IRS to Limit Probe into Coinbase User, US Court Advises ...

US Tax Guide for ETH and other cryptocurrencies

Introduction:  
Greetings, fellow ethtraders! Happy New Year! In the next few months, taxpayers across the US will be filing their 2017 tax returns. As an Enrolled Agent and a ETH/cryptocurrency investor and enthusiast, I wanted to write up a brief guide on how your investments in ETH and other cryptocurrencies are taxed in the US.
 
 
1. Are ETH/cryptocurrency realized gains taxable?
Yes. The IRS treats virtual currency (such as cryptocurrency) as property. That means if you sell ETH, BTC, or any other cryptocurrency that has appreciated in value, you have realized a capital gain and must pay taxes on this income. If you held the position for one year or less, it is a short-term capital gain which is taxed at your ordinary income tax rate. If you held the position for more than one year, it is a long-term capital gain which is taxed at your long-term capital gains tax rate. In most cases, this is 15%, but could also be 0% or 20% depending on your specific ordinary income tax bracket.
 
2. If I sell my ETH for USD on Coinbase but do not transfer the USD from Coinbase to my bank account, am I still taxed?
Yes. The only thing that matters is that you sold the ETH, which creates a taxable transaction. Whether you transfer the USD to your bank account or not does not matter.
 
3. If I use my ETH to buy OMG or another cryptocurrency, is this a taxable transaction?
Most likely yes. See #4 below for a more detailed explanation. If assuming crypto to crypto trades are not able to be like-kind exchanged, then continue on to the next paragraph here.
This is actually two different transactions. The first transaction is selling your ETH for USD. The second transaction is buying the OMG with your USD. You must manually calculate these amounts. For example, I buy 1 ETH for $600 on Coinbase. Later on, the price of 1 ETH rises to $700. I transfer that 1 ETH to Bittrex and use it to buy 37 OMG. I have to report a capital gain of $100 because of this transaction. My total cost basis for the 37 OMG I purchased is $700.
 
4. If I use my ETH to buy OMG or other cryptocurrency, could that be considered a tax-free like-kind exchange?
Probably not. The new tax law says that like-kind exchanges only pertain to real estate transactions. This was done with Section 13303, which replaced “property” with “real property” for all of Section 1031 (page 72 near the bottom). My personal interpretation:
In 2018 and going forward, cryptocurrencies can definitely not be like-kind exchanged.
In 2017 and before, it is a very gray area. I personally am not taking the position that they can be like-kind exchanged, because if the IRS went after a taxpayer who did this, the IRS would probably win and the taxpayer would owe taxes, interest, and probably penalties on every single little gain made from trading one cryptocurrency for another.
Here is a great interpretation of why trading cryptocurrency for cryptocurrency is probably not a like-kind transaction.
In my opinion, the biggest factor is that like-kind exchanges must be reported on Form 8824 and not just ignored. Therefore, if a taxpayer is claiming like-kind exchanges on crypto to crypto exchanges, he or she would have to fill out a Form 8824 for each individual transaction of crypto to crypto, which would be absolutely cumbersome if there are hundreds or thousands of such trades.
Here is another article about like-kind exchanges.
Here is the American Institute of CPAs' letter to the IRS, dated June 10, 2016, asking them to release guidance on whether crypto to crypto can be like-kind exchanged or not. The IRS has not responded to the letter.
 
5. How do I calculate the realized capital gain or loss on the sale of my cryptocurrency?
The realized gain or loss is your total proceeds from the sale minus what you purchased those positions for (your cost basis). For example, you bought 1 ETH for $300 in June of 2017. In December of 2017, you sold that 1 ETH for $800. Your realized gain would be $800 - $300 = $500. Since you held it for one year or less, the $500 would be a short-term capital gain taxed at your ordinary income tax rate.
 
6. Which ETH's cost basis do I use if I have multiple purchases?
The cost basis reporting method is up to you. For example, I buy my first ETH at $300, a second ETH at $530, and a third ETH at $400. Later on, I sell one ETH for $800. I can use:
FIFO (first in first out) - cost basis would the first ETH, $300, which would result in a gain of $500.
LIFO (last in first out) - cost basis would be the third ETH, $400, which would result in a gain of $400.
Average cost - cost basis would be the average of the three ETH, $410, which would result in a gain of $390.
Specific identification - I can just choose which coin's cost basis to use. For example, I can choose the second ETH's cost basis, $530, which would result in the lowest capital gains possible of $270.
 
7. If I end up with a net capital loss, can I claim this on my tax return?
Capital gains and capital losses are netted on your tax return. If the net result of this is a capital loss, you may offset it against ordinary income on your tax return, but only at a maximum of $3,000 per year. The remaining losses are carried forward until you use them up.
 
8. What is the tax rate on my capital gains?
If long-term, the tax rate is 0%, 15%, or 20%, depending on your ordinary income tax bracket. If short-term, the tax bracket you’ll be in will depend on your total income and deductions. The ordinary income tax brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% in 2017 and 10%, 12%, 22%, 24%, 32%, 35%, and 37% in 2018 and going forward.
Here are the 2017 and 2018 ordinary income tax brackets.
Here are the 2017 and 2018 long-term capital gains tax brackets.
Here is a detailed article on how the calculation of long-term capital gains tax work and how you can take advantage of the 0% long-term capital gains rate, if applicable.
 
9. If I mine ETH or any other cryptocurrency, is this taxable?
Yes. IRS Notice 2014-21 states that mining cryptocurrency is taxable. For example, if you mined $7,000 worth of ETH in 2017, you must report $7,000 of income on your 2017 tax return. For many taxpayers, this will be reported on your Schedule C, and you will most likely owe self-employment taxes on this income as well. The $7,000 becomes the cost basis in your ETH position.
 
10. How do I calculate income for the cryptocurrency I mined?
This is the approach I would take. Say I mined 1 ETH on December 31, 2017. I would look up the daily historical prices for ETH and average the high and low prices for ETH on December 31, 2017, which is ($760.35 + $710.12) / 2 = $735.24. I would report $735.24 of income on my tax return. This would also be the cost basis of the 1 ETH I mined.
 
11. Can I deduct mining expenses on my tax return?
If you are reporting the income from mining on Schedule C, then you can deduct expenses on Schedule C as well. You can deduct the portion of your electricity costs allocated to mining, and then you depreciate the cost of your mining rig over time (probably over five years). Section 179 also allows for the full deduction of the cost of certain equipment in year 1, so you could choose to do that if you wanted to instead.
 
12. If I receive ETH or other cryptocurrency as a payment for my business, is this taxable?
Yes. Similar to mining, your income would be what the value of the coins you received was. This would also be your cost basis in the coins.
 
13. If I received Bitcoin Cash as a result of the hard fork on August 1, 2017, is this taxable?
Most likely yes. For example, if you owned 1 Bitcoin and received 1 Bitcoin Cash on August 1, 2017 as a result of the hard fork, your income would be the value of 1 Bitcoin Cash on that date. Bitcoin.tax uses a value of $277. This value would also be your cost basis in the position. Any other hard forks would probably be treated similarly. Airdrops may be treated similarly as well, in the IRS' view.
Here are a couple more good articles about reporting the Bitcoin Cash fork as taxable ordinary income. The second one goes into depth and cites a US Supreme Court decision as precedent: one, two
 
14. If I use ETH, BTC, or other cryptocurrency to purchase goods or services, is this a taxable transaction?
Yes. It would be treated as selling your cryptocurrency for USD, and then using that USD to purchase those goods or services. This is because the IRS treats cryptocurrency as property and not currency.
 
15. Are cryptocurrencies subject to the wash sale rule?
Probably not. Section 1091 only applies to stock or securities. Cryptocurrencies are not classified as stocks or securities. Therefore, you could sell your ETH at a loss, repurchase it immediately, and still realize this loss on your tax return, whereas you cannot do the same with a stock. Please see this link for more information.
 
16. What if I hold cryptocurrency on an exchange based outside of the US?
There are two separate foreign account reporting requirements: FBAR and FATCA.
A FBAR must be filed if you held more than $10,000 on an exchange based outside of the US at any point during the tax year.
A Form 8938 (FATCA) must be filed if you held more than $75,000 on an exchange based outside of the US at any point during the tax year, or more than $50,000 on the last day of the tax year.
The penalties are severe for not filing these two forms if you are required to. Please see the second half of this post for more information on foreign account reporting.
 
17. What are the tax implications of gifting cryptocurrency?
Small gifts of cryptocurrency do not have a tax implication for the gift giver or for the recipient. The recipient would retain the gift giver's old cost basis, so it could be a good idea for the gift giver to provide records of the original cost basis to the recipient as well (or else the recipient would have to assume a cost basis of $0 if the recipient ever sells the cryptocurrency).
Large gifts of cryptocurrency could start having gift and estate tax implications on the giver if the value exceeds more than $14,000 (in 2017) or $15,000 (in 2018) per year per recipient.
Here's a good article on Investopedia on this issue.
An important exception applies if the gift giver gives cryptocurrency that has a cost basis that is higher than the market value at the time of the gift. Please see the middle of this post for more information on that.
 
18. Where can I learn even more about cryptocurrency taxation?
Unchained Podcast: The Tax Rules That Have Crypto Users Aghast
IRS Notice 2014-21
Great reddit post from tax attorney Tyson Cross from 2014
 
19. Are there any websites that you recommend in helping me with all of this?
Yes - I have used bitcoin.tax and highly recommend it. You can import directly from an exchange to the website using API, and/or export a .csv/excel file from the exchange and import it into the website. The exchanges I successfully imported from were Coinbase, GDAX, Bittrex, and Binance. The result is a .csv or other file that you can import into your tax software.
I have also heard good things about cointracking.info but have not personally used it myself.
 
20. Taxation is theft!
I can't help you there.
 
 
That is the summary I have for now. There have been a lot of excellent cryptocurrency tax guides on reddit, such as this one, this one, and this one, but I wanted to post my short summary guide on ethtrader which hopefully answers some of the questions you all may have about US taxation of ETH and other cryptocurrencies. Please let me know if you have any more questions, and I’d be happy to answer them to the best of my ability. Thank you!
Regarding edits: I have made many edits to my post since I originally posted it. Please refresh to see the latest edits to my guide. Thank you.
 
