The following transcript was created using artificial intelligence. There will be some grammatical errors below.

00:01:07:06 – 00:01:41:27

Richard Carthon: Everyone, welcome to another episode of Crypto Current, your host here, Richard Carthon. And today we’ve got a special treat for you. We have a repeat guest that is right. If you go back to episode 121 back in September of 2020, man has so much happened since then. We have an amazing guest that helped bring some insights into a lot of things, all things accounting as it relates to crypto in the blockchain. Of course, there’s even more happening right now, and of course, it’s timely. With tax season upon us here in twenty twenty two, it is amazing and great to have you back.

00:01:41:29 – 00:01:44:29

Richard Carthon: Dr Sean Stein Smith, how are you doing today?

00:01:46:01 – 00:01:56:25

Sean Stein Smith: Awesome, Richard, thank you so much for the invitation back on the show. I’m doing great and yes, there’s been a ton going on during the last 18 months or so, so there’s plenty to talk about.

00:01:58:03 – 00:02:23:19

Sean Stein Smith: Yeah, man, and it’s cool with your your background, with being a professor at Lehman College and then also, you know, being a crypto advisor. I’m sure you have had quite a bit on your plate as of late, just as more and more institutional players are coming in and schools are trying to figure out how to get in this space and just so on and so forth, something catches up. Over the last two years, you would have all what you’ve been up to.

00:02:25:03 – 00:03:00:09

Sean Stein Smith: So, so probably some of the high points, right, are one absolutely right as more institutions be the institutional investors, colleges, universities or huge corporations, right audit firms, tax firms for the clients of those firms are more and more trying to get a blockchain to work inside their company or actually the the easier on ramp is is actually trying to get crypto to be used as a payment tool, right? Either paying vendors in crypto or allowing customers to pay them in crypto.

00:03:00:11 – 00:03:56:28

Sean Stein Smith: And all of that, on the surface, is a easy fix, right? You you download a or you on board a API, gilded BitPay, any of those items out there and then have them handle it for you. Great on the surface, ultra easy. But then on the back end, trying to do the payroll processing and cash management Global’s payables, all the rest. All of that is there is a huge headache for firms out there. And then adding on to that. How do you audit that and then adding on to that, how do you properly do the income tax impact of all of that? So all of that is going on right, the institutional side of it? And then on the individual side, right, the individual investor, trader person, obviously DeFi and NFTs are huge and honestly, had both of them really burst out into the mainstream back during twenty twenty one and they both foresee a piece early in twenty one.

00:03:57:00 – 00:04:05:29

Sean Stein Smith: And then I guess back in the fourth quarter are now back on the upswing and then in twenty twenty two are hot button topic for everybody out there right now.

00:04:07:12 – 00:04:37:18

Richard Carthon: Yeah, I mean, again, I know you’ve been staying busy with all of that and there’s so much to unpack with everything that you just said. One that I want to start on, which is captured everyone’s minds right now, is the thing around staking. And how do you report that to the IRS? The IRS recently came out with some pretty significant news where they decided that they would not be taxing it. So can you kind of just break that down? I believe you’re publishing something that’s on a pretty big publisher pretty soon, if you can share that.

00:04:38:17 – 00:05:23:02

Sean Stein Smith: Yes, sure thing, absolutely. So, yeah, so I publish a column each week on this tiny website might have heard of it, Forbes and so and so I do. So I do have an article coming out on this topic presently. But off the top, on the one hand, yes, Richard, it is excellent news right on the surface, but on the other hand, it is not as broadly impactful as you might think. So off the top, the whole concept of DeFi and DeFi staking, basically where I put the funds, be it east, the Bitcoin, be any other type of token or coin.

00:05:23:08 – 00:06:07:05

Sean Stein Smith: I put those coins on deposit at a wallet or a company who then basically does activities with those coins or tokens that I put on deposit. And then I get paid. I earn rewards. OK, so so it’s kind of like earning interest on a bank deposit, but there’s one critical item there. Write that up until now. Ever since twenty fourteen, the IRS has has publicly and very proactively said that any time that any crypto, the Bitcoin, the Paxos Circle, USD, Tether, NFTs, to use any of them, any time any of them are transferred, traded.

00:06:07:12 – 00:06:40:05

Sean Stein Smith: So what transformed to that is a income tax event, right? Tax filing and also tax payments? Possibly. OK. But and I won’t get to to elbows deep into with you, rich. But the IRS calls it property. OK, so so a good proxy for that has been, well, basically treat any trade or transaction in crypto as if you were using a share of Apple stock, right? And so any time that is traded, there’s a income tax impact.

