Andrew Kernosky is a cryptocurrency tax professional and the owner of Archer Tax Group, LLC. He helps taxpayers understand their tax liabilities in trading, mining, lending, and how to navigate the tax side of launching via ICO. Andrew discusses cryptocurrency tax implications and his outlook on the crypto markets with Filthy Lucre.
When and why did you decide to move into the crypto tax space?
So I have been watching the market since 2016, but started getting into the market as a tax professional in early 2017. I noticed there was a gap in qualified professionals weighing in on the 2014 notice the IRS put out regarding cryptocurrency (IRS notice 2014-21). We have been one of the leading voices on the subject because we take tax law and court cases to build a reasonable position on crypto issues.
What are the unique challenges in determining tax liability in cryptocurrency?
So a big part of the equation in tax liability is the price at the time of trade. In many cases, there are multiple exchanges across multiple time zones that never close. So if you aren’t keeping good records it can be difficult to get your actual costs. You may come out ahead or behind if you are using an average price. Another interesting facet to crypto taxes is the fact that you are dealing with a ledger that is publically available, meaning that if you decide to not pay taxes on your crypto (don’t do it) there is a record of the transactions in your wallet. When the IRS starts enforcement (which they announced as a focus area starting in 2018) for those not paying their crypto taxes, there will be a record that can not be altered or erased. Even the privacy coins have a fiat or crypto on and off ramp, so there is still a paper trail.
2017 was a great year for cryptocurrency, but 2018 has been incredibly bearish. Has that affected the questions you are being asked?
With the bear markets in 2018, a lot of clients are getting smart about investing in ICOs and are harvesting losses in 2018. We have also seen an increase in the number of ICO projects focusing on tax strategy ahead of time instead of retroactively. There is still a lot of ICO activity but it is getting smarter.
Do you feel exchanges are doing enough to help users prepare for tax time?
It is difficult for an exchange to know what the value of tokens transferred in are. Honestly, you should be using a third party tracking software to link all of your exchange information.
Do most investors just treat their returns as capital gains? Are they wrong to be doing so?
Yes, the IRS treats crypto as property so it is to be treated as capital gains, either long or short, depending on the holding period. If you are mining crypto, you will have to treat the mined crypto as ordinary income/ self-employed income and will potentially owe income tax and self-employment tax if you don’t have expenses to offset income. Right now, not many people are mining at a profit.
Do you foresee cryptocurrency being used for tax avoidance purposes?
Not at all, because it is immutable, there is no way to destroy the record for say Bitcoin. It is much easier to track transactions on the blockchain than to track fiat. It’s a really bad idea to use a payment method which is so easily traceable.
You wrote an interesting post on crypto-backed loans. Have you seen an uptick in interest in that solution?
I think there would be more interest if people weren’t so concerned with the price sliding down more. There are people worried about defaulting on loans and having their crypto seized. I have had a few clients use the loans to short coins they think will do down and also stay long while diversifying their stack.
Are you an investor in cryptocurrency? If so, what coins do you prefer?
I am. Recently, I have gotten involved in trading, mining, and loaning. There aren’t any coins specifically that I would shill, but I think it’s a good idea to invest in projects that have a clear and reasonable use for their tokens and also, if they have a staking component it’s a good idea to create passive income, even in a bear market.
Any feelings on how big the market could get?
It’s hard to put a number on it. I think every transaction of information will be on the blockchain in the future but some people will never know that blockchain was involved. There is a real use case for using tokenized securities to simplify stock ownership as opposed to traditional shares.
What is the one piece of advice you would give to any crypto investors?
Always do your due diligence. Projects with high profile advisors aren’t inherently better. Make sure you understand the project’s goals and make sure they are active with their communities. Another marker is if they are talking price of coin over project results, that is a bad sign especially since that could be an SEC violation. Projects that get caught up in legal battles will have to divert resources from development to clear their name. Projects that don’t do that at least have some sort of legal counsel, which is a good sign. If it sounds too good to be true, it is.