Estimated reading time: 12 minutes, 32 seconds
Andrew Gordon of Gordon Law Group is one of the most knowledgeable professionals when it comes to cryptocurrency. Holding both a J.D. and CPA gives Andrew a unique perspective that allows him to understand cryptocurrency taxation laws.
In this video, Andrew explains how he got into blockchain and what makes the Chicago blockchain community special. More importantly, he clarifies cryptocurrency law and taxation surrounding this sector.
Who are you and what is your role in the blockchain and crypto community?
When did you first hear about cryptocurrency and blockchain technology?
I’m personally a nerd, and I’ve been interested in Bitcoin and blockchain technology really since the early days, I was following it. I don’t even want to talk about how low bitcoin was when I first learned about it. Even when I first got my Coinbase account, which was years and years ago now.
But I’ve always been very interested in the technology. Fortunately in my business practice we are able to do a lot in the industry and get involved with different clients. Since 2013, early 2014, we’ve been helping clients in both tax and just corporate law matters in the blockchain and cryptocurrency industries. So it’s been very rewarding. It’s something that I personally have a lot of interest in, to be able to help people in the industry.
What can we do to make Chicago the blockchain capital of the world?
I think Chicago is already on track to be, if not the blockchain capital of the world, one of the foremost locations or centers for blockchain. I think there’s a couple reasons for this. For one, Chicago it does have a very strong tech community. Although people don’t always think of it, Chicago is the Silicon Valley of the Midwest, at least in my eyes. There’s a very strong tech community. At the same time, there – for whatever reason – seems to be a convergence of people that have been involved early on in blockchain and cryptocurrency in Chicago.
Even for years there have been Meetups that have grown significantly from tens of people, to now hundreds. Chicago just seems to have a an excitement towards blockchain and cryptocurrencies, and we just constantly – every week – different events, and many of these are free. They aren’t even trying to raise money, but just to inform the public about cryptocurrency. I think this is very unique to Chicago as the convergence of all of these different aspects together.
So you have a J.D. and a CPA?
What things should people know about taxation and cryptocurrency?
How can auditors track what I have done with my cryptocurrency?
So although crypto is decentralized, what people often don’t realize or forget is that in the U.S., it’s a self-regulatory or self-compliance system. In this sytem, we are responsible for properly reporting on our tax returns all of our transactions. So even in theory, if the IRS couldn’t find us, it’s still our responsibility to report and pay the appropriate tax.
But to answer your question, the IRS is actually investing in hired companies to trace through the blockchain/crypto activity. So although it’s decentralized, it is very possible still – especially with the main cryptos such as Bitcoin and Ethereum – to trace activity. The IRS is increasing both their investments and enforcement action in these areas. So although it’s decentralized: 1) it doesn’t get rid of your own personal obligation report, and 2) the IRS is still going to be able to track you down.
What are some frequently asked questions about cryptocurrency?
I would say the most frequently asked question is, “If you have one cryptocurrency, and then you buy another one, is that taxable?” So most commonly if you go from bitcoin to Ethereum, you don’t necessarily sell the bitcoin to cash. You just buy the Ethereum with bitcoin. Is that taxable? People hate the answer, and people fight with me every day about it. But most practitioners in the area – those that read the tax law – believe that it is a taxable event. It’s the same as selling your bitcoin to cash, and then using that cash to buy Ethereum.
Similarly if you use the Ethereum to buy into an ICO, then that is also potentially taxable. You have a gain or loss on the purchase of that ICO. So again, a simple way to think of it is that you sold the Ethereum or the original cryptocurrency for cash, and then use that cash to buy into the ICO.
Especially now that the market isn’t as high as it was in November in December, this has been causing a lot of trouble for people. Because they’ve got significant gains at the end of 2017 when the market was very high, and they are trading and now that the market is lower, they don’t want to sell in order to pay their taxes. But at the same time there’s a tax bill. Many people that were trading at the end of 2017 didn’t sell to fiat. Rather they just converted to different cryptos.
What are the advantages cryptocurrency as compared to fiat currencies?
Well I think aside from cryptocurrency itself, blockchain technology is something that, even just in accounting and law with very simple things like property deeds, can implement blockchain technology. So that we’re not going to a recorder of deeds office and pulling files – just simple things like that. I think there’s going to be significant purpose and implementation of the blockchain.
In the area of cryptocurrency, being able to send money quickly across the world, and also for those that are unbanked or are not able to open bank accounts. It provides a means to store and acquire wealth, and then also transmit it. There’s many people in the United States and in the world that do not have access to banking or can’t open bank accounts or credit cards. So in those types of situations it also provides a good solution.
How is the IRS classifying cryptocurrency?
Another big misconception is that the IRS hasn’t ruled or issued guidance on cryptocurrency. The reality is that, back in 2014, the IRS issued a notice that said that cryptocurrency is not currency, but rather property.
The classification as property led to now the treatment of capital gains — short-term and long-term capital gains– and being able to deduct losses, and so forth. But one of the results of this is that, for example, if you were to buy a Lamborghini with cryptocurrency, that’s taxable because it’s not a currency; it’s property or an asset.