00:06:41:07 – 00:07:15:07

Sean Stein Smith: But. The actual process of creating these DeFi staking rewards that is actually creating new property. New crypto. New tokens. OK, so if the IRIS is out is out here, we’re saying that all crypto is property and it’s taxed as such. But on the other hand, the IRIS code actually outlines any new property created, and the example used is actually gold.

00:07:15:26 – 00:07:38:06

Sean Stein Smith: Right. So as a gold miner, I’m out there mining for gold and I find it. We find it polished up all the rest. I don’t pay taxes on that gold until I have a external transaction, right until I actually sell it. And so on the one hand, my tax folks CPAs.

00:07:40:12 – 00:08:24:01

Sean Stein Smith: In the IRS itself have all been saying that any time that you earn any DeFi coins or tokens, those have to be taxed at that moment. But if they are property and these coins and tokens are new property, that is what. Right. And so all those block rewards should not be taxed until the point in time that they are sold. And so it’s a bit to me that’s the case, right? That under current guidance and current talking about it commentary, all the rest that as tax payers have been paying taxes, it’s a possibility that over the last five or seven years, taxpayers have been overpaying.

00:08:24:12 – 00:08:42:18

Sean Stein Smith: And it hasn’t really been an issue in Seoul now because from January 20, 25 total assets invested into DeFi operations were half a billion dollars as of the fourth quarter of last year. It was over two hundred

00:08:44:03 – 00:09:41:09

Sean Stein Smith: billion dollars. And so it’s grown incredibly fast. There are institutions doing it. There were individuals doing it. I’m doing it. And so and so having that transparency and so actually hold on a second. On the one hand, you’re saying this, but then on the other hand, the previous tax code tax law says the opposite. And so all of that is at the crux of this case. And so offends ends you. Actually, the underlying question is when do investors have control ownership or receipt of these tokens or coins being created? And then to when are those coins or tokens actually taxed? But but I do want to also issue just a little caveat here that basically the IRS has has judged based on the facts and circumstances of this one case.

00:09:41:21 – 00:10:11:13

Sean Stein Smith: And so I would caution anybody out there who’s involved in these activities to go to your CPA, go to your tax pro, talk to them and to try to make the best choice possible. I’m still encouraging people to play it safe and to and to pay taxes as they have been paying. Right, right. Because the IRS has has been no public commentary, no formalized update to how they are treating it overall rather.

00:10:14:11 – 00:10:28:18

Sean Stein Smith: The IRS has chosen to not pursue this matter in this one case. So, on the one hand, positive news for sure. On the other hand, has to be sort of cautiously optimistic about it, for sure.

00:10:28:21 – 00:10:41:06

Richard Carthon: No, you brought up a lot of points in one of the ones that kind of stuck out to where it’s kind of a double edged sword where. We technically are paying over paying taxes, but at the same time.

00:10:42:24 – 00:10:43:16

Richard Carthon: It sounds like.

00:10:45:06 – 00:11:17:27

Richard Carthon: The thing that I want to go back to is kind of like you’re saying, going from like USDC to USD T or going to Paxos, going from in and out of these stablecoins. Each of those are taxable events, and I guess my question then becomes like if they’re quote unquote stablecoins, why? Because if you are going, I guess, from like literally USD to a foreign currency and then you tried to come back, why would the gut, like with the government tax you on that as well? Or like, how does that work? You know, I’m saying, like, how does that work if it’s supposed to be a one to one entry? Let’s say you move.

00:11:18:12 – 00:11:18:27

Richard Carthon: Yeah.

00:11:20:21 – 00:12:10:06

Sean Stein Smith: So, yes, so so the so the core difference there, which is that is a foreign currency is actually it’s it’s a whole separate branch of all of us taxes. And that as far as the IRS goes, us dty us. Do you see any of these other five, at least in stablecoins, are sure they are advertised as a one to one match to the US dollar. But in the eyes of the IRS, who is the only US regulator to have issued any binding guidance on this stuff as far as they’re concerned, any crypto asset is property right, how it’s advertised, how it’s built, how it’s used or how it’s or how it operates has no bearing on how it’s taxed and so.

00:12:10:08 – 00:12:32:14

Sean Stein Smith: And so that’s the key issue. There is all of this and all of the headaches and compliance headaches and cost and confusion really is all is all achieved based on the fact that only in the US, at least the the IRS has issued any binding guidance on how these instruments are to be treated.

