Aryeh Munk & David Zareh from OnChain Accounting on Crypto Taxation in the US

[00:00:00] Umar: Welcome to the Accountant Quits, brought to you by the Web3CFO Club, a community of web3 CFOs sharing best practices on web3 operations, and Cryptoworth, a crypto accounting solution to help you automate your crypto bookkeeping. On this podcast, we discuss how blockchain will impact the accounting profession and how accountants should prepare themselves for the future of work.

[00:00:26] Umar: My name is Umar, your host, and even if some might refer to me as the accountant gone rogue, my job is to provide you with the blockchain knowledge you need that will be relevant for the accounting industry as a whole. 

[00:00:39] Umar: Welcome to Episode 54 on crypto taxation in the US. Now before I go through the intro, I have to apologize for the bad quality of the sound, which is mainly coming from when I speak.

[00:00:51] Umar: I had the great idea of switching recording softwares for this episode, and in the editing process, we've tried to enhance the quality of when I speak as much as we could. 

[00:01:02] Umar: Are you as a company contemplating using crypto in your business, be it for investment purposes or rather in your daily operations.

[00:01:10] Umar: The first advice, irrespective of the jurisdiction that you're in, is to speak with a qualified tax advisor. Once you understand the crypto inflows and outflows, you can also determine the character of income of your crypto, which basically falls under two buckets. Ordinary income, subject to income tax, and capital income, subject to capital gains tax.

[00:01:35] Umar: Since tax is jurisdiction specific, I'm starting a new series on crypto taxation. And for the first episode, we'll look into the US. And today I have the pleasure of speaking with David Zareh and Aryeh Munk, the Managing Partners at OnChain Accounting, an accounting and tax services firm focused on crypto. 

[00:01:58] Umar: For this first episode on crypto tax, we'll go through some basics and cover what's capital gains tax and some examples of transactions, whether paying in stablecoins gives rise to a taxable event, areas the IRS makes it clear on income tax for crypto, tax optimization before filing your crypto tax, best practices for crypto tax compliance and much more.

[00:02:25] Umar: David and Aryeh, welcome, and thanks for making the time to be here. 

[00:02:29] David: Pleasure to be here. Yeah. Thank you Umar for having us. 

[00:02:33] Umar: Before we speak about crypto tax, can each of you share a little bit about your background, how you became interested with blockchain and how that eventually led to both of you starting OnChain Accounting?

[00:02:44] David: Yeah, I'll take, I'll take that first. Yeah. I got placed into the whole crypto blockchain industry back in 2015. Sort of very early on at that point, I wasn't thinking about it from a sort of transformative accounting and finance perspective. I was thinking about it more just as a fun sort of tool and, you know, maybe a way to make money.

[00:03:06] David: But over time I started to realize the differences between that and traditional banking and accounting. And it became very clear to me how much more superior it is to be using blockchain technology. 

[00:03:21] David: Even today when people are, you know, paying overdraft fees or are receiving absolutely 0 percent interest on their money, using a bank account or sending an ACH and it's taking 5 to 10 business days, you know, these are the sorts of things where I watch people do every day. And it's just because traditional banking has such a stronghold on the industry due to, you know, our government and the way things are structured. So I think eventually that will all come down. I think it's going to take a very long time, but it excites me to be on this journey because over the course of 10 to 20 years, I'm going to see this transformation happen, which is what ultimately excites me about this whole industry. 

[00:04:05] Umar: And Aryeh?

[00:04:07] Aryeh: Yeah. So my journey began a similar time in 2015. I was working as a Controller at a private equity firm then a few years after graduating college.

[00:04:18] Aryeh: And I've always been researching the latest tech, looking at this thing, that thing, and a friend of mine introduced me to Bitcoin, Ripple, a couple of other ones I was looking into, and I didn't have a strong understanding of it, like I do today That took a handful of years of further research and understanding. At the time, it was very clear to me that this solves a real problem, you know, real payment infrastructure.

[00:04:45] Aryeh: Our current payment infrastructure is ancient. It's archaic. It's slow. It's janky. Wires get lost, you know, working at a private equity firm, wires have gotten lost, you know, we had closings and sometimes they'd be held up. And you'd be shocked the kind of things that go on behind the scenes.

[00:05:03] Aryeh: So, you know, at that time when I was looking into it, it was clear to me that this is the future. And throughout the years, I just followed the space, while working my TradFi job. And at some point I said, I had enough. This is boring. This is, you know, this is going to be, this is the future. I want to be part of it.

[00:05:22] Aryeh: And I want to bring my traditional accounting background to the blockchain. And that's how David and I began OnChain Accounting. On Chain 

[00:05:31] Umar: Accounting is a great name. It's good for SEO with Google. But how did you guys get the idea to actually start an accounting practice? Were people coming to you and asking for clarifications on crypto accounting? What's the story there? 

[00:05:47] David: Let me take this one. I definitely want to take this one. Aryeh decides to message me one day on LinkedIn and he's like, you know, I'm looking for help for accounting for my fund. I have this digital asset fund, you know, so on and so forth. And at the time I was doing accounting for a DeFi company called DeFi Pulse.