Disclaimer:
The information contained within this post is provided for informational purposes only and is not intended to substitute for obtaining tax, accounting, or financial advice from a professional.
Any U.S. federal tax advice contained in this post is not intended to be used for the purpose of avoiding penalties under U.S. federal tax law.
Presentation of the information via the Internet is not intended to create, and receipt does not constitute, an advisor-client relationship. Internet users are advised not to act upon this information without seeking the service of a tax professional.
submitted by Nubboi to ethtrader [link] [comments]

BitcoinTaxes Podcast: Crypto Audits w/ Alex Kugelman

BitcoinTaxes Podcast Link
TLDR; Alex Kugelman, a tax controversy lawer, discusses crypto audits and how to avoid them.
Highlights:
IRS audits are a real possibility for anyone who has traded cryptocurrencies. Our guest today is Alex Kugelman, a tax controversy lawyer with an abundance of knowledge concerning cryptocurrency audits. He's here to share his expertise on IRS cryptocurrency audits, including risk reduction strategies as well as enforcement predictions and misconceptions.
Alex Kugelman specializes in IRS audits. His experience includes four years of Federal government court experience at the U.S. Tax Court and a U.S. District Court. [00:40]
Alex: I'm an attorney out in California. I clerked for a US District Court judge and as well as the United States Tax Court. I've been in private practice exclusively doing tax controversy work for the past five years or so. I kind of got involved with crypto towards the end of 2016. I tended to represent clients mainly with compliance & disclosure issues with respect to cryptocurrency. I just really like it. Really interesting area.
The Coinbase summons in 2018 played a major role in Alex's interest in crypto audits. [01:19]
Alex: What started me into the crypto space was when the IRS first issued summons for Coinbase. We started getting some interesting calls regarding that. And at that time I thought to myself, this might be an interesting area. So I started following the actual summons enforcement proceeding at the District Court here in San Francisco - from there kind of worked with people under different types of compliance, including international disclosures. Now we're starting to see some of the first cryptocurrency audits come through.
First, let's get a brief rundown of how IRS audits work. [02:00]
Alex: It is important to understand the IRS as an administrative agency and all different layers of it. So when it comes to an audit the term that the IRS uses is an examination and there's three basic levels.
The first is a correspondence exam. That's where you get a letter that says, dear taxpayer, so-and-so reported that you had $100 of interest income that wasn't on your tax return - we're going to increase your tax. If you want to challenge that, you can. And that's basically termed an under reporter notice. That's probably not going to be a cryptocurrency audit if you get that notice.
The next one is an office exam. That is someone in the local IRS office sending you a letter that says, we have selected a certain tax return for audit and we're going to look at these issues. We'd like you to call us to schedule an appointment. That's going to be usually a tax compliance officer that is doing that.
The third and probably the most serious level of exam is a field examination. That's also going to be a local IRS representative, typically a revenue agent. There, the revenue agent may come to your work or ask come to your work or business to kind of conduct the audit.
All three of those are going to start the same: a letter that's sent to you at your most recent address provided to the IRS.
Cryptocurrency audits follow a similar protocol. [05:40]
Alex: I think it's likely that most crypto audits are going to start with one of two things happening. One is that there is information from the Coinbase summons that is inconsistent with what was on a taxpayer's tax return. I think for someone who's involved with that issue, they're going to have a good sense of that one because they should've gotten an email notice from Coinbase.
Or two, the audit notice is going to identify older tax years - 2013, 2014 or 2015 because those are the years that the information related to.
Another reason I think people will get audited is going to be because information on the return is incomplete, in the sense that the taxpayer or the cryptocurrency owner reports some transactions, without enough detail to figure out the actual cost basis.
Does reporting your data in an aggregated fashion increase your chances of being audited? [06:45]
Alex: I mean one - to the extent that there's going to be a lot of taxpayers - a lot of people use TurboTax, right? If that's the way TurboTax is preparing all of those returns, it would seem to me you're kind of in a herd of people like that. And at least it's consistent with what a lot of people are doing. The second part of that is going to be at least those people who have prepare the returns in that manner, they're going to, or should have, the underlying data. So even if it's an aggregate reporting of each asset class as opposed to each individual trade, if there ever were questions then you're going to have your CSV files, you're going to have your Bitcoin.tax exports, you're going to have all the information that you need to back that up.
Alex is an advocate of over-reporting your information to the IRS. [09:30]
Alex: I'm a big proponent of over-reporting - and I don't mean paying too much tax. I just mean including too much information. Because at some point there's kind of two ways that your returned can be flagged: a computer flags the return for some reason or there's a special unit or a person who actually flags it. At the end of the day, a human being will be looking at that return and deciding whether it actually is going to go all the way through to an audit. I want them to completely understand what's being reported, why it's been reported, and if there's too much information, that's fine - it's less likely that someone's going to have more questions.
A crypto audit is very likely to be a field exam - and it's important to hire a good rep. [11:00]
Alex: It's very likely going to be a field exam, which means you're going to have a revenue agent - and those are kind of the best of the best auditors for an IRS audit. And remember - an IRS audit is a civil matter. It is not criminal at this point. Again, it's unlikely that it will become criminal. It is, however, the highest level of audit you're going to get.
If you're going to hire a representative, which you have every right to do, you should contact that person, let them know what's going on and probably have them interface with the auditor. You should receive, as part of the opening notice or letter, the information document request - which is identifying what things to bring for the auditor. Also, it'll tip to what topics might be important. For example the typical things you're going to see will be bank statements, financial or asset account statements, which I view as requesting exchange statements or exchange CSV files. Any documents that show the cost basis for your cryptocurrency trades.
Audits are more art than science. [13:35]
Alex: The auditor has a fair amount of power. So if you play real hardball - that's not going to prevent the auditor from expanding to other years. So when you get that audit notice ,and let's say that you're going to deal with this yourself, the first thing you want to kind of figure out is what are the areas that I wouldn't want to go into, and what are the areas that I don't have good records? That will help guide the way to respond or what information to pull together.
The reality is, and let's just be honest here - for most people reporting cryptocurrency gains, they have all of the information. The IRS does not have much. They might have some records from Coinbase, but it's not as if they have a treasure trove of third party data.
The burden is really going to be, in every audit, on the taxpayer to prove their tax return is correct.
It's difficult to say how lenient the IRS will be regarding past years. [15:35]
Alex: I think the way that I would look at it is that maybe the standard of of records required to really substantiate older years might be a little bit lower for older years as opposed to now because it's different now. There's a lot better information provided by some of the exchanges. There's a lot more software out there to help you, especially for people who are newer to crypto. You should have access to all your bank records. You should still have a lot of emails, reflecting on-ramping off-ramping, or other purchases. You should be able to kind of pull this all together.
I can understand when we have clients who come in and are early adopters and they're missing chunks of information. So I do think that in those types of circumstances, yes, I think there would be a little bit of leniency. But I don't think if you're asking, hey, I reported my gains in 2017 but I never really did it 14, 15 or 16 - I don't think that's going to be viewed very favorably.
It is possible to substantiate your data without all of your records. [19:00]
Alex: I think the first thing is, I mean, outside of cryptocurrency and just generally in audits, how many people have complete records to support everything on their tax return from three years ago? Right? It's just not the reality.
The best source of information in a lot of these cryptocurrency clients are the clients themselves. They kind of know what they did and they can remember. There's some who take good notes and other people don't, but as you go through and ask people: what exchanges have you've been on, what type of coins, if you bought any ICOs, have you ever sold for actual US cash, and have you ever bought goods or services? As you talk through things people tend to recall what happened. We use that information and we cross check that against bank statements, as well as CSV files, to pick out what those transactions look like.
Most people have some sort of records, at least reflecting the transfer in and the transfer back out of that exchange. So you can use historical data and historical pricing information to essentially estimate what that transaction would have been. And then what we do is we provide a written statement summary of what we're doing and why we're doing it.
The other big one that we see all the time - and anybody listening to this, please hear this, do not trade for your friends on your exchange accounts - because that type of commingling causes such major problems. Essentially you are walking into those taxable gains just because you're allowing someone access to the exchange to make sales.
If you need representation for an audit, get representation. [23:00]
Alex: My general rule is that I think experienced representatives are really important. I probably would not hire the CPA that prepared my return unless they were: one, experienced with being a representative in audits. And two, you felt comfortable that they weren't going to go in there with a conflict of interest. But I do think if you're worried about going into audit - hiring a skilled, and experienced rep is really, really important.
If they're experienced with this, they should understand the appropriate ethical standards and go in there and essentially help resolve portions of the audit and move it to a resolution that you can deal with.
Taxpayers actually have a lot of leverage in an audit. And that sounds crazy to say, but there is a lot of truth to that. And so as you're kind of working through the audit itself, you want to make sure that you're not just agreeing to something to be done with it. You're not agreeing to something just because you think that you'll get in more trouble or get a worse result otherwise.
There are important risk-reduction strategies you can utilize to avoid a crypto audit. [28:15]
Alex: The first thing that you really want to do, is just assess; for those of you that are really worried about an audit - just assess what it is you've actually done over the years. When did you start trading, what exchanges were you on, do you have records that reflect on-ramping and off-ramping? And that's going to be your bank account statements. Do you know where you've been, what exchanges you've been on?
For foreign exchanges, there may not be as much of that AML & KYC compliance, but I really believe that you do have reporting requirements under FATCA for FBAR and something called an 8938, which if you listen to the podcast with Tyson, he kind of explains what that is. But it's basically if you have ownership of a foreign bank account or asset, you have certain reporting requirements, whether you've had income or not.
You want to make sure you at least track when you've actually exchanged crypto for cash or vice versa. That's partly because that's one of those areas where when people can get in trouble with some sort of federal investigators - because those types of transactions can be potentially considered money laundering.
For those who believe that they've used like-kind exchange rules to defer taxable gains -you should look on your tax returns to see if you filed the form 8824, which is where like kind exchanges are actually reported. That kind of goes back to the over reporting issue I was talking about before. I think that if you didn't report the actual trades that you're taking like-kind treatment for in past years, I don't know that you've actually taken like-kind treatment to be frank with you. I think, objectively, that might be viewed as just not reporting certain transactions.
You want to make sure that you address these issues sooner rather than later.
1099-K forms can be misleading - to the recipient and, potentially, the auditor. [32:40]
Alex: A 1099-K is actually a merchant processing third party information returns. And it really is typically associated with people who have credit card sales - so it's going to reflect a gross amount and typically on a monthly basis.
It shows the gross amount and what I've seen too is that sometimes transfers actually get caught into that amount as well. So it's not even just gross sales or purchases - it may have other information. So the 1099-K can be really inflated. That's why reconciling that against accounting records is really, really important because that is one of those issues that I think could lead to an exam.
To those who think crypto isn't beholden to tax laws: you are not correct. [37:38]
Alex: The current commissioner of the IRS is Charles Rettig, and he's a really well known practitioner in tax controversy. I know from people that know him well, that he's actually mentioned Reddit as one of the reasons that cryptocurrency enforcement is his number one enforcement priority right now.
The other person that I've seen speak a couple of times is the head of the IRS Criminal Investigation Unit. His name is Don Fort and every year he does a presentation at the National Tax Controversy and Criminal Tax Conference. The last two years cryptocurrency has been number two and number one on his list. As much as the IRS lacks the funding and the manpower that it needs for all the enforcement, the IRS CI are really, really good and they are probably best agency at dealing with cryptocurrency enforcement issues.
I really think that it's gaining steam and I think once the audits from the Coinbase summons kind of get going, I think it's going to be a really scrutinized area. I think the people who have gone through the cost and the pain of disclosing and amending returns and doing everything they can will be happy that they did in a couple of years. I think the other people are going to be sweating it out - I don't know if it's ever really worth it to be honest with you. I would recommend people do their best to get in compliance.
In summary: do your best to report your crypto gains and losses - and don't try to pull one over on the IRS. [42:36]
Alex: For people who have potential issues with past years, one is getting a consistent record and just amending your past years, so they're consistent.
For people who have the foreign account issues - let's just say, for example, had an account with Binance, and that Binance account was never reported. The IRS has disclosure programs that allow you to amend certain returns, pay the tax that you report and pay a penalty, which would be 5% of the the highest account value that you have.
For people who don't want to deal with this, I think taking evasive steps is the best way to get the worst result possible. One of the things that I learned very early in dealing with audits and tax compliance, is that you can always make things worse. I think you really just want to address it and resolve the issue while you have a good opportunity.
We may see criminal prosecution of some of the "big fish" tax evaders from the Coinbase summons. [46:43]
Alex: Yeah, and I think the two things that I'm fairly certain we're going to see: one is we're going to see the IRS use the information provided by Coinbase to start auditing the biggest account holders from that period. I think that's very likely.
Probably the second one that I would say is very likely is that you're going to see limited criminal prosecutions related to cryptocurrency. And these are going to be people that have some sort of level of notoriety, whether actually famous or maybe famous in the cryptocurrency world. That's typically how the IRS and Department of Justice uses limited resources to prosecute criminal tax tax crimes.
Alex is a great guy to reach out to with any audit-related questions, crypto or otherwise. [48:50]
Alex: You can go to my website: www.kugelmanlaw.com. You can email me at [email protected]. I have clients all over the country, international clients. If you need any sort of help, whether that's representing you, or at least doing the nitty gritty audit investigation, we're always willing to talk to people and help them out as best we can.

