David Kemmerer, Co-founder & CEO of CryptoTrader.tax: How The IRS is Viewing Crypto

David Kemmerer is the co-founder and CEO of CryptoTrader.tax. In this conversation, David and Anthony Pompliano discuss the new tax guidance from the IRS, why it’s so complex, why cryptocurrencies are becoming more difficult to report through the legacy infrastructure exchanges, and how CryptoTrader.tax is helping clients quickly and accurately report their tax treatments. BLOCKFI-----BlockFi allows you to keep your crypto, put it up as collateral, and receive a USD loan funded directly to your bank account. They do loans ranging from $2,000 to $10,000,000, and they're perfect for helping you reach your financial goals of all sizes. Visit BlockFi.com/Pomp to learn more about putting your crypto to work without having to sell it. CRYPTO. COM-----Crypto.com is a pioneering payment and cryptocurrency platform that seeks to accelerate the world's transition to cryptocurrency. With the vision of "cryptocurrency in every wallet", the Crypto.com App offers a full range of financial products with competitive pricing, well designed UX and high security. It is the best place to buy, sell and pay with crypto. COINMINE-----The Coinmine One is like an Xbox that turns your electricity into Bitcoin. You just plug it in, connect to wifi, and tap on the crypto you want. It’s so easy anyone can do it. Everything is controlled from the Coinmine mobile app and the Coinmine keeps getting better with over the air updates that add new coins, features and services to your Coinmine. Visit coinmine.com/pomp to get a Coinmine and earn crypto for powering a new world. ETORO-----This episode of Off the Chain is sponsored by eToro, the smartest crypto trading platform, and one of the largest in the world. Join 11 million other traders and create an account at etoro.com and build your crypto portfolio the smart way.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off the Chain, simply the best podcast in crypto. Let's kick this thing off. David Kemmerer is the co-founder and CEO of CryptoTrader.Tax. In this conversation, we discuss the new tax guidance from the IRS, why it is so complex, how cryptocurrencies are becoming more difficult to report through the legacy infrastructure exchanges, and how CryptoTrader.Tax is helping clients quickly and accurately report their required tax treatments. I really enjoyed this conversation and I learned a lot. I hope you enjoy it as well.

• 0:41Anthony Pompliano?

  Wanna know who has the best URL? Crypto.com. That's right, Crypto.com. They're a crypto platform with one goal: motherf***ing mass adoption. That's why we're all here. We're trying to get crypto in every wallet. Crypto.com is helping people do that through buying, earning, lending, and card payment. Everything you could want at Crypto.com. Go help your boy out, tell him Pomp sent you. Download the app or visit Crypto.com. Pomp's got you, always. Ever wanted to get into mining and didn't know how? Don't worry, your boy Pomp's got you. Everybody got some electricity and wifi? All you gotta do is go to CoinMine.com, you buy a coin mine. It's like an Xbox or a Playstation that helps you turn your electricity into Bitcoin.

• 1:26Anthony Pompliano?

  That's right, you purchase it, it shows up at your doorstep, you pull it out of the box, you plug it in, connect to your wifi, five minutes or less, you're mining Bitcoin. All you have to do is control it from the mobile app they provide, and then you receive over-the-air updates that add new coins and new features on a consistent basis. Kinda like how Tesla does over-the-air updates and updates the car software. Just you're updating your coin mine. Consumer mining made easy. That's right, go to CoinMine.com, tell them Pomp sent you, and thank me later. As many of you know, crypto investors store their digital assets on exchanges or in cold storage for long-term safekeeping. However, this strategy doesn't help them grow their investment holdings or build overall wealth. With the new BlockFi interest account, users

• 2:11Anthony Pompliano?

  can now securely store their Bitcoin or Ether at BlockFi and receive 6% annual interest, paid monthly in cryptocurrency. 6% is an absurdly high rate. It's the best rate in the industry. I highly suggest you go check out blockfi.com/pomp. Again, that's blockfi.com/pomp to sign up and start earning crypto today. If you follow Bitcoin and crypto, you've probably heard of eToro. They're the world's number one social trading platform, and I love it. They've got more than 10 million other traders that love it, too. And guess what? They just launched in the United States. eToro offers access to the world's most popular cryptocurrencies, including Bitcoin, Ethereum, and others. With the smartest trading tools and the ability to connect with the

• 2:53Anthony Pompliano?

  best traders around the world, there's no better place to build your perfect portfolio. If you're new to Bitcoin and crypto, you can test the waters with their $100,000 virtual trading feature. But if you're more experienced, you can create custom technical charts and use eToro's social feeds to inform your trading decisions. They've got transparent fees, and so you never miss out. They also have an easy-to-use application available on iPhone, Android, or any web browser. You can get started today in just a few clicks at etoro.com. Again, that's etoro.com. Get VIP access to Bitcoin and crypto markets today.

• 3:27Speaker 01

  Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 3:53Anthony Pompliano?

  All right, guys. Bang, bang. I've got David sitting here with me. Super excited to record this episode. I get tons and tons of questions about tax treatment around Bitcoin and cryptocurrencies. So I wanted him to come in and really just kind of talk through what's going on in the tax world and the product that they've built and how it can be helpful to people. So thanks so much for coming to do this.

• 4:15Speaker 02

  Yeah, yeah. No, thanks so much for having me, Tom. It's good to be here.

• 4:18Anthony Pompliano?

  All right, let's start with your background. Obviously, there's not that many technologists who are excited about tax. So what did you do pre-Bitcoin and cryptocurrencies?