So the IRS, in many areas of cryptocurrency, has already issued guidance. Those areas that individuals feel still remain vague, there are other areas of tax law that we can apply to crypto. Although crypto is new, before 20-30 years ago there weren’t credit cards. The law was interpreted to apply to credit cards. So similarly we can look to other different examples and apply those same types of facts or same types of patterns to cryptocurrencies.
In the areas of stock trading there’s a lot of similarities to crypto. So as practitioners often, although we don’t have absolute guidance on crypto, we have guidance on other similar things such as stocks.
So… I should claim my cryptocurrency as property?
The IRS classifies cryptocurrency as property versus, for example, being classified as a currency. Since it’s classified as a property, you do have to pay attention to things such as capital gains. When you use it to purchase items, there’s a gain involved in that. When you use a dollar, although the dollar changes in value relative to gold or other currencies all the time, if you purchase something with it there’s no taxable event.
But because the IRS considers cryptocurrency to be property, more akin to something like gold or just any physical property, there are gains or losses every time it’s converted, sold, or used. So yes, based on the the IRS in 2014 classifying it as property, all of the capital gains and losses need to be considered.
What is at risk if I ignore the taxation policy?
I think it’s actually a misconception that the tax policy is not very clear. Sure it does not directly address every question related to crypto directly. But there are very similar other examples in Tax Court and in tax law decisions that we can apply to cryptocurrency law and taxation.
One example is in the area of forks or airdrops. Now, of course, the Tax Court has never ruled on that. The IRS may never directly rule on the issue of forks. But we can look to other similar laws or cases that have occurred. So one area in the issue of forks, that people have looked to, is laws or cases regarding found treasure or when you receive something you might not have necessarily wanted or asked for. But all of a sudden it arrives at your doorstep! And so very similar with forks or airdrops, no one asks for it, but you all of a sudden receive something. The practice that the IRS would generally use is that this is income. If you found treasure in your backyard, that’s income to you.
So although in this area the IRS hasn’t directly ruled and said this is taxable, what we have to do is put ourselves in the IRS’ shoes and once given that fact pattern tried to decide how the IRS would rule. What we’ve seen is they’ve ruled in certain ways with very similar fact patterns, such as treasure. So we think they’d rule the same way with forks and cryptocurrency.
Ironically applying old case law to new things that pop up has been occurring for generations. Because with every new technology people think “Oh wait, the law needs to be changed!” In most cases it’s just going to be interpreted with the new technology.
Another example along those lines, for decades cash was king. People didn’t have credit cards, and it was very difficult for the IRS to trace cash transactions. Someone could be holding millions of dollars of cash under their mattress. Nevertheless, there was still the obligation to report. Cash is not necessarily traceable, much like cryptocurrency. Yet you still had to report. And the IRS found means to audit individuals and trace that cash even though there is no direct history of it, such as with credit cards.
What is in the future of blockchain for accounting?
I think there’s going to be a couple different ways that crypto and blockchain technology are going to be impacting accounting. For one, I think the accounting industry as a whole is going to adopt blockchain as a way to have a more secure ledger, that doesn’t necessarily have the such a need for audit. The audit industry in itself is based upon the need for examination or distrust in ledger’s and recording systems. So I think the accounting industry will begin to adopt a lot of these things, as businesses do as well.
In terms of taxes and and regulation, I think a lot of these areas that people think are not very clear, we’ll start to see cases of enforcement. Where the IRS goes after individuals for failure to do certain things and then it becomes very clear that “Hey wait… We all really had to do this.” So I think we’re gonna see more enforcement and some clarity in some of the guidance.
But I don’t think that there’s going to be any significant changes. Meaning crypto to crypto, I don’t think that will ever change from being taxable. I also think exchanges are going to be more involved in the reporting process. They can make it a lot easier for the users to report their taxes. One of the biggest difficulties now is that tax payers don’t necessarily have all the records, all the time in order to report all their crypto gains properly. This is because exchanges disappear or don’t keep good records. Whatever it may be. So I think we’re gonna see more of an obligation on them to issue reports. Just like investment firms or brokers have to issue you forms regarding your stocks. I think we’re gonna start to see in coming years crypto exchanges doing the same thing.
How do you see blockchain affecting our everyday lives?
I think at first blockchain is going to impact our everyday lives in more subtle ways. For example, being more in the back-end in terms of providing the ledgers or the ways to store data or information. Just things that occur every day like property ownership and medical records. Things like that are less intrusive, but have strong value. I think that will probably be some of the first phase of blockchain adoption.
From there, I think we’ll start to see more unique ways to implement it. I don’t think it’s going anywhere. I think that, even independent of cryptocurrencies, blockchain as a technology; that’s going to impact us during our lifetime significantly. Time will tell as to how it will do that.
Where can people learn more about Gordon Law?
If you enjoyed this interview about cryptocurrency taxation laws, definitely check out this talk on estate planning with crypto. Our interview with Louis LaPat of Coinflash may also peak your interest!
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