[00:06:06] David: And, you know, I wasn't interested at all. I said, who is this guy? You know, stop talking to me, but he wouldn't leave me alone. So eventually we met up, I don't know why, but we met at a Starbucks and, you know, we started talking and then one thing led to another, you know, Aryeh had the ideas like, why don't we, you know, there's this big gap, right?

[00:06:26] David: There's traditional accounting and then there's accounting for digital assets. And it seems like there's just a gap and, and, you know, who's going to fill this sort of need in the industry. And I wasn't so sold, right. But then, you know, we started discussing and, you know, we were headed into a bear market, which didn't really help, but over time we just were like, okay, maybe there's something there.

[00:06:48] David: Maybe there's something there. And then eventually we were like, you know what? There is something there. And over time, we just went into it full time. So, it went from me being like, who is this loser, to you know, him being my partner and us, you know, working out of Manhattan, you know, every week. So, it's kind of crazy how things happen, I guess, in life.

[00:07:11] David: Aryeh, you're not a loser, okay? 

[00:07:15] Aryeh: Yeah, that's how it went down. 

[00:07:18] Umar: All right, so to kickstart this conversation today on crypto taxation, I want to speak first about capital gains tax. So most jurisdictions globally consider crypto as property for tax purposes, and therefore any gains and losses from disposal of crypto would be subject to capital gains tax.

[00:07:38] Umar: I want people who perhaps they don't have a great understanding of capital gains tax to understand the different examples where this would actually give rise to a taxable event. For example, paying employees using crypto would be a capital gains tax event. Or buying for goods and services, when you're swapping crypto for crypto or crypto to fiat.

[00:08:01] Umar: Bridging your crypto or providing liquidity to a liquidity pool. Those are like different examples that I just gave. But what are some areas today where companies where they come to you guys and they seek tax advice, what are these areas that they seek advice around capital gains tax? 

[00:08:20] David: Okay, so capital gains tax that the way I would think of it from a very basic high level perspective is if there is a transition from one cost basis to another right,

[00:08:34] David: so if i'm paying an employee in crypto, there may or may not be a capital gains tax. So if I'm paying them, so if I bought one USDC, for example, and then paid my employee one USDC, there is no capital gains tax because I acquired that crypto for $1 or USDC 1 and I paid it for USDC 1. 

[00:08:57] David: Now, if I purchase Ethereum at, let's say $2,000 per ETH, buy one ETH and then it goes to $3,000 per Ethereum. And then I pay my employee. Well, now the idea is that I purchased it at a certain cost basis, which was $2,000. And I'm disposing it at a different cost basis, which is $3,000. And that spread has to, that's what triggers the tax ultimately. So when you're swapping or when you're trading crypto, let's say maybe I'm, you know, I buy Bitcoin and I held it.

[00:09:33] David: And then obviously, the price fluctuated and then I sold it, now that difference is either going to be a gain or a loss. Just like the traditional markets. So the nature of crypto, right, is that there's so many different types of transactions and therefore there's different forms of capital events that could be triggered, but if there is no difference in cost basis, usually that there is no capital tax. 

[00:10:01] David: If there is, you know, for example, swapping or trading or, you know, paying an employee or disposing of crypto, you know, with, with a volatile digital asset, then there will be a capital event. I hope that makes sense. 

[00:10:15] Aryeh: Yeah, that's exactly right, David.

[00:10:18] Aryeh: And another thing I think is like a big misnomer in the space, which also confuses people is calling Bitcoin a cryptocurrency. So something like Bitcoin, like why is it taxed at a capital gain rate versus a dollar, like a stablecoin, like David just gave an example for. It's not taxed. 

[00:10:40] Aryeh: That's an actual currency, right? Dollar representation of USDC on the blockchain is just like a dollar that you're sending an ACH. So you can move that around and there's no capital gains tax, but something like property, whenever you go in and out of property, you acquire property, you establish a cost basis, and when you dispose of property, you're disposing it at the market value, and that difference is your gain or loss.

[00:11:06] Aryeh: And the reason, just to, just zoom out a little bit, in the U. S., there's a lower tax rate on property is to incentivize investments. So, you know, ordinary income people have a job, they go to work, they earn a salary and they pay taxes on ordinary income to stimulate an economy, to encourage investments, to encourage citizens to invest in the future.

[00:11:35] Aryeh: There's a lower tax rate for investments, and that is where this comes in to play, which is property you're buying property for the longterm outlook on the appreciation of the property or on the, maybe the cashflow that the property will generate. So, and that is why the capital gain rate is lower than ordinary income.

[00:11:55] Aryeh: And also why, if you hold it for over a year, it's a lower rate than if you held it for under a year. 

[00:12:03] Umar: Okay, so holding period matters and in the U. S., so for people having crypto for their businesses, could you go through maybe some of these rates that would be favorable to them the longer they hold on to the assets?

[00:12:19] Aryeh: Sure. Yeah, so in the U. S., you're incentivized to make investments and the longer you hold it for, the lower tax rate that will be applied. So the specific, there's a range, however, the specific rate will depend on your, your tax bracket as well. So we can't really get into that, that level of granular detail, but what I could say is, is that if you're in the short term capital gain, which is less than one year time horizon, it could be up to 37% tax rate.