00:12:34:11 – 00:13:06:18

Richard Carthon: Wow, OK. Well, that’s definitely interesting, and as we kind of look at this and in because it’s interesting as you kind of look at this where a lot of people who have done things from bridging, from going from one blockchain to another with even the same token, right going from like USDC on Ethereum and then bridging it and then going into the Solana ecosystem Travelodge or something like that. So even though it’s going to another ecosystem, I guess, because it’s now a USD or whatever it is, that’s a taxable event.

00:13:07:09 – 00:13:21:07

Richard Carthon: So it’s just interesting on how. How I guess that’s the big question there, it’s just like even how you move your money around each of those moments could be considered a taxable event.

00:13:24:20 – 00:13:52:17

Sean Stein Smith: Hey, cryptocurrency, Drew. This is Steve Miller, and I’m the host of CSI Live show that keeps you up to date with what’s poppin off in crypto in every episode of CSI Live brings you. The latest news keeps you updated on the top projects in decrypts. Everything you need to know to get ahead in the wild world of Web3. So if you really want to stay cryptocurrency, join Richard, Chris and I every Tuesday and Friday at seven p.m. Eastern, only on YouTube Live. So what are you waiting for? Subscribe to cryptocurrency YouTube channel today and as always, stay cryptocurrency.

00:13:56:01 – 00:14:28:29

Sean Stein Smith: Yeah, no end. I mean, bridging or any wrapping bitcoin right is a huge open item right now. Wrapped Bitcoin and it all comes down to is there a economic transaction happening, right? Is there a transfer? Is there a trade? Is there a is there a actual swap? Whereas if you’re technically only moving the exact same asset from blockchain, the blockchain technically, technically that transaction didn’t happen, but there is no transaction.

00:14:29:01 – 00:14:59:27

Sean Stein Smith: I’m just moving it around. But if you have to convert it at any point, pay any gas fees or or if you happen to have it moved from watching the blockchain, then all of that triggers the IRS of classification as a transaction happening. And so, yeah, I mean, it is a monster headache, right for anybody out there trying to give tax advice to clients. It’s a monster headache, right? Because one, the Irish treatment is, I think so of.

00:15:00:25 – 00:15:31:12

Sean Stein Smith: Heavy handed and just blanketing everything to treat it the exact same way is not really accurate. And then too, it’s also more sort of hands on how do you get all of that information out of these companies out of cracking Coinbase, even you and all of these other sort of protocols and platforms that are truly decentralized? How do you possibly get all of that transactional history out of it? And so all of that it’s it’s a huge headache and a huge mess, and

00:15:33:07 – 00:15:40:09

Sean Stein Smith: I feel for anybody out there trying to help clients navigate this, this outlet, because it really is complicated.

00:15:41:09 – 00:15:59:01

Richard Carthon: Yeah. On that subject. Talk about Complicated to deal with the legislation that just went through back in twenty twenty one. They basically punted until twenty twenty three to actually enact on basically the tax law around who is.

00:16:01:16 – 00:16:04:23

Richard Carthon: You know which one I’m talk with, basically. They’re going to have to figure out

00:16:06:10 – 00:16:18:09

Richard Carthon: if they in the eyes of the IRS, are able to choose a broker broker, a broker. That’s the word I’m looking for. Yes, man. So just for a second.

00:16:19:06 – 00:16:54:12

Richard Carthon: Sure, sure. And so yes, and I believe it was passed on. No, No. 15. It was a bipartisan infrastructure bill. It was passed in the fourth quarter of of twenty one. And so and so two main things going on there. One, this this whole classification, again, using a overly broad umbrella I think of a broker can, as the law is, is currently written. If if the law is is enforced as it is written and all of that is still open to debate.

00:16:54:14 – 00:17:31:06

Richard Carthon: As you said, anybody who’s involved really in it in any aspect of transactions linked to crypto could be classified as a broker. Miners, developers, wallet boosters, anybody who is involved in those transactions. OK, fine. On the surface, like, all right, fine. So so, so then I have some compliance work to do. Well, yes, but it’s a lot of compliance, right? Because ultimately, if you are classified as a broker, you have to file and have the exact same level of transparency and compliance,

00:17:32:25 – 00:18:06:05

Richard Carthon: even if that same volume of of our customers. You have to have the exact same level of compliance as if you were a Coinbase or a cracking actual corporate entities who are who have people on the on the payroll to handle just that. So on the one hand, there’s a huge compliance burden on the entire ecosystem that supports tokens, DeFi NFT activities. So on the one hand, it’s a huge burden on them. And then to and and this change is the actual one that I’m the most worried about.