If you enjoyed our podcast, be sure to check back frequently for more great discussions about a range of topics in the crypto space. If you have any questions for Alex Kugelman, or want to schedule a consultation with him, he can be reached via his website www.kugelmanlaw.com, or via email at [email protected].
If you would like to request a topic for an interview, or have any questions related to this podcast, be sure to reach out to us at [email protected].
submitted by Sal-BitcoinTax to bitcointaxes [link] [comments]

Bitcoin: understand, buy and sell crypto currencies.

Bitcoin: understand, buy and sell crypto currencies.

https://preview.redd.it/4tibwd36tdn31.jpg?width=1280&format=pjpg&auto=webp&s=e025c8df96392f897f44e164920a9246b34ecd4b
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submitted by TubeNerd92 to u/TubeNerd92 [link] [comments]

Consensus Network EP35: Cryptocurrency and Asymmetric Risk with Teeka Tiwari

Catch the full episode: https://www.consensusnetwork.io/podcastepisodes/2019/9/8/ep35-cryptocurrency-and-asymmetric-risk-with-teeka-tiwari
Buck: Welcome back to the show everyone. Today my guest on Wealth Formula Podcast is no stranger to the show. He's a guy who grew up in foster care and came over the US at the age of 16 with just 150 bucks in his pocket and the clothes on his back. And then by the age of 18 becomes the youngest employee at Lehman Brothers. By 20 he becomes the youngest vice president in Lehman history. Later in his career he goes on to launch successful hedge fund and lived the Wall Street dream. I mean he's known on Wall Street as the guy who's made a fortune on what is known as asymmetric risk which is what we’re going to talk about in quite a bit and for the rest of us, for many of us that is, he is best known for being the editor of the Palm Beach confidential newsletter which focuses on digital currencies and I am a subscriber to this by the way. Teeka, welcome back to Wealth Formula Podcast, Teeka Tiwari.
Teeka: Thanks Buck. It’s a pleasure to be here and thank you for having me.
Buck: Yeah so you know you were on not too long ago and some people are listening to the stuff about cannabis and they're probably thinking to themselves, why is this guy talking about cannabis and digital currencies like what is his specialty? In fact the way I'm thinking about this there's one main thing that they have in common, they're both in this area that you call and we call asymmetric risk which is really your thing. Discuss what that means and if you would how have you applied it to your own growth and ultimately to your own wealth.
Teeka: So before I get into asymmetric risk I want to talk about how I discovered asymmetric risk and how I changed the way that I yeah. So when I was in my 20s I developed a lot of wealth by taking massive risk in the stock options and commodities market. And I would bet huge positions. And then that all came to an end in the late 90s when I was on the wrong side of a series of trades that were triggered by the Asian financial crisis which ultimately compelled me to file for bankruptcy. And so I had lost about ten years of wealth creation which was considerable at the time. And what I learned was that I had to change my approach that I couldn't get it all every single time otherwise I would never get off this boom-and-bust merry-go-round. So what I realized was is that I would I would build the portfolio of somewhat safer more income oriented investments and then I would focus on these ideas that are called asymmetric risk trade. So what's an asymmetric risk trade? An asymmetric risk trade is where you can take a relatively trivial sum of money and if the idea doesn't work out it doesn't impact your net your net worth or your day-to-day lifestyle in any way shape or form. But the asymmetric part of it is is that if it does work out it can absolutely move the needle on your net worth. So an example of that would be something like neo which I recommended at around 12 cents that ended up going up to about a hundred and sixty one dollars so that's something that you could have put a thousand dollars in and turn it into over a million dollars. That's a classic asymmetric trade. So what I what I tell my readers is you can't build your whole portfolio around high-risk asymmetric trades. But if you take let's say five to ten percent of your liquid net worth and allocate it to these types of situations in a and one of the things I talk about is using uniform position sizing, what you put yourself in the position to do is absolutely grow your network sometimes three four five six X without putting your current lifestyle at risk and it is a sweet spot of wealth creation that I've created and popularized now for several years that has not only transformed my financial life but the financial life of many of my readers.
Buck: So as you know Teeka my group the Wealth Formula Group in general I mean there's a lot of people who are well-to-do they're you know accredited investors they have you know typically probably more money to invest than others they're you know and I say this because there is a little bit of a difference there when it comes to somebody who's barely getting by living check to check, that there is an opportunity in your portfolio to say okay what percentage of this portfolio could I put in that I mean listen if I lose it no big deal I mean I won't be happy about it but it won't hurt me that much on the other hand this could explode. Now when you look at it from the perspective of somebody who's got a fair amount of money and link who's investing you know several hundred thousand dollars a year or maybe a million dollars or something like that like what do you think is a reasonable amount of a portfolio? Like I know for example that even universities are getting into this and they're looking at hey maybe you know 1/2 of 1% or something like that I mean I know you're not in the business of giving financial advice but I'm just curious kind of what your approach would be in terms of allocation.
Teeka: So again generally speaking I would say 5 to 10% of your liquid net worth. So let's say you've got a business that kicks out a million a year that you have to allocate for your investment 50 to $100,000. Definitely nobody likes to lose 50 or a hundred thousand dollars but it's not going to have a material impact on your lifestyle but if you invest 50 to $100,000 and these asymmetric bets pay off you're talking about five six seven eight ten twelve million dollars in returns on what is a relatively tiny investment relative to your net worth and that is the beauty of this approach.
Buck: Yeah and and I'm glad you said that because that's exactly kind of where I'm at sort of lingering between five and ten percent you know and for me you know I I kind of put this in there about you know I kind of put this in that area with startups right I'm not gonna I'm not gonna have a separate category just for digital currencies but anything that is super high risk and high reward and I'm sitting about five or ten percent.
Teeka: That all goes into the same bucket so that's right that for everybody it's not just oh this is crypto currencies five to ten percent and startups is five to ten percent. No all go into the same bucket is asymmetric risk.
Buck: Yeah now okay so we kind of got ahead of ourselves and you know you haven't been on the show talking about crypto currency in a fair amount of time we have a lot more new listeners now so for those who know very little about cryptocurrency but they're smart they're sophisticated say they're a group of you know I know worth investors you're talking to you they've not heard about this how do you explain this in the most efficient way possible and what the significance of it is?
Teeka: Okay so that's a really big question.
Buck: Yeah no I don't but I bet you've answered it a few times.
Teeka: I'm gonna take a shot at it. So listen as a wealthy investor myself why would I want to bother with cryptocurrency? I'm already rich why do I want to mess around with this? So I'm gonna answer it from that perspective. One it's always nice to make more money. But two the bigger reason is, is what I want people to understand especially wealthy investors is that it's very rare to invest at the beginning of a brand-new asset class very very rare right it's brand-new asset classes though just don't come about. Digital currency is a brand-new asset class that has legs. So why does it have legs? It has legs because we have never had an asset class that is completely non correlated with the business cycle. It's never existed before. Every asset class in the world is somehow tied to the business cycle gold, industrial, metals, currencies, stocks, bonds, they're all tied to the business cycle in one way shape or form things like Bitcoin are not so why why does that make it valuable it makes it valuable because if you are pension fund you're allocating capital across traditional and non-traditional assets you still have this problem of deep correlation right the business cycle falls apart and you're taking hits across the board. So there have been studies that have shown just with a small allocation of Bitcoin anywhere from one to five percent across the portfolio even though Bitcoin is wildly volatile because it is not correlated and not tied to the business cycle it actually reduces your overall volatility and your overall risk in your portfolio and that is incredibly valuable. So just from a high level portfolio construction standpoint you will see the world's hedge funds, pension funds, massive allocators of capital start to move tiny slivers of their money into things like Bitcoin and we're talking tiny slivers of an 80 trillion dollar pie right it's in real terms its enormous money in relative terms relative to what they have under management it's a small amount but when you're coming off a base where the whole markets only worth 300 billion it doesn't take much to move the market. So that's from the high level that's why you must have some cryptocurrency. And then the next level beyond that is that mankind has never had an asset there's never been an asset we're a stronger man couldn't take it from a weaker man. So whether it was the caveman knocking one guy over the head for his shells or the government coming in in Venezuela and confiscating money or the Argentinian government saying oh we're having a holiday and taking all your assets from the bank something Brazil has done on multiple occasions. You know the everyday person has not had this ability to hold an asset that has been beyond the confiscationability of a government so something like Bitcoin and digital currency if you are smart and how you buy it if you don't talk about it you buy quietly and you store it appropriately it is absolutely impossible short of somebody putting a literally putting a gun next to your head for them to take that asset from you and that is remarkable because even if you've got a million dollars in gold and you somehow manage to hide it how are you gonna travel the world with a million dollars in gold how are you gonna spend a million dollars in gold you just gonna go to the store and break a piece off with a piece of pliers you just can't do that the beauty of digital currency is you can walk around with a thumb drive that big with a billion dollars in it and nobody knows and let's say hey oh I don't want to keep a billion in Bitcoin I want to do it in a stable coin fine put it in a stable coin. But this idea this portability of money and this complete ownership of an asset that nobody else has any ability to take from you that is valuable that is incredibly valuable.
Buck: So let me ask you a what may seem like a very basic simple question but I think it's worth asking. So why is it so volatile why is Bitcoin Ethereum for example why these are the major the two biggest by market cap why are they so volatile and you know to the extent that they are uncorrelated do you see that as a function of the size of the market cap or is it something else inherent about digital currencies that makes it this volatile?
Teeka: I think it's both. One they're relatively small so if for instance if you look at Microsoft in its early days it was a crazy volatile stock up 40% down 40% down 30% going through bear markets that lasted two years wrecking billions of dollars in value you look at the early days of Microsoft from the 80s into the mid 90s the stock was all over the place and then as the stock got bigger and more mature of course volatility tamp down so you will see that. So what I say with volatility is that welcomed that volatility without it the opportunity to make enormous amounts of money off a small amount of money won't exist. At some point Bitcoin and the theorem will move to this more blue chip status where maybe you make eight percent a year or six percent a year or something or something like that thank goodness we're not there yet. The other side of it is is that there you know the markets that are built around trading these are completely unregulated. They're wild. And there's all types of crazy manipulation that goes on in the market you have some Bitcoin whale let's sell a thousand coins and scare the market down and then let's go buy back 2000 coins it's the Wild West and somebody a skeptic might say well why do I want to buy now why don't I buy when the market calms down because when you buy when the market calms down and it's moved to this very highly regulated very low volatility asset it could have ten x between now and then. So yes there is volatility but I believe if you position size rationally you will be well rewarded for that moment for that volatility and that uncertainty.
Buck: So admittedly I was skeptical of cryptocurrency early on and you know I finally did get in and my timing was actually really good it was a fall early fall 2017 right before a massive bull run. And that of course was followed by what has been called crypto winter. So the question is, is winter over because it sure seems like it's an awful long thawing period I mean no we seem like to have gotten there but there's a stall is it over or do you still see some you know rocky shores ahead before there's a you know big move potentially to all-time highs?
Teeka: Well no crypto winter was over in April. I put out a report talking about that and I pinpointed when that happened it happened when Bitcoin broke its downtrend line. So if you go back and if you look at each of the so-called crypto winters or horrible bear markets that have been in the space Bitcoin will always lead the market first always and then the altcoins play catch up right so it feels worse than it is right now because the alt coins got crushed and many of them have stayed crushed they haven't come back that’s probably the most popular question I get take okay bitcoins up and it's you know been up as much as 400 percent this year but why aren't the old coins moving and my answer is because it's not yet time. If you look back at the data generally there is at least a six-month time lag between the time Bitcoin breaks its downtrend line and the time that the alt coins move higher. So that that next stage we'll be entering to in about October and you'll see a percolation in the alt coins and they'll start playing catch-up.
Buck: Does that also correlate Teeka with Bitcoin like an all-time high for Bitcoin though? I mean I mean obviously Bitcoin has recovered substantially we're like you know three four hundred percent up from you know where we were when Bitcoin was at you know three thousand. The question I have is and I have not looked at this history closely even though there's this recovery, do you have to start approaching all-time highs for those alts to really make their move is that what you've seen historically?
Teeka: No you look back when they all started playing catch up in 2016 Bitcoin was starting to move higher and then going into 2017 and then the alts really didn't start kicking in until around May and that's when they started moving and eventually the alts outpaced the type of action that was going on with bitcoins. So if we look back at how the altcoins move generally what happens is you have a new series of buyers that come into the market and they're all centered around Bitcoin. And that's happening right now. Kelly Lafleur just announced from backed that they're gonna have physically backed futures have been approved September 23rd I believe is the date that they're actually gonna start trading. So this brings in a whole new group of traders a whole new group of investors and then so they start getting their feet with Bitcoin and all of a sudden they're there they might not even know anything about alt coins Buck that that's the thing right for a lot of people out there to them when they think digital currency the only thing they really think of is Bitcoin.
Buck: So as the alt coins are just anything that's not Bitcoin for anybody what we keep talking about so anything Ethereum, any other and any other token that's not Bitcoin generally it's called an altcoin.