[00:12:50] Aryeh: And if you're in the long term capital gain rate. It could be up to 20%. So as you see, there's a big incentive from the upper tier of 37 to the upper tier of 20% for people that hold investments longer than one year from the time of purchase. 

[00:13:07] Umar: Now for businesses in the U S what forms would they actually be using to report or all of their capital gains or loss from their crypto assets that they, that they holding onto.

[00:13:18] Aryeh: We would use a form 8949, which lists your disposition of assets. 

[00:13:22] Umar: That would be filed once a year, right? 

[00:13:26] Aryeh: Yeah. It's an attachment. 

[00:13:28] Umar: Perfect. Okay. I want to move on to some specific examples on DeFi taxes. So I was mentioning earlier that swapping, bridging, providing liquidity to a pool, these gives rise to taxable events.

[00:13:44] Umar: Maybe we can focus on some of them. Like let's take for example, bridging, which for our listeners, not familiar with the term is the action of moving assets from one blockchain to another. For example, I can bridge Bitcoin to Ethereum and then it becomes wrapped Bitcoin. And I can then have access to DeFi, let's say on Ethereum.

[00:14:06] Umar: So, for taxes, bridging can be treated either as taxable under an aggressive approach or non taxable, and then it can be regarded as an, just like an internal transfer. Is IRS clear today on bridging, and if so, can companies choose whether to recognize tax or not? 

[00:14:27] Aryeh: That's a great question. And that's exactly right. There's really two approaches the IRS hasn't given guidance. So, you know, I would say everyone should consult with their accountant and see what makes sense for them. But we can explore the two options. So one option is the logic is, okay, I have, let's say native Bitcoin on the Bitcoin blockchain.

[00:14:54] Aryeh: And I want to wrap it and put it on Ethereum. So, essentially, it's the same asset. It's just on a different set of rails. It's on a different blockchain. So, taking that approach is, nothing changed. Although I bridged it from, from Bitcoin to Ethereum, it's the same asset, and the value is tied to Bitcoin, and it's just Bitcoin, just on Ethereum.

[00:15:18] Aryeh: So therefore, it's not a taxable event, right. It's like trading one Bitcoin for one Bitcoin. The other approach, which is more aggressive is that when you wrapped it for Bitcoin, you essentially created a new asset. And although their values are pretty much tied to each other. It's another, it's a different form of Bitcoin.

[00:15:40] Aryeh: And because you created a new form of Bitcoin, which has now new utility for that asset, there is an argument to be made that that's a taxable event and the tax consequences could be massive. For example, if you bought native Bitcoin when it was, you know, let's just say $20,000 about a year ago, and now you're like, Oh, I want to wrap it and put it on Solana and play in DeFi.

[00:16:10] Aryeh: Now Bitcoin's $40,000, just wrapping it and moving it to Solana is going to trigger a $20,000 capital gain. And the reverse could be if you bought wrapped Bitcoin, you know, you might want to harvest losses when you bought wrapped Bitcoin, when it was $50,000 during the last bull run. And now it's $40,000, you might want to unwrap it and create a $10,000 loss.

[00:16:33] Aryeh: So it goes both ways. The one thing I would for sure say is be consistent, whichever you adopt, be consistent with it, with all your taxable years. And I think we'll have to wait for, for guidance in the IRS. I happen to think that wrapping it should not be a taxable event. You know, if the IRS asks me for my opinion, I will surely give it.

[00:16:57] Umar: Now let's take another example, simple example of I'm the lender I'm providing. Let's say uSDC on Aave, Aave is a DeFi protocol. And in return, I receive aUSDC. So could you run us through the different tax event as for me, the lender, from the time I'm lending my tokens until I close my position? 

[00:17:23] Aryeh: So when you deposit tokens to Aave, you're going to receive a receipt called Aave USDC, and that's just essentially is your receipt for retrieving back your tokens, as well as the balance, which now starts to accrue inside of your deposited tokens.

[00:17:47] Aryeh: So what's happening when you deposit. USDC into Aave is you're lending it to this decentralized protocol and by providing liquidity and making these funds available for, for loans, you're earning a yield interest income on these dollars. So that interest income that you're earning is just like, you know, interest income that we're familiar with from the TradFi world. 

[00:18:14] Umar: Understood. So also when I'm providing my USDC at let's say inception, this would trigger a taxable event, but also at the time I'm closing my position, right? So receiving aUSDC and giving back my aUSDC would be two different taxable events. 

[00:18:33] Aryeh: I don't believe so. Because, well, there wouldn't be a capital, a capital taxable event. Meaning USDC is $1, so when you deposit it, you're gonna get the same. 

[00:18:49] Umar: Yes. USDC is a bad example, right? I should have taken ETH for example. 

[00:18:53] Aryeh: Yeah. Yeah. I see where you're going with your question though. Yeah, so, so just talking out loud here, the interest income that you earn theoretically should be recorded as it's earned. However, it's actually recognized on your wallet when you swap, when you withdraw those, those assets. Which is really interesting because that doesn't really follow the GAAP accounting framework that we know it. And this is because the technology is just not built like that. It's interesting to see how, how that will play out.