00:18:06:28 – 00:18:56:00

Richard Carthon: That, as the law is, is currently written. If you are classified as a broker and you are not in in compliance with all of my paperwork and stuff, buy one one 20 20 for the IRS Code Section 60 50. I, as also has also been updated to include now cash flow wise and then now virtual assets. And so now going forward, any business, any individual developer program or anybody who’s involved who gets paid over 10 grand in crypto during that annual period for business services has to be in full compliance with those broker rules.

00:18:56:21 – 00:19:33:26

Richard Carthon: And if you’re not under the IRS code section 60 50 II, that’s a felony. So it’s a one. It’s it’s compliance paperwork, whatever but to if you are caught up in it and you are not in compliance as the law is is currently written, right now, it’s a felony. So, so so there are some big, big changes coming down the pipe and trust me, any any time that any time over the last half year or so, any of the tax conversations that I have, both of these items are our hot button top burner items.

00:19:35:20 – 00:19:43:01

Richard Carthon: They have to be because I mean, I don’t know if there’s ever been something in place that one could stifle innovation and then to.

00:19:44:21 – 00:20:16:22

Richard Carthon: Make an enormous amount of people liable to be considered a felon because, you know, the majority of people who are involved in the space who might have done it in the last, you know, I I think it tracks back. It’s not like at the moment when that passes, if you do something and it’s in its period. So like if you’ve done any criminal training period and then just forgot about it or whatever, you could be susceptible to being a felon like this is going to impact millions of people. I don’t see how in the next two years, they don’t try to fix this.

00:20:17:00 – 00:20:29:05

Richard Carthon: Like there’s just there’s way too much implications and like liability for like your everyday person just trying to like, involve and innovate the space.

00:20:31:12 – 00:21:04:28

Sean Stein Smith: Yeah. I mean. Coinbase is the obviously it’s the one the highest profile company out there, right, that has individual users. Coinbase has over 80 million customers. People can buy crypto on Robinhood Cash App. I can use it to now pay bills via PayPal. MasterCard and Visa are also rolling out crypto payment options. I mean, it’s it’s it has moved very quickly into a tool and an instrument that anybody can use.

00:21:05:27 – 00:21:38:23

Sean Stein Smith: To to pay anything on their phone, on their tablet, at home, on their computer. And so I would say, yes, absolutely. You’ve got that right now, right? From a policy point of view here in the US, it’s a critical point. Right? Right. Because and I believe that I had brought this up last time I was on your show that as you blockchain and crypto right, there is no fundamental reason why the US has to be the home for blockchain companies or any crypto companies.

00:21:39:04 – 00:22:18:21

Sean Stein Smith: Right? There is no underlying reason why it’s a global decentralized marketplace. And then to write and sort of the bigger picture angle here. Right. And right now, I do know that that MIT in the Boston Fed just, I think at the end of January published their their first white paper, basically outlining how the US crypto dollar could work. And so it’s really critical to also sort of point out here, right from sort of a big picture policy point of view that the one fundamental economic advantage of the US over any other country in the world.

00:22:19:00 – 00:22:25:06

Sean Stein Smith: Right. Objectively speaking, right is is the dollar being the global

00:22:27:04 – 00:23:26:09

Sean Stein Smith: reserve currency? And if and if other currencies right China, the euro, other currencies out there, if other currencies are augmented with the blockchain, attributes crypto attributes and are easier, faster, cheaper to use or can be to use, guess what’s going to happen? Our dollar is over. Time is going to become obsolete. And so I would feel really, really that outside of sort of the everyday arguments over tax treatment valuations that, on the other hand, right in the background, this is a big sort of pivot point, right? How is the US going to actually treat crypto right with with open arms as a asset, as an opportunity to innovate, to actually create? Or are we going to be heavy handed and and try to ultimately control how it develops, which never ends up being good for the marketplace, right?

00:23:26:12 – 00:23:57:19

Sean Stein Smith: And I want to say that for a second, because some cryptocurrency is international, it doesn’t have to be based here in the U.S. and like you said, right now, the strength that we have is that a lot of crypto, ultimately when you cash out is trying to be pegged back to the US dollar because and you know, the greater world right now, the dollar, the US dollar is king, but it doesn’t have to be into the future. I mean, I believe there’s been a change in the national. Currency, I believe, what every eighty to one hundred and twenty years.

