Crypto & Taxes: What You Need to Know

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Digital Assets, Real Taxes: The Tax Implications of Trading Cryptocurrency – Jack Labranche Tax Senior

Trading cryptocurrency might feel like digital magic, but the tax consequences are very real. In this essential episode of Knowing What Counts, senior tax associate Jack LaBranche demystifies the complex world of digital asset taxation.

The conversation begins with a clear distinction between digital assets (anything digital with value) and cryptocurrency (a specific type of digital asset functioning as digital money). Jack expertly breaks down the five key activities that trigger tax events: selling crypto, exchanging between different cryptocurrencies, using crypto to purchase goods, earning crypto through mining or staking, and receiving crypto as payment for services. Each scenario carries distinct tax implications that traders need to understand.

Most crucially, Jack explains that the IRS considers cryptocurrency as property rather than currency, subjecting it to capital gains rules similar to stocks. However, crypto enjoys a significant advantage over traditional securities – it currently isn't subject to the "wash sale rule," allowing traders to sell at a loss, immediately repurchase, and still claim the tax loss. This creates a powerful tax planning opportunity, though Jack cautions this loophole may close in the future. Other digital assets like NFTs face specialized treatment, potentially being taxed as collectibles at rates up to 28%.

The conversation also covers practical considerations: the critical difference between crypto wallets (digital safes for your keys) and exchanges (trading platforms with no FDIC protection), essential record-keeping practices, and upcoming regulatory changes like the new Form 1099-DA arriving in 2025. Jack's final advice emphasizes education, meticulous record-keeping from day one, and working with tax professionals who understand the rapidly evolving digital asset landscape.

Whether you're a crypto novice or experienced trader, this episode delivers actionable insights to help you protect your digital investments from unexpected tax surprises. Listen now and ensure your crypto strategy accounts for what truly counts – keeping more of your gains through proper tax planning.

To learn more about MP CPAs visit:
https://thempgroupcpa.com/
MP CPAs
413-739-1800

Episode Transcript

Speaker 1 (00:01):
Welcome to the Knowing what Counts podcast, the
place where expert guidancemeets smart financial decisions.
Whether you're a high net worthindividual or a thriving
business, the experts at MPCPAsare here to help you protect and
optimize your wealth.
Let's get started, becausesuccess begins with Knowing what

(00:22):
Counts.
Because success begins withknowing what counts.

Speaker 2 (00:26):
Trading crypto might feel like digital magic, but the
IRS definitely wants to peekbehind the curtain.
Jack breaks down how digitalasset activity triggers very
real tax consequences and whatsmart traders should know before
year ends.
Welcome back everyone.
I'm Sofia Yvette, co-host andproducer, back in the studio

(00:49):
today with Jack LaBranch, SeniorAssociate at MPCPAs.
Jack, how are you today?

Speaker 3 (00:55):
I'm doing good.
How are you?

Speaker 2 (00:59):
I'm also doing good.
Now, before we get started, whydon't you introduce yourself to
our listeners today?

Speaker 3 (01:07):
Yes, my name is Jack LaBranch.
I'm a senior associate here atMPCPAs.
I've been here for four yearsnow.
I work with a wide range of taxreturns individuals, corporate
fiduciaries, estate returns andwe also assist clients with
proactive tax planningstrategies.

Speaker 2 (01:28):
Wow, Jack, it sounds like you have quite the
experience.
Let's get started with thebasics.
What is considered a digitalasset and how is that different
than cryptocurrency?

Speaker 3 (01:41):
So that's a great question.
So digital assets are anythingthat exists in digital form and
have value.
So this includes cryptocurrency, which I real world assets
which are on a blockchain, andeven some digital securities,

(02:08):
which are regulated investmentassets issued and traded using
blockchain technology as well.
So cryptocurrency is a type ofdigital asset, but it's a more
specific digital asset.
It's like digital money in away, If you think of Bitcoin or
Ethereum and those type ofcryptocurrencies.

(02:28):
So they are digital assets, butthey're not all digital assets.
It's just a type of digitalasset.

Speaker 2 (02:35):
Understood Now what creates a taxable event when
dealing with these digitalassets that people should be
aware of when dealing with thesedigital assets that people
should be aware of.

Speaker 3 (02:45):
So there's about five taxable events that can occur
with digital assets.
The first one is just selling adigital asset.
This is similar to like sellingstocks or real estate.
This is what creates a digitalor a taxable event.
The second one is you canexchange one crypto or digital

(03:09):
asset for another.
This is the same.
This is also a sale, whichcreates a taxable event.
You can also use it to buysomething, so some people use
crypto to, say, buy coffee.
This is pretty much the same asjust selling your crypto and
then taking the cash and buyingthe product, so this does create
a taxable event.
You can also earn cryptothrough investing, through

(03:30):
mining and staking.
This creates a taxable event aswell.
And then you can also receivecrypto as a form of payment for
your services.
So when you receive the cryptoor digital asset, it is taxable
and it's a taxable event.