• 4:28Speaker 02

  Yeah. No, you're exactly right. So my background, I've always kind of had the entrepreneurial feel. So coming out of school, I kind of wanted to decide, hey, what's the best way to apply, you know, my background and get into more of the entrepreneurial world. And so I went the sales-marketing route. Just thought that'd be the quickest way, right? When you look at building a company, I think the two most important things are, you know, people who are building the product or service and the people who are getting it out the door. So I wanted to really specialize in distribution, sales, business development. And so got going with a big software company, worked at Oracle doing sales for them for

• 5:12Speaker 02

  a while, and then ultimately made the jump into entrepreneurship, launched a card game company that ultimately kind of took off. But it was like Cards Against Humanity for colleges and universities. So ultimately got into some like legal troubles with their, you know, IP attorneys kind of coming after me. So after that kind of flamed out, I got really into crypto, kind of fell down the proverbial rabbit hole and started doing some market-making, high-volume trading. And so with that, we kind of ran into the tax problem. And so that's what ultimately sparked the idea for cryptotrader.Tax.

• 5:50Anthony Pompliano?

  All right, let's talk about this card game, first of all. What the hell, what was going on with this card game?

• 5:56Speaker 02

  Yeah, so, um, so yeah, so coming out of school, um, I saw a Kickstarter campaign for like a Cards Against Humanity version, but for like Harry Potter. And, uh, it like had destroyed its Kickstarter goals. I'm like, okay, that's like genius. And it just got all these wheels in my head going on like how Cards Against Humanity gets way more fun, the more hyper-local it becomes. So, right, the more and more people can like immediately relate to the content of the card game, right? And so kind of wheels are going. And I thought the ultimate use case for that is bringing it to like college campuses where people, you know, live and die. It's this intense college experience. And so I started essentially just building

• 6:41Speaker 02

  a, the card game, right? Similar to Cards Against Humanity, but around your college experience and all the things that you do, right? When you're, I went to University of Wisconsin, right? When you're at Madison, you know, whatever it may be. And so launched that and it just absolutely exploded. Um, again, getting back to like the distribute distribution, which is what I love and what I'm really good at is marketing, et cetera. And with that, right, everyone who buys that card game, it was called College Cards, um, right? They bring other people to the game, right? So they buy it and then they have to go play it with eight other people. And so naturally you get this viral effect with this game and it starts to snowball. And we were selling tens of thousands of dollars of this card game at the University of Wisconsin.

• 7:24Speaker 02

  And so ultimately the university takes notice to that and I got some cease and desists from the law firms that represent them. But I expanded out to Michigan, to Ohio State, to University of Texas. Um, ultimately had to shut everything down after a long process, but it was really cool. I thought it was my ticket to, you know, building a really big business.

• 7:43Anthony Pompliano?

  And, and so I, I think it's interesting that you look at it as the hyper-local component makes it more interesting. What was the, like, give me some examples of the things that were in the game, right? So for University of Madison, I have no clue anything that's there, but like, what were some of the things that were actually part of the game?

• 7:58Speaker 02

  Yeah, I mean, it was it was obviously very explicit content, and that was the point. Get people like talking, but it'd be like, you know, getting your fake ID taken at the KK, which is, you know, a popular bar on campus. Or like, you know, certain professors, right? Um, Econ 101 with Elizabeth Kelly. So it was very, very specific, like these inside jokes, right? That everyone who went to Wisconsin would know. Greek life played a big role, right? Making fun of certain stories and fraternities. And so again, whenever it's this this hyper local, you'll get people tagging each other on Instagram posts. It's such like a Facebook social media product. And so just all that virality built in, it just it blew up. But we we ran into problems, right?

• 8:41Speaker 02

  Where you get the trademark people from Wisconsin, even though we weren't directly using any official Wisconsin trademarks. Anytime you're associating yourself with the school, um, with those types of places, you're going to run into problems. Um, so it was unfortunate. It left a bad taste in my mouth just because, you know, it's a work of satire. We're not really, um, taking anything away from Wisconsin. And we wanted to pay them a royalty, but they wouldn't even do that deal. They just didn't want the game to exist. So it's tough swallow, but like ultimately blessing in disguise because that led me to the world of crypto. Got it. And so you said that you guys were doing like some market making and stuff like that. Explain that a little bit more. Yeah, yeah.

• 9:21Speaker 02

  So this is back in 2017, um, and I sat down and had dinner with a really good friend of mine. And he told me this interesting story of his brother, who was doing market making on Binance, so essentially writing, you know, scripts and programs to automate automate the trading, um, for a lot of these assets. And he was making $70,000 a month in 2017. So obviously I was blown away with that. I immediately call up my brother after that dinner, tell him about it. My brother's pretty technical. And we decide to start trying to build a market making bot similar to what my buddy was describing on Binance. Wasn't as easy as I thought it might be, but essentially what you're trying to do is provide liquidity to these,

• 10:06Speaker 02

  you know, exchanges, which back then, very early on. Um, and you can just trade the volatility of these assets and make the spread, right? And you're it's a high volume strategy.

• 10:17Speaker 02

  So we started doing that. We weren't like crazy successful. We were making some money. This is really when everything's starting to run up. So like we were doing well, but not well enough. Anyways though, so the market making side, that's kind of how we got into it. It was ultimately just because I heard someone was making a lot of money.

• 10:32Anthony Pompliano?

  And so ultimately, as you're doing that, there's lots of transactions and you gotta pay taxes. So I'm assuming that's what turned you on to the tax problem?