[00:19:29] Umar: Yeah, that's interesting. So blockchains operate on a cash basis and accounting is done on an accrual basis. So I can only then recognize this interest income once I receive it, but for accounting and under accrual concept, I still have to account it at the year end, even if I didn't claim it back, right?

[00:19:48] Umar: So in essence, how would the accountant, even though this is a more accounting related question, how would the accountant be accounting for these interest income? 

[00:19:58] Aryeh: That's a great question. So at year end, what we would do is go look at our lending positions, right. So if you have an Aave lending position and we would see, okay, when we deposited, what was our balance? And what has accrued since the end of the year, we would make an adjusting journal entry to pick up that income.

[00:20:19] Aryeh: And then when the money is returned and the balance, you know, we recognize that additional funds going into our wallet, when we pull that loaned assets out of Aave, then we would record the remainder of the income for that year and offset any extra income with the prior year, you know, journal entry essentially. But we would recognize it in the year that it was recorded, you know, under accrual accounting.

[00:20:48] Umar: Moving on to income tax. So there are many examples of income from crypto being considered as taxable events. For example, I'll just list a few. Your mining income, staking income, Aryeh gave an example of the interest income you earn from the liquidity pool, any trade or business income. So if I'm invoicing, let's say my clients in crypto also receiving crypto as compensation, those are a few examples.

[00:21:13] Umar: So, every time a company would be receiving some form of crypto income, this would be calculated as the number of tokens that were received, multiplied by the fair market value at the time of receipt. In the US right now, where would you say the tax guidelines are very clear and possible areas where tax treatment is a bit ambiguous?

[00:21:38] David: Yeah, I would say for income It's a bit more solidified because at the end of the day, if it is revenue, then it is taxable, right. And, you know, not all revenue has to be just selling services or selling goods. You know, you could have income, for example, which is like interest income and staking income, et cetera.

[00:22:03] David: So in the crypto world, there's different forms of income, but if it is a way of making money from someone else, and it's similar to income in the traditional world, well, then it's income, right? And that income is taxable. It's just, you know, instead of interest income from a bank account or from a bond or from a dividend, it's staking income, right?

[00:22:27] David: It's just labeled a little bit differently, but at the end of the day, it's the same form of money that's coming in, right. And that needs to be, you know, that needs to be taxed, of course. I would say maybe it could get a little bit hazy if it's, for example, when it comes to liquidity pools, but again, you know, you could consider that as similar to dividends.

[00:22:52] David: So again, you know, I overall, I'd say what regarding income tax, income in the crypto space, it's a little bit less ambiguous compared to different areas of tax treatment in this industry. 

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[00:24:39] Umar: Yes, you're right. Income is income and it's going to have to be taxed. I want to go through staking income. I was reading the revenue ruling, it's termed 2023/14, and which highlights that in order to be included in gross income, the recipient must have dominion and control over these staking rewards.

[00:25:00] Umar: So again, there's a mismatch, right? Between what you record in your financial statements, because like we're just talking with Aryeh, it has to be under the accrual basis. So you have to record your staking income, but for tax purposes, the staking income would only be recognized when the tokens are basically unstaked and you receive their rewards.

[00:25:21] Umar: Would that be correct? 

[00:25:23] David: Yeah. So, you know, again, all the guidance is not a 100%, you know, written in, you know, the way it is in traditional accounting but right. For example, we have a client right now and he staked a considerable amount of ETH and he's trying to figure out, right, like if he doesn't have dominion, is it considered income? Is it taxable? You know, what exactly is the way to play this? And for me personally, you know, if for example, let's say I have a bank account and I put my assets in that bank account and then, you know, that bank provider is paying me interest and that money is going into another bank account and it's just being held there until transferred over to my original bank account, right?

[00:26:10] David: I would consider that still to be you know income I would I would consider that to still be mine. However right in this space if you don't totally have control of it, you could make the argument for, okay, well, it's still on the platform, you know, for example, maybe it's still on the DEX and I don't have actual total control of it.

[00:26:32] David: It's not in my wallet. I don't totally possess it. And so therefore it's not considered income yet. So it's, it's definitely a gray area, but me personally, I would consider it when you receive that income that it is income. But I know that, you know, for, for tax purposes, some people you know, because they don't have that dominion, they are not going to be, you know, filing that on their taxes until they actually do take control of that, of those assets.

[00:27:04] Aryeh: That's a great example, David. And just to like pinpoint, I think it boils down to is dominion in your wallet or is dominion the ability to claim it? And if dominion includes the ability to claim it, then that's still dominion. And then the question is, okay, well, what are the risks if I don't claim it? Like, will it always be there?

[00:27:25] Aryeh: Right. Staking rewards versus LP rewards are a little different. Like LP rewards can disappear if the platform goes down, but you know, if there's a hack, but like ETH staking reward is probably a little more of a sure thing. So does that play a role in it? Right. Because like, you know, if it's LP on a new platform and I could claim it, but is that really dominion? Cause it might not be there. There might be a rug pull, you know, so I think that also plays a role and there's something else to consider as well.

[00:27:55] Umar: All right, I'm going to move on to tax optimization. There are several strategies a company could use to optimize their tax position. How can a business using crypto approach tax optimization from the time of structuring until the time of filing?

