Episode 5 — A conversation with Jeff Neumeister, owner and CEO of Neumeister & Associates, a Burbank, California accounting firm specializing in crypto taxes.


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Host:
Chitra Ragavan
Chief Strategy Officer
Gem

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Like many newbies, I fell down the rabbit hole of crypto investing at the peak of the bull market in 2017. My investments were and remain modest. But I felt for the first time the thrill of becoming an investor, felt a deep connection to money, more so than to any investments I had made in the conventional stock market, despite the fact that I was dealing with virtual currency and was learning about concepts I knew nothing about.

Before long, I was moving along the classic crypto investor path — from simple purchases on Coinbase, to trading crypto on multiple exchanges. My family found my fascination for cryptocurrency bizarre and confounding to say the least. It did give this staid mom somewhat of a cool factor with my two sons, who got a kick out their “crypto mom.”

Like a lot of crypto investors, throughout that crazy year-long trajectory of buying, selling, and trading currencies, I paid little attention to something called taxes. I felt the cold sweat of fear running down the back of my neck the first time someone told me that EVERY transaction I had made over the past year of rabbit-holing could have tax implications and that I needed to go back and trace ALL of those transactions and find out the “cost basis,” for EACH transaction.

“Wait, what?” I asked friends, disbelieving. “Every transaction?”

“Yep,” was the answer.

Where to even begin?

A colleague suggested I speak to Jeff Neumeister, who owns a full-service accounting practice in Burbank, California,, called Neumeister & Associates, with a speciality in cryptocurrency taxes. Jeff is a so-called “forensic accountant.” In other words, he’ll discover all of your financial secrets, even if you don’t want him to! Among other things, Jeff helps federal and state law enforcement agencies investigate cryptocurrency cases. I figured that if Jeff couldn’t figure out my crypto rigmarole and related tax liability, if any, no one could!

It took several weeks to identify all of my transactions, moving through exchange by exchange, wallet by wallet, downloading what amounted to dozens of transactions from over the course of the year. I had no idea I had even done so many trades. What was I thinking? Well, that’s a bull market for you. Crypto fever sets in and you get caught up in the madness of it all.

Now, as many of you know, digital wallet companies and exchanges don’t make it easy for you to analyze and download your transaction history — and some are worse than others. So it was slow going.

Somehow, with help from my crypto-savvy colleagues at Gem who were generous with their time and expertise, and Jeff’s deputy, Abhinav Soomaney, who exercised both incredible patience and smart sleuthing, I ended up with a simple spreadsheet of every transaction I had made, the cost basis of each, the profit or loss I had incurred, and the total value of my portfolio.

It was sheer luck and finding Jeff that my abject failure to understand the tax implications of investing in cryptocurrency before I made my first transaction, didn’t come back to bite me in a big way at tax time. I ended up with very little tax liability. And it felt good to see it all outlined on paper. I felt my sense of helplessness, fear and anger at myself dissipate. Knowledge is power.

The bottom line is that we all stand to benefit greatly from understanding how the IRS views crypto (Hint: Weirdly, it’s falls in the same category as your house and taxed similarly, as property).

It’s important to note that the IRS is paying keen attention to cryptocurrency. Not paying your taxes is NOT an option. In November, as Sean Williams of the Motley Fool reported in this helpful article, the IRS won a case against Coinbase relating to obtaining access to information about nearly 15,000 users, most of whom had traded a significant amount of Bitcoin over a five year period between 2013 and 2015, but had failed to report the capital gains on their federal tax returns. “Put plainly,” said Williams, investors were knowingly and willingly avoiding paying their fair share of capital gains tax.”

Undoubtedly, some of these presumed tax scofflaws will be hearing from the IRS.

As Jeff and other tax experts will tell you, when it comes to crypto taxes, the bottom line is this: The buck stops with you. What you know and don’t know can make or break you.

Look what happened to one U.S. college student in 2017 who invested $5,000 into Ethereum and somehow wound up owing the IRS $400,000 in taxes. By his own admission, he’s still in shock about what happened.

Knowing your tax liability is especially important this year after the recent market crash, since many investors are selling their cryptocurrency and fleeing the market without full knowledge of the tsunami of capital gains implications of their decisions.

With relatively little time to figure all this out before tax time, I invited Jeff over to the Gem studio here in Venice, California to share some of the same wisdom he shared with me last year, with you all.

In this episode, Jeff offers practical tips on everything from what constitutes a taxable event to how mined coins are taxed, what to do if you give or receive a gift of crypto, and best practices for tracking your tax liability.

That’s just a few of the topics we discuss in this comprehensive tax primer. You’ll come away feeling a lot more confident about understanding your tax burden as you brace yourself for jumping back into the crypto rabbit hole — this time to retrace your path through what is likely to be a dizzying maze of crypto transactions. I wish you safe passage.

Join us next week for a fascinating discussion with Jill Richmond, Co-Founder and COO of the Digital Assets Trade Association (DATA) about the heated politics of crypto regulation. We’ll talk about the patchwork of federal regulations and the conflicting interpretations by the alphabet soup of agencies over how crypto should be regulated. And we’ll show how many states are jockeying with Washington DC to shape the crypto ecosystem and vying with each other to increase their revenue base by making their states more crypto friendly.

Topics Covered

  • What makes filing crypto taxes so challenging
  • What constitutes a taxable event
  • What makes it different from conventional taxes
  • What are short-term and long-term crypto gains
  • How mined coins are taxed
  •  How gifts of crypto are taxed for giver and recipient
  • How crypto can be used favorably for taxes through charitable donations
  • What happens if you are hacked?
  • What happens if you lose your crypto?
  •  Can you get away without filing taxes?
  • Penalties for tax evasion
  • Auditing your taxes
  • Filing your taxes
  • Maintaining good records for taxes
  • Retracing your steps and figuring out your taxes
  • Biggest obstacles for average investors
  • Differences in exchanges in terms of tax documentation
  • Best practices for beginners
  •  Closing thoughts

About Your Host, Chitra Ragavan

A little background about me — I’m the Chief Strategy Officer at Gem, a Los Angeles-based crypto portfolio startup. Prior to Gem, I was Senior Counselor to the CEO of Palantir Technologies. Before entering the software startup world as advisor to CEOs, I was a long-time journalist at WTTW/Public Television in Chicago, National Public Radio (NPR) and U.S. News & World Report Magazine (U.S. News).

My goal is to provide independent and thoughtful analysis of the events and news shaping the industry.

By way of full disclosure, I am a crypto investor. If we ever mention a specific cryptocurrency in the context of a discussion, I will fully disclose my investments, if any, in that currency and expect the same from my guests. I’ll avoid any and all conflicts of interest in the course of these discussions.

You can learn more about me on LinkedIn, my website, or my Instagram.

Enjoy your crypto journey, unicorns!

Chitra Ragavan