Teeka: Right so as they come in they start getting exposed to these other coins and then they start playing with them and they start investing and then they start trading with them and all of a sudden people look at look at Bitcoin and they look at something else it's a little bit smaller and they say okay let's let's play around here and then you start seeing this broadening of the rally.
Buck: So you think that this time around though specifically I know you you you're part of your thesis is that this time around may be different because you know bigger money institutional money, but one of the things that we've really looked at or you've looked at and talked about is you know one of the limitations to big money coming into this stuff is custodianship but the altcoins a lot of the old coins most of them are not gonna have that kind of infrastructure so does that I mean just playing devil's advocate does that then say well they may just stick to whatever they can buy on Coinbase and Bakkt.
Teeka: Well they have well these coins most of the all coins are ERC 20 coins so in terms of having the infrastructure as long as you can support ERC 20 you can support hundreds of coins that currently trade and so if you look at what Bakkt is doing they're gonna be supporting Bitcoin first and then they're going to be supporting Ethereum. So if they support a theory they will naturally support every other ERC20 that's out there and remember companies like Bakkt they're in the business of incentivizing trading because they get paid for everything that that goes through their network. So it would be odd to imagine that they're only going to limit their entire business models with just the trading of Bitcoin it doesn't make any sense. If you look at what they've done in the securities market they haven't just limited themselves to the trading of the S&P 500 they trade everything so I do think that liquidity will trickle down into the whole market and of course the ERC 20 coins I think will be the first to get the most amount of liquidity because it will be the easiest to support from from a back end technology standpoint. The other thing I want to mention is that another driver of the alt coins would be what I believe will be a proliferation of securitization products. So ETF's different types of futures I see a world I've gotta believe within the next 12 months we will see an ETF that will give us the ability to own 20 30 40 maybe 50 coins in one ETF that trades or one type of security that trades maybe it's a coin put out by back and says okay you buy this coin and you've got the top hundred altcoins exposure to the top hundred alt coins.
Buck: Right and then you know I know a lot of people bring do you talk about the ETF for Bitcoin and this has been sort of bounce back but yeah you know we're delayed with the SEC several times do you really think of that as a big deal compared to some of the other movements that you you mentioned Bakkt and I think there's LedgerX things like that where that are allowing for institutional buyers to dissipate is an etf really make much of a difference in your view?
Teeka: I think an ETF is important but I think the SEC is becoming less important in that process and I'll tell you why. Several very large brokerage firms from the Fidelity to eTrade to TD Ameritrade have announced that they want to offer Bitcoin trading to their users. So I'm talking about a system where you can log in click on a button on your Fidelity account and you can start trading Bitcoin the way you with the sp500. Once that comes out let's assume it comes out this year which they've talked about but they want to do it this year but we'll see everything seems to run a little slower than people think. But if that that comes out this year and something like 15 to 20 million people can now trade Bitcoin directly from their brokerage accounts to me it makes an ETF a foregone conclusion because the SEC has no reason now to stand in the way of it. And that's what I'm think that they're waiting for Buck the SEC is not known for blazing a trail the SEC is not known for moving ahead of the market. So if they can look and say well Fidelity is offering it TD Ameritrade is offering it Schwab is offering it we are asses covered if we approve an ETF I think it's really a CYA problem with the SEC they don't want to be the first to make this move and let's say there's a problem with it and everybody blames the SEC.
Buck: You know there is this product data that I know of maybe you could talk about this because then you know in the context of an ETF and being able to buy Bitcoin easily you know.
Teeka: I look at the there's a grayscale Bitcoin trust gbtc which is publicly traded I mean what's the difference what am I missing there I mean that's a closed-end fund that has limited liquidity and sometimes trade at a hundred percent premium.
Buck: Yeah okay so lots of things happening in the spaces you mentioned and one of the things that I think that that you said that is very seems very clearly true whether or not what you know whether or not you believe there's gonna be another bull market is there's a ton of of Technology improvements and infrastructure and all these things that are going on and price mean a lot more by the way then back in 2017 when prices were off the charts so within that context what are you know say they the one or two things that are you most excited about in the space that gives you the greatest confidence that this is you know this is the the new you know the new dot-com era I guess after the rebels fell as you mentioned before offline and you know the rise of the Amazons and the apples in the crypto world.
Teeka: I'll tell you why it's because I'm finally seeing major corporations real corporations doing partnerships with crypto companies not memorandums of understanding MOU’s are meaningless but real partnerships where they're actually using the technology this is stuff i talked about a year ago. Eighteen and a half months ago I said like real companies are going to start coming into this space they're gonna start partnering with some of these companies and start using the technology and it's happening. I'm seeing real businesses like Barclays put up their own money to back certain platforms I was like for instance with trade finance. BMW putting up their own money for back in logistics. So this is a huge shift in in in the type of person that is getting involved in the marketplace. I'm seeing massive credit card processors get involved with tiny startups because they want to piggy back what's going on and the markets that they're opening up with with their with their applications. So this to me Buck is is such a difference maker right like if we came into 2019 and none of these deals were happening I would say I would be on here and I would say buck you know what the cake just isn't baked yet man we just probably gotta wait another year. But when I start seeing very large very smart corporate players making strategic moves to align themselves to certain projects, you can't ignore that. This is something you can't ignore. And so this is what has me incredibly excited for this next phase that I see taking place in crypto.
Buck: You know one of the one things that you mentioned earlier and you've mentioned in the past which I agree with generally speaking is that you know some level of regulation is a good thing so that it becomes less of a manipulated market. So it becomes something that you know larger big money investors and institutional investors take an interest in because they don't want to be in something that's you know that's that's not legit. There is a negative a little bit to that and that some opportunities out there are you know start or you're starting to get restricted in terms of American investors. You know one of the examples I can think of to me is one of what I'm probably one of the biggest things is Binance which is you know the number one trading platform in the world is now effectively you know saying US investors we'll see you later we're gonna build something you know sometime and we're gonna call it you know Binance US and we're gonna have a lot fewer tokens there what concerns me is an investor in some of the various digital currencies at that point is well how does that affect my liquidity as a US investor and I'm wondering how it is affecting your your portfolio?
Teeka: Okay so there's a couple of things around that and I can't advise people to do this I can only report on what some people are doing to get around this geofencing. They're using Virtual Private Networks. With the use of a virtual private network can get access to any exchange in the world so long as they're using a VPN that mimics a country that this exchange is allowed to operate in. So as far as I know Binance is not doing anything to prevent anybody from using a VPN so just want to get that out there.
Buck: Jut to interrupt there I mean that that in itself is a little tricky though right I mean isn't it because then you've got to deal with you know US taxes and all that if you're dealing…
Teeka: Well you always have to deal with US taxes no matter what whether you're using a VPN or not.
Buck: So it wouldn't be illegal technically to use Virtual Private Network to use Binance?
Teeka: For me as an individual would I be breaking any laws, I don't think so but I'm not an attorney. Binance might be breaking some laws or but I don't think that I would be but again this is something everybody has to make their own decision with. But the other side of this is that by Nance is putting together their own decks which is a decentralized exchange which will allow for peer-to-peer trading and I think you'll see more of these types of decentralized exchanges which I'm a big fan of I hate the idea of centralized exchanges anyway. So there are some speed problems with decentralized exchanges but they're getting ironed out and I think within in the future a lot of trading is going to move to peer-to-peer but you're right it's certainly a concern for now I would say the biggest solution that I have read about and again I can't formally tell people to do this is to use a virtual private network.
Buck: The other question though I think as just as a follow-up on that Teeka is that okay so say you use a VPN but not everybody's gonna do that you know probably most people aren't gonna do that didn't then there's an issues just in terms of liquidity right or don't you think that's a problem anymore?
Teeka: I do think it's a problem but I also rely on the greed factor of the participants in this market that they will figure out a solution because there's too much money to be made for liquidity that wants to come into the market somebody will find a way to bring that liquidity into that okay so anyway so like you you know I believe that Bitcoin bull run is inevitable what do you think of anything what are you looking for that might trigger and I know you you're saying already that we're kind of in a bull market already but what triggers that sort of next level all-time high thing is there anything or do you think this is something that's gonna be more of a gradual rise or organic than it was in 2017?
Teeka: Well there are several things which I'm gonna be talking about specifically I don't really want to spill the beans on that here but I have an event coming up which I talk in more detail about a very specific event that I think will act as a massive catalyst. Outside of that I think this whole idea of I call it this kind of new narrative right among institutions where before two years ago three years ago they looked at Bitcoin and they said oh my gosh Bitcoin that's for Gun Runners and pornographers where we we have no interest in Bitcoin. And now they're starting to see Bitcoin as a way to eliminate this correlation risk in their portfolio. So I think that narrative will gain more ground in fact I've been invited to a conference in San Moritz with 500 top-tier investors and I will be putting forward that research that I've drawn together to that audience and really helping propagate that narrative because it is transformational if you manage a large pool of capital what you can do with your overall volatility and how you can adjust it lower through just a tiny amount of Bitcoin is absolutely remarkable. So I think that's more of a slow burn Buck, but as that gains speed I mean can you just imagine just the amount of buying if pension funds say okay going forward half of 1% of all our assets are going to be in digital currency.
Buck: I mean in part of part of understanding that for people is to understand one of the the great things about Bitcoin in particular is that this is an asset with that is fixed to a certain number of Bitcoin that'll ever be created so you know we've never really had a that kind of monetary thing before I mean to a certain extent gold is that way of course but even you know gold there's always more gold every year a little bit more gold. This is a truly deflationary asset that really where you know you put more money in the pot you know each one of those bitcoins gonna be worth a lot more and that I can't think of anything else that's out there like that.
Teeka: I agree.
Buck: I know you've got you know the the Palm Beach Confidential Newsletter Teeka I just have to compliment you because I you know I have been a reader for a couple years it is one of the most comprehensive and thoughtful investment newsletters I've ever subscribed to. I mean it is totally the real deal and I appreciate that and one of the things that people can't join any time and it opens and closes and I know that it is going to be opening up and you're going to do a webinar coming up on that but can you talk a little bit about the newsletter and the event that's coming up?
Teeka: Yeah sure so in the newsletter what I do is I will typically find one idea each month and give you a complete breakdown on the idea. And what I try to do I understand not everybody is a cryptocurrency enthusiastic of their currency investor and so what I try to do is write in a way that is easy to digest, easy to understand, not simplistic but very easy for the layperson to get their head around and to really understand the concept that we're talking about. And I have not opened up Palm Beach confidential for any new members for this whole year, this is the first time that I've done that and the reason is, is I only open up Palm Beach confidential to new members when there's an event that I think can have a massive impact on the broad market. So on September 18th at 8 p.m. I'm going to talk about one of these events and the last time this event took place you could literally take 500 dollars and turn it into five million dollars. There's only a few times in the history of crypto where you have those types of windows of opportunity and so one of those windows of opportunity is about to open and so at this event I'm gonna explain what it is why it works and why it will absolutely happen this particular event will absolutely happen there's nothing that can stop the event from taking place. And so I'm gonna share my five top coins, one of which I'll give away for free during the webinar that I think have that ability to go from five hundred dollars literally into five million. So it's an exciting time and I'm really kind of chomping at the bit to kind of get in front of everybody and talk about this research that I've discovered.
Buck: One last thing I want to point out is I get you know when we talk like this sometimes people get really skeptical they're like yeah that sounds a little salesy Buck that's not really kind of the usual thing that you're talking about and I get it right. The reality is this is a situation this isn't you know there are real people out there there are kids out there who've become multimillionaires by doing exactly this. And so it's real, that's why I'm interested.
Teeka: In my own investing I've seen a thousand dollar investment go to as much as 1.6 million dollars, ok so it's real. The other thing I want to convey to everybody I don't have to write newsletters anymore I don't have to come on podcast I can sit on a beach all I want ok. So why do I do this I do this because moving the needle on somebody's net worth maybe not this audience maybe my broader audience it's incredibly gratifying right helping people change their lives without putting their current lifestyle at risk that's I mean if that's my one legacy in this life could you ask for anything more Buck? Really it's incredibly gratifying to be able to do that and we have this opportunity now and but this opportunity won't last forever at some point this will be a multi trillion dollar asset class and the ability to make gains like that just won't exist.
Buck: Teeka, as always it's been a pleasure talking to you and thanks again for being on Wealth Formula Podcast.
Teeka: Thank you Buck.
Buck: We'll be right back.
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Wealth Formula Episode 175: Cryptocurrency and Asymmetric Risk with Teeka Tiwari

