Digital Assets Tax Updates for 2025 with RSM US

[00:00:00] Skip Carlson: Get in line with the safe harbor right now, move your lots over to whatever wallets you need for your cost basis for 2024, and then just have a plan in place for 2025 and beyond for how you're going to be moving those assets across. Cause likely scenario, you probably have a lot of assets that are in cold storage.

[00:00:18] Skip Carlson: That have a very low cost basis. You want to keep them in that wallet. But if you do want to dispose of them, it might be smart to move them into an exchange account. 

[00:00:26] John Cardone: The IRS revenue procedure is quite broad. They said we will accept any reasonable allocation of basis amongst these subledgers. So to me, the key thing is to tie in your ending year on balance with the start of the sub ledger.

[00:00:44] Umar: Welcome to The Accountant Quits podcast, where we help accounting and finance professionals learn how to manage a business using crypto. 

[00:00:52] Umar: Today's topic will be an update on crypto taxation in the US. Donald Trump's presidency is stirring up buzz in the web3 community. Builders and users alike are optimistic about how the new administration will shape the future of digital assets with promises of clearer regulations and greater adoption of cryptocurrencies on the horizon.

[00:01:16] Umar: But while we wait for these changes to take effect, there are already some major tax updates you need to know of. 

[00:01:24] Umar: So in today's episode, we'll dive into important topics that every US CPA and taxpayer involved in crypto should be aware of, including the new reporting requirements for digital assets from the IRS and the Safe Harbor relief, the domiciliation issue when earning staking rewards, how to value airdrops, the tax implications of token migrations, updates on DeFi regulations in the US and more. 

[00:01:54] Umar: And to help us navigate these complex but important updates, I'm thrilled to welcome back RSM US, one of the largest accounting firms in the world and a leader in digital asset space with some of their web3 clients, including Ondo, Stellar, Binance, Paradigm, BitGo, and ConsenSys. And joining us today are Skip Carlson, Digital Assets Market Leader at RSM US and John Cardone, their Senior Tax Director. 

[00:02:25] Umar: RSM provides accounting, audit and tax services for digital assets, is represented on the AICPA digital assets working group and are actively providing specialized training to their new hires on everything related to blockchain accounting and tax. 

[00:02:43] Umar: Lastly, if you're new to this channel, I'd really appreciate your support to help us grow by liking this video and subscribing.

[00:02:49] Umar: Now enjoy my conversation with Skip and John.

[00:02:53] Umar: Skip and John, welcome, and thanks for taking the time to be here.

[00:02:57] Skip Carlson: Thanks for having us.

[00:02:59] Umar: Before we dive into the accounting and tax topics, could you both share an intro about yourself and your respective roles at RSM today?

[00:03:10] Skip Carlson: Sure. I'll go first. Yeah. Skip Carlson. I'm the Market Leader for the Blockchain and Digital Asset Practice at RSM. That really means I lead sales and go to market strategy, helping to, find the right subject matter experts to find, to solve our client's needs. Understanding the technology, how they're using blockchain, how they're transacting in digital assets, but it's understanding their business models and how we can support them. And then just caring, being with them through the client journey. As we move on to a successful engagement. 

[00:03:43] John Cardone: My name is John Cardone. I came to the RSM about three years ago after spending 20 plus years with the government, in particular with the IRS, running different sorts of tax administration and enforcement programs. One of the last thing I was doing at the IRS was their digital asset program which had started out as an offshoot of their offshore compliance programs, which I was running at the time. So I concentrate basically on all kind of tax issues involving digital assets, information reporting and IRS compliance efforts and programs with respect to digital assets. 

[00:04:21] Umar: All right, to start our conversation today, I want to go through the safe harbor relief. So in 2024, the IRS issued the revenue procedure 2024-28 to provide taxpayers, a safe harbor to assist in transitioning from the universal wallet approach to the multiple wallet tracking.

[00:04:39] Umar: Now, I want to provide some context to the listeners. So back in 2014, the IRS issued guidance that digital assets are treated as property for tax purposes. And just like any property transaction, you then have to track the cost basis to recognize gains or loss upon disposal. So under the current guidance, taxpayers can track the cost basis of their digital assets as if they were held in a single wallet address.

[00:05:05] Umar: Hence, the term being used, Universal Wallet Approach. Just to give you an example, if I held ETH across several non custodial wallets and exchanges, at the time of disposal, I can aggregate the cost basis across the entire pool of assets and exchanges. But that's no longer from January 1st, 2025.

[00:05:25] Umar: And based on the feedback I've had, most people use universal wallet method. So multiple wallet tracking or account level tracking, it is a significant change to how digital assets transactions must be reported and tracked for tax purposes. So I want to start with this major change and could you please share with the listeners what they need to be aware of around this new safe harbor relief? 

[00:05:52] Skip Carlson: John, you want to lead off?

[00:05:54] John Cardone: Sure. As you correctly summarized The state of the guidance before the release of the regulations and the safe harbor, this 2024-28, this Revenue Procedure was a piece of companion guidance that was issued with respect to the reporting regulations. 

[00:06:10] John Cardone: And the IRS really made it clear in general, they never want taxpayers at the end of the year to retrospectively reconstruct, their records or determined the tax liability with hindsight. So the IRS kind of made it clear that you need to establish a kind of a wallet level approach to accounting for your digital assets. 

[00:06:32] John Cardone: You could still use a variety of accounting methods. You could still use HIFO. You could still use FIFO. You could still establish practices for selling high high basis sales. But that has to be done at the beginning of the year, established at the beginning of the year and then stayed with it throughout the year. And that needs to be documented. 