00:23:57:27 – 00:24:02:23

Sean Stein Smith: And right now the U.S. is coming upon its what hundred something year. So?

00:24:04:12 – 00:24:17:09

Sean Stein Smith: And China, right now with the digital one, is truly figuring out CBDCs, figuring out how to get it done in China. All of a sudden, one day says, Hey, for you to do business with us, you have to accept our digital one. You think most countries are going to be like, No, no thanks.

00:24:18:24 – 00:24:30:00

Sean Stein Smith: Probably going to go with it and they’re going to have the infrastructure that’s in place. Yeah. So it’s one of those things where I hope the US government doesn’t allow, you know?

00:24:32:08 – 00:25:03:29

Sean Stein Smith: Themselves to get in their own way from innovation and stopping things. And I guess time will tell, but a lot of this always comes back to the money and this is why it’s an important conversation. Always had these accounting conversations with even how you are documenting and getting everything ready, because in the event that nothing changes, everyone listening, as you just heard it here from Dr. Smith, if you are not figuring out how to document everything properly, the Iris could come after you in the next two years. Twenty twenty four. And that’s not, you know, threat or to scare you.

00:25:04:01 – 00:25:07:15

Sean Stein Smith: But like as things are written in the law right now and nothing changes.

00:25:09:11 – 00:25:39:17

Sean Stein Smith: Yeah, if you’re not taking care of business, you technically become a felon overnight, and that’s a wild concept to think about. But that’s that’s where we currently are. And I’m sure there’s going to be people within our own government that will be proactive and try to get this. The language changed and not have a lot of this happened, but we are in a crucial point right now where. You always have to see your way and make sure that you are covering your tracks and do what you need to to stay in compliance.

00:25:39:28 – 00:26:09:02

Sean Stein Smith: And I know that, you know, a couple of different resources to kind of help along the way with that. Do you have some some of those different resources? I know earlier you drop gilded shards, gilded. We’ve had rain. Enjoy on the show, back on back in the day, and they’re great with being able to have payments for your company to be able to pay your employees, receive payments invoice using using crypto. But do you have other resources and things that people can do to as they run their crypto businesses, be in compliance?

00:26:10:15 – 00:26:27:08

Sean Stein Smith: Sure. So, so the top piece of advice that I always offer is to is to partner with a crypto tax company or a crypto bookkeeping company, and there are plenty out there. Coin tracker crypto tax token trader

00:26:29:07 – 00:27:02:20

Sean Stein Smith: Luka Baradei. I mean, there are plenty of firms out there whose entire business model is to help you and your business and your customers, vendors, suppliers to manage their own crypto trading, investing in banking. So that’s the piece of advice that I would that I would always give. And and obviously doing that cost a lot of money. But but the the cost and the risk of of being wrong and and not being in compliance and owing back taxes, fees, penalties.

00:27:02:22 – 00:27:11:04

Sean Stein Smith: And don’t forget, the IRS goes all the way back in twenty twenty one in some of their lawsuits versus circle and.

00:27:12:28 – 00:27:43:19

Sean Stein Smith: Cracking. They actually go all the way back to twenty fifteen. So. So the top piece of advice is to partner with companies who are experts in this area one and then two. It’s really up to all of us as entrepreneurs, business owners, investors to educate ourselves, right? Because it’s all evolving so, so fast. But the but the core point on being educated is that obviously being educated overall is always good.

00:27:43:21 – 00:28:20:07

Sean Stein Smith: But but actually prior to getting into any type of crypto activity? Right? Because it’s awfully using that there are endless NFTs. These DeFi Project Coins tokens know metaverse stuff. It’s really, really critical to understand what the economics are of that business or activity being invested into, right? Because ultimately, I can have all of the crypto stuff on top. But ultimately, the actual inputs and outputs that matter are those baseline economic components.

00:28:20:19 – 00:28:34:21

Sean Stein Smith: And so and so on the one hand, being educated overall is good, but you always have to do your homework on any investment or activity in this space, as you would any other activity or asset allocation choice.

00:28:36:12 – 00:29:02:07

Sean Stein Smith: Absolutely no. And that is everyone. Go back. Listen to that. Do it a couple times. Do what you can to be as safe and compliant as possible, especially in some of these newer areas. But something I do want to go back to because we talked about it very briefly earlier. But I know that I am even curious about tax implications around in a tease and any kind of talk about that a little bit as well. Sure.