Wealth Formula Episode 175: Cryptocurrency and Asymmetric Risk with Teeka Tiwari

Catch the full episode: https://www.wealthformula.com/podcast/175-cryptocurrency-and-asymmetric-risk-with-teeka-tiwari/
Buck: Welcome back to the show everyone. Today my guest on Wealth Formula Podcast is no stranger to the show. He’s a guy who grew up in foster care and came over the US at the age of 16 with just 150 bucks in his pocket and the clothes on his back. And then by the age of 18 becomes the youngest employee at Lehman Brothers. By 20 he becomes the youngest vice president in Lehman history. Later in his career he goes on to launch successful hedge fund and lived the Wall Street dream. I mean he’s known on Wall Street as the guy who’s made a fortune on what is known as asymmetric risk which is what we’re going to talk about in quite a bit and for the rest of us, for many of us that is, he is best known for being the editor of the Palm Beach confidential newsletter which focuses on digital currencies and I am a subscriber to this by the way. Teeka, welcome back to Wealth Formula Podcast, Teeka Tiwari.
Teeka: Thanks Buck. It’s a pleasure to be here and thank you for having me.
Buck: Yeah so you know you were on not too long ago and some people are listening to the stuff about cannabis and they’re probably thinking to themselves, why is this guy talking about cannabis and digital currencies like what is his specialty? In fact the way I’m thinking about this there’s one main thing that they have in common, they’re both in this area that you call and we call asymmetric risk which is really your thing. Discuss what that means and if you would how have you applied it to your own growth and ultimately to your own wealth.
Teeka: So before I get into asymmetric risk I want to talk about how I discovered asymmetric risk and how I changed the way that I yeah. So when I was in my 20s I developed a lot of wealth by taking massive risk in the stock options and commodities market. And I would bet huge positions. And then that all came to an end in the late 90s when I was on the wrong side of a series of trades that were triggered by the Asian financial crisis which ultimately compelled me to file for bankruptcy. And so I had lost about ten years of wealth creation which was considerable at the time. And what I learned was that I had to change my approach that I couldn’t get it all every single time otherwise I would never get off this boom-and-bust merry-go-round. So what I realized was is that I would I would build the portfolio of somewhat safer more income oriented investments and then I would focus on these ideas that are called asymmetric risk trade. So what’s an asymmetric risk trade? An asymmetric risk trade is where you can take a relatively trivial sum of money and if the idea doesn’t work out it doesn’t impact your net your net worth or your day-to-day lifestyle in any way shape or form. But the asymmetric part of it is is that if it does work out it can absolutely move the needle on your net worth. So an example of that would be something like neo which I recommended at around 12 cents that ended up going up to about a hundred and sixty one dollars so that’s something that you could have put a thousand dollars in and turn it into over a million dollars. That’s a classic asymmetric trade. So what I what I tell my readers is you can’t build your whole portfolio around high-risk asymmetric trades. But if you take let’s say five to ten percent of your liquid net worth and allocate it to these types of situations in a and one of the things I talk about is using uniform position sizing, what you put yourself in the position to do is absolutely grow your network sometimes three four five six X without putting your current lifestyle at risk and it is a sweet spot of wealth creation that I’ve created and popularized now for several years that has not only transformed my financial life but the financial life of many of my readers.
Buck: So as you know Teeka my group the Wealth Formula Group in general I mean there’s a lot of people who are well-to-do they’re you know accredited investors they have you know typically probably more money to invest than others they’re you know and I say this because there is a little bit of a difference there when it comes to somebody who’s barely getting by living check to check, that there is an opportunity in your portfolio to say okay what percentage of this portfolio could I put in that I mean listen if I lose it no big deal I mean I won’t be happy about it but it won’t hurt me that much on the other hand this could explode. Now when you look at it from the perspective of somebody who’s got a fair amount of money and link who’s investing you know several hundred thousand dollars a year or maybe a million dollars or something like that like what do you think is a reasonable amount of a portfolio? Like I know for example that even universities are getting into this and they’re looking at hey maybe you know 1/2 of 1% or something like that I mean I know you’re not in the business of giving financial advice but I’m just curious kind of what your approach would be in terms of allocation.
Teeka: So again generally speaking I would say 5 to 10% of your liquid net worth. So let’s say you’ve got a business that kicks out a million a year that you have to allocate for your investment 50 to $100,000. Definitely nobody likes to lose 50 or a hundred thousand dollars but it’s not going to have a material impact on your lifestyle but if you invest 50 to $100,000 and these asymmetric bets pay off you’re talking about five six seven eight ten twelve million dollars in returns on what is a relatively tiny investment relative to your net worth and that is the beauty of this approach.
Buck: Yeah and and I’m glad you said that because that’s exactly kind of where I’m at sort of lingering between five and ten percent you know and for me you know I I kind of put this in there about you know I kind of put this in that area with startups right I’m not gonna I’m not gonna have a separate category just for digital currencies but anything that is super high risk and high reward and I’m sitting about five or ten percent.
Teeka: That all goes into the same bucket so that’s right that for everybody it’s not just oh this is crypto currencies five to ten percent and startups is five to ten percent. No all go into the same bucket is asymmetric risk.
Buck: Yeah now okay so we kind of got ahead of ourselves and you know you haven’t been on the show talking about crypto currency in a fair amount of time we have a lot more new listeners now so for those who know very little about cryptocurrency but they’re smart they’re sophisticated say they’re a group of you know I know worth investors you’re talking to you they’ve not heard about this how do you explain this in the most efficient way possible and what the significance of it is?
Teeka: Okay so that’s a really big question.
Buck: Yeah no I don’t but I bet you’ve answered it a few times.
Teeka: I’m gonna take a shot at it. So listen as a wealthy investor myself why would I want to bother with cryptocurrency? I’m already rich why do I want to mess around with this? So I’m gonna answer it from that perspective. One it’s always nice to make more money. But two the bigger reason is, is what I want people to understand especially wealthy investors is that it’s very rare to invest at the beginning of a brand-new asset class very very rare right it’s brand-new asset classes though just don’t come about. Digital currency is a brand-new asset class that has legs. So why does it have legs? It has legs because we have never had an asset class that is completely non correlated with the business cycle. It’s never existed before. Every asset class in the world is somehow tied to the business cycle gold, industrial, metals, currencies, stocks, bonds, they’re all tied to the business cycle in one way shape or form things like Bitcoin are not so why why does that make it valuable it makes it valuable because if you are pension fund you’re allocating capital across traditional and non-traditional assets you still have this problem of deep correlation right the business cycle falls apart and you’re taking hits across the board. So there have been studies that have shown just with a small allocation of Bitcoin anywhere from one to five percent across the portfolio even though Bitcoin is wildly volatile because it is not correlated and not tied to the business cycle it actually reduces your overall volatility and your overall risk in your portfolio and that is incredibly valuable. So just from a high level portfolio construction standpoint you will see the world’s hedge funds, pension funds, massive allocators of capital start to move tiny slivers of their money into things like Bitcoin and we’re talking tiny slivers of an 80 trillion dollar pie right it’s in real terms its enormous money in relative terms relative to what they have under management it’s a small amount but when you’re coming off a base where the whole markets only worth 300 billion it doesn’t take much to move the market. So that’s from the high level that’s why you must have some cryptocurrency. And then the next level beyond that is that mankind has never had an asset there’s never been an asset we’re a stronger man couldn’t take it from a weaker man. So whether it was the caveman knocking one guy over the head for his shells or the government coming in in Venezuela and confiscating money or the Argentinian government saying oh we’re having a holiday and taking all your assets from the bank something Brazil has done on multiple occasions. You know the everyday person has not had this ability to hold an asset that has been beyond the confiscationability of a government so something like Bitcoin and digital currency if you are smart and how you buy it if you don’t talk about it you buy quietly and you store it appropriately it is absolutely impossible short of somebody putting a literally putting a gun next to your head for them to take that asset from you and that is remarkable because even if you’ve got a million dollars in gold and you somehow manage to hide it how are you gonna travel the world with a million dollars in gold how are you gonna spend a million dollars in gold you just gonna go to the store and break a piece off with a piece of pliers you just can’t do that the beauty of digital currency is you can walk around with a thumb drive that big with a billion dollars in it and nobody knows and let’s say hey oh I don’t want to keep a billion in Bitcoin I want to do it in a stable coin fine put it in a stable coin. But this idea this portability of money and this complete ownership of an asset that nobody else has any ability to take from you that is valuable that is incredibly valuable.
Buck: So let me ask you a what may seem like a very basic simple question but I think it’s worth asking. So why is it so volatile why is Bitcoin Ethereum for example why these are the major the two biggest by market cap why are they so volatile and you know to the extent that they are uncorrelated do you see that as a function of the size of the market cap or is it something else inherent about digital currencies that makes it this volatile?
Teeka: I think it’s both. One they’re relatively small so if for instance if you look at Microsoft in its early days it was a crazy volatile stock up 40% down 40% down 30% going through bear markets that lasted two years wrecking billions of dollars in value you look at the early days of Microsoft from the 80s into the mid 90s the stock was all over the place and then as the stock got bigger and more mature of course volatility tamp down so you will see that. So what I say with volatility is that welcomed that volatility without it the opportunity to make enormous amounts of money off a small amount of money won’t exist. At some point Bitcoin and the theorem will move to this more blue chip status where maybe you make eight percent a year or six percent a year or something or something like that thank goodness we’re not there yet. The other side of it is is that there you know the markets that are built around trading these are completely unregulated. They’re wild. And there’s all types of crazy manipulation that goes on in the market you have some Bitcoin whale let’s sell a thousand coins and scare the market down and then let’s go buy back 2000 coins it’s the Wild West and somebody a skeptic might say well why do I want to buy now why don’t I buy when the market calms down because when you buy when the market calms down and it’s moved to this very highly regulated very low volatility asset it could have ten x between now and then. So yes there is volatility but I believe if you position size rationally you will be well rewarded for that moment for that volatility and that uncertainty.
Buck: So admittedly I was skeptical of cryptocurrency early on and you know I finally did get in and my timing was actually really good it was a fall early fall 2017 right before a massive bull run. And that of course was followed by what has been called crypto winter. So the question is, is winter over because it sure seems like it’s an awful long thawing period I mean no we seem like to have gotten there but there’s a stall is it over or do you still see some you know rocky shores ahead before there’s a you know big move potentially to all-time highs?
Teeka: Well no crypto winter was over in April. I put out a report talking about that and I pinpointed when that happened it happened when Bitcoin broke its downtrend line. So if you go back and if you look at each of the so-called crypto winters or horrible bear markets that have been in the space Bitcoin will always lead the market first always and then the altcoins play catch up right so it feels worse than it is right now because the alt coins got crushed and many of them have stayed crushed they haven’t come back that’s probably the most popular question I get take okay bitcoins up and it’s you know been up as much as 400 percent this year but why aren’t the old coins moving and my answer is because it’s not yet time. If you look back at the data generally there is at least a six-month time lag between the time Bitcoin breaks its downtrend line and the time that the alt coins move higher. So that that next stage we’ll be entering to in about October and you’ll see a percolation in the alt coins and they’ll start playing catch-up.
Buck: Does that also correlate Teeka with Bitcoin like an all-time high for Bitcoin though? I mean I mean obviously Bitcoin has recovered substantially we’re like you know three four hundred percent up from you know where we were when Bitcoin was at you know three thousand. The question I have is and I have not looked at this history closely even though there’s this recovery, do you have to start approaching all-time highs for those alts to really make their move is that what you’ve seen historically?
Teeka: No you look back when they all started playing catch up in 2016 Bitcoin was starting to move higher and then going into 2017 and then the alts really didn’t start kicking in until around May and that’s when they started moving and eventually the alts outpaced the type of action that was going on with bitcoins. So if we look back at how the altcoins move generally what happens is you have a new series of buyers that come into the market and they’re all centered around Bitcoin. And that’s happening right now. Kelly Lafleur just announced from backed that they’re gonna have physically backed futures have been approved September 23rd I believe is the date that they’re actually gonna start trading. So this brings in a whole new group of traders a whole new group of investors and then so they start getting their feet with Bitcoin and all of a sudden they’re there they might not even know anything about alt coins Buck that that’s the thing right for a lot of people out there to them when they think digital currency the only thing they really think of is Bitcoin.
Buck: So as the alt coins are just anything that’s not Bitcoin for anybody what we keep talking about so anything Ethereum, any other and any other token that’s not Bitcoin generally it’s called an altcoin.
Teeka: Right so as they come in they start getting exposed to these other coins and then they start playing with them and they start investing and then they start trading with them and all of a sudden people look at look at Bitcoin and they look at something else it’s a little bit smaller and they say okay let’s let’s play around here and then you start seeing this broadening of the rally.