[00:06:55] John Cardone: For most taxpayers, if they were operating on an exchange, They don't really have to do anything.

[00:07:01] John Cardone: But as you said, if you were self custody in your assets, and you were using this universal wallet approach, you need to be you need to be a little more disciplined about your accounting in your sales practices, so that you are tracking each sale. Or tracking your sales by wallet and you're using a consistent method whether it's a HIFO or FIFO or some other specific ID.

[00:07:24] Skip Carlson: Yeah. And just to add on to that, it really depends. Your situation depends on what type of crypto holder you are. If you're just a retail investor who has a couple of wallets and has some funds on some exchanges, you can probably have an easier time tracking your lots and your cost basis across your wallets. We also have clients who have hundreds of wallets for varying different purposes. Some are trading accounts, some are operational, some they just hold in cold storage. We've been working with them through the Safe Harbor period. One, to make sure they've done a good job with specific ID, spec ID, to understand what their specific basis is for each of those assets, where they're allocated across their wallets. 

[00:08:04] Skip Carlson: And then as John alluded to doing a little better job of foresight into their inventory management of where they want those wallets to be, what they're going to use those wallets for moving the assets into the right wallets right now during Safe Harbor. And for most folks in the space, if you've been using a decent sub ledger over the past few years, you probably have a pretty good idea of your basis on most of the assets you purchased. Sometimes it's not so straightforward, depending on how much volume and trading you've been doing. But really it's get in line with the Safe Harbor right now, move your lots over to whatever wallets you need for your cost basis for 2024, and then just have a plan in place for 2025 and beyond for how you're going to be moving those assets across because likely scenario, you probably have a lot of assets that are in cold storage.

[00:08:55] Skip Carlson: That have a very low cost basis. You want to keep them in that wallet. But if you do want to dispose of them, it might be smart to move them into a, an exchange account. So it all depends on your situation, but we've been working with many private clients and institutional clients across the space. 

[00:09:11] Umar: Now I have a follow up question on how the IRS defines what a wallet is. So they actually define it as a means of storing a user's private keys. But most people think of wallets as addresses, right? So to give an example, for the listeners, if I take my Metamask wallet, I can create a hundred different addresses.

[00:09:32] Umar: So is the multiple wallet tracking method telling me to track these hundred addresses individually, or rather for that single wallet? Could you share your understanding of this? Because I know the IRS is not very clear on

[00:09:47] Skip Carlson: Yeah, you gave a perfect example with, a single MetaMask private key being able to access multiple addresses. And you're right, the IRS has not opined on how they define a wallet. We feel you likely don't need to address it at the address level, just at the wallet level. So that one, private key you have that accesses multiple, you should be tracking on just a per wallet basis, not a per address basis. But be curious to get John's thoughts on it as well.

[00:10:15] John Cardone: Yeah, I would agree with that. I think there's sometimes when really business common sense, the for all the criticism the IRS takes they do recognize that it really just doesn't make sense to track at the address level when there could be hundreds of addresses in basically one utility wallet that's used for operations. I think the wallet level what they're really looking at is the character of the activity going on in the wallet. And are you being consistent in tracking that activity? As Skip mentioned before, if it's an operational wallet if you're using a bunch of different change addresses, they're not going to be worried about that. As long as the character of the activity is really the same in that wallet, and you're consistent in how you're accounting for the transactions. 

[00:11:01] Umar: Now to prepare for this transition, a lot of our listeners already using subledgers or tax tracking tools. I've seen a lot of the subledgers out there already informing their users that their software is ready for multiple wallet tracking. I want to ask you for the listener, what should they be paying attention to their subledger?

[00:11:21] Umar: Or in other words what they have to ensure the subledger is providing them for multiple wallet tracking. 

[00:11:29] John Cardone: I think now is really a unique time where hopefully most taxpayers have their ending balance of their basis in their digital assets. And you want to take that number and distribute it as appropriate amongst the subledgers. The IRS revenue procedure is quite broad. They said we will accept any reasonable allocation of basis amongst these subledgers. So if I have 100 units in a ledger, I'm sure the IRS would accept it, and the aggregate basis is in there. You could reasonably allocate the assets routably amongst those 100 units. If the source basis, is trackable. So, to me, the key thing is to tie in your ending year end balance with the start of the subledger.

[00:12:19] John Cardone: If that requires you to manually enter in a basis for your systems going forward, now is really the time to do it. You don't want to have to try and go back and do this in December of 2025.

[00:12:31] Skip Carlson: Yeah, agreed. A lot of the subledgers out there do a good job of automating this, but not all of them are going to catch it perfectly. So just make sure you're going back and manually tracking and putting in that basis what you might have to do.

[00:12:45] Umar: Now, before we move on to the topic of delegated staking, a few weeks ago, the IRS issued some new regulations describing the services that will trigger broker reporting requirements for users of decentralized trading platforms referred to as TD 121.

[00:13:02] Umar: Could you go through what these new changes mean for these decks and also what it means for DeFi participants for the 2027 , and 2028 reporting periods?

[00:13:14] John Cardone: Sure! Hopefully the effect on DeFi participants won't be any different from the reporting that normal custodial brokers are receiving. But what the IRS did in December, right before Christmas was issue the final piece of what they consider to be someone who's facilitating trading services.

[00:13:35] John Cardone: Earlier in June, I told people if you're a broker and you serve as an on and off ramp to DeFi, or you redeem your own coins, and you basically take custody of the assets, you're a broker. Now what the IRS is also saying is if you are a front end service provider. If you are a bridge for someone to get into traditional DeFi, then you potentially are a broker. 

