Saving BIG On Your CRYPTO TAXES with Nicholas Slettengren

0:02Who's ready to rock today, Fire Nation? JLD here and welcome to Entrepreneurs on fire brought to you by the HubSpot Podcast Network, the ideal destination for business professionals with great shows like Created with John Ushai. Today, we'll be breaking down how to save big on your crypto taxes. To drop these value bombs, I am brought to Nicholas Sleddingrand and the EO Fire Studios. Nicholas is a digital marketer by trade and crypto entrepreneur by evolution. His new company, Count on Sheep, is becoming a leader in crypto accounting for both B2C and B2B clients. He is joined by founding employee and CPA, Justin Zanardi.

0:37And today, our nation will talk about cryptocurrencies, if they need to be reported or not. We'll tell you about the proper steps to report crypto taxes, the mistakes that people make, tax harvesting, cost basis model, and so much more. And a big thank you for sponsoring today's episode goes to Nicholas and our sponsors. The Next Wave, your chief AI officer, hosted by Matt Wolf and Nathan Lanz, is brought to you by the HubSpot Podcast Network, the audio destination for business professionals. Matt and Nathan are leading AI creators in your guiding light in the AI and technology frontier. AI technology is transforming the way we do business and the media landscape is fragmented.

1:14The Next Wave strives to be the leading podcast on AI technology and how you can apply it to growing your business. Listen to The Next Wave wherever you get your podcasts. Ever thought about giving a TEDx talk? It's one of the most powerful ways to share your message with the world. And four-time TEDx speaker, Taylor Conroy from Thought Leader can help you get there. Visit thought-leader.com slash fire to join Taylor's free training where he teaches you how to land a TEDx talk and spread your message to millions. Nicholas, Justin, so fired up to have you on the show today as we talk about saving big on your crypto taxes that's not just moved to Puerto Rico.

1:55It's more than that, Fire Nation. So Nick, I want to start with you because a lot of people have the belief that cryptocurrencies are anonymous and therefore just don't need to be reported. Bust this myth. Hey, John. Well, thanks for having us, first of all. And yeah, thank you for that. I mean, that is one of the biggest things that we face. A lot of people are still, you know, think that you don't have to record cryptocurrencies or cryptocurrencies like Bitcoin are private. It couldn't be anything other than the truth. It's the world's first, you know, global distributed ledger. Everyone has access to it.

2:27including the IRS. And also all your exchanges are sending all of your information to the IRS, you know, and that's part of them being able to operate in the United States. So, you know, first we want to blow that one out of the water real quick. And, you know, and then another thing that we're also seeing is just people trying to do it themselves are getting very frustrated. You know, it's not as easy as just, you know, doing your TurboTax by any means, you know. and one of those things we see is DIY software saying they'll do it all for you and you know just plug in your information here and they'll spit out you know the perfect forms for you to hand off to your CPA or file on behalf of yourself and typically that's not the case you know unless you're just using one exchange you're just holding for a really long time you know so on but really you know they're great for debt the DIY tax softwares for crypto are great you know don't get me wrong, but they're great for aggregating data.

3:23They're not good for the actual accounting process and getting the best savings on your taxes. Justin, anything you want to add to that? I think Nick nailed that. At the end of the day, these exchanges like Coinbase, Gemini, they're reporting to the IRS all of your transactions. So this idea that you're trading as anonymous couldn't be further from the truth. In addition to that, on the blockchain, and you can see every wallet that you've interacted with. So once they connect that to an exchange, they can pretty much say, hey, yeah, this person's wallet is going here to here and it's pretty easy to follow.

3:59So the IRS knows what you're up to and they're watching it. So Justin, you're a CPA and now that we know the truth and we want to do this right, because Fire Nation, of course, we want to do the right thing. What are the proper steps when it comes specifically to reporting crypto taxes? Yeah, that's a great question. So the first thing that you're going to want to do is just make sure that you have all of your data. Completeness and accuracy is huge in the accounting world. So you're going to want to make sure that you're aggregating all of your exchanges and wallets all into one place. We like to use different softwares like Coinly or CoinTracking.