Buck: So you think that this time around though specifically I know you you you’re part of your thesis is that this time around may be different because you know bigger money institutional money, but one of the things that we’ve really looked at or you’ve looked at and talked about is you know one of the limitations to big money coming into this stuff is custodianship but the altcoins a lot of the old coins most of them are not gonna have that kind of infrastructure so does that I mean just playing devil’s advocate does that then say well they may just stick to whatever they can buy on Coinbase and Bakkt.
Teeka: Well they have well these coins most of the all coins are ERC 20 coins so in terms of having the infrastructure as long as you can support ERC 20 you can support hundreds of coins that currently trade and so if you look at what Bakkt is doing they’re gonna be supporting Bitcoin first and then they’re going to be supporting Ethereum. So if they support a theory they will naturally support every other ERC20 that’s out there and remember companies like Bakkt they’re in the business of incentivizing trading because they get paid for everything that that goes through their network. So it would be odd to imagine that they’re only going to limit their entire business models with just the trading of Bitcoin it doesn’t make any sense. If you look at what they’ve done in the securities market they haven’t just limited themselves to the trading of the S&P 500 they trade everything so I do think that liquidity will trickle down into the whole market and of course the ERC 20 coins I think will be the first to get the most amount of liquidity because it will be the easiest to support from from a back end technology standpoint. The other thing I want to mention is that another driver of the alt coins would be what I believe will be a proliferation of securitization products. So ETF’s different types of futures I see a world I’ve gotta believe within the next 12 months we will see an ETF that will give us the ability to own 20 30 40 maybe 50 coins in one ETF that trades or one type of security that trades maybe it’s a coin put out by back and says okay you buy this coin and you’ve got the top hundred altcoins exposure to the top hundred alt coins.
Buck: Right and then you know I know a lot of people bring do you talk about the ETF for Bitcoin and this has been sort of bounce back but yeah you know we’re delayed with the SEC several times do you really think of that as a big deal compared to some of the other movements that you you mentioned Bakkt and I think there’s LedgerX things like that where that are allowing for institutional buyers to dissipate is an etf really make much of a difference in your view?
Teeka: I think an ETF is important but I think the SEC is becoming less important in that process and I’ll tell you why. Several very large brokerage firms from the Fidelity to eTrade to TD Ameritrade have announced that they want to offer Bitcoin trading to their users. So I’m talking about a system where you can log in click on a button on your Fidelity account and you can start trading Bitcoin the way you with the sp500. Once that comes out let’s assume it comes out this year which they’ve talked about but they want to do it this year but we’ll see everything seems to run a little slower than people think. But if that that comes out this year and something like 15 to 20 million people can now trade Bitcoin directly from their brokerage accounts to me it makes an ETF a foregone conclusion because the SEC has no reason now to stand in the way of it. And that’s what I’m think that they’re waiting for Buck the SEC is not known for blazing a trail the SEC is not known for moving ahead of the market. So if they can look and say well Fidelity is offering it TD Ameritrade is offering it Schwab is offering it we are asses covered if we approve an ETF I think it’s really a CYA problem with the SEC they don’t want to be the first to make this move and let’s say there’s a problem with it and everybody blames the SEC.
Buck: You know there is this product data that I know of maybe you could talk about this because then you know in the context of an ETF and being able to buy Bitcoin easily you know.
Teeka: I look at the there’s a grayscale Bitcoin trust gbtc which is publicly traded I mean what’s the difference what am I missing there I mean that’s a closed-end fund that has limited liquidity and sometimes trade at a hundred percent premium.
Buck: Yeah okay so lots of things happening in the spaces you mentioned and one of the things that I think that that you said that is very seems very clearly true whether or not what you know whether or not you believe there’s gonna be another bull market is there’s a ton of of Technology improvements and infrastructure and all these things that are going on and price mean a lot more by the way then back in 2017 when prices were off the charts so within that context what are you know say they the one or two things that are you most excited about in the space that gives you the greatest confidence that this is you know this is the the new you know the new dot-com era I guess after the rebels fell as you mentioned before offline and you know the rise of the Amazons and the apples in the crypto world.
Teeka: I’ll tell you why it’s because I’m finally seeing major corporations real corporations doing partnerships with crypto companies not memorandums of understanding MOU’s are meaningless but real partnerships where they’re actually using the technology this is stuff i talked about a year ago. Eighteen and a half months ago I said like real companies are going to start coming into this space they’re gonna start partnering with some of these companies and start using the technology and it’s happening. I’m seeing real businesses like Barclays put up their own money to back certain platforms I was like for instance with trade finance. BMW putting up their own money for back in logistics. So this is a huge shift in in in the type of person that is getting involved in the marketplace. I’m seeing massive credit card processors get involved with tiny startups because they want to piggy back what’s going on and the markets that they’re opening up with with their with their applications. So this to me Buck is is such a difference maker right like if we came into 2019 and none of these deals were happening I would say I would be on here and I would say buck you know what the cake just isn’t baked yet man we just probably gotta wait another year. But when I start seeing very large very smart corporate players making strategic moves to align themselves to certain projects, you can’t ignore that. This is something you can’t ignore. And so this is what has me incredibly excited for this next phase that I see taking place in crypto.
Buck: You know one of the one things that you mentioned earlier and you’ve mentioned in the past which I agree with generally speaking is that you know some level of regulation is a good thing so that it becomes less of a manipulated market. So it becomes something that you know larger big money investors and institutional investors take an interest in because they don’t want to be in something that’s you know that’s that’s not legit. There is a negative a little bit to that and that some opportunities out there are you know start or you’re starting to get restricted in terms of American investors. You know one of the examples I can think of to me is one of what I’m probably one of the biggest things is Binance which is you know the number one trading platform in the world is now effectively you know saying US investors we’ll see you later we’re gonna build something you know sometime and we’re gonna call it you know Binance US and we’re gonna have a lot fewer tokens there what concerns me is an investor in some of the various digital currencies at that point is well how does that affect my liquidity as a US investor and I’m wondering how it is affecting your your portfolio?
Teeka: Okay so there’s a couple of things around that and I can’t advise people to do this I can only report on what some people are doing to get around this geofencing. They’re using Virtual Private Networks. With the use of a virtual private network can get access to any exchange in the world so long as they’re using a VPN that mimics a country that this exchange is allowed to operate in. So as far as I know Binance is not doing anything to prevent anybody from using a VPN so just want to get that out there.
Buck: Jut to interrupt there I mean that that in itself is a little tricky though right I mean isn’t it because then you’ve got to deal with you know US taxes and all that if you’re dealing…
Teeka: Well you always have to deal with US taxes no matter what whether you’re using a VPN or not.
Buck: So it wouldn’t be illegal technically to use Virtual Private Network to use Binance?
Teeka: For me as an individual would I be breaking any laws, I don’t think so but I’m not an attorney. Binance might be breaking some laws or but I don’t think that I would be but again this is something everybody has to make their own decision with. But the other side of this is that by Nance is putting together their own decks which is a decentralized exchange which will allow for peer-to-peer trading and I think you’ll see more of these types of decentralized exchanges which I’m a big fan of I hate the idea of centralized exchanges anyway. So there are some speed problems with decentralized exchanges but they’re getting ironed out and I think within in the future a lot of trading is going to move to peer-to-peer but you’re right it’s certainly a concern for now I would say the biggest solution that I have read about and again I can’t formally tell people to do this is to use a virtual private network.
Buck: The other question though I think as just as a follow-up on that Teeka is that okay so say you use a VPN but not everybody’s gonna do that you know probably most people aren’t gonna do that didn’t then there’s an issues just in terms of liquidity right or don’t you think that’s a problem anymore?
Teeka: I do think it’s a problem but I also rely on the greed factor of the participants in this market that they will figure out a solution because there’s too much money to be made for liquidity that wants to come into the market somebody will find a way to bring that liquidity into that okay so anyway so like you you know I believe that Bitcoin bull run is inevitable what do you think of anything what are you looking for that might trigger and I know you you’re saying already that we’re kind of in a bull market already but what triggers that sort of next level all-time high thing is there anything or do you think this is something that’s gonna be more of a gradual rise or organic than it was in 2017?
Teeka: Well there are several things which I’m gonna be talking about specifically I don’t really want to spill the beans on that here but I have an event coming up which I talk in more detail about a very specific event that I think will act as a massive catalyst. Outside of that I think this whole idea of I call it this kind of new narrative right among institutions where before two years ago three years ago they looked at Bitcoin and they said oh my gosh Bitcoin that’s for Gun Runners and pornographers where we we have no interest in Bitcoin. And now they’re starting to see Bitcoin as a way to eliminate this correlation risk in their portfolio. So I think that narrative will gain more ground in fact I’ve been invited to a conference in San Moritz with 500 top-tier investors and I will be putting forward that research that I’ve drawn together to that audience and really helping propagate that narrative because it is transformational if you manage a large pool of capital what you can do with your overall volatility and how you can adjust it lower through just a tiny amount of Bitcoin is absolutely remarkable. So I think that’s more of a slow burn Buck, but as that gains speed I mean can you just imagine just the amount of buying if pension funds say okay going forward half of 1% of all our assets are going to be in digital currency.
Buck: I mean in part of part of understanding that for people is to understand one of the the great things about Bitcoin in particular is that this is an asset with that is fixed to a certain number of Bitcoin that’ll ever be created so you know we’ve never really had a that kind of monetary thing before I mean to a certain extent gold is that way of course but even you know gold there’s always more gold every year a little bit more gold. This is a truly deflationary asset that really where you know you put more money in the pot you know each one of those bitcoins gonna be worth a lot more and that I can’t think of anything else that’s out there like that.
Teeka: I agree.
Buck: I know you’ve got you know the the Palm Beach Confidential Newsletter Teeka I just have to compliment you because I you know I have been a reader for a couple years it is one of the most comprehensive and thoughtful investment newsletters I’ve ever subscribed to. I mean it is totally the real deal and I appreciate that and one of the things that people can’t join any time and it opens and closes and I know that it is going to be opening up and you’re going to do a webinar coming up on that but can you talk a little bit about the newsletter and the event that’s coming up?
Teeka: Yeah sure so in the newsletter what I do is I will typically find one idea each month and give you a complete breakdown on the idea. And what I try to do I understand not everybody is a cryptocurrency enthusiastic of their currency investor and so what I try to do is write in a way that is easy to digest, easy to understand, not simplistic but very easy for the layperson to get their head around and to really understand the concept that we’re talking about. And I have not opened up Palm Beach confidential for any new members for this whole year, this is the first time that I’ve done that and the reason is, is I only open up Palm Beach confidential to new members when there’s an event that I think can have a massive impact on the broad market. So on September 18th at 8 p.m. I’m going to talk about one of these events and the last time this event took place you could literally take 500 dollars and turn it into five million dollars. There’s only a few times in the history of crypto where you have those types of windows of opportunity and so one of those windows of opportunity is about to open and so at this event I’m gonna explain what it is why it works and why it will absolutely happen this particular event will absolutely happen there’s nothing that can stop the event from taking place. And so I’m gonna share my five top coins, one of which I’ll give away for free during the webinar that I think have that ability to go from five hundred dollars literally into five million. So it’s an exciting time and I’m really kind of chomping at the bit to kind of get in front of everybody and talk about this research that I’ve discovered.
Buck: One last thing I want to point out is I get you know when we talk like this sometimes people get really skeptical they’re like yeah that sounds a little salesy Buck that’s not really kind of the usual thing that you’re talking about and I get it right. The reality is this is a situation this isn’t you know there are real people out there there are kids out there who’ve become multimillionaires by doing exactly this. And so it’s real, that’s why I’m interested.
Teeka: In my own investing I’ve seen a thousand dollar investment go to as much as 1.6 million dollars, ok so it’s real. The other thing I want to convey to everybody I don’t have to write newsletters anymore I don’t have to come on podcast I can sit on a beach all I want ok. So why do I do this I do this because moving the needle on somebody’s net worth maybe not this audience maybe maybe my broader audience it’s incredibly gratifying right helping people change their lives without putting their current lifestyle at risk that’s I mean if that’s my one legacy in this life could you ask for anything more Buck? Really it’s incredibly gratifying to be able to do that and we have this opportunity now and but this opportunity won’t last forever at some point this will be a multi trillion dollar asset class and the ability to make gains like that just won’t exist.
Buck: Teeka, as always it’s been a pleasure talking to you and thanks again for being on Wealth Formula Podcast.
Teeka: Thank you Buck.
Buck: We’ll be right back.
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In case you missed it: Major Crypto and Blockchain News from the week ending 12/14/2018