• 10:38Speaker 02

  Well, yeah, so I had no idea about the tax implications of this stuff. But keep in mind, I had just recently been burned by the law from the card game. So when I found out about this, it scared me and I was like, you know, Michael, who's my brother. I was like, hey, we have to somehow be keeping a record of the US dollar value of these, you know, Bitcoin, Ethereum, whatever the asset we were in at the time of the trade, because that's what you need to know to calculate the capital gain and capital loss, you know, on the transaction. And in the world of cryptocurrency, right? Especially with exchanges like Binance and whatnot, nothing's quoted in US dollars.

• 11:19Speaker 02

  So tracking that becomes seriously a nightmare. And so we ran into this huge problem, scoured the internet, trying to figure out, you know, how we fix this. There was nothing out there. And so myself and my two other partners, not my brother, but we were all kind of doing this together. We kind of flipped the switch and were like, this could be seriously an infrastructural piece of this market if it really does continue to expand, right? Like it or not, taxes aren't going to go away. And I very much believe that, you know, for crypto to reach mainstream and to kind of expand its use cases, it has to play nicely with the current financial world and the current system. And so, you know, just flipping the switch, we're like,

• 12:03Speaker 02

  this could be a really important piece. So we essentially built software to automate the tax reporting process.

• 12:09Anthony Pompliano?

  And you've got no background in tax?

• 12:11Speaker 02

  Well, so I studied finance and accounting at school. I was going to go into investment banking and consulting, decided not to. But so in that sense, I have some, but no, I'm not like a tax accountant or anything. But like, to be fair, this stuff is pretty, pretty simple, right?

• 12:27Anthony Pompliano?

  All right, so let's just start with kind of crypto tax one on one. What are the aspects of the law that are important to pay attention to? And kind of how does crypto tax work today?

• 12:36Speaker 02

  Yeah.

• 12:37Anthony Pompliano?

  Yep. And crypto tax being the actual law itself?

• 12:40Speaker 02

  Right. Yeah, so I think the easiest way to break it down, just because it's much more relatable for people, is comparing it to the world of stocks. Because cryptocurrency, like stocks by the IRS, is classified as property for tax purposes. And so what that means is when you're selling or disposing of your cryptocurrency, right? When you're trading it, whatever it may be, you're incurring capital gains and capital losses, right? And that's the same as the world of stock trading, right? So let's run through a quick example, right? Let's say I buy $100 of Apple stock, right? People are very familiar with this type of thing. And let's say two months later, that investment has appreciated.

• 13:23Speaker 02

  Now that same Apple stock that I bought is worth $150. And I cash out, let's say I sell that Apple stock. Well, from that transaction, I've incurred a $50 capital gain, right? And I will owe a percentage of that gain in taxes. And so that's capital gains taxes. People who are familiar with equities, with property, you know, real estate, they're familiar with the world of capital gains, capital losses. And so what a lot of people don't understand is cryptocurrency is treated the exact same way, but because of the transferable nature, et cetera, with cryptocurrency, some additional challenges arise when it comes to tax reporting. I was kind of getting into them, right? When I was talking about the Binance example.

• 14:06Speaker 02

  But so let's look at a cryptocurrency example. Let's say I, again, buy $100 of Bitcoin with Coinbase, okay? And, you know, again, two months later, let's say now that Bitcoin is worth $500, right? I've made some money. And let's say I cash out on Coinbase, make that $500. Well, I have a $400 capital gain, and I'll owe a tax on that. And so the tricky part with, so that at a high level, right? That's how it works. The tricky part with crypto is the different taxable events that trigger these gains or losses. So again, looking at the world of stock trading, what actually triggered my gain was when I sold my Apple stock, right?

• 14:47Speaker 02

  In the world of crypto, disposing of property, your cryptocurrency can be, you know, when you're selling it for fiat currency. Also, though, when you trade it for another cryptocurrency. And this is where kind of the challenges arise, because let's say I bought that Bitcoin for $100. It appreciated $500, but let's say I didn't cash out and I instead exchanged it all for Ethereum. So that triggers a taxable event, like I realized my $500, my $400 gain in that Bitcoin and I also need to pay a tax on it. And as I'm sure you can kind of imagine that, right, crypto to crypto triggering taxable events makes the situation more sticky and challenging from a reporting and compliance standpoint.

• 15:31Anthony Pompliano?

  Yeah, so part of this is just that there's, when it gets treated as property, there's certain elements in the tax code that make this much, much more complex than it kind of historically has been when it was just an investable asset like a stock, et cetera. And so one of them is crypto to crypto, right? So what you think is, hey, I'm not selling my Bitcoin, I'm just simply trading my Bitcoin for Ethereum, uh, because I want to use that for something. Um, and let's say that you're not even speculating on price, you're literally just using the, the, um, digital asset. That is still a taxable event, because in, um, kind of the minutia, you've sold Bitcoin, you've bought Ethereum, right? Is how the, uh, tax treatment is. On top of that, even when you go to sell that Bitcoin, it may not execute in one single transaction, right?

• 16:15Anthony Pompliano?

  It could get broken up into six separate, uh, transactions in order to sell it. And my understanding is that's also a taxable event?

• 16:22Speaker 02

  Yeah, exactly. So that's, that's all, that's all correct. Other taxable events, right? And this stuff is annoying, right? Because obviously...

• 16:31Speaker 02

  Cryptocurrency is a lot more, you know, it takes on so many characteristics, right? It can be this form of digital money. It very much is an investment that people are speculating on. It's also, you know, a utility tokens, right? There's, there's so many use cases. So it is challenging that the IRS blanketly treats everything as property. But that is how it's handled right now.

• 16:53Anthony Pompliano?

  What, what do you think it'll take to change that kind of guidance, right? In terms of today, they treat it all as property. Is there something that you see coming down the pipe or, or some kind of inflection point that would make that evolve into some other guidance?