4:35So once you sync those up into those softwares, you're going to have all of your data in one place. As Nick mentioned early on in the first question, if you just generate your reports from that point, you're probably going to get the wrong answer. The next step in the process would be to reconcile all of that data. And this is generally where professional comes in handy. You can try to do it yourself. And if you have easy trading, you might be able to pull it off. But at the end of the day, if you're not familiar with how to reconcile it, you're going to end up with some inaccurate results. So Nick, anything you want to add to that when it comes to the proper steps to reporting crypto taxes?

5:11Justin nailed it down. He is the CPA of the group and the brains of our operation. I also just want to say just for the listeners, it's really about one is aggregating your data. It's really getting into one of those tax softwares. We're pretty agnostic. Coinly, shout out to them. CoinTracking, CoinTracker, all of these softwares. They all have their perks. and then some drawbacks. But you want to get all your account exchanges and wallets in one place. So that's step one. Step two is really getting the reconciliation done and really figuring out what's what and where your transfers are, where you sent your Bitcoin and where you sent your other cryptocurrencies and having those tied back to your ledger correctly.

5:55And then the last piece is really getting the forms done, populating those forms and getting your A949 done and having that ready to go to send off to your CPA to file on your behalf. So those three steps are really what we do to get everybody in line with crypto taxes. Now, Nick, I have zero doubts that you see not a little, but a lot of mistakes that cause people to lose money when they're attempting their own crypto taxes. Share are some of those mistakes now? Oh, yeah. Well, I'll give you one. You know, what really made me get into this industry and really the accounting specific part was, you know, because I was trying to do my own crypto taxes at first.

6:40And I realized it was just way out of my wheelhouse. It's just so multifaceted. There were so many wallets. I mean, so many trades. I didn't know where everything was. So I went to two of my high end CPAs. I use, you know, one of the in New York, another one in LA. And I basically pit them against each other to figure this out for me. And these are high powered, high dollar CPAs. And they both came back with different results, which obviously threw me through a loop. So I tried to figure out who was right, you know, what went wrong, and only to find out that none of them had it right. So I did do a little bit more deep diving.

7:16And I found an ex Ernst & Young employee that was starting to specialize in crypto taxes and she took care of me and really was able to give me the tax savings that i i deserve by really going through my account thoroughly and looking at matching everything up correctly and looking for tax loss harvesting opportunities which we'll get to i'm sure and um you know so it really turned on that light bulb so as far as this goes one of the biggest things that why they're getting it so wrong is i was trained on multiple exchanges and they'll issue you multiple 1099 so you'll get 1099 from jim and i will get 1099 from coinbase So we get$10.99 for finance if you're trading on those exchanges.

7:53And every time I'm passing from my wallet to another wallet on another exchange, it wasn't registering as that. In fact, it defaults and acts as if you sold your cryptocurrency position every time you switch it to an exchange. So if you don't tag your wallets correctly from exchange to exchange, because that's not a taxable event. It's like transferring from one bank account to another. That's not taxable. But basically when you sell, obviously it becomes a taxable event. But it makes it look as though it sells every single time you trade to another exchange unless you tag that and reconcile it correctly.

8:29So cost basis comes into play here. And being able to pass that cost basis from one exchange to another and having it documented correctly is key. Otherwise, you can pay two, three, four times the amount of taxes you owe just by not getting your wallets reported correctly. I love how you pitted those two CPAs against each other and they both came back with the wrong answers and that would have both cost you money, not to mention, I'm sure they charged you money. So Fire Nation, this is why it's so important to find the right people. And Justin, do you have anything you want to add to these mistakes that we were talking about?