[00:28:13] Umar: Some of the recurring examples could be, first of all, choosing the right cost basis, or there's not one right cost basis. That would vary depending on the state of the market. In the U.S I understand most businesses use FIFO. We can go through what tax loss harvesting is, which for the listeners, it essentially means you sell your assets in a loss position and you net those losses against the gains from other disposals that you've made.

[00:28:43] Umar: We can also go through what wash sales mean. I understand this are still allowed in the U.S. So what are some of the recurring tax strategies used by companies in the US for tax optimization? 

[00:28:57] David: Yeah, I'll, I'll speak about, you know, cost basis, and then I could hand it over to Aryeh about, you know, maybe tax loss harvesting and wash sales.

[00:29:05] David: So cost basis is very important, right? It determines your entire capital gains, your entire capital loss, and depending on the method you choose, it could be very different, right? So there's something called FIFO, and there's something called LIFO. You know, just briefly FIFO is first in first out. So it follows the beginning of time of the trail of the assets So when you first purchased it, then when you sold it and so on so forth and LIFO is just the reverse order you know in time right. 

[00:29:36] David: And due to the difference of pricings in those time during those times you're going to have a different taxable event different tax treatment. So right now there's this sort of like period of time where you know, you could push for the tax treatment you want, right.

[00:29:52] David: And you could record it and you have to have proper record keeping of what you're doing and why you're doing it. And, you know, sort of choose which one is most favorable. Although you are right, Umar, that mostly in the U.S people are doing FIFO, which, you know, just makes the most sense conceptually because you're just following it from the beginning of time to to date right to right now. 

[00:30:15] David: But since there's, and it's not just FIFO and LIFO, there's other ways to do it, but since, you know, these assets are so volatile, you could also get to this sort of point where it's like, okay, well, is it when I sold it at that moment of time, is it, you know, the medium price of that day?

[00:30:36] David: Because for example, maybe Bitcoin was $30,000 in the morning and it was $32,500 at night, right? So understanding cost basis, understanding how to treat it and having the proper record keeping of it, I think is so important, right? Because if you have that, and then if anything happens in the future and you have to speak to, you know, any government entity or, you know, look back at your taxes in the future, right?

[00:31:00] David: You have that, you have that record keeping, you have that sort of like why and that trace of what you did. So yeah, cost basis as it relates to volatile assets is just, it's huge, right? And at the end of the day, if you have a crypto accountant and if you have an accountant helping you, you know, they may pay for themselves just by saving you in taxes, right?

[00:31:23] David: Applying a favorable tax treatment. So it's something that I would not overlook if I was using crypto in my business today. But yeah, so Aryeh, you know, I'll pass it off to you regarding, you know, tax loss harvesting and, you know, wash sales. 

[00:31:40] Aryeh: Yeah and before I touch upon the wash sale, also using a crypto sub ledger is really helpful to optimizing tax expenses for gas fees.

[00:31:51] Aryeh: You know, sometimes gas fees are added to the cost basis of your purchase. Sometimes they're not. And just in general, using a crypto sub ledger is helpful in making sure you've got every single payment that you made. If you made a payment, or if you lost some crypto or whatever it might be that crypto went, you know, it's just really hard to see the full picture if you're not using a crypto sub ledger and making sure you have everything.

[00:32:16] Aryeh: So frequently we'll discover, oh yeah, that expense, that expense. And it might not be called optimizing. It's like the basics of just capturing all your expenses. Yeah. And as far as wash sale, so it's really interesting. You know, we're in this moment in history where the regulators are still wrapping their head around crypto.

[00:32:36] Aryeh: It's considered property and the wash sale law is applied to securities. And basically what the law is, is they want to prevent people from harvesting losses. So let's just say you bought a stock and it was worth $100. And you bought it in the beginning of the year for $100. And then at the end of the year, that stock is worth $50.

[00:32:58] Aryeh: So if you were to sell it, you would generate a $50 loss. Now the law prevents you from buying that stock again within 30 days. Because that indicates you just sold that stock just for that $50 loss. So really you didn't have, you didn't want to get rid of that position. You just wanted to harvest that loss.

[00:33:19] Aryeh: So to prevent people from doing that, if you were to buy it again within 30 days, you know, you don't get that loss, you lose it. So if you are, and now people still do harvest losses, but they have to be very careful and make sure that they're outside that 30 day window. Now with crypto, this doesn't apply.

[00:33:39] Aryeh: So you can go ahead. If it's at the end of the bear market, which won't apply to your 2023, but did apply last year in 2022, you can go ahead and sell your crypto at the end of the year and then repurchase it a moment later. There's no waiting. There's no law that prevents you from doing that.

[00:33:58] Aryeh: And then you can efficiently harvest your losses. And run zero risk of the market moving away from you, right? Because if you have to wait 30 days, Bitcoin's at $30,000 now, but in 30 days, you know, you know how it is, it could be at $45,000 and that risk of the market getting away from you just to chase some losses, it would not be wise.

[00:34:20] Aryeh: But the way it currently is, you could do that and not have and not run that risk of market exposure. So, that's pretty much in it a nutshell. 