[00:13:59] John Cardone: And the IRS laid out basically to boil it down as if you're making money off the transaction then you better, look carefully at these regulations. Because if you're providing service that's helping someone get into a DeFi product and actually execute an exchange, regardless of whether you take custody, then you better look at these regulations because chances are you are a broker. 

[00:14:24] John Cardone: And the IRS laid out tests of whether or not you can amend your terms of service, whether you can charge fees for this product, and whether you can monitor whether the person actually executed the trade. 

[00:14:36] John Cardone: So this broadens, so to speak, the definition of who has to report under these regulations not only what I call the traditional bridge from DeFi into fiat currency but this also broadens it to what they call front end service providers and the IRS talked about, they use the simplified layered stack of the layer one, the interface layer, people who operate on the interface layer. 

[00:15:03] John Cardone: Now, that is the broker of the effect. The goal for the IRS is that they really wouldn't change the effect on the actual user of the DeFi product because in theory, if they weren't using a DeFi product and they were using a traditional custody broker, they would be receiving a 1099. Well, they're going to be receiving a 1099 DA for their what they maybe thought was decentralized or wholly decentralized finance. The IRS regulations they tried to make sure that there wouldn't be duplicate reporting. There may be some duplicate reporting, but the IRS regulations tried to compensate and avoid that so that there would only be one report on these DeFi transactions.

[00:15:46] Skip Carlson: Yeah, this, obviously these regulations caused no small stir in the industry. In fact, they were immediately challenged by the DeFi Education Fund, Blockchain Association, and the Texas Blockchain Council immediately filed a suit against treasury. The day after basically saying that the agency had, exceeded its statutory authority and had violated the Administrative Procedures Act.

[00:16:14] Skip Carlson: So we will see where that all heads or in this new administration, if some sort of repeal might happen, but these are the regulations for now. So we're going to operate under the assumption that these are how our clients and, operating companies in the space needs to comply with. 

[00:16:31] Skip Carlson: I think John really laid out, what their obligation is going to be, the type of reporting that they're going to need to do. But really it's going to give us a little bit more of a better interpretation of what a you know front end service provider is under the law, what they need to comply with. They specifically mentioned, with a wallet connect button that can facilitate the dispositions of any crypto or NFT transactions.

[00:16:53] Skip Carlson: If there's a swap feature. It was a little less clear if the regulations will extend to websites that lack the connect wallet functionality. So this might extend to, ChatGPT or Google, which you can direct, maybe make some of these transactions. I know that was something that was voiced in social media.

[00:17:11] Skip Carlson: How far does this extend. Is it just for these crypto sites or are they trying to take an even broader stance, which would cause some, some complications there. So, we have the regs at the end of the day. They're not all that surprising. We knew this was going to come. The timing of which might be a little suspect with the end of the year and a little inconvenient for the industry with the new administration coming in.

[00:17:33] Skip Carlson: But, we have these regulations in place now, we're going to help our clients, report and be compliant with them.

[00:17:39] John Cardone: And of course this reporting, is set to start a year later. And it's for transactions beginning in January, 2026.

[00:17:47] Skip Carlson: Yeah, and there are some exceptions that were put into the regs. Several DeFi transactions are exempted from reporting. Wrapping and unwrapping, liquidity providers, staking, lending, and short sales, things like that. The IRS basically said that they need a little bit more time to see how they're going to deal with those types of transactions, but you're, yeah, for the, your run of the mill, you go to Uniswap, you swap one token for another, make a trade, that's going to be collected your cost basis.

[00:18:18] Skip Carlson: And there's going to be reporting from a 1099 DA.

[00:18:21] John Cardone: Right! That was a very good point from Skip that, when the IRS issued the regulations in June, they put out notice 2024-57 that listed certain exceptions, the DeFi exceptions that I refer to it. And those stay in place. The new regulations applying to DeFi brokers doesn't bring those accepted transactions in.

[00:18:43] John Cardone: So the accepted transactions still are excluded for the regulations as of now.

[00:18:49] Umar: Perfect. Thanks for those. And the other news right now, which is fresh is notice 25-7. So I want to ask you, what is the significance of this this temporary relief under notice 25-7 for taxpayers holding crypto with brokers and how does this affect the way they can identify and report crypto transactions during the 2025 relief period? 

[00:19:12] John Cardone: I think the notice is really 2025-7 it really was relief for the brokers. Well, it was a recognition that the brokers can't be accepting, or some brokers, don't have the ability to accept specific transaction information. 

[00:19:28] John Cardone: So for a taxpayer that it has an account with a broker that wants to use the FIFO method of identification for assets to be sold, that's the default and they don't have to do anything. But if they want to use an alternative method then they needed to provide instructions to their brokers and the IRS realized, well, a lot of brokers don't have the systems in place to accept these instructions. 

[00:19:50] John Cardone: So how is the taxpayer supposed to use some identification method other than FIFO? Really what this notice, 25-7 effectively means for taxpayers is they have to follow the same procedures that were set forth in revenue procedure 24-8, which was the end of universal wallet accounting. So, if taxpayers want to use some method other than FIFO to identify which assets they're going to sell, then they need to take some contemporaneous action which is to specify a standing order. Or take some of the other steps that are set forth in Revenue Procedure 24-8.

[00:20:33] Skip Carlson: Yeah. And more importantly, this also gives the brokerages time to understand and put in place how they're going to interface with their customers to understand how they want to dispose of those specific tax lots. Have they been doing specific ID? Do they want to sell a specific portion?