• 17:07Speaker 02

  Yeah, honestly, not really. So the one thing that I think would be cool, honestly, I don't think it's going to happen. My team has a lot of conversations with a lot of people very close to the IRS. One thing that I would, I think would be cool would, would be to implement like a de minimis tax exemption where, you know, the first $1,500 of capital gains is tax free and you don't need to be necessarily reporting that because then, you know, if I'm using Bitcoin to buy a TV or to purchase some goods or services, then I don't necessarily, necessarily need to be tracking my capital gains or losses if it's up to X threshold. Now, to be clear, that's not how it's handled today, right?

• 17:51Speaker 02

  All of these things do realize your gains or losses in the asset. Other things that I think would be cool in the future, and again, I'm not sure how likely this is, but if the IRS actually explicitly came out and said, and didn't blanketly cover everything, right? And was like, hey, for stable coins, which are designed to be a medium of exchange, right? These shouldn't be triggering capital gains and losses every time you transact with it, right? That's just a nightmare for businesses, for retail investors. It's unfortunate that it's treated that way. But if, you know, they actually classified separate assets differently, right? Bitcoin, for example, that's always going to be property. Too many people use this as an investment, right?

• 18:34Speaker 02

  I think, pump, you're, you're very much bullish on it as an investment. And so that's always going to be, have income associated with it and therefore capital gains, capital losses. But for the stable coins especially, right? That shouldn't be treated as property because it's designed as a medium of exchange. But for the IRS to have to actually classify that, they would have to seriously like come out and say, hey, this is a form of currency, which I don't think they're willing to do.

• 18:57Anthony Pompliano?

  Got it. And so obviously, this is going to be super difficult for the individuals who are transacting in this stuff, right? But they rely on experts in accounting and tax, right? So whether it's lawyers, accountants, et cetera, I can't imagine that those folks are experts at cryptocurrency, tax treatment, et cetera, because they're just doing so much other stuff. What are you seeing in kind of the expert help vertical, right? Where I'm some individual, I'm a business, I need help with my taxes, I go to my accountant, I go to my lawyer. How up the curve are they and educated on this stuff versus are they kind of just shooting in the dark and really they just need as much help as they can get?

• 19:34Speaker 02

  Yeah, that's a great question. So-

• 19:36Anthony Pompliano?

  Have you listened to the podcast? All I do is great questions.

• 19:40Speaker 02

  So honestly, there is a huge lack of supply in tax professionals, accountants, enrolled agents who are familiar with this stuff. So with that lack of supply, right, means the demand is exceeding supply, meaning the tax professionals who are very comfortable with this can charge a very large premium on servicing this, you know, lack of supply and this high demand in the market. So we're seeing that start to change. But yeah, like you said, the vast majority of tax professionals, of accountants, have no idea how Bitcoin, how Ethereum, how whatever it is, is treated from a tax perspective. And when their client

• 20:20Speaker 02

  comes to them, right, when they have a collateralized debt position with MakerDAO and they're, you know, getting interest payments and they say, how do I treat this on my taxes? You know, the accountant's going to run away very quickly. We're seeing that start to change, right? A lot of firms are actually starting to build an entire tax practice around crypto, because it's a great avenue for client acquisition right now, right? If you can have on your website, hey, we're familiar with crypto, you're going to get a ton of clients right now. Just because, again, there's not much supply, but there's a ton of pent-up demand, especially as the IRS starts, you know, increasing awareness about how this is tax enforcement, et cetera. But yeah, you hit it. The vast majority of professionals out there have no idea how this is treated from a tax perspective.

• 21:03Anthony Pompliano?

  Got it. And so what did you guys build to solve this problem?

• 21:06Speaker 02

  Yeah. So great question. So we built cryptotrader.Tax is the application that my team-

• 21:13Anthony Pompliano?

  That's a great name, first of all.

• 21:15Speaker 02

  Thank you.

• 21:16Anthony Pompliano?

  All right. So what does it do?

• 21:17Speaker 02

  Yeah, the name is very much an SEO play, just trying to game Google. So yeah, so the high-level pitch is we build the software automates the entire cryptocurrency tax reporting process. And we're very much focused on the consumer, so you can frame it up in your mind like a TurboTax for cryptocurrency investors. And I will say, we also build tools for tax professionals, for exchanges, etc. But really what it does is it allows someone to land on our platform. We integrate with all major exchanges and cryptocurrency platforms, so they can suck in all of their transaction history into the platform with the click of a button. Right, and once everything is into cryptotrader.Tax, then they can generate their tax reports for the year with the click of a button.

• 22:01Speaker 02

  So it really automates the entire capital gains, capital losses reporting, so that you, as a cryptocurrency investor, or user, or enthusiast, can then just go plug this report into your TurboTax account, into TaxAct, or just give it to your tax professional, so they don't have to know anything about how crypto's taxed, how to do it, how to do these calculations. They can just file that form like they're used to with stock trading.

• 22:26Anthony Pompliano?

  And how easy is it for you guys to interface with the exchanges? Like, are these APIs pretty sophisticated and built out? Or there's kind of a lot of customization you have to do for each one?

• 22:36Speaker 02

  Yeah, that's, again, a funny question, because, I mean, it's so drastically different across the board. Like, working with Coinbase's API is awesome, right? They have great team there. But, I mean, there's problems with it, too. Like, there's certain things, there's bugs in their API. But it changes so much across the board, and that's one of our biggest challenges, is there's no uniformity across these platforms and exchanges. And so, from my team's standpoint, we have to dive into every single API, every, you know, specific exchange, and build out that integration from scratch. So, to answer the question, no, there's no uniformity. But we take that onus from the user, right? And we make it easy then, once you're actually in our platform.