00:29:03:07 – 00:29:36:26

Sean Stein Smith: All right. So off the top, you are going to owe taxes on benefits if you are buying them or selling them, trading them because a common comments, right? That that I’m hearing quite a bit these days is that, well, it’s an NFT. So it’s so, so it’s not like bitcoin. So I don’t know any taxes on it. That’s incorrect. Right? Again, the the IRS case, there’s a wide net over anything linked to crypto is treated as virtual assets, right? And they’re all treated as property.

00:29:37:07 – 00:30:10:00

Sean Stein Smith: OK, so if you are the creator of a NFT, if you are actually minting your own NFTs, that’s probably going to be ordinary income to you. Right, right. Because I I create the NFT, mint the NFT and then have a transaction. I sell it and I earn income off of that. That’s going to be ordinary income. If you are buying a NFT, and so here’s where you have two options. Option A, did you go to a company like or a platform like NBA

00:30:11:24 – 00:30:43:26

Sean Stein Smith: Top Shots and you can buy NFTs in US dollars? Easy stuff. But if you’re buying NFTs like a boarding right and you have to pay for that increase, that automatically means you have a tax compliance obligation and possibly a income tax payment too. Right? So dollars to ease fine so far, then eith to the NFT, that is a taxable event right there paying for that NFT in your eyes.

00:30:43:28 – 00:31:26:21

Sean Stein Smith: As a investor or a buyer, that means you owe income taxes on that. Again, ordinary income and then as that investor, if you hold it for over that, that 12 month annual period, any of your gains are then taxed at that lower cap gains rate. But if you have NFTs and those NFTs end up being classified as a collectible again as defined in the IRS code, if that is classified as a collectible on your balance sheet or in your portfolio, then it’s taxed at a higher rate.

00:31:27:22 – 00:32:01:27

Sean Stein Smith: And then plus you might depending on your own residence, you might have different state level investment taxes also. So so the whole conversation around taxes on dynasties really does. D- does does actually upend on if you are the mentor creator, the buyer investor of it. And then if you do hold it, how it’s actually shown on your portfolio as a investment or as a collectible.

00:32:02:19 – 00:32:33:02

Sean Stein Smith: And then to add some extra hot sauce here, rich right now, actually, some teas have the option to allow NFT holders investors to earn money off of those NFTs. And so then if you’re earning money off of the ownership of this NFT, how is that taxed? It depends if those payments royalties are paid in dollars tax as ordinary income.

00:32:33:20 – 00:32:54:18

Sean Stein Smith: But if they’re paid in coins or or tokens, then you have to figure out what the current market value is of those tokens. And then and then actually, do you have access to them or are those payments basically held in a escrow light? Type of holding a town until the end of that period.

00:32:56:05 – 00:33:17:13

Sean Stein Smith: So then all of that as that extra layer to it, but overall, NFTs do have tax impacts for anybody who is involved in those transactions. And so again, it’s really, really critical document stuff and to actually talk to somebody who was who is a tax expert and also knows crypto.

00:33:19:01 – 00:33:33:16

Sean Stein Smith: Oh man. So my mind blown because the first thing that comes to mind for me is like, aren’t all entities collectibles? Because if it’s one of ten thousand or one of a thousand or what, couldn’t it be argued that those are collectibles?

00:33:35:26 – 00:34:13:29

Sean Stein Smith: So, yes, and it’s also no right, right, because the IRS code section says that it can be artwork, jewelry, gems, alcohol or other assets as defined at the IRS. So it depends on actually how the NFT being purchased and held is actually being classified, right? So while it’s a quick example here, if it’s an NFT of this picture right here that is artwork and so and so that is technically a collectible.

00:34:14:09 – 00:34:26:28

Sean Stein Smith: But if it’s an NFT of a album being dropped next month, that’s not as easy to actually pin down. Is that a collectible or not?

00:34:28:13 – 00:34:37:16

Sean Stein Smith: I see. So that’d be all entities that are like the profile picture, the PPP type situations. They’d be considered art. So therefore, they’re collectibles.

00:34:39:23 – 00:34:40:10

Sean Stein Smith: I would.

00:34:42:22 – 00:34:44:20

Sean Stein Smith: I would say, generally speaking, yes. Yeah.

00:34:45:15 – 00:35:16:00

Sean Stein Smith: Interesting. So it’s just going to be at a higher tax bracket. Man, there’s just so many layers to the accounting fund that goes into this, even the fact that. Purchasing these new teas with all the conversions of that, each of those are taxable events as well. So it again looks like a lot of this is still evolving, looks like there’s still a lot of the new ones things are out there, the final one that I do want to throw out there because I believe some news came out that the IRS also decided that they aren’t going to tax airdrops.