9:04I think I'll just give you an example. One client we had, we loaded him up into our software, and he had a Coinbase account and a Coinbase Pro account. You'd think it would be pretty obvious that those should sync up pretty well, but all of his transfers between those two accounts were not synced. And so it looked, as Nick was mentioning, it looked as each transfer was a sell and then a rebuy. And so when we first populated the software, it came out saying he had a$700 ,000 capital gain because he had bought really early on. Once I was done with the reconciliation process, he actually had a$1 ,500 loss.

9:41You know, huge, huge difference. He was thrilled about that. It's like, yes, I lost money. Exactly. Exactly. Yeah. I mean, but if he just went with what the software was telling him, you know, he would have ended up with a hugely unfavorable capital gain there. So really important to just always be looking at your transfers. I think that's probably the number one thing that you can do if you're trying to do this yourself is just make sure that anytime you transfer from one exchange or wallet to another, that is actually, you know, properly picking that up. Fire Nation, we are just getting started and we have some more critical things to talk about as soon as we get back from thanking our sponsors.

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12:46Join Taylor to learn exactly what TEDx organizers are looking for in their speakers, how to write a talk that goes viral once it goes online, and more. Visit thought-leader.com slash fire. Join Taylor for this free training and get your message out of your head, out of your heart, and out into the world where it belongs. That's thought-leader.com slash fire. So Justin, we are back. And as Nick alluded to before the break, we're going to talk about tax loss harvesting. We're going to talk about cost basis modeling. These are things that we sometimes hear about, but rarely understand. So brother, shed some light.

13:23Yeah, absolutely. So the first thing to note here is that cryptocurrency is not a security. As much as the SEC wants it to be, it is currently not classified as a security. The IRS does not treat it as a security. it is property. And so there is a key distinction here from crypto versus stocks. With stocks, there's this thing called the wash loss sale. You're basically barred from taking a loss on something if you sell it at a loss and then buy it back immediately. With crypto, that's not the case. So if you buy Bitcoin at$50 ,000 and then it drops to$40 ,000, you could sell it and then rebuy back immediately and take that$10 ,000 loss.

14:00So when you're loading your transactions up into new software, it actually gives you better visualization of your current holdings. And if you really get into it and hire a professional, they can actually generate these reports where it shows all of your different tax slots and start planning for different scenarios. So one of the tools we built at Count on Cheap is a really robust tool where you can basically say, hey, I want to pull out X amount for my crypto holdings in the most tax favorable way. What coin should I sell? And it'll spit out. It'll say, hey, sell 67 of these, 14 Ethereum, one Bitcoin, it'll just tell you exactly what coins to sell and the exact amount to result in the most tax favorable treatment.

14:44So it's really robust. It is quite complicated because you need to keep detailed information of all of your tax slots. And if you get the right software, that can definitely help you with that. But if you have a high net worth portfolio, it's definitely worth looking into. Nick, what do you want to add to this? Markets move in two ways, right? They move up and they move down. And typically, we're always focused on them just moving up as investors. But with that said, we should be focused on them moving down as well. The wealthy in this country are and all over the world. They know how to take a loss against their future gains.

15:18You're going to be paying taxes. Everybody needs to pay taxes. Only death and taxes are certain, right? So with that said, if you're taking banking losses, for instance, you might be using Bitcoin as a store of value and watching it go up. And, you know, it does get volatile, but mostly it kind of moves up if we look at that moving average. And then from there, if you're betting on some mean coins that absolutely you get destroyed on, you shouldn't be afraid to sell those. Take a loss. Realize that you're going to want to bank that for the future when you go and sell, you know, one of your assets like Bitcoin or Ethereum or something that's, you know, doing better.

15:50And you won't owe all those taxes, you know, so you can play them against each other. So it's very important to point that out. And if you really get into your trading and are starting to, you know, become more high net worth, it's definitely worth taking a look at at all levels of the game, to be honest. So I just want to point that out. And then also, you know, cost based modeling. I'll go real quick on that. And that's basically just these modeling principles like first in, first out, last out, first in. They have all these different ones in specific ID. But we can – it really – depending on how you're trading, these models can be applied for different years to give you the best tax savings.