[00:20:50] Skip Carlson: They want to do HIFO, they want to do LIFO. So this really just gives the industry a chance, especially if you're selling on brokerages to just understand how you're going to interface with them. How are you going to share your records? How are you going to communicate the tax lots you want sold? So it's a good thing.

[00:21:04] Skip Carlson: It's a good relief. There were a lot of takes out there that, misconstrued what this relief notice was, that this was going to delay, broker reporting. It was going to delay the Safe Harbor. It's not that. 

[00:21:16] Skip Carlson: You still have to do Safe Harbor. You still have to keep proper books and records.

[00:21:19] Skip Carlson: There's the DeFi reporting still in place. It's just how you're going to be able to track it and communicate that for selling your tax lots. There is an interesting concept that we've talked a little bit about earlier, where you're talking about, this is on a per wallet basis and within a wallet, you can have multiple addresses. 

[00:21:37] Skip Carlson: In theory, you could, buy your crypto on a, centralized exchange. Transition that to your own, you know, cold wallet, your own self storage under the same private key and keep all of your, assets there and not really have to worry about communicating to a brokerage because you could then liquidate, via your hot wallet.

[00:22:01] Skip Carlson: And then transition to a stable coin, move it back to the centralized exchange and not have to worry about this. Now that's an interpretation you could take from just how the regulations are put out there. So that's, if you want to take more of a savvy approach, there's a little bit more risk there with doing it your own custody, but all that is to say we have better guidance.

[00:22:22] Skip Carlson: Now we know what the rules of the road are, and, we've already had plenty of calls with our clients talking about how they're going to comply with it. Even on the individual taxpayers, how they're going to sign their tax lots and communicate with them with the brokerages. 

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[00:24:15] Umar: So in the intro, I mentioned that we'll actually be going through numerous topics today and the next topic is on staking and for new listeners joining, I just want to provide some context on what staking is. So with proof of stake blockchains like Ethereum, Solana, and many others, holders of the native tokens can stake their assets in return for staking rewards.

[00:24:39] Umar: Most holders would not set up the technical infrastructure for staking themselves, but they would rather delegate their tokens to a validator. And some of the well known companies include P2P, Figment, or Kiln. Now, I want to go through very specific topic called the Created Property Argument. So under revenue ruling 2314, the IRS considers staking rewards as taxable income at the fair market value at the time of receipts, or in other words, when the delegator has dominion and control over them.

[00:25:15] Umar: There is another argument called the Created Property Argument, which refers to the idea that staking rewards should not be recognized as taxable income when they are received, but instead only be taxed when the taxpayer disposes those tokens. Could you go through the origin of the Created Property Argument and its current legal authority and status?

[00:25:36] John Cardone: Basically, the Created Property Argument, the property you create isn't an income until you have a disposition event, until you sell or otherwise exchange it. The common example is if a baker takes a loaf of bread out of the oven, there is not income until they sell the bread. 

[00:25:54] John Cardone: If you have this position, you really do want to talk to your tax advisor because a lot of taxpayers personally believe, and I tend to agree that Revenue Ruling 2023 is really not very well reasoned. 

[00:26:07] John Cardone: The IRS has made it clear that they believe that when you validate that transaction and the algorithm generates an additional coin, that's income. But the IRS doesn't call it services. At the same time, they cite cases that, are of a service provider an accounting firm or providing services or a law firm providing services. So, that revenue ruling is a little confusing. They disclaim any applicability of that revenue ruling to Section 83.

[00:26:37] John Cardone: Which pertains to services performed, yet they cite cases that were services were clearly performed. So that's one problem I have with the Revenue Ruling. 

[00:26:46] John Cardone: The IRS then goes on to say, well, you've performed services, but you don't have income. If you are cash basis taxpayer until you actually receive the coin, and that generally makes sense.

[00:26:59] John Cardone: If you're a cash basis taxpayer until you receive the remuneration, you don't have income. But then what are accrual basis taxpayers supposed to take out of this revenue ruling? So, it's very confusing for accrual basis taxpayers and I think the Revenue Ruling is written very broadly. That says the income occurs when the coin is created. 

[00:27:18] John Cardone: So I think there's a lot of problems with that revenue procedure or that Revenue Ruling. And so I think taxpayers could still frame an argument. The counter argument that, income must be separate from the property from which it's derived has recently been discussed in other Supreme Court cases involving a realization event where in recent Supreme Court cases the justices of the Supreme Court have made it clear that you still have to have some sort of realization event and I just don't see it here. I see that the creation of a coin is not income that the two have to be separate. 

[00:27:55] John Cardone: The income has to be separate from the property in which it's derived. So, IRS guidance out there is really very thin. It's just the revenue ruling. They don't really cite cases that I find too persuasive. And there's other guidance out there still affirming the need for a realization event. So I think taxpayers, could recognize the income or could still say it's created property and that it's not income until it's otherwise sold or disposed of.

[00:28:23] Skip Carlson: And just to dovetail off of that, it's when you approach the Created Property Argument in general, it's good to just understand what is eligible and what is ineligible for Created Property for deferred revenue recognition. Just high level, it has to be newly minted tokens. So to give an example on Ethereum, for instance, those consensus layer rewards are eligible because those are payments for newly minted ETH validators or performing duties, to maintain the protocol's operations. Those rewards are more predictable, but then there's also a consensus layer or sorry, consensus layer rewards are eligible execution layer rewards are not eligible. Cause those are not newly minted tokens. So little bit of a nuance there and every protocol is different. Solana, Polkadot, Near, they all have different consensus mechanisms.

[00:29:21] Skip Carlson: So you have to take a look at what is eligible. What are newly minted tokens? When you get into delegated staking, there's also some nuances there. For example, if you're going to be staking Solana through Jito. 