00:35:17:20 – 00:35:21:06

Sean Stein Smith: Do you have any info on what to do about airdrops?

00:35:22:25 – 00:36:01:21

Sean Stein Smith: So the whole the whole conversation on taxes and airdrops is an area that I’ve been trying to figure out since about 2017. Right. And and that, honestly, you know, there is no hard and fast rule around airdrop taxation, right? Because on the one hand, are you an active participant? In the airdrop, meaning are you doing anything taking any action? Opening a a hyperlink? Are you taking action to then earn those AirDrop tokens or are you truly a passive recipient of these AirDrop tokens? One.

00:36:02:00 – 00:36:08:02

Sean Stein Smith: And that’s also hard to prove. Right? And then two. Is there any way to actually

00:36:09:18 – 00:36:45:07

Sean Stein Smith: externally value any AirDrop tokens, right? The the vast bulk of these AirDrop tokens have no market value and aren’t ever going to. Right? So then how do I value them? And then three, how do I actually track how the transaction history of these tokens on unfolds, right? Right. So. So a quick example there. Most people aren’t being airdropped bitcoin or EOS or XRP, Litecoin.

00:36:45:15 – 00:37:17:24

Sean Stein Smith: And so and so actually trading in these coins or tokens isn’t as liquid or as easy as as trading bitcoin or the more liquid crypto is. And so then all of that basically combines to create a very uncertain tax tax question as to how to value them and how to trace them, how to tax them, and then how to actually figure out who owns what tokens, right? The ownership valuation and then the proving of that.

00:37:18:03 – 00:37:42:22

Sean Stein Smith: I would say that I would hope that going forward that the IRS has some more clarity and has more nuance to their current commentary on it. Again, you know, the actual tax code or the IRS cues have not yet actually gotten updated. And so it’s really critical to always treat every instance, right, every individual, investor or taxpayer as its own.

00:37:44:25 – 00:37:50:04

Sean Stein Smith: Unique situation, if you’re trying to figure out, do you have taxes on any?

00:37:51:07 – 00:38:26:24

Sean Stein Smith: AirDropped tokens right now, that’s definitely good to know the well, I mean, look, there’s going to be more and more new wrinkles to throw into the equation every year, and I’m sure there’s always going to be a reason for it to bring you a follow up to unpack even more of this. But you know, the big ones to take away today, right now again, are DeFi implications and its implications and potential airdrops as well. But all the same or even how you are switching in and out of potential money, for example, if you use these DEXs, each of those are tax implications as well.

00:38:26:29 – 00:38:30:00

Sean Stein Smith: Can you quickly speak on that as well? And we’ll kind of wrap up there.

00:38:32:02 – 00:39:17:27

Sean Stein Smith: Sure. So I think DEXs are a excellent innovation and an excellent tool, but they are an absolute nightmare for any tax compliance. I saw documentation work right because if you’re trading on a DEX and it’s truly a DEX, right, there is no of or any home page to go to. And so how can you possibly trace trace your transactions on a DEX to DEX basis? In those cases, the best sort of work around that I found for now, and I do know that there are some companies working on building basically blockchain explorers to point out to to actually trace those transactions from DEX one two two three four.

00:39:18:07 – 00:40:00:28

Sean Stein Smith: But at this current time, the the best piece of insight that I would say is to try to track your transactions as they go on to DEXs and off of them and to then have that be your your your cost basis or your or your current market valuation. Now all of that is also helped by if the tokens or the coins you were trading had any external valuation and you have your own transaction records on your app or in your wallet, then then it’s a lot easier for you and your tax pro again to go through and to hopefully have a tool.

00:40:01:07 – 00:41:14:23

Sean Stein Smith: Or actually you would normally go through and actually map together your your cost basis per day per transaction because every individual has their wallet and so has their own history. And so it’s really up to the individual taxpayer. Partnering with somebody hopefully who’s an expert in the space to actually try to piece together and to map out your own transaction history. But if you aren’t able to handle that, do that or some other factor the on ramps and off ramps right as you either convert your your tokens being traded on those DEXs back into tether or into bitcoin or into US dollars, those on ramps of off ramps are at the very least a a baseline or a touch point that that can be used to help you sort of outline how much you probably owe in income taxes and and also will help you if the IRS does ever ask you for more information, right? The IRS has actually emailed out at this point, I think 50000 letters to individual of.