Developments in Financial Services

Regulatory Environment

General News


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US Tax Guide for Cryptocurrencies

Introduction:  
Greetings, cryptax! Tax season is upon us, and in the next couple of months, taxpayers across the US will be filing their 2017 tax returns. As a tax professional, an Enrolled Agent, and a cryptocurrency investor and enthusiast, I wanted to write up a brief guide on how your investments in cryptocurrencies are taxed in the US.
 
 
1. Are cryptocurrency realized gains taxable?
Yes. The IRS treats virtual currency (such as cryptocurrency) as property. That means if you sell BTC, ETH, or any other cryptocurrency that has appreciated in value, you have realized a capital gain and must pay taxes on this income. If you held the position for one year or less, it is a short-term capital gain which is taxed at your ordinary income tax rate. If you held the position for more than one year, it is a long-term capital gain which is taxed at your long-term capital gains tax rate. In most cases, this is 15%, but could also be 0% or 20% depending on your specific ordinary income tax bracket.
 
2. If I sell my BTC for USD on Coinbase but do not transfer the USD from Coinbase to my bank account, am I still taxed?
Yes. The only thing that matters is that you sold the BTC, which creates a taxable transaction. Whether you transfer the USD to your bank account or not does not matter.
 
3. If I use my BTC to buy another cryptocurrency (XMR for example), is this a taxable transaction?
Most likely yes. See #4 below for a more detailed explanation. If assuming crypto to crypto trades are not able to be like-kind exchanged, then continue on to the next paragraph here.
This is actually two different transactions. The first transaction is selling your BTC for USD. The second transaction is buying the XMR with your USD. You must manually calculate these amounts (or use a website such as bitcoin.tax or software to calculate it for you). For example, I buy 1 BTC for $8,000 on Coinbase. Later on, the price of 1 BTC rises to $9,000. I transfer that 1 BTC to Bittrex and use it to buy 38 XMR. I have to report a capital gain of $1,000 because of this transaction. My total cost basis for the 38 XMR I purchased is $9,000.
 