[00:29:33] Skip Carlson: And if you're going to be contributing to a pool and you get a liquid staking token in return. That token it doesn't earn SOL separately. It owns a percentage of the pool reward. So when that pool increases and the balance increases your JitoSOL token that you had an exchange that increases in value, and that's a whole another kind of topic for, is that a taxable event? Is that revenue recognition?

[00:29:57] Skip Carlson: But basically there's a really nuanced approach you have to take to every chain. Everyone requires its own analysis, from an argument perspective. You want to take that opinion. But it's good to just understand what qualifies and what doesn't.

[00:30:09] Umar: And staying on delegated staking, does the geography of the validator play a role in how the delegator recognizes revenue? 

[00:30:17] John Cardone: That's a very good question. And that's really one that the IRS has not answered at all. As far as I could tell, uh, most people delegating. Does it matter where the delegator is located? Or does it matter where the actual node operator is located. 

[00:30:33] John Cardone: I think you could make arguments either way that if you're making the argument, I'm just an investor investing in a protocol, my resources are located where the investor is located. So it's sourced to me as the investor. 

[00:30:48] John Cardone: A counter argument might be, is, if you know where the nodes are, but if the node operator, the person doing the actual validating is located in a particular country, maybe it's sourced in that particular country, I, think the arguments are stronger that you're an investor, but you could probably make an argument either way. And again, this is assuming, you're saying, okay, this is income at the time of the staking rewards.

[00:31:14] Skip Carlson: Yeah, you really see an opportunity for some companies in the space to do some kind of regulatory tax arbitrage or where they want to source that income from. In many cases, large treasuries that are using third party staking providers that might have a good reason to source that revenue overseas and are in a specific jurisdiction. 

[00:31:34] Skip Carlson: So really all depends on where you're trying to source that revenue from. And there's a little bit of gray area right now, but. I believe in the future, we're probably going to get clarity on that. And there's a lot of arguments that can be taken to sourcing the residents. We'll see what the IRS comes out with in the future.

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[00:33:30] Umar: Now, when we were brainstorming to prepare this episode, you guys were very kind to send me some of the topics that are relevant for this episode. And one of them is on frozen staking rewards. So what does that mean for the listener? So on November 1st, 2024, the IRS published a memo on the tax liability of staking rewards held on platforms that have filed for bankruptcy.

[00:33:52] Umar: In this memo, the IRS concluded that the tax payer must include staking rewards in their gross income for the year when they were received since the taxpayer had dominion and control over those rewards prior to the bankruptcy filing. It seems harsh, so what lessons can we drive from this regarding staking on exchanges or other custodial staking providers? 

[00:34:15] John Cardone: In one sense, I think, the consequences of a bankruptcy can be severe for people holding claims. If they did have dominion and control over assets that were frozen as a result of an automatic stay, a lot of taxpayers wanted to, claim losses immediately. That in a lot of ways is pretty standard law that you can't claim a loss until it's recognized until it becomes completely worthless or you dispose of the loss. 

[00:34:41] John Cardone: So a lot of taxpayers sold their claim for pennies on the dollar in some instances, and then you can legitimately claim a loss. That particular guidance harsh consequences for holders, but it's not really that different from what is existed in other bankruptcy contexts in financial institutions. Just because your accounts are frozen, if there was income earned before the bankruptcy, you would still have to recognize that income.

[00:35:07] Skip Carlson: Yeah, this really gets back to a common theme that everyone in crypto is well versed on is you get airdrops, you get staking rewards. Once it hits your wallet. You have dominion and control over it. You're, you have the ability to dispose of it. In this particular instance with this taxpayer who despite the fact there was his tokens were locked because of a bankruptcy where the exchange where he was staking those tokens, he was still liable for that tax bill on the revenue he received. 

[00:35:35] Skip Carlson: So you just need to be mindful. At the end of the day, these were mutable transactions. And when you have ownership of them you have to be able to bear responsibility for your tax burden. 

[00:35:45] Umar: Now moving from staking to airdrops and again for the listeners if you're not very familiar with what an airdrop is, basically it's the distribution of tokens directly to the user's wallets. Usually these are for free or in exchange for performing specific task on the blockchain or protocol.

[00:36:03] Umar: Some of the very famous airdrops before were from Uniswap, ENS, Optimism, Arbitrum, 1inch, and the Bored Ape Yacht Club NFT. Can you walk us through how airdrop recipients should approach valuing airdrops when there's no public market and what factors might justify assigning a value instead of just defaulting to zero? 

[00:36:25] John Cardone: Sure. I think. In most instances, and this is where I talked about like the common sense rule. There is no blanket rule. As you said, if there's no public market, it doesn't mean something has no value. A lot of times, it's a good indication that it has no value. But if something sounds, too good to be true or, is not realistic. I'm sure before there was a public market for a Bored Ape coin. I'm sure you wouldn't have assigned your rights to that to me for pennies on a dollar because you anticipated that it did have some value. Maybe is discounted. So my only caution to people is to not draw a blanket line that says, Oh, there's no public market. So I have no value. 

[00:37:07] John Cardone: It might be a nominal value. It might be very small value. And so it's always, yes, you have an accounting issue, unless it's just so onerous. It's always safest to account for to asign some value to it. At least then you've established. the receipt of it, you've established a holding period and, should the coin go up in value at some later point in time you sell it a few years later, you'll at least be able to, you'll have gain, but it might be in more of a capital nature than considered a short term gain. 

[00:37:39] Skip Carlson: Yeah, there's also instances where many of our clients, many groups out there are providing services to a foundation or a labs group before the token is released. 