16:31So you really want someone to get in there and turn these levers for you and apply these tax-based models because they can save you thousands. They can save you hundreds of thousands. So it really is important to look at cost-based modeling when you are doing your taxes or have a professional look at that for you and help you out. Justin, let's see if I'm getting this right on this example. So let's say you buy Bitcoin at$50 ,000. It drops to$40 ,000. You don't sell. And then it goes to$60 ,000 and you do sell. You have a$10 ,000 capital gain. But if it's at$50 ,000, it goes down to$40 ,000. you sell and buy, and then it goes up to$60 ,000 and you sell, you can offset that negative$10 ,000 with your positive$10 ,000 and have 0 % capital gains?

17:16Not quite. So if it went back up to that $60 ,000, you would have a$20 ,000 gain because you sold at$40 ,000. And you re-bought back in. That's right. But the important thing to keep in mind here is, at least for tax planning and tax strategy, it is almost always favorable to take your losses now and then kick the can down the road for gain. So I mean, this is a strategy that the wealthy always deploy. It's like, defer taxes, defer taxes, defer taxes. But if we have a loss, take it now. Because it takes money to make money, Fire Nation. And Nick, I want to talk about specific examples of how some crypto companies are handling their internal crypto accounting.

17:59not not very well is what we're finding so hey we're coming also live to you from consensus 2024 in austin so uh you know we want to throw that in there and shout out to them they put a great event on and while we're talking to these big companies this week um you know a lot of them you know just don't have you know that what we call proper wallet hygiene you know it just seems like a big slush fund of crypto kind of they're accepting crypto they're using crypto's operations and things of that nature. And it's just not really streamlined. And so we're looking to educate people about this wallet hygiene.

18:36This is Justin's brainchild and really going through and developing wallets, like an accounts receivable wallet where you get paid in. And then that dumps into an operations wallet where you operate your company from, you spend money, your crypto comes out of that. So really set it up similar to how businesses would have it on the fiat side, but doing it in crypto. And then also taking cryptocurrency, you know, and it's moving all over the place with its markets, everything else. And people are having this on their balance sheet, these crypto companies, being able to reconcile all that on the corporate side of things, and then push it through their ERP.

19:12So an ERP would be like QuickBooks, NetSuite, you know, all the accounting softwares that we use for fiat accounting. So So we're really good at taking all the crypto and pushing it through and then being able to turn it over for fiat accounting. So the executive teams on the other side can be like, okay, I have so much dollars and cents I have a big, so much dollars and cents I have a Solana, et cetera. So it helps the executive teams operate a little better in the fiat world from the accounting we're doing on the crypto side. Justin, let's get real detailed here. What IRS form should we be on the lookout for if we continue to maybe not handle our crypto taxes correctly?

19:54I'm glad you asked that because there's a lot of scare whenever you get an IRS form. But hopefully I can help clear up some of that information. So if you received letter 6174, this is honestly not that bad. This is basically the IRS just telling you that they believe you might have not reported everything. and this is pretty much just encouraging you to, you know, rethink about what you've reported and make sure that it's necessary. This is not a very severe IRS form. If you get the next iteration of it, it's 6174A. This is them saying, you know what, we actually believe that we have information to, you know, reason to believe that you haven't reported everything.

20:33We encourage you to amend your return. Still, no response is required. It's still not that severe of a threat, but it does mean they're watching. Going down to the next level of severity, we have 6173, and this is actually a warning letter indicating that the IRS has information that you have not reported, and they are actually requesting you to make an amendment to your return. If you don't respond, They will send you another letter and basically threaten you. So you definitely don't want to just sit on that and not respond to it. Then there's also two others, CP2501. So this is the IRS indicating that there could be a discrepancy in your return.