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[00:36:12] Umar: Next I want to go through some of the good practices that you would advise like listeners to, to have when carrying out their tax reporting. Before coming to good practice, some of the challenges with having on chain transactions would be completeness, for example, where you'd have to be able to capture like a hundred percent of your on chain transactions, which as you mentioned Aryeh, you can use a sub ledger, a crypto sub ledger for that, or a crypto tax calculator.

[00:36:41] Umar: I understand crypto tax calculators in the market are mostly used by individuals, so retail. And sub ledgers is mostly for corporate. Maybe I'm wrong. The second one would be having proper pricing at the time of receipt or disposal. And this would vary on the pricing source, whether you're retrieving the price from an aggregator, like CoinGecko, CryptoCompare or an exchange.

[00:37:04] Umar: Again, if you're using a crypto sub ledger, usually they would already have like a pricing aggregator built in the tool. Also being consistent with your cost basis. So if you chose FIFO or if you chose LIFO, you would not be changing those cost basis methods every year. In practice, what have you observed your clients getting wrong?

[00:37:25] Umar: So the first time clients come to you and they've had maybe a bunch of transactions on chain. What are they doing wrong? Most of the time from, from the way they are recording their transactions. 

[00:37:39] Aryeh: Yeah so one of the biggest challenges we face is when a client comes to us, the individual, and they don't have all their sources.

[00:37:49] Aryeh: So when you're trying to reconcile on chain transactions, it's extremely important to have your sources, which means if you moved crypto around to another wallet and then we moved it back or you just moved it to another wallet and now you're holding a cold storage, we need that source. It's part of the big picture.

[00:38:09] Aryeh: If we're missing a piece of the puzzle, the report, the output report, it's, it's incomplete. And sometimes there's explanations, you know, I lost the crypto, I don't have access to it. Sometimes actually frequently it's the API for a certain centralized exchange is wonky, which is very, very frustrating and annoying, interestingly, but not surprising.

[00:38:33] Aryeh: Like it's easier to deal with, with a blockchain wallet operating on the blockchain with DeFi than it is to deal with centralized exchanges because centralized exchanges, they're not all reliable to give you good data, and sometimes you lose access to the exchange, and then you have no data, which also happens.

[00:38:54] Aryeh: So, and as we know with, with blockchain wallets, you always have access to the blockchain. So, but then, you know, there's some downsides too, you know, with blockchain transactions, you have a lot of spam, a lot of spam transactions, and sometimes you have to scrub the activity to exclude. These are spam transactions that you know are duplicating your trades or making it look like you received additional funds when you really didn't. So there is that as well, which could be challenging again.

[00:39:22] Aryeh: Yeah, and having someone that is familiar with some of these pain points as a client helps the process along, it goes smoother. So having an educated client is very helpful for us to do our job well and provide accurate crypto reconciliation reports. And yeah, back to what you're saying about the different softwares.

[00:39:45] Aryeh: The crypto sub ledgers are typically for businesses because what they're doing is they're not just reconciling your trades. In fact, businesses typically don't trade. A business that's like trying to build something on the blockchain, but their business isn't trading like they're mainly building a company.

[00:40:03] Aryeh: And what does the company do? The company has expenses and it's generating revenue. So they're paying invoices. They're receiving payments. They're frequently paying in stablecoins, but they'll also pay with Bitcoin or Ethereum. And they're surely using gas, you know, and transaction fees. 

[00:40:20] Aryeh: So obviously ties back into the whole cost basis issue with property because, you know, if they're going to pay someone with Bitcoin or Ethereum, that's a disposition of an asset when the payment goes out. So we need to know, well, what price did that client buy that asset? And now that they're disposing of it for a payment, that difference can be a gain or a loss.

[00:40:42] Aryeh: Unlike a regular individual who is trading, whether it's on a centralized exchange or a decentralized exchange. They're not sending or receiving stable coins as a form of income or operational expenses. If there is stable coin movement, it might be just yield that they earned, or they're moving around money between their wallets, or they're trading, you know, in and out of other assets and denominating in stablecoins.

[00:41:08] Umar: I have a follow up question on Crypto subledgers. So we don't have to be shilling like any of the solutions out there. I've actually spoken to most of the founders on this podcast before, and the listeners would be familiar to them. But as let's say what would be very important for these tools to have when it comes to filing crypto taxes?

[00:41:31] Umar: So I understand all of them are able to, how do you say, they have the different cost basis over there and you can choose which cost basis you want. But at the end of the day, when you want to file your taxes, which would be important for listeners to consider with these crypto subledgers besides just looking at prices.

[00:41:51] Umar: Prices is one factor, but over and above taxes. What should people pay special attention to? 

[00:41:57] Aryeh: Well, I'll just share what came to my mind and then you can go ahead. So an obvious thing that comes into mind is making sure it's compatible with your blockchain and the team is aware of the blockchain, like every blockchain is a little different.

[00:42:13] Aryeh: So, you know, If you're going to sign up with a ledger software that has experience with your blockchain, you might run into some issues, which, you know, yeah, I would imagine they would ultimately figure out, but, it might create some additional pain points for that experience. And I think also understanding how it works is really important because I think there's a misunderstanding with some of the people that we speak to that, you know, okay, let me get this crypto sub ledger.

