Crypto Taxes Just Got Serious | IRS Enforcement Shift Explained with Clinton Donnelly - Thinking Crypto News & Interviews

Episode Transcript
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Speaker 1 (00:00):
This is a very significant tax here for crypto investors.
It marks a big shift in how the IRS approaches
crypto traders and understands their trading behavior. If you're someone
who has been not reporting, get into compliance so you
can call our offices. You're allowed to amend the up
to the last three years of tax return, so amend
those to make them correct. Report your past gains. Then

(00:23):
be consistent and report everything going forward.

Speaker 2 (00:26):
So to confirm. These centralized exchanges in the United States
will provide you with these forms and it's your responsibility
to then file it with your taxes.

Speaker 1 (00:35):
It's correct.

Speaker 2 (00:41):
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to learn more, visit the link in the description. Hey, folks,
welcome into the Thinking Crypto Podcast. I'm your host, Tony
Edward and joining me today is Clinton Donnelly, who is

(01:48):
the CEO of Crypto tax Audit.

Speaker 1 (01:51):
Clinton.

Speaker 2 (01:51):
Great to have you back on.

Speaker 1 (01:53):
It's awesome to be with you again, Tony. Yeah.

Speaker 2 (01:56):
Clinton. I think it's a very good time for us
to be talking because we're approaching the end of the
year and whether you have you have crypto gains or
crypto losses, we need to start thinking about and planning
for tax season. And I think you're the you're the
expert here and we've talked many times over the years,
so let's start about you know, what are some tips

(02:16):
folks need to should have or know for prepping for
the upcoming tax season.

Speaker 1 (02:21):
Well, this is a very significant tax year for crypto
investors and it marks a big shift in how the
IRS approaches crypto traders and understands their trading behavior. And
this is the year that if you have not been
reporting your cryptos in the past, you need to take
serious plan to get current. Let me tell you what's
happening with the IRS this year. They've had a twenty

(02:44):
five percent head count reduction, so a lot of the
people that were let go were new employees, so the
older employees are all retiring. So you know, the IRS
is facing a lot of manpower and a lot of
backlog because of the missing people. Secondly, they have had
seven Commissioners of the IRS this year. At this point
in time, the Commissioner of the IRS is the Secretary

(03:09):
of the Treasury, Scott Bennett. Then, and this is highly irregular,
they appoint he appointed the Commissioner of Social Security to
act as the CEO, which is a new position in
the IRS, basically managing the day to day. So you
got that guy's wearing two hats, you know, and so
very strange things happening at the top. I think they're

(03:30):
basically keeping a tight rain at the Treasury on the IRS.
The next big thing that's happening is the broker dealer
reporting right, and this is a bill that went into
regulations that went into play started last year and they're
going to see it at a taxpayer level this year.
Come late January February, everyone's going to start to receive

(03:53):
a tax form a ten ninety nine DA. DA stands
for Digital Asset. You're going to get it from your
centralized exchanges that you use on the in the US,
so you will not get these from foreign exchanges. You
will not get these from decentralized and these forms are
totally new. We've maybe seen forms in the past and

(04:13):
they were kind of like a bottom line number from
the exchange in terms of how much your transactions were.
But now with the ten ninety nine DA, they're getting
transaction level detail, every sale, every exchange, every transfer, both
the whether it's two or from your your online wallet,
and it's also going to include the address that you

(04:34):
transferred to or from. This is explosive information for the IRS.
They're going to see now they're not going to know
how much you paid for those things that you sold
in exchange, but they will see how much you sold
it for. They'll see like if you say I sold
one bitcoin and I got twenty ethereum for it, that's
exactly the information they'll get. They'll get the time and

(04:54):
date stamp as well. So it was transfers. They're going
to say, you know, to you bitcoin came in and
here's the wallet address which it came from. Now what's
going to happen is they can start to look at
these wallet addresses and they can start to reconstruct all
the other addresses that you're using because they're connected to

(05:15):
the addresses that they know about. This is this is
significant influx of information for the irs, and you need
to take it's coming tougher and tougher to hide. If
you're one of the seventy five percent of crypto traders
that aren't reporting your crypto.