[00:37:51] Skip Carlson: Whether you would classify this as an airdrop is another question. But in many cases, if you're swapping tokens for services that have been rendered between two disinterested parties and there's no public, price or market for those tokens, then the presumed value of those tokens that are going to be received is the fair market value of those services rendered. Again, you might not qualify that as an airdrop per se, but in some instances you're actually being paid these tokens that are dropped to you for services. And you can take into account the value of those services.

[00:38:21] Umar: Interesting. Does that happen a lot in practice? The last example you provided.

[00:38:27] Skip Carlson: Yeah, more than you would think. Um, there's a lot of consultants. There's a lot of groups out there trading entities that form partnerships and agreements with some of these foundations and labs groups whatever advisory or consulting services that might be and they're rewarded in kind for those tokens. 

[00:38:44] Skip Carlson: Typically around the same time, these airdrops occur when the tokens are released. So it happens quite frequently. So then it comes down to an exercise of what is the value of those services. And that would dictate the fair market value of what you'd be receiving in kind for the tokens. I

[00:38:59] Umar: Perfect. Now moving from airdrops to token migration, another topic you wanted to touch on. Recently, there's been the dYdX token migration, for example, from Ethereum to Cosmos. 

[00:39:14] Umar: For the listeners, what's like the tax liability when such token migrations occur? How does it affect the tax bill? 

[00:39:22] Skip Carlson: I mean, it really depends how conservative you want to be. Token migrations are commonplace. They happen all the time. Maple just went through one. Polygon just went from Matic to Poly. dYdX also moved from Ethereum to Cosmos. These migrations are going to continue to happen. 

[00:39:38] Skip Carlson: In some cases there's no material change to the token and other situations like dYdX, there's an actual bridge where you have to go and swap out your token from one to the next. 

[00:39:49] Skip Carlson: If you are conservative you might pay taxes and consider that a taxable event and it just you know When you swap them for the new token Or you can take the position that's not taxable and you should not be taxed on swapping from one token to the next. Talk to many clients about this specific issue. John and team have taken opinions for those making carry on the conversation on where we approach it from a tax and legal basis.

[00:40:16] John Cardone: You really have to look at what does the token represent before the migration and what does it represent after the migration? Yes, that you know the technologies are different. It's operating on a different blockchain. But are your rights to the ecosystem, have they really changed substantially? And has there been a counterparty to the transaction? In the simplest format, a lot of times you could think of wrapping a token is really just like a token migration as well. And people, a lot of times people think, well, if I'm just wrapping my ETH or if I'm wrapping my Bitcoin, it's really the same thing.

[00:40:53] John Cardone: It's just I'm changing it so that it can operate somewhere else, but the amount of value it represents hasn't really changed. So, you can look at it that way and really come up with an argument that I haven't, really changed my bundle of rights as represented by that token.

[00:41:11] Skip Carlson: And as I explained before, you have to dive into all the details of how that migration happened. What was the allotment of tokens across the community before the migration happened? What was the governance process and the voting like to approve that migration? Are you moving from one layer one to another?

[00:41:28] Skip Carlson: Are you just changing the name of the token? There's lots of different token migrations out there. But to defend a position to the full degree and create a, write up an opinion and a memo on it it takes quite a bit of analysis to dive into the smart contract layers, the bridge, how you're swapping that token, the marker for either token after it happens.

[00:41:47] Skip Carlson: So. It's fun stuff to dive into.

[00:41:50] Umar: Yeah, it's very similar to wrapping and bridging like you just alluded to. And for bridging, for example a conservative tax treatment would be that there is no tax impact.

[00:42:02] John Cardone: No, the conservative tax treatment might be that if you had a lower basis in the asset and you're bridging to a new basis to recognize the gain because, you've moved from ETH to wrapped ETH or something and you would recognize a gain. Conservative, that means, you're recognizing the income and you're not trying to defer your gain. But I think a lot of, I mean, wrapped coins. Now you can't always judge by how, what the information reporting regulations, how that IRS treats us substantively as income. But the IRS also did call out in the information reporting regulations that they weren't really interested on information reporting for wrapping situations.

[00:42:42] John Cardone: That was one of the instances that they exempted out of the new information reporting. So I think a lot of the indicators are that you're just changing the nature of the mechanics so that this wealth or that this asset that the token represents is operating on a different platform. So there's really, no change in your total rights just in the technology, like, of the token itself.

[00:43:06] Umar: Perfect. Thanks for clarifying and my bad for just confusing between a conservative and aggressive treatment. 

[00:43:13] Umar: Now I want to go through regulations in the US. 

[00:43:18] Umar: John, with your extensive experience , at the IRS, can you share what it's like when there's an administration change? How does the new leadership impact the development of future guidance and regulation specifically for crypto? 

[00:43:34] John Cardone: I think at the highest level there's a, maybe a push to look at things differently. And they definitely can change the direction, but the US especially the federal regulatory regime really requires notices it, first of all, it requires to follow the law, to make the law clear, and it requires a notice and comment period. The Supreme Court has recently issued some opinions very critical of the IRS regulatory regime as steering too far away from the actual language of the statute. 

[00:44:07] John Cardone: So, I know that there's talk about a change in administration and definitely a new attitude towards digital assets. But as far as the tax regulatory framework, there's a lot of structure in place, guardrails. in place by the law, by Congress and the courts, that it's really difficult for just one branch of the government to unilaterally alter the direction without agreement from Congress as well. 