[00:42:42] Aryeh: I'm going to plug it in, enter my wallets, link it to QuickBooks or Xero, and I'm done. I'm good to go. At the end of the year, I'm going to generate a P&L, balance sheet, 8949, send that up to my accountant, let me know when it's done. Amazing. Let me know what my tax bill is. 

[00:42:58] Aryeh: And I see you're smiling. Obviously, it's not like that. And obviously, you have to know how to use the platform, because if you don't know how to use it, it's going to be wrong. And then there's just going through many different transactions because the software's don't know every single application. The software doesn't know this DEX, that DEX, right?

[00:43:18] Aryeh: There's new one's popping up. There's new networks popping up. So you have to go in there and make sure it's interpreting it properly because there's different protocols that work differently and they do weird things and you just have to make sure that it's coming into the system properly. And following the accounting standards appropriately.

[00:43:37] Umar: Now we spoke a lot about crypto taxes. I want to move on to speak a bit about OnChain Accounting. Can you tell us how today you're helping clients who have crypto on their balance sheet, manage their bookkeeping, accounting, reporting, and tax? And what are some of the different client profiles that you have today? 

[00:43:56] David: You know, so a lot of these companies majority i'd say except for maybe even the DEXes right and the exchanges they have the off chain portion, but majority all have off chain, right?

[00:44:08] David: They have the traditional bank account. They probably have credit cards You know, they have employees. It's not no one is fully on chain, right at least yet. And so you know the way we help is by consolidating everything, right? You don't want to have fragmented accounting services. You don't want to have to go to one person for, you know, bookkeeping for your bank account and one person for bookkeeping for your crypto, and then go to someone else for your taxes at the end of the year end.

[00:44:37] David: You know, that's sort of really a big value add that we have to offer is that you could come to us and we could do all of that for you in one shot, right? We build out the entire accounting back office. We streamline it. We save you a ton of time. We save you a ton of effort. We negotiate prices for any crypto sub ledger you may be using.

[00:44:58] David: For example, this morning we spoke to a potential client and they mentioned two sub ledgers that they spoke to and the prices they received. And we explain to them, you know, if you come with us or if we facilitate the conversation for you right there, you're going to get price savings, right? We're going to facilitate this whole process.

[00:45:18] David: Like there's no need for you to go field it and like google and look and see what makes sense and what doesn't make sense, especially if you're operating on a blockchain that is maybe not so popular, right? For example, we were working with a client this week and last week operating on the Kadena network.

[00:45:36] David: And there's really not many, I don't think any actually crypto sub ledgers that we spoke to that have that. And what we did was we got them to implement it within five days. We got them special pricing. And we're onboarding them and we're doing the reconciliation of all their on chain transactions. So where can you find that?

[00:45:55] David: You know, I don't think you can really in the market. Maybe you can in a few places, but it's very hard. And some people are charging, you know, ridiculous fees maybe because they have the resources and they're longstanding traditional accounting firms, but ultimately, you know, the way we operate and the value we offer is that.

[00:46:14] David: We do this full time. We've been in crypto since 2015. We play with the tools you guys are building. We live and breathe it. So when when you guys come to us or we have that initial conversation, we know what questions to ask. We know what pain points you may have, and we already know who we should be speaking to, to get you guys going, right.

[00:46:36] David: And it's December right now. So, you know, a lot of people, for example, the call we had this morning. They're looking to get set up, you know, as soon as possible. So how does that, how does that work right. Would it make sense for them to do it themselves? Obviously not. And you know, would it make sense for them to consult with other people?

[00:46:53] David: Yes. But how many people know how to actually do this? So we're at this like very weird sort of period of time, but you know, ultimately it excites Aryeh and I, and that's why we're doing this, right. And that's why we've been building throughout the bear market and we just can't wait to see what's to come.

[00:47:08] David: You know, hopefully this promulgates throughout many countries and hopefully US regulation comes and is more lenient and is more, you know, structured. And, you know, we see a lot of people enter this industry and that's, you know, that's OCA. That's what we're betting on. That's, that's what we're building.

[00:47:27] Umar: A few weeks ago, you published a guide called the ultimate crypto accounting guide. What can people learn in this guide and what did you have in mind that you wanted to bring forward to your audience? 

[00:47:41] David: I think Umar, just like yourself and how, you know, you're building all this knowledge base around crypto accounting.

[00:47:47] David: We like to add value into the market, not just crypto accountants, but maybe traders and individuals in the space. And everyone is sharing content. Everyone is sharing their opinions. You know, for example, we mentioned bridging, right? Like, what does that mean? We spoke about today, we spoke about dominion of, you know, staking interests, right.

[00:48:05] David: And what that looks like. And ultimately that guide is to add value to what everyone else is doing right. And, and seeing who is right and contemplating and debating, right. 

[00:48:17] David: And so just adding value to others is really the goal and, you know, being here a long, long time. And, you know, that, that's the point of the guide, you know, I kind of owe it.

[00:48:27] David: We, we need to share what we know, what we're learning just as everyone else is. So it's just kind of like doing our part almost. 

[00:48:37] Umar: Yeah. We've come a long way since let's say two and a half years ago when I first started the podcast, there was like no content at all on crypto accounting or auditing, but now it's way better.

