Drew Hinkes

Gaps In Guidance (02:00):

“The guidance that we got in 2014 was excellent by 2014 standards. It demonstrated that the IRS fundamentally understood what these assets were, how they were used, and it demonstrated some thoughtful decision making by the IRS. That being said, we’re in 2019 and the crypto world looks very different. We have a variety of different products that didn’t exist at the time, including ERC-721 NFTs and securities offered in tokenized form.”

“[The guidance] is showing its age based on certain things that don’t make sense anymore or certain things that were left out. The first two that I’ll mention are airdrops and forks. These were not really part of the crypto lexicon in 2014.”

FIFO? LIFO? Calculating Your Gains (08:38):

“The reality is we need to know which way the IRS wants us to value these assets. There are essentially three options here. You can do LIFO, FIFO, or moving average, which is something that we see more in mutual funds. Obviously the decision as to which strategy to use is impactful, since it can change a short-term gain into a long-term gain.”

FBAR Filing and “Foreign” Investments (17:50):

“Let’s assume that I own a Bitcoin. Where is it? It’s not immediately clear because Bitcoin and similar crypto assets are a fundamentally different form of property than we’re used to dealing with.”

“My argument is that the asset exists on the Internet, which is kind of everywhere and nowhere at once. So when you start to think about where is a Bitcoin, you end up with this really confusing question of how can an asset that’s everywhere and nowhere at once exist in a specific jurisdiction?”

Crypto State Regulations (23:35):

“Most of the attention has been paid to what the federal law requires us to do with respect to paying taxes. But kind of flying under the radar has been a bunch of state laws that take a variety of different approaches to crypto. For instance, Michigan, Missouri and Wisconsin have said virtual currency is not taxable service or tangible property subject to sales tax. So in those jurisdictions you may not have any state sales tax obligations at all.”

“You’ve got about 35 or 40 states that are moving to capture remote nexus sales tax transactions, which like I said, may incidentally include crypto. You’ve got bills in places like Arizona where they would want to add income derived from exchange of virtual currency for other currencies to the computation required for state gross income. And then you’ve got a bunch of sort of one off oddball bills. Nevada passed a law that banned local governments from taxing blockchain use. I’m not exactly sure what that means…”

Asset Valuation and Fair Market Value (35:30):

“You’re supposed to value your virtual currency assets based upon the fair market value, which means not necessarily the price you paid, but the actual value based on the guidance you’re given. It tells us that we’re supposed to report the value in US dollars, that we’re supposed to determine the fair market value of virtual currency in US dollars as the date of payment or receipt. If it’s listed on an exchange and the exchange rate is established by market supply and demand, we’re supposed to convert the virtual currency into US dollars at the exchange rate in a reasonable manner that is consistently applied. Now the lawyer in me can cut that up into a thousand pieces and make it mean a hundred different things.”

“What this ends up with is a situation where a bunch of like-minded people, who want to comply,  come up with drastically different methodologies that results in different values. This results in different amounts of tax paid, and that doesn’t seem right. What I have suggested, and what I think is right, is that we should look at the tax guidance that’s used for securities that are traded on multiple different securities exchanges. That tax guidance suggests that we’re supposed to look at the exchange that has the highest amount of volume and use that value, which could make sense here. However, we might also see that people for some reason are making transactions where the value that they’re getting for crypto assets is wildly out of sync with the actual market value.”

“The fair market value is essentially the price at which the property would change hands between a willing buyer and a willing seller, and the former is not under any compulsion to buy in, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. So I would posit the question back to you. How many crypto transactions are a fair market value transaction? I’d say almost none because I have no idea with whom I’m transacting. I don’t know if the person is under compulsion to deal because they have recently had health problems and have massive medical bills. I don’t know whether a person has a gun to their head and they’re being made to make a transaction so that they can go get cash. I have no idea whether the person understands crypto the way that I do. I don’t know their circumstances at all.”