Speaker 2 (05:30):
So to confirm these centralized exchanges like your coin base,
your upholds, your cracking and so forth in the United
States will provide you with these forms, have all the transactions,
and it's your responsibility to then file it with your taxes.
It's correct now they will not be reporting purchases. Okay,
So if you went from cash and purchase something.

Speaker 1 (05:51):
They're not going to report that. They'll report exchanges one
coin for another, but they're just focused on the revenue.
Here is this is big for the IRS because a
lot of people have been hiding and eventually, even if
you're trading off on decentralized platforms, at some point in time,
you know you're going to you want to off ramp

(06:12):
something and you're going to expose to the I r
S addresses that you have.

Speaker 2 (06:17):
Oh yeah, yeah, because I've heard I've seen reports of
the IRS. To your point, they're going to be able
to plug into these major exchanges. They're also going to
be able to plug into blockchain explorers and see all
the transactions and it's it's all there, right Clinton. Yeah,
So you got to stay on top of what you're doing.

Speaker 1 (06:35):
Very big. The I r S has for many years
been using software from Palenteer, and they have the Palenteer
software called Foundry and this allows Foundry allows it to
read blockchain information, et cetera. So there's I think this
is very scary information. And I'll also let you know
of something this is this is going to this is

(06:55):
very shocking.

Speaker 2 (06:56):
Uh.

Speaker 1 (06:57):
The White House is in the process of looking at
and possibly signing a recommendation from the Treasury Department to
join the what's called the Crypto Asset Reporting Framework or
CARF as we call it c ARF. And this reporting framework,

(07:18):
the best way I can describe it is it's basically
a ten nine to nine DA from every other country
that's signed them this treaty, and they're going to all
start to report information back to the IRS about US
traders on foreign centralized exchanges. Think about that. You can't
hide it used to be a lot of trade offshore.

(07:39):
Now people are saying, right, well, now you can say, well,
I'm going to trade a decentralized exchange. Okay, great, but
at some point in time, you're going to want that
one coin that's only offered over on finance, and you're
going to expose an address to finance, and finance eventually
is going to have to report that back to their
local tax authority, which passes it on to the IRS.

(08:00):
Along with these addresses, these all become input to the
I r S. They start to see it, and their
Palenteer software will allow them to start to reconstruct people's
portfolios even at a point of time.

Speaker 2 (08:11):
Yeah, so you can send your uncle Jerry in some
other jurisdiction. Some bitcoin here traded for me on leverage,
make some money, then send me back more bitcoin. You're
going to have to uh, oh, that's going to be tracked, right.

Speaker 1 (08:26):
You're gonna be exposed. Hey, this is this is super
super big and uh, it's just because people have become
very much aware of it because of the Roger verb
prosecution for tax evasion. And in there the indictment the irs, well,
the prosecutors described how they took blockchain addresses and used

(08:47):
basically tools to wander the blockchain and discover all the
other addresses, and they used an advanced technique called cluster analysis,
and they could identify which addresses were Rogers and which
were somebody else's just because of the behavior, and they
were able to reconstruct the values of his portfolios. And well,
that case settled at the end of what at the
beginning of October. Coincidentally, this is when the price of

(09:11):
bitcoins started to drop. And if you've heard, you know,
and most recently this came to people's attention from videos
from Andrew Tate. Have you have you seen some of
his most recent videos about factions? Yeah, okay, so this
is this became explosive. People realized that KARF and ten
ninety nine DA are going to start to report addresses

(09:32):
people who have never been reporting their crypto gains for
a long time. Whales who have big lots amount at
stake are trying to hide these accesses, basically distance themselves
from all their addresses by taking their assets, exchanging it
for z cash and which is a zero knowledge proof