• 23:21Anthony Pompliano?

  Skrt skrt. Wanna know who has the best URL? Crypto.com. That's right. Crypto.com. They're a crypto platform with one goal. Motherf***ing mass adoption. That's why we're all here. We're trying to get crypto in every wallet. Crypto.com is helping people do that through buying, earning, lending, and card payment. Everything you could want at crypto.com. Go help your boy out. Tell him Pomp sent you. Download the app or visit crypto.com. Pomp's got you always. Ever wanted to get into mining and didn't know how? Don't worry. Your boy Pomp's got you. Everybody got some electricity and wifi. All you gotta do is go to coinmine.com. You buy a coin mine. It's like an Xbox or a Playstation that helps you turn

• 24:05Anthony Pompliano?

  your electricity into Bitcoin. That's right. You purchase it. It shows up at your doorstep. You pull it out of the box. You plug it in, connect to your wifi. Five minutes or less, you're mining Bitcoin. All you have to do is control it from the mobile app they provide, and then you receive over the air updates that add new coins and new features on a consistent basis. Kinda like how Tesla does over the air updates and updates the car software. Just your update in your coin mine. Consumer mining made easy. That's right. Go to coinmine.com, tell them Pomp sent you, and thank me later. One more word from our sponsor BlockFi. Their new interest account allows you to securely deposit your Bitcoin or Ether at BlockFi and receive 6% annual interest paid monthly in cryptocurrency.

• 24:50Anthony Pompliano?

  This rate actually compounds, so you receive a 6.2% APY, which is very attractive given the alternatives. So you can actually take your Bitcoin, you can deposit it with BlockFi, and get paid an interest rate of 6% in return. Go check out blockfi.com/pomp. Again, blockfi.com/pomp to sign up and start earning interest on your crypto today. Got it. And so after I come to your website, I sign up, I OOF you into my accounts, you suck in my data, you kind of do all your analysis, what do I get as kind of the the end product of this?

• 25:27Speaker 02

  Yeah, so you get an entire tax report, and that contains a lot of things. Number one, it contains a breakdown of all of your capital gains and capital losses, short-term, long-term, in the fiat currency that you transact in. So that's really important, right? Everything's going to be denominated in US dollars, and that's with our historical engine that we've built. We can, you know, the software will go back and retrieve the price of Bitcoin on July 13th, 2015, at 3:13 PM, and we can get that data down to the minute. So it's extremely accurate reporting from a US dollar perspective. But in terms of what the output you'll actually get, you'll get IRS Form 8949, which is your

• 26:08Speaker 02

  capital gains and losses statement that you need from a tax reporting perspective. You'll also get a complete income report, we call it, which details, let's say you're a cryptocurrency miner, let's say you're getting staking rewards, or you're running a master node, right? That's treated as ordinary income, right? Not necessarily capital gains, losses. And so we'll break all that down automatically in US dollar terms, right? So a digestible income report, again, then you can just give this to your accountant, plug it into TurboTax. We also give you a complete audit trail report, which details every single taxable event that you incurred, and exactly how we landed on that calculation. So let's say the IRS ever does come knocking at your door, you can just give them this

• 26:50Speaker 02

  audit trail and show them, hey, this is exactly how I calculated the taxes on every single taxable event. Here you go, sift through it. And a number of other things, but those are the main things. So that's the output, right? You're getting an actual report that then you can go file yourself, you could easily give it to your tax accountant, or you can easily plug it right into TurboTax or TaxAct.

• 27:11Anthony Pompliano?

  Got it. And then how do you guys make money?

• 27:14Speaker 02

  Yeah, so we, it's completely free to get started with our software. So you can jump in, import all of your trading history, get in all of your income, make sure everything looks good, right? We don't want to put a pay gate right in front of just getting, so getting started is completely free, but we make money when you want to generate your tax reports, which here in the US is typically once a year. So the regular, you know, user will come to us, generate all their tax reports, and pay anywhere from fifty dollars to three hundred dollars to download their entire tax report for that year. So it's not like your typical subscription or software as a service, right? Where it's a monthly fee, where just a one time a year, you generate your ports, you pay for it, and then you're good to go.

• 27:57Anthony Pompliano?

  Got it. And then how do you think about the evolution of the business, right? Today, you guys are super focused on crypto taxes. Are there other areas that you're eyeing in terms of where you could potentially expand in the future? Or will you just kind of go deeper in the tax vertical?

• 28:11Speaker 02

  Yeah, so right now, the immediate areas of expansion is actually international expansion. And then a number of other things going deeper in the current market we operate in. But so, for example, capital gains, capital losses are treated very universally, right? Now, there's some nuance, but you know, for example, in Australia, they pretty much treat this stuff exactly like the US does. So from the technology that we've built, we can almost immediately serve another market. And so we just launched Australia this past summer. We're rolling out Canada. And then next month, we'll go to UK here before the year's over. And international, right? So we just need to tweak the logic of the software to account for slightly different variations of the rules, right? That slightly different things, but it's all the same, right?

• 28:56Speaker 02

  It's, you're trading this stuff and you're making money, and so that is a form of taxable income. So that's the immediate. And two is to go deeper in the current market. So I'm sure you know, there's so many different use cases of crypto. You know, margin trading, you know, staking, all this stuff, you know, it's all...

• 29:16Speaker 02

  Income, right? It really is. People are using this to generate income, whether that's, you know, these new DeFi services where your interest from loans, right? The BlockFi guys, I know. All this stuff is taxable and it's all challenging because again, nothing is typically quoted in USD. It lives in these fragmented places. And so we can go deeper in the market by further servicing, you know, margin traders, lending platforms, DeFi. So there's a lot to go after. And it's kind of, you know, get your, get your roots planted in the core and then just blow it up from there. So those are the two really big focuses.

