From Niche to Necessity: Tax & Accounting for Web3 and Digital Assets

Hello and welcome to another episode of Niche to Necessity. Today we have a special

guest. We have Phil Gaudiano. He is one of the co

founders and partners over at Chainwise CPA and also at

Chainwise Crypto Academy, where they educate folks on how to do their own

crypto taxes, but also folks that want to get involved in the industry. So welcome,

Phil. Thanks for joining us. Hey, thanks for having me, Taylor.

So I wanted to touch basically, you check in on kind of some of the

upcoming changes that we have from a regulatory standpoint.

We've got a lot of things in the pipeline, a lot of things that are

kind of still up in the air and maybe not we don't have full clarity

on quite yet. But as far as the upcoming

1099 reporting requirements that will impact the tax year

2025, how do you think that these will affect the crypto

industry? And can you just kind of give us an overview on what those entail?

Yeah, sure. Well, this all stems back from

2021, the passage of the infrastructure bill. And

in that bill it mandated that there was going to be what's called broker

reporting, that that was going to be expounded down onto crypto

exchanges and crypto brokers. Broker was a

broadly defined term basically capturing anyone who touches

crypto really. And so went back and forth with

industry experts in Congress and and, you know, committees and things like

that. And they finally landed of a narrower definition, but

still a pretty broad one. But the upshot is that for all trades

that happen, or really for all transactions that happen

after January 1, 2025, which is, you know,

coming up in two months here, they have to be reported on a

1099, a new form 1099, called a 1099

DA and that's going to be required to report

gross proceeds from the transactions and then the next

year beginning in 2026, reporting basis

information and things like that. So it's an effort by the government to

simplify crypto taxes. I'm not sure that it's going to

meet that mark because there's going to be a lot of inherent work that has

to be done in reporting what's on the 1099 versus

what we calculate when we're doing the crypto tax

calculations, but that is what it's meant to do, is to simplify

it. And so that's really what the big talk is

right now, because it's going to be a lot of papers

coming in the mail or delivered by email,

and we're going to have to it's an Official tax form. Now it's a

1099, so we've got to show it on the return. And

a lot of the information is probably not going to be correct

or might need to be manipulated or changed somehow.

So it's going to be. It's going to be a lot of work coming down

the pipe. Yeah. So when we got some of the final broker

eggs, I know that there was a. There's a lot of confusion around, you know,

what works for centralized actors versus decentralized actors

and what the different reporting requirements. Can you touch base a little bit on that

and what those differences are? Yeah. So for now, the irs,

they kind of kick the can on Dexs and a lot of DEFI

stuff because the regs say that

brokers have to report, provided that knowing the information that

they're required to report is part of what they normally do

or would be required to do. So it's another way of saying

essentially centralized exchanges definitely have to begin

reporting right away in 2025.

But decentralized exchanges, Dexs, DEFI platforms,

things like that, the IRS needs more time to assess what

they can require them to report based on what kind of information they

collect from their users. And they're going to pass regulations

there at some point in the future. We don't know when that'll happen. So

for now, Defi kind of gets a buy.

Yeah. Because I mean, it seems like based on the requirements, it seems

like it would fundamentally upend the ethos of Defi and a

lot of the principles that go into why these tools were built

originally. So the thought of having to report on every

transaction on a place like Defi Uniswap, for example, when you

don't have to, it's meant to be permissionless.

Right. So it opens up a whole can of worms and it almost, you know,

when I first heard about these, I was like, oh, sounds like the US is

going to be at risk of getting GEO blocked out of using some

of these portals, or you'll just have clone portals

continuously popping up that may get shut down, but it's just

computer code that you can keep copying and moving to a new server or something

like that. So there seems like there's some flaws with the decentralized reporting of this.