[00:44:33] Umar: Some states in the U. S. have taken initiatives to regulate crypto. I want to ask you if there's a state today that stands out in terms of regulation that they've enacted for digital assets and maybe why? 

[00:44:45] Skip Carlson: That was a good question, John. I'm not sure about that. 

[00:44:50] John Cardone: I'm sure there's so many different ways that they can run. Some states are and it's definitely some states are definitely more aggressive as far as sales and use. some states are much better at defining a token. That recognize is this a membership to a club or is this token, subject to a sales tax?

[00:45:08] John Cardone: Is this property that's being sold? So the so states it really, it is difficult because you do have the local state taxing sales tax regimes as well as most of the states generally follow the IRS as far as the income tax character is concerned. But the sales tax sales and use taxes can be very different.

[00:45:29] Skip Carlson: Yeah, when you talk about state regulatory bodies, like the NYDFS from a regulating trust companies that's a whole different arena where states do vary on their regulatory stances. From a tax perspective, as John alluded to sales and use taxes, pretty commonplace. I think where you see some areas where some variability is around nexus, like if you have a distributed workforce and you have employees, maybe offshore, some of the United States, the States like California and Oregon, just by having one employee there gives you a permanent establishment, gives you Nexus in that state for filing requirements. 

[00:46:08] Skip Carlson: Every states are different. As far as what establishes. an establishment of a company. So those are things we work with on our clients as well, who have a distributed workforce and looking at, employee compensation and how they structure those things with EORs and things of that nature. So.

[00:46:26] Umar: Perfect. Thanks for sharing. I said in the intro, RSM is a returning guest. So I actually had Jay Schulman, the National Leader for Digital Assets at RSM in December, 2021. So it's three years already. Back then we had discussed like NFTs, NFTs were very hot, but back then we had discussed DAOs, career opportunities with blockchain.

[00:46:48] Umar: So, I want to ask you if you could share with the listeners an overview of the services provided today at RSM specifically for digital assets.

[00:46:58] Skip Carlson: Yeah, I mean for those who are not acquainted with RSM, we're the fifth largest CPA firm in the United States, top ten globally. So it means we are an audit firm, we're a tax firm, an advisory firm. Everything we do in the traditional sense, all the services we provide to our clients, we can do for digital asset clients, whether that's financial statement audits, assurance services, SOC reports, tax advisory, transfer pricing, and then on the advisory side, it's everything from implementing a, an ERP to doing management consulting, transaction advisory. 

[00:47:38] Skip Carlson: Everything we do for our clients, we can do for our digital asset and blockchain enabled clients.

[00:47:43] Skip Carlson: It just takes a little bit of nuance to understand the technology, the transactions, the accounting, the tax treatments but really it is a list of a hundred or hundreds of different services we provide to our clients.

[00:47:56] Umar: What would you say was like going back a couple of years, like I don't know, 2017, 2016, at the beginning, when you first started out providing these services, what was like the most difficult in the beginning, the challenges you had to overcome, maybe some proprietary tools you had to develop in house to do auditing, for example, for digital assets.

[00:48:20] Skip Carlson: Yep, any, anyone operating a company in the space or a fund understands there's more of just a premium you have to pay to get really good services. Even just the compliance services, like the filing and audits cause you have to understand how are these digital asset transactions happening?

[00:48:39] Skip Carlson: What are their accounting treatments for GAAP and for tax and then for audit, especially, how do we verify the accuracy of these transactions or of these holdings so that your bookkeeping entries in your balance sheet are accurate. And to verify some of those things, you have to go and get, verifiable third party data who run their own nodes and are SOC compliant. 

[00:49:03] Skip Carlson: So yeah to be a provider in this space and a vendor you have to be able to understand the technology. You have to understand the tools and you have to stay on top of the regulations from all the different regulatory bodies from FASB and the AICPA to the IRS so you can just serve your clients well.

[00:49:20] Skip Carlson: So it has been, I think, a journey for all the CPA firms in the space from, 2009 when Bitcoin was released till today and all the advent of all the different chains and technologies. So yeah it's been a journey for I think for everyone in the space. 

[00:49:36] Umar: Skip, for example, you've been working at RSM for more than five years. During this time, is there a project maybe that you're very proud of to have worked on or something that you yeah, it really enhanced your understanding of this space by working on this or that client?

[00:49:53] Skip Carlson: Yeah, even prior to coming aboard to RSM I was just involved in the crypto community, you know was an investor was an evangelist would attend conferences was very just keen on the technology Getting the opportunity to come and work in the industry from the service provider perspective, from the tax and accounting perspective has been really fascinating.

[00:50:15] Skip Carlson: You get to speak to a lot of different companies, get help them solve really critical challenges in their growth get to know these founders and these companies on a really intimate basis. I think just my proudest moment is helping to build a really successful practice here at RSM. We have north of 350 clients in the space today. We do a substantial amount of revenue for the firm and really being able to just grow a practice, create a brand, provide really good client service and help the industry grow in a meaningful way and legitimize a lot of the industry's operations. 

[00:50:49] Skip Carlson: I think that's the fun thing you get to have as a CPA firm is most of the, our clients are coming to us looking for, assurance or audits or tax. And they're looking for a service provider. They can have confidence in that knows their industry, knows their business model, knows the technology and being able to grow a reputable brand in the space, I think has been really fun, really rewarding.

[00:51:15] Umar: I also wanted to ask you how you train employees on blockchain at RSM. I went on your website and there's there's a link called spotlight.rsmus.com. I was very impressed with the amount of courses that you have there for your employees. There's a lot of courses on blockchain. So yeah, I just wanted to ask you how the work like you've been doing on upskilling the current employees to work in the digital assets department.