• 29:49Anthony Pompliano?

  Got it. And how similar are the tax guidance in these other countries, right? So in terms of capital gains, capital losses, they're the same, but is Bitcoin and cryptocurrencies treated as property in all these other countries? Or do you see kind of a wide variety of treatments?

• 30:08Speaker 02

  Yeah. So in the, in the vast majority, it's treated very similarly. And that, that means it's treated as property, it's treated as this investment. Now, there's some one-off countries where they've said, hey, we're not even going to tax capital gains and losses. Portugal, for example. There's some other ones that are, but the majority are treating it very similarly to the US. So yeah, now again, there's, there's slight variations. For example, Canada, you're required to use average cost basis as your costing method, which is kind of getting into the minutia of actually doing the accounting for capital gains, capital losses. But here in the US, typically you're using first in, first out, last in, first out, or like highest in, first out to optimize, you know, or minimize your

• 30:53Speaker 02

  taxable gains. But yeah, it is actually honestly treated pretty similarly. Like I said, Portugal's a little bit different. There's some other countries that we don't service at this point, but treat it a little differently.

• 31:04Anthony Pompliano?

  Got it. And then how about businesses, right? So we talked a lot about kind of crypto traders themselves, but how do you guys see the, the corporate customers or potential customers and, and how they're kind of interacting with this tax guidance, especially when, like, let's say, for example, they're just receiving Bitcoin because their customers are paying with it. What's going on there?

• 31:24Speaker 02

  Yeah, so in that example you just gave, that's pretty straightforward, right? It's still just a form of income, right? That these businesses would be receiving if they're being paid in Bitcoin. And again, the income they're recognizing should just be the fair market value of Bitcoin at the time they receive it. Now, where things get really complex, and I feel bad for, is the exchanges that operate in the US and the actual companies that are very much crypto-native companies. Just because they have an enormous set of rules, regulations, that they need to comply with, right?

• 32:04Speaker 02

  And, you know, we don't, you know, so like, for example, if you're considered a money transmitter, you have to, you know, comply with FinCEN, you have to do all these things, right? And that's why you see a lot of exchanges leaving the US because the cost of doing business and complying is tough. Now, again, we don't, we don't service that. But from a business standpoint, that's challenging. Now, where we do work with exchanges, and we have a bunch of partnerships with them, is, you know, all of their users, right? Cryptocurrency exchange users, platforms, they have this tax reporting problem. And the exchange themselves actually fundamentally do not have the ability to give their users

• 32:47Speaker 02

  capital gains and capital losses forms, which is this fundamental problem in the space that a lot of people don't have a handle on. And I like to explain it, it's this like user expectation versus reality problem. Because a lot of cryptocurrency users, right? Perhaps they're used to, you know, going to a typical stock broker, a brokerage house, like an E-Trade, or a Charles Schwab, or, you know, a Betterment, right? All these kind of fintech-type things, where that's where they're doing their investing, their stock trading, you know, whatever it might be. And at the end of the year... Right, that Charles Schwab or E-Trade gives them a 1099B, right?

• 33:29Speaker 02

  A tax form that they can go and file with their tax return, right? And on that form, it breaks down everything they need to do their capital gains and capital losses calculations. And tax professionals are used to getting a whole bunch of these, right? From their clients that they plug into their software. TurboTax, for example, is used to just, you know, letting you import these 1099Bs from the Charles Schwabs and the E-Trades, right? To automatically do this. But cryptocurrency exchanges fundamentally cannot provide this type of form, and that's because of the transferable nature of crypto. So let's run through example, because it's really interesting to wrap your head around, and it's this huge problem in the space. So I love to compare it to stocks, and that's just because they're treated very similarly

• 34:13Speaker 02

  from a tax perspective. So again, let's go back to, you know, the Apple stock. Let's say I buy Apple stock in Charles Schwab, and I do some investing, buying, selling over the, over the year, right? At the end of the year, Charles Schwab can give me that form that shows, hey, David bought Apple stock at $100, we're seeing that he sold it at 150, we're seeing that then he went into, you know, Tesla, sold at XYZ, right? And all these are broken out to me on the form that they gave me at the end of the year. But cryptocurrency exchanges cannot do this, and that's because the data is so fragmented, and I can, I can send Bitcoin into my Coinbase wallet or into my Gemini wallet from wherever, right? And so Coinbase, right?

• 34:58Speaker 02

  They don't have an entry in their database as to what price I originally bought that Bitcoin for, right? So they're just seeing that .051234, right? Bitcoin appeared in my Coinbase wallet. That's when the entry gets entered in their database. But they have no history as to what my cost basis in that Bitcoin is, meaning what I actually spent to acquire it. And so at the end of the year, they can't give me a capital gains and capital losses report, because they have no idea the original price I purchased and you know you can imagine this gets so complicated because people are sending wallet to wallet all the time. They're pulling it down into cold storage. They're

• 35:40Speaker 02

  sending their income they've made from a mining rig right into the exchange to go cash out etc. And so the end of the year comes around and the users are so accustomed to be able to just download their tax tax forms from their provider and you know the exchanges are like, well, we can't really do that. Sorry. So the onus falls completely on the consumer and they're kind of left high and dry. And again, that's just because of the nature of cryptocurrency because this stuff can be transacted and sold and sent from wallet to wallet that the exchanges themselves cannot provide this form. And so that's the solution, right? That's the problem that we solve with cryptotrader taxed.