(09:53):
privacy coin, and then later take that z cash and
rebuy the positions that they want to have now with
new addresses and new wallets not associated to the old
They kind of like, you know, the technical name for
this is called money laundering. Yeah, you know, from a
from a lower point of view, you know. But they're
trying to hide the old addresses. And I think this
is a bad strategy because when you exchange to z cash,

(10:18):
you're that's a capital gains events, okay, and then but
maybe that's not discovered, but later people discover that you
have all of a sudden, this is a big chunk
of let's say head bitcoin. All of a sudden, a
big chunk of bitcoin appears on your address. Where did
this come from? Will that'll be treated as you know,
income at as wages, and you'd be taxed at at

(10:39):
your ordinary tax bracket, which is much higher than long
term capital gains, So you really set yourself up for
a higher tax rate. Plus you've you've engaged in a
transaction which have discovered would look to the court like
money laundering. And I don't think it's the best way
to protect yourself. I'll give you a strategy for protecting yourself,
but I think this decash strategy is bad.

Speaker 2 (11:01):
Oh absolutely. I don't understand why people would do that
in the first place. You know, I don't think it's
smart to go do those things. With the irs getting
more sophisticated, they're going to use AI in different technologies. Now,
this is not twenty seventeen or twenty sixteen or beyond
before that. It's much more sophisticated. So I think people

(11:21):
have to be aware and get their taxes in order
and do the right thing.

Speaker 1 (11:26):
You're absolutely right. I mean, the news is tightening, and
if you're going to try to hide in a dark corner,
that corner is getting smaller and smaller, and eventually you're
going to be blocked from engaging. And basically you're making
a lot of money, but you won't be able to
do anything with it because you're going to have to
unload it at severely discounted prices to get anything out
of it. You might as well pay taxes. All right,
it's not that bad to come in from the cold.

(11:48):
Let me tell you a better strategy I have. If
you're someone who has been not reporting and you're terrified, rightly,
for sure, here's what I suggest doing. Get incompliance and
you can call our offices. We can have a confidential
discussion about your situation. But get into compliance. You're allowed
to amend the up to the last three years of
tax return, so amendos to make them correct, to report

(12:10):
your past gains, and then be consistent and report everything
going forward. Here's what happened. Here's how the IRS thinks
and decides who to audit. They looked at certain data points,
and the key data point is did you report on
your tax return all the income that the IRS knows

(12:31):
about you? Well, this income is coming from ten ninety
nine forms and in the future year it will be
a car forms as well. They're gonna see what was
the total sale values of all that? Now, did you
on your tax return report at least that many that
much in sales on your tax return, right, because if
you didn't, then obviously you didn't report everything. You're hiding,

(12:52):
they'll auditude. If you report more than that they know about,
then auditors go like, well, this guy's being honest. He's
telling is tell us about everything, So they're not going
to spend time going after the accurate and truthful tax return. Now.
If you hide, then you're gonna get set yourself up
for a correspondence or even an IRS human audit, in

(13:16):
which case they will start to engage the palanteer tools
to look for past behavior like this and catch you.
All right, So if you want to prevent that from happening,
get current and stay current on your taxes now, and
they will look past you as they start looking at
who to go after. There's so much low hanging fruit
for the IRS that they're not going to spend time

(13:37):
looking for the person who's being honest. Yeah, And the
second thing you do is you get our tax shield product,
which is on our website eighty nine dollars a month,
and we monitor IRS records. We can see six months
in advance if the IRS is auditing you, and we
can set up a chance to repair the tax return
before the audit begins and keep it from ever happening.

(14:00):
We also will defend you for that price if you
do get audited. So this is there's no other service
like it. Those two things are the best strategy for
protecting yourself.

Speaker 2 (14:09):
That's really great that you can proactively monitor, you know
if you're someone's about to get an audit. Is it
like an API type setup where you are able to
see that.