[00:51:43] Skip Carlson: Yeah. I know this is something you're particularly passionate about at The Accountant Quits, you guys have some fascinating curriculum for upskilling in the space. Same, we have an entire educational division of our blockchain practice. That's just dedicated to the curriculum, the upskilling and the training internally of our employees. Most of the folks that have come to work within our practice came from other divisions, came from audit, came from tax, came from consulting the, yes, they had the bug of being into crypto and being into blockchain. But we've done a fantastic job of enabling our really our workforce and we have different levels of curriculum.

[00:52:21] Skip Carlson: There's a 101, a 102, a 103 course. I know some of our professionals just got back from trips to Europe and to Cayman where we've had some collaboration with our Alliance members, our Alliance firms, upskill internationally on their capabilities to service the blockchain space as well.

[00:52:40] Skip Carlson: So that's definitely a big part of our practice and big part of the firm strategy is just upskilling our workforce to be confident to service clients in the space.

[00:52:50] Umar: And if there are people listening who would like to join RSM, what's like the best or join the digital assets department team. Should they just go to the careers page and go through the process there? Or is it different?

[00:53:04] Skip Carlson: Yeah. I mean, There's certainly, you want to look for the, whatever roles are open, but if you are interested in working for RSM or another firm in the space and their digital asset practices, reach out to myself or John or Jay Schulman or Bennett Moore, who leads our practice.

[00:53:20] Umar: Now this last question I want to go through. I mentioned I interviewed Jay Schulman in 2021 and actually the title of that episode was where to pay attention to blockchain in 2022. So I want to end this episode today by asking you for this year. What are you currently looking forward to in the Web3 space?

[00:53:43] Umar: Can be anything from regulation, new guidance on for the from the AICPA or the IRS or what the new Trump administration brings?

[00:53:55] Skip Carlson: John, you want to start on that one?

[00:53:57] John Cardone: I think the, information reporting although it doesn't happen until the end of 2025. One of the things that happens whenever the IRS implements information reporting is a change in taxpayer behavior. There's a ripple effect. And I'm really looking forward to seeing the different activities.

[00:54:15] John Cardone: I think a lot of taxpayers will use this opportunity to get their, subledgers in place. So I'm looking forward to the kind of the changes, both in on the taxpayer behavior and really from the IRS and enforcement perspective of what the effects of this information reporting is going to be, how it's going to change the ecosystem, because I think it will have effects. I'm just not exactly sure what.

[00:54:39] Skip Carlson: Yeah. I mean, I'm very excited for the industry moving forward. I think some of the drag that's been put on the industry from the lawsuits across the industry. I think some of those were to like lift, it would help a lot of companies operating the space. It would encourage more entrepreneurs to build more companies, to start more companies in the United States to receive funding.

[00:55:02] Skip Carlson: We'll see what happens between the CFTC & the SEC where the industry gets regulated. Certainly the IRS is going to play a big part on the tax regulations moving forward. I think everyone's hopeful for more favorable Trump administration to obviously are a little bit more favorable towards the industry. 

[00:55:19] Skip Carlson: But there's also really exciting things. The advent of stable coins, the market cap, I think is over 200 billion at this point how that helps to strengthen the US dollar, how it gives access to the US dollar overseas, the payment networks. I think that's going to be a compelling area. Everyone's always talking about the cross section of AI and crypto and enabling agents to be able to trade their own wallets. Those are going to be big parts of it, but I think overall, what you want more than anything is to encourage entrepreneurs and builders in the space to be unfettered by unnecessary lawsuits or regulation. I think that's where we're heading so that people who want to have a great idea and want to build something in the space, want to build an application, build a company, I think we're going to get to a better environment where they're going to be able to do so in a more conducive fashion in the United States. And that's really what's going to drive innovation in the sector. That's what's going to drive capital creation. And all the the fun price appreciation that everyone loves. So

[00:56:24] Umar: Perfect. John and Skip, thanks a lot for your time today. Thanks for being so generous with your time. And also thanks a lot for helping me to prepare this episode with providing suggestions for topics relevant topics to be discussed. There's a last question that, it's like a tradition on this podcast before the guest leaves.

[00:56:44] Umar: I always like to ask them if they have a favorite quote or a maxim that they live by. Would each of you have one? 

[00:56:54] Skip Carlson: You want to go for it, John? 

[00:56:55] Skip Carlson: It looks like you're thinking 

[00:56:56] John Cardone: Oh, I'm such a boring. He who returns his phone calls. That's why that's my quote or maxim.

[00:57:01] Umar: He who returns the phone calls?

[00:57:03] John Cardone: He returned his phone calls. I returned my phone calls. That's what I live by.

[00:57:08] Skip Carlson: It's a very cliche one, but life is short. Like, do what you love. I enjoy working in the space. I enjoy working at RSM. I get to work with brilliant people like John and everyone else that's in the blockchain practice across the firm. So life is short, do what you love. Crypto is a fascinating space.

[00:57:26] Skip Carlson: I love working in it. 

[00:57:28] Umar: Uh, you mentioned earlier, if people want to reach out to you, what's the best way to reach out to you, Skip and John? 

[00:57:35] Skip Carlson: Yeah, you can message my email, skip.carlson@rsmus.com or my telegram handle is skip_carlson. You have any questions about anything accounting, tax, crypto related as far as CPA world goes, feel free to hit us up.

[00:57:51] John Cardone: And I'm john.cardone@rsmus.com

[00:57:57] Umar: Perfect. Well, thanks a lot to both of you for your time today and we'll be in touch.

[00:58:02] Skip Carlson: Thank you.