And I think, I think that's part of the reason why they're kicking it down

the. Kicking the can down the road. But it's all interesting

stuff, you know. Yeah, yeah. I mean, as it stands right now, you

know, DEFI is not set up for this at all. Right. If you think about

tax reporting from an IRS perspective, every transaction that

occurs, you know, whether it's in crypto or whether it's in stocks or whether it's

selling your house or your car or whatever, all of that is tied to

a person ultimately. Right. A person with a Social Security number, a

tax ID number. You know, the ethos of Defi

is that you don't need that. Right. There's no KYC when you go on

Uniswap. There's. There's no identity of any of the

users. Right. All the transactional data is there, but

we just can't tie it to an individual. So it's going to

be, you know, impossible, at least very

difficult, if not impossible for most defi platforms

to incorporate this without, like you said, without fundamentally

changing how they do business. So, yeah, it's going to be

interesting to see where the IRS lands on this. You

know, we're waiting with bated breath because it could have a huge

impact on the defi industry. Yeah,

I think it kind of underscores the need for additional clarity on

what type of entities these are in a lot of cases, because

in the example of Uniswap, it's a, it's a foundation that provided

the initial code and things like that, but the actual

app can run on its own without any outside input.

So it's like, if you're gonna do, if you're gonna implement these

rules and then put penalties in place, who are you gonna penalize?

And so the enforcement aspect of this is

muddy as well. So, yeah, I think that it's all gonna be a challenge. And

like you said, we need more clarity here and we need to understand better,

like, or have better rules as to an exceptions as to

what needs to be required of these defi platforms. Yep, I

agree. I agree. Yeah. And so with regards

to these 10, 99 days that are going to start coming out,

I'm less concerned because I think that the crypto brokers, they're going to have, they're

going to have to figure that one out on their own. But as far as

investors go or people that might be receiving these, what are some of

the ways that they can prepare for the reporting challenges

of receiving a bunch of these, or is there anything really that they should be

doing to kind of set themselves up for success in dealing with these

new reporting requirements? Yeah, well, first and foremost,

you're still going to have to do a crypto tax calculation. Right.

The nature of crypto is such. And everybody that's in crypto knows this, but,

you know, part of the appeal is in the portability.

You buy a coin on Coinbase, you transfer it to cold

storage, you transfer it to another wallet, throw it up on Uniswap and trade

it. You know, there could be six or eight different steps between

when you buy and when you sell. And so the question

becomes, how does the exchange where you sell it, know what you paid for

it? And in a lot of cases they won't, even though they'll be

required to, you know, provide that basis information on the

1099. So that's where we get into this kind of

rigmarole of expecting a lot of the information on these forms

to be incorrect. Right. I think the gross proceeds will be correct

because that's going to be based, you know, just essentially it's going to go

to some sort of aggregator site, Coin gecko, Coin market cap

or something like that, and just take down, you know, the price of ETH at,

you know, 12:12pm on October 25th

or whatever the date is. That, that part's fine.

But as far as the basis, it's going to be, you know,

a different level of exactitude that's going to have

to happen to calculate that and it's going to have to be done at the

individual level. So when we look at this in terms of reporting

where this all winds up on the tax return, now we've got

amounts that traditionally have not been reported on 1099 forms.

Traditionally we put them down on the lower lines of both

the short term and the long term capital gain summary on schedule

D. Now we're going to have to move them up into the lines

where they are reported and then we're going to have to report the basis that's

reported and then we're going to have to back that basis out and then

report the correct basis. So it's going to be a couple of hurdles to

get through on the reporting side as well. But the bottom line is if

you're a taxpayer, if you're actively involved in trading

crypto, I think it's going to be a

while, if ever at all, before you can actually rely

on these forms for anything aside from just gross

proceeds. Yeah. And I, I actually, it's interesting, you know, you

bring all that up, like the gross proceeds part, as you say, it's, it's,

it's the easiest part to, to source. But I was running an

example just to illustrate how important it is to get this basic

information right. And I ran an example and this

could, you could, this could be magnified by a lot more than this.