• 36:21Anthony Pompliano?

  Got it. And so as you see, and are talking about these forms, the IRS is now asking every American whether they've actually traded cryptocurrency or not. Talk a little bit about this.

• 36:32Speaker 02

  Yeah. So this was crazy. So I mean, the past month has honestly been probably the busiest from a cryptocurrency tax standpoint. And again, that's because the IRS released its first guidance in the past five years. Technically, it's the second one they've released, but it's first update to the original 2014 tax guidance on cryptocurrency. This in October, we're in October 2019 for those listening two years from now.

• 37:02Speaker 02

  And two days after they released that guidance, they also released a draft of the future 1040, which is the standard income tax form that every single taxpayer in America fills out. And on this draft that they sent out to all the tax software companies and the big accounting organizations to kind of prepare for it, they sent these out on that form. There is a checkbox that, you know, under penalty of perjury now, every single American taxpayer, which is roughly 150 million, will have to check yes or no to the question, "Did you buy, sell, transact, or obtain any financial interest in any virtual currency?" And so, as a taxpayer, you know, throughout the year, and so as a taxpayer, you will have

• 37:46Speaker 02

  to check yes or no. And so, this is just blowing open the floodgates of, you know, awareness, you know, the media outlets are going crazy over this. It's just really crazy. And so, yeah, to answer that, it's newly on this new 1040 that everyone will have to fill out, all Turbo taxes and TaxAct will have to ask their customers now, "Hey, did you ever transact in virtual currency this year?" And so, we're just seeing, you know, compliance from that perspective just go through the roof.

• 38:18Anthony Pompliano?

  I'm actually more shocked, not so much about the IRS asking that question, but that only 150 of the 325 million Americans pay taxes.

• 38:26Speaker 02

  Yeah. Well, I mean, if you think about it, it's like, so many people file jointly, and if you're like, under, you're not actually filing your own tax returns. So, like, these are individual tax returns. It's estimated 150 million.

• 38:39Anthony Pompliano?

  Got it. Okay. And so, where do you see this all going, kind of moving forward, really? What are you excited about over the next 12 months?

• 38:46Speaker 02

  Yeah. Well, so, obviously, this is really big for, you know, our company at cryptotrader.Tax, just because we're doing a lot of educating in the market. And that also comes with, you know, the tax professionals and accountants, like I said, majority of them really have no idea what's going on in this world. So, you know, that's a big focus for us, is educating those folks, you know, bringing them software tools to help make their world easier as they serve a bunch of clients, and as they now go and ask their clients if they've ever... Transacted with this type of thing. So we're excited about that.

• 39:26Speaker 02

  And then I think we're also just excited about making the world of crypto investment, you know, transacting in it easier. And so, you know, all this tax talk can leave like a bad taste in your mouth. I get it. I don't like paying taxes either. But, you know, we received hundreds of chats on our customer support lines from our users who are like, "Hey, you guys made this so much easier. I was literally dreading this for months." I'm like so, I'm so comfortable staying and trading in crypto because I know I can just, you know, generate my reports simply and stay compliant. And it's about making

• 40:09Speaker 02

  it easier. And so I'm excited about that because, you know, anytime you can make transacting and operating in this world of crypto easier, you allow more mainstream, more people who are not as technical, comfortable in the asset class. And we're really seeing, you know, with this guidance, with all this IRS activity, you know, they're validating this asset. Like, this is going to be on the IRS 1040, Schedule I, that's, like I said, filled out by 150 million people. And that's validating this market, right? We're not seeing any slowdown in the market. I think it's going to keep exploding. And

• 40:50Speaker 02

  again, I'm excited just to make the tax reporting, this ugly, not sexy process, super easy for people. That's what I'm excited about.

• 40:57Anthony Pompliano?

  For sure. Before we get into the rapid fire questions, where can people find out more and kind of find the product and learn more about it?

• 41:04Speaker 02

  Yeah, so you can find us at cryptotrader.tax. That's probably the easiest way. If you want to reach out to me, it's David Kemmer. And probably easiest way is just on LinkedIn, David Kemmer.

• 41:15Anthony Pompliano?

  All right. Rapid fire questions. What do you think is the most important company in crypto, other than your own?

• 41:24Speaker 02

  Probably one of the exchanges, I'd say probably Coinbase, sitting here in the US. What they are doing is pretty impressive.

• 41:31Anthony Pompliano?

  What's the one regulation that you would change or improve if you could?

• 41:36Speaker 02

  Either the accreditation laws where you have to have X net worth to participate in a lot of this, not crypto stuff, but just in general. Or the IRS ruling around how hard forks are taxed. I think it's kind of short sighted and I would just more treat it as a zero cost basis and not as income when you receive it.

• 42:00Anthony Pompliano?

  What's the most controversial thought you have in crypto so that when you say it, people will vehemently disagree with you?

• 42:06Speaker 02

  Uh.

• 42:09Speaker 02

  Hmm.

• 42:13Speaker 02

  I'm still not sure where a lot of this is going. And I think, you know, in crypto, you get so many people who are so sure that Bitcoin is going to be, you know, the reserve currency of the world. And like I'd challenge that, I'm still not sure. It's not going to go away, I can tell you that. But yeah, I'm not sure as to how this is all going to play out, but it's going to be a good ride for sure.

• 42:39Anthony Pompliano?

  So basically the upside, like what, how far up is the ceiling to some degree?

• 42:46Anthony Pompliano?

  Fair?

• 42:47Speaker 02

  That's my question, you're saying?

• 42:48Anthony Pompliano?

  Yeah, that's basically how you think.

• 42:50Speaker 02

  Yeah, yeah, exactly.

