Crypto Tax Insights from Head of Strategy: Shehan Chandrasekera
CoinTracker has emerged as a leader in crypto tax calculation as well as cryptocurrency portfolio tracking. Their Head of Strategy/Tax, Shehan Chandrasekera, caught our eye as a CPA who’s on a mission to educate the public and conquer fear when it comes to best practices when filing taxes. Shehan has been working diligently with other industry leaders as well as the IRS to help provide clarity to the public.
We were lucky enough to speak with Shehan both about his path and perspective on the crypto industry, as well as to get some answers to questions directly from our BitIRA customers.
BitIRA: When did you first become interested in cryptocurrency and what made you trust in its future?
Shehan: I first got into crypto in the beginning of 2017. That time was very memorable for me because I got into crypto and, within three months, it went from $3-$4k per Bitcoin to $20K. And with all of the other altcoins factored in as well, it felt like every time I refreshed my phone everything was going up and up. The technology and what crypto was trying to do were major draws as well.
Then my contribution to the whole space became to help taxpayers deal with their questions around how to handle cryptocurrency. How should I pay taxes? What are some ways I can save on taxes? What are some tax planning options? So I started researching Bitcoin and other cryptocurrencies more formally.
Since then, I’ve always been involved with something that has to do with crypto in some way. It doesn’t necessarily have to buying and selling; it could be services that indirectly contribute to the crypto space, or services like CoinTracker that’s building a software to track crypto gains and losses and calculate taxes.
BitIRA: What are some of the biggest public misconceptions that you see around cryptocurrency?
Shehan: There is a significant number of people out there who think their crypto activity is completely invisible from the IRS and other regulators. They think their crypto transactions are not regulated and that they do not need to be compliant.
BitIRA: Whoa, you still see that a lot?
Shehan: Absolutely. I would say the majority of US crypto holders. Some of them genuinely don’t know that there’s any tax obligation associated with it. And some of them just don’t believe in centralized agencies like the IRS so they don’t care about taxes. They think that crypto transactions cannot be tracked, whatsoever.
We actually went to an IRS Virtual Currency Summit, which was an invite-only event for all the stakeholders in the space. I saw how the IRS, with the help of companies like Chainanalysis, can literally track where your coins are going. This is also how they catch the instances where groups are engaging with illegal activities like child exploitation.
So, the misconception is that people think crypto is non-traceable and that it’s completely invisible from the IRS. That’s not the case.
You need to pay your fair share of taxes. There are many legal things you can do to save on taxes.
BitIRA: In light of all of that experience you have with both the public and the stakeholders in the crypto space, what do you anticipate as being the most pressing regulatory needs in crypto right now?
Shehan: The most pressing need is that the IRS needs to figure out how they are going to regulate the exchanges, which are on-ramps and off-ramps for crypto holders.
The focus so far has mainly been on policing the taxpayer. But most of the taxpayers dealing with crypto are not very complicated or sophisticated. But if you can regulate an exchange, that means you regulate all the people participating in the exchange.
This is how brokerages and banks work. Every year the IRS asks them to report their taxable income from transactions; a copy of that report also goes to the taxpayer, who then uses that report to file their taxes.
Right now, the crypto exchanges are not required to provide an annual tax form like 1099-B or something similar. Some exchanges do, but I bet they’re doing the bare minimum.
So when it comes to regulation, if the IRS can be a little more effective in regulating those big exchanges, then that’s going to increase the users’ compliance.
BitIRA: Are there any other governments you know about that are ahead of the US on regulating the exchanges?
Shehan: Not really. One government that comes to mind is the Australian Government who recently sent out tax notices to about 350,000 Australians who didn’t report their crypto transactions properly. Last year, the US sent similar notices to about 10,000 taxpayers, which is far fewer.
BitIRA: Taking a step back, are there any particular issues or problems you’d like to see crypto and/or blockchain tackle next?
Shehan: I think overall everybody’s trying to do one thing: to simplify blockchain and crypto. Coinbase is trying to simplify crypto trading. Other companies are trying to make the process of getting a loan or some financial transaction simple in the blockchain ecosystem.
I think in the next five to ten years, we’re going to see a major push toward simplifying the process of getting people from fiat-based infrastructure to blockchain-based infrastructure with the least amount of resistance.
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(Disclaimer: This article is for educational purposes only. Please consult with a certified tax professional to review your particular situation and receive advice.)
#1 – If my crypto gets lost or stolen, how should I account for this in my taxes?
Good question – we see this all the time.
Unfortunately, the answer is not so simple, as with anything involving taxes, because you have a general answer but there are always exceptions and limitations to factor in on a case-by-case basis.
Typically, casualty and theft losses are not deductible under the new tax law passed in 2017, The Tax Cuts and Jobs Act (TCJA). After that was passed, you are no longer eligible to deduct casualty and theft losses when you file your personal return (with some exceptions).
If you’ve been trading under a business entity then you may be eligible to deduct those expenses as a tax loss but, again, it depends on the particular circumstances.
It’s very hard to give a one-size-fits-all answer to this question because, in the case of theft, it depends on what sort of theft was involved: was it a scam, did it happen to multiple people, what records do you have, how can you prove that you lost this amount, and so forth. You can read this post to see if your case is eligible for a deduction.
But, in general, these are not tax-deductible.
#2 – If I had a hard fork happen in 2018, do I need to go back and amend my return to account for the IRS’ recent guidance?
Another good question. I’ll give you my reasoning. It depends on the taxpayer.
The IRS released their 2019 guidance, which says that you have to recognize all of your income—including the new coins—regardless of whether you knew about it or approved it.
Now, the question is, what happens to returns you filed before this guidance came out; should you go back and amend them, and pay more taxes?
In a perfect world, yes—that would be the right answer.
With that being said, during the AICPA National Tax Conference held in DC, the IRS was asked this same question－whether this guidance is active prospectively or retroactively. The IRS representatives there gave a very diplomatic answer. They said, 2019 guidance is an extension of 2014 guidance so new guidance has always been active since 2014. So in their eyes, even though this is new guidance that was issued in 2019, they think that the proper tax treatment of forks should have been known by the public since 2014.
So, again, it depends on the taxpayer. In a perfect world, I would go back and amend it, but you could make the argument not to do so as well
#3 – If I took money out of my 401K in Q1 of 2019, and then invested all in cryptocurrencies, can I put those cryptocurrencies into a cryptocurrency IRA (such as BitIRA) at this point to minimize taxes for 2019?
Yes, but you have to do it in a special way (known as a rollover). If you do it as a proper rollover, there are no taxes to be paid at the time of conversion.
Once you properly set up a self-directed IRA with a service like BitIRA, you can buy/sell crypto inside the IRA and the gains are tax-sheltered until you retire and/or take out the money down the road.
#4 – What do you advise I do if I haven’t kept detailed records on my crypto trading before now?
It’s actually easier to create those records than you might think. If you connect your crypto wallets into a platform like CoinTracker, we can pull these detailed records through APIs and create that documentation for you.
Then if someday the IRS asks a question like, “How did you calculate your gains?”, we can open up your CoinTracker and show how the calculation was done.