Speaker 2 (03:47):
Now, when one of these events occurs, how is a
cryptocurrency transactiontreated for tax purposes?

Speaker 3 (03:56):
So the IRS considers crypto as property, not currency
, so it's taxed, just likestocks and real estate are taxed
.
So if you sell it for more thanyou paid for, it's considered a
capital gain, and then, on theflip side, if you sell it for
less, it's considered a capitalloss.
But there are a few other waysthat crypto is treated for tax

(04:20):
purposes.
So if you buy something withcrypto, you recognize a capital
gain or loss at the time of thesale.
If you exchange the crypto, asI mentioned earlier, you can
think of this as sort ofexchanging foreign currency.
So if you exchange, say, forexample, a euro for a US dollar,
you could have a gain or lossdepending on the exchange rate.

(04:41):
This is the same as when youexchange crypto to crypto.
And then the last piece of howit's taxed a little differently
when you're compensating incrypto is that you take the
value of the crypto at the timethat you're paid and that's
treated as ordinary income,which is important to note.
You may be subject toself-employment taxes if you're

(05:05):
being compensated in crypto.

Speaker 2 (05:07):
so usually it's capital gains for the most part,
but if you're compensated it'streated as ordinary income now,
how are some of these otherdigital assets treated for tax
purposes, some of the other onesyou mentioned.

Speaker 3 (05:20):
So I mentioned so NFTs.
These are treated likecollectibles, so an NFT is
pretty much like selling a pieceof art it's just digital art.
This means that you could betaxed at a higher rate up to 28%
on the gains.
I also mentioned earlierstaking.
So staking rewards is where youlock up your money in a digital

(05:44):
asset and it earns money foryou at an APY, which is similar
to like bonds, for example.
These are treated as ordinaryincome when you receive them.
And there's also somethingcalled airdrops, which is
another type of digital asset,and these are pretty much
rewards that are given to you aspersonal items.

(06:05):
So, if you think in the realworld, if you sign up at a bank
and sometimes they give you areward for opening a checking
account with them, this issimilar to how airdrops work as
a digital asset and these arealso taxed at ordinary income as
well.
Then there's also somethingcalled tokenized securities,

(06:27):
which is just often taxed liketraditional stocks or bonds as
well.
So there are different waysthat these digital assets are
taxed.
So it's important to know howyou're receiving these digital
assets and what they are exactly, and when you trade them, how
they may be taxed on your taxreturn.

Speaker 2 (06:45):
I've heard of terms like a crypto wallet or crypto
exchange.
What are the differencesbetween the two of these?

Speaker 3 (06:52):
Yeah, so a crypto wallet is pretty much like a
digital safe, so it stores yourprivate keys and it lets you
send and receive crypto.
There's sometimes softwaresthat you can use like certain
apps.
There's sometimes hardwarewallets which can be stored on
USB drives and there's evenpaper wallets, but so pretty

(07:13):
much when you have a cryptowallet, you only lose your
investments in your wallet ifit's hacked or you forget your
keys, but on the flip side.
So then there's a cryptoexchange which is more like a
stock brokerage, where you cantrade, openly trade all these
cryptos.
But the difference between acrypto exchange and wallet is

(07:35):
that you lose your investmentsif the exchange goes under.
Crypto exchange and wallet isthat you lose your investments
if the exchange goes under andthere's no FDIC protection.
So some platforms allow you toalso have a crypto wallet on
their crypto exchange, but theyare different and they both
serve different purposes.

Speaker 2 (07:52):
Now, what are the tax implications when you have
losses with cryptocurrency andwhat planning opportunities are
there?
Implications when you havelosses with cryptocurrency and
what planning opportunities arethere.

Speaker 3 (08:00):
Yes, that's a great question because sometimes in
the crypto world you canexperience losses.
So pretty much when you sell acrypto at a loss, you can use
those losses to offset anycapital gains from other
investments that you may have.
For example, if you're tradingstocks, you can offset your
crypto loss with those stockgains, and brokerage companies

(08:25):
often use tax loss harvesting tooffset gains which you can do
with crypto.
If your losses are bigger thanyour gains for the whole year,
you can deduct up to $3,000against your regular income each
year and then you can carryforward to $3,000 against your
regular income each year andthen you can carry forward any
capital loss.
Carry forwards to future years,just like you can with stocks.