But I ran an example where an individual bought to

bitcoin back in 2021 for a total of

100k and then sold those two bitcoin for 150k. And if you don't have

your proper, proper basis of information and you're, you know, let's just say you're single

and you know, had no other income, it could be a 65

times difference in how much tax you pay or more, you

know, based on how big that, that trade is

if you don't have proper basis reporting. So it makes a huge difference. And it's

really important to get all this stuff right. And kind of that

leads us into my next question, which seems like it's another

attempt for the US Government and the IRS specifically

to improve upon their reporting. Though I don't know how

effective it's going to be with implementing wallet by wallet reporting.

At least now you have the lots in each different

wallet. What kind of challenges do you foresee with folks implementing

these? You know, I've started to reach out to some of the crypto tax

software companies to see how they're going to be handling it and

I haven't gotten too many responses quite yet. I think they're still working through how

they're going to do that. But what types of challenges do you foresee with your

own clients and in implementing this wallet by wallet

porting? Yeah, well, the big challenge is that

historically it hasn't been done this way. Right. Historically we've taken kind of

this global or universal perspective where,

you know, a digital asset that's owned by a person is, is owned by that

person. It's not owned by that person in some sort of

sil. Right. The wallet by wallet guidelines tell us

that now we have to separate this all into each wallet or each,

you know, account, if you're talking about an exchange or something like that.

And then we have to go through and allocate basis to each of the

assets in each of the wallet and there's a revenue procedure out now that

gives us a couple of methods on how we can do that.

But primarily from a historical perspective, all

of a person's crypto generally is muddled up and

mixed together and now we have to break it all apart and assign

basis based on which wallet it's in. So there's

some decisions that have to be made relatively timely too, because

you kind of have to make a decision on how you're going to do it

by January 1st of 2025 or

before you sell any sort of crypto assets. So if

you're an active trader or something like that, you kind of got to get this

done, you know, in the next couple of months. But yeah,

as far as the software limitations, you know, there's a lot of software out

there now that allow for wallet separation or for depot

separation. You know, they've got different terms, but it doesn't really

tackle the initial allocation of the basis that you have. And

so that's just comes down to math.

You know, at the end of the day, it's just a big math problem

where we have to look at historically all of the activity in the account,

what still sits in the account, and then put all those

assets into the different wallets where, where they exist in the real

world. So it's, it's a, a lot of

it. It's, you know, it's labor intensive, it's math intensive,

and it's not all that logical to

completely shift systems of, of doing this

because now, you know, at this point, we've been doing this for, you know,

since 2014, since the revenue notice came out in 2014, which said

that, you know, crypto is taxable. So people have been doing the Universal method

for 10 years, and now all of a sudden you've got to flip a switch,

you know, in two months and get this all figured out.

It's, it's a lot of work. It's a lot for anyone involved. And if

you, if you violate the safe harbors, you know, which is

a couple of methods that the revenue procedure gives you. The

IRS says that they can, you know, levy fines and penalties and things like that.

And we don't yet know that there wasn't a whole lot of detail given on

what those penalties might be. But, you know, it

could potentially allow the IRS to go back in and recalculate their

own gains and losses and lead to higher

taxes for you. Yeah, I think this is, there's going to be a bit of

a trap here as well for folks that were reporting

maybe they were filing their crypto taxes, but either their CPA or

themselves weren't checking their basis against what actually

was in their wallets at, at year or month end or whatever, at

period end. And I think that there's a lot

more CPAs and folks that are serving this industry that aren't checking that

and aren't doing a reconciliation of what the actual basis was and how

many units of crypto you had in that wallet at year,

month end that I think that this is one of Those moments where it's

going to be exposed because you're going to have to do that math. And if

the math doesn't math, then you're going to have to, you know,

either go back and amend because you're realizing that the data that you provided to

them previously was incorrect, or, you know, you might have to eat some of those

penalties in a current year or whatever. So I think there's

a lot of stuff that's going to, you know, expose people with regards

to this transition. And it just underscores the fact

that if you're, you need to either be working

with someone that knows what they're doing or educate yourself to the point where you

can get it. Right and not educate yourself to the point where, you

know, not enough to get enough to get yourself in trouble,

but not enough to do it. Right, right. Kind of got to. Yeah, exactly,

exactly. And it kind of speaks to, you know, software limitations and

it speaks to the level of knowledge that's needed in general. Right. Because it's easy

enough to sign up with, you know, coin tracking or coinly

or, you know, a bitcoin trader or whatever and, and hook up

all the APIs and all your wallets and then get some sort of report

populated and call it good. But is it really good?