4. If I use my BTC to buy another cryptocurrency, could that be considered a tax-free like-kind exchange?
Probably not. The new tax law says that like-kind exchanges only pertain to real estate transactions. This was done with Section 13303, which replaced “property” with “real property” for all of Section 1031 (page 72 near the bottom). My personal interpretation:
In 2018 and going forward, cryptocurrencies can definitely not be like-kind exchanged.
In 2017 and before, it is a very gray area. I personally am not taking the position that they can be like-kind exchanged, because if the IRS went after a taxpayer who did this, the IRS would probably win and the taxpayer would owe taxes, interest, and probably penalties on every single little gain made from trading one cryptocurrency for another.
Here is a great interpretation of why trading cryptocurrency for cryptocurrency is probably not a like-kind transaction.
In my opinion, the biggest factor is that like-kind exchanges must be reported on Form 8824 and not just ignored. Therefore, if a taxpayer is claiming like-kind exchanges on crypto to crypto exchanges, he or she would have to fill out a Form 8824 for each individual transaction of crypto to crypto, which would be absolutely cumbersome if there are hundreds or thousands of such trades.
Another is that there has to be a Qualified Intermediary that facilitates a like-kind exchange. So, it's a more involved process, and that's why I think cryptocurrency cannot be like-kind exchanged.
Here is another article about like-kind exchanges.
Here is the American Institute of CPAs' letter to the IRS, dated June 10, 2016, asking them to release guidance on whether crypto to crypto can be like-kind exchanged or not. The IRS has not responded to the letter.
 
5. How do I calculate the realized capital gain or loss on the sale of my cryptocurrency?
The realized gain or loss is your total proceeds from the sale minus what you purchased those positions for (your cost basis). For example, you bought 1 BTC for $3,000 in June of 2017. In December of 2017, you sold that 1 BTC for $18,000. Your realized gain would be $18,000 - $3,000 = $15,000. Since you held it for one year or less, the $15,000 would be a short-term capital gain taxed at your ordinary income tax rate.
 
6. Which BTC's cost basis do I use if I have multiple purchases?
The cost basis reporting method is up to you. For example, I buy my first BTC at $3,000, a second BTC at $5,300, and a third BTC at $4,000. Later on, I sell one BTC for $8,000. I can use:
FIFO (first in first out) - cost basis would the first BTC, $3,000, which would result in a gain of $5,000.
LIFO (last in first out) - cost basis would be the third BTC, $4,000, which would result in a gain of $4,000.
Average cost - cost basis would be the average of the three BTC, $4,100, which would result in a gain of $3,900.
Specific identification - I can choose which coin's cost basis to use. For example, I can choose the second BTC's cost basis, $5,300, which would result in the lowest capital gains possible of $2,700.
The IRS has not given any guidance on cost basis accounting methods for cryptocurrency, but I am taking the position that any method can be used, and that you can change your method at any time as you please (e.g. FIFO for one year, LIFO for another. Or, FIFO for the sale of a specific lot, then LIFO for the sale of another lot on the same day).
 
7. If I end up with a net capital loss, can I claim this on my tax return?
Capital gains and capital losses are netted on your tax return. If the net result of this is a capital loss, you may offset it against ordinary income on your tax return, but only at a maximum of $3,000 per year. The remaining losses are carried forward until you use them up.
 
8. What is the tax rate on my capital gains?
If long-term, the tax rate is 0%, 15%, or 20%, depending on your ordinary income tax bracket. If short-term, the tax bracket you’ll be in will depend on your total income and deductions. The ordinary income tax brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% in 2017 and 10%, 12%, 22%, 24%, 32%, 35%, and 37% in 2018 and going forward.
Here are the 2017 and 2018 ordinary income tax brackets.
Here are the 2017 and 2018 long-term capital gains tax brackets.
Here is a detailed article on how the calculation of long-term capital gains tax work and how you can take advantage of the 0% long-term capital gains rate, if applicable.
 
9. If I mine BTC or any other cryptocurrency, is this taxable?
Yes. IRS Notice 2014-21 states that mining cryptocurrency is taxable. For example, if you mined $8,000 worth of BTC in 2017, you must report $8,000 of ordinary income on your 2017 tax return. For many taxpayers, this will be reported on your Schedule C, and you will most likely owe self-employment taxes on this income as well. The $8,000 becomes the cost basis in your BTC position.
 
10. How do I calculate income for the cryptocurrency I mined?
This is the approach I would take. Say I mined 0.01 BTC on December 31, 2017. I would look up the daily historical prices for BTC and average the high and low prices for BTC on December 31, 2017, which is ($14,377.40 + $12,755.60) / 2 = $13,566.50. I would report $13,566.50 * 0.01 = $135.67 of income on my tax return. This would also be the cost basis of the 0.01 BTC I mined.
 
11. Can I deduct mining expenses on my tax return?
If you are reporting the income from mining on Schedule C, then you can deduct expenses on Schedule C as well. You can deduct the portion of your electricity costs allocated to mining, and then you depreciate the cost of your mining rig over time (probably over five years). Section 179 also allows for the full deduction of the cost of certain equipment in year 1, so you could choose to do that if you wanted to instead.
 
12. If I receive BTC or other cryptocurrency as a payment for my business, is this taxable?
Yes. Similar to mining, your income would be what the value of the coins you received was. This would also be your cost basis in the coins.
 
13. If I received Bitcoin Cash as a result of the hard fork on August 1, 2017, is this taxable?
Most likely yes. For example, if you owned 1 Bitcoin and received 1 Bitcoin Cash on August 1, 2017 as a result of the hard fork, your income would be the value of 1 Bitcoin Cash on that date. Bitcoin.tax uses a value of $277. This value would also be your cost basis in the position. Any other hard forks would probably be treated similarly. Airdrops may be treated similarly as well, in the IRS' view.
Here are a couple more good articles about reporting the Bitcoin Cash fork as taxable ordinary income. The second one goes into depth and cites a US Supreme Court decision as precedent: one, two
 
14. If I use BTC or other cryptocurrency to purchase goods or services, is this a taxable transaction?
Yes. It would be treated as selling your cryptocurrency for USD, and then using that USD to purchase those goods or services. This is because the IRS treats cryptocurrency as property and not currency.
 
15. Are cryptocurrencies subject to the wash sale rule?
Probably not. Section 1091 only applies to stock or securities. Cryptocurrencies are not classified as stocks or securities. Therefore, you could sell your BTC at a loss, repurchase it immediately, and still realize this loss on your tax return, whereas you cannot do the same with a stock. Please see this link for more information.
 
16. What if I hold cryptocurrency on an exchange based outside of the US?
There are two separate foreign account reporting requirements: FBAR and FATCA.
A FBAR must be filed if you held more than $10,000 on an exchange based outside of the US at any point during the tax year.
A Form 8938 (FATCA) must be filed if you held more than $75,000 on an exchange based outside of the US at any point during the tax year, or more than $50,000 on the last day of the tax year.
The penalties are severe for not filing these two forms if you are required to. Please see the second half of this post for more information on foreign account reporting.
 
17. What are the tax implications of gifting cryptocurrency?
Small gifts of cryptocurrency do not have a tax implication for the gift giver or for the recipient. The recipient would retain the gift giver's old cost basis, so it could be a good idea for the gift giver to provide records of the original cost basis to the recipient as well (or else the recipient would have to assume a cost basis of $0 if the recipient ever sells the cryptocurrency).
Large gifts of cryptocurrency could start having gift and estate tax implications on the giver if the value exceeds more than $14,000 (in 2017) or $15,000 (in 2018) per year per recipient.
Here's a good article on Investopedia on this issue.
An important exception applies if the gift giver gives cryptocurrency that has a cost basis that is higher than the market value at the time of the gift. Please see the middle of this post for more information on that.
 
18. Where can I learn even more about cryptocurrency taxation?
Unchained Podcast: The Tax Rules That Have Crypto Users Aghast
IRS Notice 2014-21
Great reddit post from tax attorney Tyson Cross from 2014
 
19. Are there any websites that you recommend in helping me with all of this?
Yes - I have used bitcoin.tax and highly recommend it. You can import directly from an exchange to the website using API, and/or export a .csv/excel file from the exchange and import it into the website. The exchanges I successfully imported from were Coinbase, GDAX, Bittrex, and Binance. The result is a .csv or other file that you can import into your tax software.
I have also heard good things about cointracking.info but have not personally used it myself.
 
20. If I move my BTC from one exchange to another, or into a hard wallet, is this a taxable event?
No - you are not selling anything, so no gains are realized.
 
21. Where do I report cryptocurrency sales on my tax return?
The summary of your sales would reported on Schedule D on line 3 and/or line 10 depending on short-term or long-term. Supplemental Form 8949 must also be included with Box C or Box F checked depending on short-term or long-term. Form 8949 is where you must list each individual sale.
 
22. If coins become lost or inaccessible (e.g. lost or forgotten passphrase or thrown away hard drive), can I claim that as a loss? What about coins that have gotten stolen? What about losing money in investment or ICO scams (e.g. Bitconnect or Confido)?
These are really tricky questions. Unfortunately, the potential to claim such a loss against ordinary income is very low, especially with the new tax law. At the very least, capital losses can be claimed, but the deduction is capped at $3,000 per year against ordinary income with the rest carrying forward indefinitely.
The new tax law changed the casualty and theft loss to only apply to presidential disaster areas, so at least in the case of a loss passphrase, I think the answer is no for 2018 and going forward. For 2017, the answer is possibly yes. Here is an article on the subject if you are interested in reading more.
 
23. Taxation is theft!
Sorry, I can't help you there.
 
 
That is the summary I have for now. There have been a lot of excellent cryptocurrency tax guides on reddit, such as this one and this one, but I wanted to post my guide on cryptax which hopefully answers some of the questions you all may have about US taxation of cryptocurrencies. Please let me know if you have any more questions, and I’d be happy to answer them to the best of my ability. Thank you!
Regarding edits: I may make many edits to my post after I originally post it. Please refresh to see the latest edits to my guide. Thank you.
 
Disclaimer:
The information contained within this post is provided for informational purposes only and is not intended to substitute for obtaining tax, accounting, or financial advice from a professional.
Any U.S. federal tax advice contained in this post is not intended to be used for the purpose of avoiding penalties under U.S. federal tax law.
Presentation of the information via the Internet is not intended to create, and receipt does not constitute, an advisor-client relationship. Internet users are advised not to act upon this information without seeking the service of a tax professional.
submitted by Nubboi to cryptax [link] [comments]

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Coinbase - Downloading Tax Reports (Beta) - YouTube

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