(08:46):
But the one rule that'sdifferent for crypto that
doesn't relate to stocks is thewash sale rule.
So when you trade stocks, youcan't sell a stock at a loss and
buy it back within 30 days.
This is a unique rule and theIRS treats it like it was never
sold and that loss istemporarily disallowed.

(09:09):
So the wash rule sale doesn'tcurrently apply to
cryptocurrency, which is uniquefor crypto, and you're able to
recognize a loss and then buyback in at any point.
So it is a unique planningstrategy, but the IRS is
constantly updating the rules ofcrypto, so that rule could

(09:30):
change in the future.
But it is interesting to notethat wash sale rules don't apply
to crypto, which you can takeadvantage of.

Speaker 2 (09:38):
Crypto transactions sound complicated.
What kinds of records shouldpeople keep?

Speaker 3 (09:43):
So it can get complicated and so it's good
once right.
When you're investing in crypto, from the beginning, you should
keep good records.
You should track the dates andamounts of all the purchases and
sales.
You should track your fees thatyou've paid.
You should track the fairmarket value at the time of

(10:04):
every transaction.
You should also keep yourwallet and exchange history and
your logins because, as Imentioned earlier, if you forget
your login, you may not be ableto access your wallet.
And you should also track thepurpose of each transaction.
So was it an investment?
Was it a payment?
Was it income that you receivedfor services?

(10:27):
So this is all important thingsthat you should track.
I would try to look at it astracking your stock trades or,
if you're running a business,tracking your income and
expenses.
You should do the same thingwith crypto, because, although
many exchanges often give youreports at the end of the year,
it is your responsibility tomake sure that everything's
correct and that you have thecorrect cost basis and fair

(10:49):
market value.
And then one thing is sometimesyou can export all your
transactions into an Excelspreadsheet, which can make
everything easier, but I wouldsay staying on top of your
records is the most importantthing for accurately reporting
on your return.

Speaker 2 (11:05):
What should someone do if they did not report
digital asset transactions inthe past or did not know they
were supposed to?

Speaker 3 (11:15):
So if you missed any reporting in prior years, I
wouldn't panic, but I alsowouldn't wait either.
So the IRS is paying closeattention to digital assets and
cryptocurrency and they'recontinuing to make improvements
on how they can regulate it.
I would say you can amend pastreturns to include this missing

(11:36):
info.
If it was an honest mistake, Iwould say fixing it voluntarily
always leads to a better outcomethan the IRS come knocking at
your door for not reportingcertain things.
So I would say, just bring itup to your tax advisor and we'll
look into either amending thereturn or figuring out how to

(11:59):
handle it from there.

Speaker 2 (12:00):
Final question for you today, Jack what advice
would you give to people who areinvested in cryptocurrency and
other digital assets?

Speaker 3 (12:10):
So my advice would be just to start small and take
the time to educate yourselfbefore you make your first
transaction.
Just understand the taskconsequences, because they can
sneak up on you pretty quick ifyou're not prepared.
As I mentioned earlier, I wouldalso keep great records from
day one.
You want to track every dollarin and out and have your correct

(12:33):
cost basis when you do reportthese on your return and, as I
mentioned in the previousquestion, I would just not
assume the IRS isn't payingattention.
They're constantly looking forways to better regulate this
relatively new area of trading.
Actually, starting in 2025,they rolled out a new form, the

(12:55):
Form 1099-DA.
Da stands for Digital Assets,so this form will be issued by
brokers to report your digitalasset sales, similar to how you
receive a 1099-B for stocktrades.
While brokers aren't requiredto report your cost basis yet,
they will be reporting the gross.
They in fact just passed theGenius Act, which is still in

(13:18):
the works, but this is prettymuch a bill that is a one-to-one
backing with liquid assets,like cash and treasury bills.
It requires regular audits andtransparency and allows both
banks and non-bank issuers tooffer stable coins.
So this is still in the works,but they're constantly trying to

(13:39):
improve how they regulate thisarea.
So, although it can getcomplicated, I would say it's
more important now than ever towork with a tax professional who
understands this space, becausea little bit of planning now
can save you a lot less stressand potentially money later on.

Speaker 2 (13:56):
Well, thank you for those helpful insights today.
Jack, We'll catch you in thenext episode.
Have a fantastic rest of yourday.

Speaker 3 (14:04):
You too.

Speaker 1 (14:06):
Thanks for listening to the Knowing what Counts
podcast.
Ready to optimize your wealthand protect your future, visit
TheMPGroupCPAcom or call413-739-1800 to connect with our
team of experts.
Remember, success is aboutknowing what counts.