your crypto?” They say, “Um, I don’t know that I have any.” And I say, “Yes, you do. Let’s try this again. How much did you put in? How much did you get?” We rely on our 1099s historically to do that for us. It’s all about being an educated buyer. If you buy a car, or buy shoes, or crypto, you need to be an educated buyer.
What kinds of holdings are you seeing in crypto? Is it still mostly bitcoin?
It’s still mostly bitcoin. I’ve seen a smattering of other things. But when I’m talking to my neighbor, a client, not my super tech-savvy 28-year-olds, when I’m talking to my 40 or 50-year-old business owners, most of them are in bitcoin. I definitely see the more tech-savvy, younger investors trying all sorts of interesting things.
At the end of the day, I tell people, “This is great, and let’s embrace it.” We all want to embrace new things. I just don’t want people to use their last dollar. I want them to use their extra money. I want them to use the money that if they lose it, they’re not going to be rendered homeless. I think that’s the piece that always scares me a little because people think, “Oh, I’m going to make as much money as my neighbors or what I read on the internet.” And so they put their last dollars in, or they take money out of savings to invest, and that’s what makes me a little nervous.
Right, that makes sense. Do you invest in crypto at all?
I do, but only with play money. I allocate a certain percentage of my play money to it, because that’s how I see it right now. If it makes money, I’m going to jump up and down and be thrilled. And if it doesn’t, I’m going to go, “oh boo-hoo, I could have bought shoes.” But I’m absolutely not adjusting my traditional savings and wealth building strategies. I’m not changing any of that. I’m adding to it with this level of investment.
Right. Is it bitcoin, or something else?
Bitcoin. Yes. I’m not quite there with all the others yet. But slowly, but surely, maybe next year.