21:16This doesn't necessarily need to relate to crypto, but in regards to crypto, this could just be you not reporting an exchange. And then there's CP2000, which is basically them indicating that you haven't reported everything. the exchanges reporting information to the IRS that you have left out of the return. And so this is also where you're going to need to respond. Fire Nation, a lot of things to think about here, but at the end of the day, you want the right information and you want the right people doing the right things when it comes to this because, man, penalties, all that stuff, it's just something you don't want.

21:49You don't want to all of a sudden be spotlighted by the IRS because once they start looking, they may keep looking and keep looking and keep looking. Now, Nicholas, I don't want to really just focus on this too much because this is not a political show, but it's pretty crazy how cryptocurrency is becoming a political hot topic right now. Just briefly, what are your thoughts on this? You know, it's interesting. We are at consensus, as we said, and we see a lot of RFK. You know, like he's going to be here speaking, closing things out, I believe tomorrow. And also, Also, he's a big advocate. So we've seen a lot of his information flying around here in terms of his cryptocurrency policy and believing that you should have the right to your own keys and that you should be able to privately be a custodian of your own crypto and a lot of other things that is matching with it.

22:43So he's very big on the crypto policy piece. We also seen Trump just kind of enter in. Now he's been taking a very pro stance on crypto as well. He's also taking donations in crypto. So we have two candidates that are very much crypto friendly. From what I'm seeing on the Biden side of things, it's a little wishy-washy. I think he comes out and says some things that seem relatively good and he's pushing for regulation like most people are in the industry. But then again, it seems that they're not as forward thinking as the other two candidates. So that's kind of what I see so far. Okay, just give us one key takeaway, Nick, from everything that we chatted about here today.

23:25And then Justin, I'll pass over to you to give one key takeaway as well. The one key takeaway is, you know, we met with the IRS the other day. The IRS were at this conference. We had a great chat with them. And, you know, they're not as bad as you would think. And they're just looking for, you know, they want a fair regulatory environment for crypto to thrive in. They want people to pay their taxes and just pay their fair share. They don't want any more than they're owed. And going with a company that understands this environment and that can actually really play to your advantage with the tax loss harvesting and take advantage of some of these different tax-saving methods, they're all for it.

24:07But they also want to make sure that they are getting paid and they are starting to look at different ways to get people's attention. And I want to loop it. I'll leave it with this. We talked at the beginning about the exchanges having the information. That's the thing. They give all the information to the IRS. The IRS already has it. So it's only a moment in time. So it might as well just get in front of it now before, like you said, John, before it comes to an audit or something like that that's more painful. It's just good to get in front of it and get it done and get those paid. And Justin, take it home.

24:37What's one key takeaway? Yeah, absolutely. I think the number one takeaway here is if you're trading crypto on more than just one exchange, like if you're on anything other than just Coinbase, you should probably aggregate your data into a software. It's going to be hugely helpful come tax time. And if you have a simple account, great. You can do it yourself and generate those reports and hand those off to your CPA or TurboTax. Or if you have a more complicated account, get a professional. They can help model different cost-based accounting methods for you and help with your tax savings. It's honestly just better to get in front of this, as Nick said, than wait for something bad to happen and then have to start paying penalties and hire a lawyer if you're getting audited.

25:16It's really just not worth it. So stay ahead of it, pay your taxes, and then you'll be compliant and all good. Nick, give us a call to action. If Fire Nation wants to learn more about you, wants to follow you, wants to understand what you have going on, what is your call to action for our listeners today? my call to action is you know john we're a long time uh fans of your show thank you we love what you do so i mean uh first of all we're count on sheep.com and that's where you can find us book a meeting with us for free we'd love to chat a lot of our competitors don't do free uh you know uh initial meetings so we would love to offer that and then also we'd love to give another 15 off to anyone who mentions you uh that came through this podcast because uh we really appreciate it and we just want to help anyone we can.