Chances are, you know, that there's a lot of work that has to be done

behind the scenes in times in terms of, you know, tying out ending

balances, seeing if there's any missing transactions or something like that.

But a lot of the industry right now is just focused on, you know, getting

the raw data into the software and taking whatever the software spits

out as, as, you know, a valid report. And so

if that's been your habit over the last, you know, three, four or five,

however many years, you're going to be in a world of trouble. What do you

need to go back in and figure out exactly what you have and exactly what

the basis is and then make a decision on how to allocate that it's going

to be. It's going to be difficult for a lot of people. Yeah.

So switching gears a little bit to kind of year

end and, you know, more like positive, like, how do I reduce my tax

liability at the year, you know, with year end approaching? What are some

tax saving strategies that investors can implement now, you know,

before year end to either limit or kind of

mitigate how many, how much tax they pay for the year? 20,

24. Yeah, well, this kind of dovetails with what we were just talking about.

Right. Because the big tax saving strategy is tax loss harvesting.

We all know what that is. Basically you go through your portfolio, you look for

the losers, you sell the losers, and those losses can offset

some of the gains that you have elsewhere in your portfolio. In order to do

that, you need to know what's in there, right. So you kind of have to

do these calculations and figure out exactly what you've got so that you can make

those decisions on what to sell. Other

strategies. That's a tried and true strategy that applies

to crypto assets, stocks and bonds, mutual funds, all that good

stuff. And that's kind of a classic year end strategy.

There hasn't been a whole lot of losses this year, you know, at least in

the, you know, in the, in the larger coins. But I'm sure you can find

some, particularly if you bought, you know, in, in 2021 or something like that,

and you still carry this super high basis.

Aside from that, you know, there's charitable giving which is becoming more

and more popular. There's an increasing number of charities that are accepting crypto

donations. So that's an easy enough avenue to

do. I always just caution people there that if they

contribute more than $5,000, they have to get

a qualified appraisal in order to be able to deduct

that on their schedule A. So make sure you're talking to your tax

pro. Make sure you know what the requirements are and if you're making

any larger gifts, make sure you get a qualified appraisal or the

IRS can just say, no, it's not valid.

That's great. And so if someone does donate to a charity and let's say

it's under that $5,000 threshold, do they still have to pay capital gains on

that disposal or is, is that, how does that

work, generally speaking? No, generally speaking, it's going to be capital gain

property. Right. Which, which means that the, the gain isn't recognized. Right.

It's the same way that it works with appreciated stock or,

you know, appreciated anything. Right. You can donate a

car theoretically to a charity that appreciated value, you get

the higher write off value of it. It's just that, you know, cars

generally don't appreciate, they go the other way. But

yeah, and generally speaking, you can, you can save yourself the, the capital gain

there. So you would, you would get both the capital gain and the

deduction on your return potentially based on if you file

schedule A. Yeah, yeah, yeah. And that's a good, that's

a good point. That the requirement to deduct the charitable contribution is that

you file a Schedule A, which is itemized deduction. So make sure that

you're above the threshold there to qualify to itemize.

Otherwise, you know, it's all. It's all a wash. It won't matter. Yeah.

Cool. Well, those are the questions I had for you for today. I really appreciate

you joining us today, Phil. Your expertise is always well

needed and well appreciated. So thanks again, and

we'll. We'll keep in touch and get more of your. More. More of your face

on some of our calls and things like that. Great. I look forward to it.

Thanks for having me. All right, Phil, Have a good one. Take care.