00:41:15:21 – 00:41:19:01

Sean Stein Smith: Taxpayers asking for more data, so.

00:41:19:17 – 00:41:49:24

Sean Stein Smith: Well, you heard it here first. There is plenty to keep unpacking in the accounting world. There’s a lot that’s going to continue to unfold. There are resources out there like Smith said, a lot of them earlier, but make sure you’re putting it out there and make it a priority this year to make your first attempts at your crypto taxes, especially if you have never paid them before, might be worth a bit a little bit of investment towards it. Trying to get your ducks in a row, do what you can to at least make sure you’re making those first steps so that you can be prepared for this tax season and all tax seasons into the future.

00:41:50:02 – 00:41:59:12

Sean Stein Smith: But again, ActionScript, thank you so much for spend some time with us dropping all this knowledge. What? What’s a final thought that you want to leave with this first? And then what are ways that people can connect with you?

00:42:01:12 – 00:42:40:27

Sean Stein Smith: Sure. So I would say that my my final thought here is that I’m a avid believer in crypto. I’m an avid investor and user of it and that yes, there are tax headaches right now, compliance headaches, whatever. But all of that is is a part of how the asset class and how the ecosystem is actually growing and actually becoming a more more mainstream. And so yes, it’s obviously a headache right now, but ultimately having transparency and clarity and more consistency will help with the asset class and all of us go further going forward.

00:42:42:14 – 00:42:52:12

Sean Stein Smith: And then as far as the as the best place to be in touch with me, I’m on Twitter at Shorenstein Smith and I’m on LinkedIn. Not shown signs, but perfect.

00:42:52:14 – 00:43:23:25

Sean Stein Smith: Well, definitely appreciate your time today. And as always, everyone, make sure you go and check out Dr. Smith and of course, stay cryptocurrency. Hey, cryptocurrency crew, we want to give a quick shout out to all of our faithful listeners out there. It’s been an amazing journey and we really appreciate your support throughout the years as we’ve been growing as a community. Each episode, we decided that we would start sharing some of the reviews that you were leaving for us for today. We would like to share this review. Today’s review comes from J. Dog. three three five great information and easy to digest. I’d recommend to anyone interested in crypto.

00:43:24:04 – 00:43:58:18

Sean Stein Smith: We sincerely appreciate this review and all reviews and would like to ask that if you’re enjoying our show, please take a quick moment to go and leave a review on our podcast so that hopefully we can be highlighting your review next. Simply go to our show notes or go to our website where we have a link, where you can share your review today. Hey, everyone, I hope you enjoyed today’s episode. For more information on today’s episode and all of our episodes, please visit us at WW w that crypto dash current, not SEO. You can also find a link in the show notes. Want to stay up to date on the latest news in cryptocurrency? Sign up for our newsletter today.

00:43:58:27 – 00:44:34:10

Sean Stein Smith: You’ll receive daily emails Monday through Friday that are personalized and curated content specific to you and your interest. Powered by artificial intelligence, you can either go to our show notes or go to our website to sign up today. Are you an accredited investor looking to invest in cryptocurrency? Quezon City Capital can help go to Quezon City Capital dot com for more information. I don’t know if you’ve noticed, but the quality of our podcast each week are improving. I can only thank my amazing producer Andrew Darida with the Ritter Productions, who has been putting all of this together. If you have any podcast music or audio needs, please go to Ritter Productions dot com.

00:44:34:12 – 00:44:38:12

Sean Stein Smith: That’s D-R.I. TR Productions dot com.

00:44:44:04 – 00:44:57:01

Sean Stein Smith: Thanks for tuning into another episode of cryptocurrency with Richard Condon. We’ll be back with more exciting developments from the world of blockchain and cryptocurrency next. But until then, stay cryptocurrency.

00:45:06:15 – 00:45:08:28

Three U.S. citizens now.

00:45:13:20 – 00:45:48:10

Thank you for joining us for another episode of cryptocurrency. Just one quick reminder cryptocurrency is a cryptocurrency and blockchain education platform that’s bridging the gap between the curious newcomers who are just discovering the space and the thought leaders who are shaping its future. All opinions expressed by Richard Carson, the cryptocurrency team, and their guests on this show are exclusively their own opinions. You should not treat any opinion expressed by Richard. The team and their guests as a specific inducement to make a particular investment or to follow his financial advice. This show and any other cryptocurrency production is exclusively for informational purposes.