• 42:51Anthony Pompliano?

  It's like, this isn't going to go away, but like what is the, what's the upper limit?

• 42:54Speaker 02

  Right, because it's so often compared to the internet and right, looking at how far that has become. And it's like, I'm not a hundred percent sure still it can do that. We'll see, there is so many exciting use cases and sometimes I'll flip flop back and forth between that. Some days I'll be, oh wow, this could become like absolutely enormous. You know, looking at specific use cases like I love what the guys at like Brave and Basic Attention Token are doing. I think that's awesome. I think that really gets me excited when you're talking about a way to monetize your own data. So yeah, I mean, I contradict myself, but it's hard to see as I'm sure you can agree, right? Ultimately where it's going, but maybe you disagree.

• 43:33Anthony Pompliano?

  No, not at all. What, um, what do you think is the most important book you've ever read?

• 43:39Speaker 02

  Um, yeah, so I'm a marketing sales guy and I'd say traction by Gabriel Weinberg. That's just like an awesome framework.

• 43:49Anthony Pompliano?

  What is that about?

• 43:49Speaker 02

  It's, it's, it breaks down essentially every traction channel that a business can use to market or distribute their product. And so, you know, he, he breaks down like, I think it's like 18 in the book, the 18 different ways you can market or distribute your product. And once you have that wide framework, for each business, the traction channels that are, you know, uh, optimal for that certain business change, right? So for the, the card game company who is very social focused and sharing, right? For the company that I'm doing now, it's very content marketing heavy. It's very search engine optimization, right? All that stuff. So it just does a really good job of breaking down every single traction channel you can

• 44:30Speaker 02

  use to market your products and then figuring out, well, which ones should I use for X business that I'm in today?

• 44:38Anthony Pompliano?

  If you had to pick the most important book for someone in crypto, what would you pick?

• 44:45Speaker 02

  Probably the Bitcoin Standard, I think.

• 44:49Anthony Pompliano?

  Why?

• 44:52Speaker 02

  I think it's just, again, a good fundamental, it'll

• 44:57Speaker 02

  get you just thinking about money, um, you know, why we think these US dollars in our pocket have value, um, and ultimately challenge your perspective there.

• 45:10Anthony Pompliano?

  All right. Before I end each episode, I'll let you ask me one question, but, uh, aliens, real? Not real?

• 45:17Speaker 02

  Oh, yeah.

• 45:18Anthony Pompliano?

  Do you believe?

• 45:20Speaker 02

  Yeah, I, I definitely think so. I, um, I actually like took an astronomy course way back in college and you learn about like the Drake equation where it's kind of like, just the, the sheer probability about it, right? How many planets out there are circular or orbiting stars at, you know, habitable zone? And there's like zillions of them. So I think just by that.

• 45:43Anthony Pompliano?

  When I was, when I was in high school, there was nine planets. Like that was it. Pluto was one of them, but, uh, now there are way more than nine. Uh, what one question do you have for me to wrap this up?

• 45:53Speaker 02

  Yeah, okay. Um, I wanna know.

• 45:59Speaker 02

  What do I want to know?

• 46:00Anthony Pompliano?

  What do you want to know?

• 46:01Speaker 02

  Yeah, I want to know how you actually, because I don't know this. How did you originally get into crypto?

• 46:09Anthony Pompliano?

  Through mining, started building mining facilities. I saw that they were very similar to data centers. You know, no brainer to me that data center is a pretty good business to be in. It's infrastructure, you don't really care kind of who's successful, who's not. You just want as much data going through your pipes as possible. With mining, it was very similar. I really didn't care so much about the price because it was a cash flow based business. Right? So as long as my cost to mine is lower than the cost of whatever I'm mining, pretty good business. And so got started there and then fell deeper and deeper and deeper down the rabbit hole. Until somehow now we have this podcast.

• 46:46Speaker 02

  So do you still mine?

• 46:47Anthony Pompliano?

  Yes, not quite as much as I used to, but.

• 46:51Speaker 02

  It's gotten more competitive, I'd imagine.

• 46:52Anthony Pompliano?

  Yeah, it's gotten more competitive and also it's a, it's a game of incredible capital. Right? So it's just really capital intensive. And for me, it's like, hey, look, do I just buy Bitcoin? Or do I buy equipment to then mine Bitcoin? There's pros and cons to each strategy. And so I do a little bit of both. So not, not too bad. Where, where do you live in case people want to meet up in person?

• 47:17Speaker 02

  Yeah. Yeah. So I'm located in Austin, Texas. So if you're in Austin, yeah, feel free to hit me up.

• 47:24Anthony Pompliano?

  We feel like there's lots of Bitcoiners and crypto enthusiasts down there.

• 47:27Speaker 02

  Yeah, no, it's a really good community. There's a lot of us, it's tight knit, just Texas in general, actually, you know, Dallas, there's a lot of folks too. And so, yeah, I'm in Austin, Texas.

• 47:36Anthony Pompliano?

  Awesome, man. All right. Well, thank you so much for coming to do this. And then we'll have to bring you back around tax season to remind everyone to pay their fucking taxes.

• 47:43Speaker 02

  Yeah, thanks for having me, Matt.

• 47:44Anthony Pompliano?

  Hey, everyone, Pop here. If you liked this episode of Off the Chain and want to help us take crypto to the top of the apple, Spotify and other podcast charts, please do us a favor and rate, review and subscribe. To review, simply go to the Off the Chain homepage, scroll down until you see the five blank stars. Taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to the top of the charts. Appreciate you listening and see you next time on Off the Chain.

• 48:29Anthony Pompliano?

  You.