Speaker 1 (14:20):
In effect, that's how we pull the data from the
IRS as an API structure. Every week, we pull all
your tax returns the last twenty years and all the
the records and flags that the IRS has put on
your account, which there's lots of minute administrative, but we
pull it and we can detect if there's an underreporting
condition which I discussed, or if they've actually flagged your

(14:41):
tax returns for an audit. It's flagged, and then it
goes over to the auditors, which are backlogged about at
least a six month backlog at this point, and that
gives us a chance to keep you from having me
get to the audit. If the auditor sees you've already
fixed the return, he's not going to start it.

Speaker 2 (14:56):
Now, I did want to ask you about staking rewards
and taxes because we've seen staking has been gotten, has
gotten to clarity from the SEC. Many exchanges are offering
staking again. So let's say people earned a certain amount
of rewards, whether they're taking ethereum, salona, whatever else, right,
how do they report that for their taxes?

Speaker 1 (15:17):
The IRS came out with a revenue procedure which is
fairly well down in terms of guidance, and they said
that staking rewards would be taxed upon receipt at the
fair market value and US dollars when you received it. Now,
there is a proposal from that Senator Citia loomis put

(15:41):
into place called the Digital Taxation Act Digital Asset Taxation Act.
It's in the Senate and it proposes to change taxation
of staking rewards and mining rewards until to be when
you actually sell it later, so you will not be
taxed upon resus but it'll be sold later. And that's

(16:03):
in Congress. It's a bill that the White House supports.
I think there is a high likelihood that don't get
tasked probably next year. But you know, so some people
have taken some people are taking a position to say
I don't want to pay taxes on a receipt. I
would rather pay later. So you know, we actually work
with people and we just disclose it and we take
the more aggressive tax position for the client. We disclose

(16:27):
it to the IRS, which is that's a way to
make sure you don't get dinged by the IRS. On that.

Speaker 2 (16:32):
Yeah, I'm of the mindset. I love that bill, by
the way, I think the stakeing rewards like, I often
don't sell it. I just keep it because it cruise
over time and it gains in value. But I'm not
changing it for US dollars, so I don't feel there's
a taxable event. But the RS may be treating that
as income all right, even though it's not being sold

(16:53):
for dollars.

Speaker 1 (16:54):
It's an interesting bill. I think that's good. I think
the mining rewards thing is good. I mean the argument
on is, hey, you don't tax a baker on making
a loaf of bread until he sells it to a customer.
Just because it comes out of the oven it looks
like a loaf bread, he hasn't made money. I mean,
that's kind of the argument. There are some things I
don't like about it. I don't like about the bill.

(17:14):
I do not like the wash sale rule, and the
wash sale rule Section ten ninety one of the Tax
Code says if you buy back and ask if you
sell an asset for a loss and then buy it
back either thirty days before or after that sale, then
you are denied the claiming that loss on your tax return.

(17:34):
That's a very harsh penalty. And it happens to you
once you find out about it, and then it never
happens again because you figure out how to You know,
you basically buy on different exchanges and you don't report that.
It's a stupid tax. The only argument they have is
like they say, this is what happens to stocks, we
should do it for crypto, which is how about this argument, Hey,
it didn't make sense for stocks, and why do it

(17:55):
to crypto. It's a tax on being young and stupid
and how to do taxes. The other thing I don't
like is the deminimous rule. I think it's a just sep.
I think it's I think it probably The dominionist rule says,
up to five thousand, you can exclude from your tax
reporting transactions where you only had three hundred dollars of
gain or less. For a total of five thousand for

(18:17):
the entire year, and you don't have to report that
on your taxes. Well, guess what, you still have to
account for all your transactions to be able to identify
which ones had three hundred dollars a gain. I mean,
it didn't save you any labor in the tax preparation.
And you know, an auditor, this is what happens with
the IRS. They don't want to audit that all right,
because it's a maximum exclusion of five thousand dollars in taxation.