[00:48:49] Umar: Like if you Google, there's still areas where, for example, the other day I was looking for accounting for stable coins, let's say, and I was looking at, I wasn't sure on the accounting for USDC and DAI. Because I was looking at IFRS and exactly what the guidance they had published back in March 2019.

[00:49:12] Umar: And in that guidance, so stable coins would not really be accounted as financial assets even. So I wasn't sure, but then, I mean, there was a little bit more digging and then I understood it is a financial asset. But yeah, there's way more content today. 

[00:49:29] David: Yeah. And I just want to add like, you know, Umar, I appreciate what you're doing because you know, you sort of, there is no content and then, you know, you're showing up and adding all this content is it's honestly, it's very brave, right?

[00:49:41] David: Because you don't know like how it's going to stick. You don't know how people are going to reply. You don't know. You know, it's, it's not, it's, it's ambiguous. So you're kind of like leading the way and it makes it easier for us and for others to be like, okay, well, you know, I'm also going to share content.

[00:49:57] David: I'm also going to put my value ad. So I think you're definitely a pioneer in the space of crypto accounting. In my opinion, at least. 

[00:50:06] Umar: Thanks a lot for your words, but to be honest, like, I mostly ask questions and I need guests like yourselves to come and reply to, like, these questions, right? Fair, yeah. If I didn't have the guests, I wouldn't be here today.

[00:50:21] Aryeh: But you're the facilitator, Umar. Yeah. You get a lot of credit, that's for sure. 

[00:50:27] Umar: I see the time has passed really fast. Probably already at the end of the podcast. Has there been anything else that you'd like to share with, with the listeners today on crypto taxation? 

[00:50:39] Aryeh: If you're listening to this, you're ahead of the pack and you're early and you're clearly looking for an accounting solution for your crypto business.

[00:50:49] Aryeh: And congratulations that you are working in the crypto industry. You are from the few. And, you know fortunate, so we wish you luck and we hope to speak to you guys. 

[00:51:01] Umar: There's a last question, which I like to ask to my guests, if you've listened to the whole episodes before. So there's this last question, which is, do you have a favorite quote or a maxim that you live by?

[00:51:13] David: Aryeh is definitely more of a quote guy, I know he has one stirring in his head right now.

[00:51:18] Aryeh: I have for sure but you put me on the spot here, is there a quote, I have a couple of quotes I like to use like trust but verify, you know.

[00:51:28] David: I don't have a quote but I do have a mantra I've been living by ever since I sort of left the TradFi life and it's that if you're gonna do it, just do it full force, do it all in, give it your all and you won't regret it.

[00:51:42] David: You won't regret what ends up happening, good or bad. You, you know, that you gave it your all. And when you're on your deathbed one day, you'll say, well, you know, I did it. And that's, that's all that's life to me that that's, that's what life's about. Beautiful. 

[00:51:57] Umar: I like that.

[00:51:57] Aryeh: And stack sats. Obviously, you should be stacking sats. I feel a little embarrassed to just state the obvious, but yeah.

[00:52:06] Umar: David and Aryeh, so thanks a lot to you guys for making the time today for this. Like having more of an accounting background than tax. Tax is not usually my cup of tea, but lately I've been, I've had to learn a little bit more about tax and I am actually enjoying it now.

[00:52:24] Umar: So thanks a lot for making the time today. If people want to learn more about OnChain Accounting. If you guys are, let's say recruiting and, or just people want to reach out to you. How should they do so? 

[00:52:38] David: Yeah, info@onchainaccounting.com. You can email us, you can schedule a call on our website onchainaccounting.com. If you want to even speak partnerships or you want to speak about, you know, what you're doing in the space. You know, you could check out our Twitters. Mine is at @cryptocpaguy. Aryeh has a weird Twitter handle, so I don't really know what it is, but 

[00:52:59] Aryeh: It's quite simple. It's @21mx100m. That's the total amount of Satoshis in existence.

[00:53:07] Aryeh: Seems simple to me, 21m, like 21 million x times 100m. So every Bitcoin has 100 million Satoshis

[00:53:18] Umar: All right, good one. 

[00:53:23] Aryeh: Yeah Or  it's Aryeh.Btc. That's my name, but that you know, the 21m x 100m is just way cooler 

[00:53:32] David: All right. It's been awesome Umar. Thank you for having us on. 

[00:53:35] Umar: Thanks a lot and we'll be in touch .

[00:53:37] Aryeh: Thank you, Umar, take care. 

[00:53:40] Umar: I would like to thank everyone for listening to this episode. You will find all the links of the episode, show notes, and transcript on the website of The Accountant Quits at theaccountantquits.com. Please note that this content is for general information purposes only and is not a substitute for consultation with professional advisors.

[00:54:00] Umar: If you do know anyone who could benefit from the episode and you care about them, please do share the episode with them. All the episodes are available on Spotify, Apple Podcasts and Google Podcasts. And by leaving us a review and rating, you will support the channel and all your fellow accountants. In order to be notified each time we release a new episode, do follow us on Instagram and LinkedIn.

[00:54:23] Umar: We hope to have you with us next time. Bye for now.