(18:40):
With the IRS, I believe will do is create what
they call a safe harbor, and they basically say, if
you report this, we're never going to audit it. An
auditor has very high targets to how much money he
has to bring in, and he's not going to make
it by going after people's deminimous amount. I just think
I think it's just stuff for politicians to talk about.
It doesn't save anything on taxes, and it's just it's

(19:03):
just the waste. Oh I like the bill, Yeah, yeah
for sure. And maybe there's some more fine tuning to
your point. You know, the points are brought up before
that gets past. Do you think Trump has floated a
lot of ideas. You know, we don't know what's going
to actually come to fruition. Like he's right now talking
about eliminating income tax. I don't think that's gonna happen,

(19:25):
But you know, I wonder if they would do a
flat capital gains tax fee on on, you know, not
based on your income level, but maybe something lower. I
think Japan just did something like that for crypto transactions.
I think that's a really important discussion. Lots of countries
do different things. Some countries hardly tax crypto. Some of them,

(19:48):
if you hold it more than a year, they won't
tax it. In the US, if you hold it more
than a year, you can tax that lower rate. That's nice.
But both those rates are high enough rates that it
drives people in to hiding income. It puts the average
person into a risky tax position, I think. And I

(20:08):
actually wrote a letter to Donald Trump and Secretary of
Bennett a couple of months ago, and I said I
did not like the Working Group recommendations on tax. I said,
you know, the IRS has significant difficulties auditing crypto tax returns,
and my recommendation was to completely eliminate the capital gains
tax If you do that, you eliminate all that complexity. Further,

(20:31):
they want to use regulations to make the US the
crypto capital of the world. And if you eliminate capital
gains tax along with adding in taxi, you know, tokenizing
all real world assets, the US will become the center
of assets worldwide. Every asset in the world eventually would

(20:52):
be tokenized in the US because it has a zero
capital gain tax. One of my main arguments for this,
or except with arguments, but one is presently foreigners are
not taxed on capital gain activity in the US, right,
so if a Frenchman invests in stocks in the US
sells it for a gain, he experiences no capital gain tax,

(21:16):
whereas the American does. And my argument was, hey, this
is the same argument as tariffs. Why should foreigners get a
better rate than Americans. Let's eliminate it for everybody, because
it's because if we look down the road with tokenization
of assets and the tokenization of virtually everything on the blockchain,

(21:37):
when we're taxing every little minutia of life, it's the
data aspects of it are just phenomenally overwhelming, and we
don't need to be rolling in this taxation complexity if
you want to make the US the capital of crypto,
eliminate capital gains tax, and you're going to hear that
giant sucking sound of assets from all over the world

(21:58):
coming into the US. Oh yeah, yeah, absolutely, that would
be a big win. I would love for something like
that to happen.

Speaker 2 (22:05):
Let's see maybe twenty twenty six we could get something
like that, but we'll have to work.

Speaker 1 (22:11):
I think we had a push for it. I think
this will be an interesting year. I mean, we've heard
Eric Trump has at least twice that I know of,
has talked about zero capital gains tax. I've heard Donald
Trump say it a couple of times. I think it's
in there. I think they have a long term strategy.
And my argument is, like, let's jump right to it.
This whole thing about CARF where we the US shares

(22:32):
trading information with foreign countries. We don't do that in
anything else, And why would we start on crypto when
there's a genuine possibility we may eliminate taxation altogether.

Speaker 2 (22:41):
That's a good point. Clinton, great stuff. Appreciate the update,
I think very timely, and everybody has to look out
for that new ten ninety nine DA from the centralized
exchanges in the US and then you know, make sure
your reporting is up today. Don't try to hide anything
because I don't think you want to us with the
I R S.

Speaker 1 (23:01):
It's the the best way is honesty is the best policy,
and you'll still make a fortune.

Speaker 2 (23:07):
Absolutely, Clinton, thank you so much. I appreciate you, and
uh look looking forward to our next chat.

Speaker 1 (23:12):
Thank you, m m m hm

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Crypto Taxes Just Got Serious | IRS Enforcement Shift Explained with Clinton Donnelly

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.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}Crypto Taxes Just Got Serious | IRS Enforcement Shift Explained with Clinton Donnelly