Be Careful With Your Taxes If You Have Crypto ETFs: Bits + Bips

If you traded like ETPs, if you have ETFs, there's this there's a second step that you need to do in addition to relying on the 1099B that you're getting from the broker.

>> Wow, that does sound quite complicated.

Hi everyone, welcome to Bits and Bips the interview. I'm your host Steve

the interview. I'm your host Steve Erlic, executive editor at Unchained, and we've got a terrific lineup for you today. Uh, first I'm going to be joined

today. Uh, first I'm going to be joined by Shihen Chandrasakura, head of strategy at Coint Tracker, and then we're going to follow up with Sebastian

Derivo, a co-founder at the D5 platform Steakhouse Financial. We have a lot to

Steakhouse Financial. We have a lot to talk about today. Um, Sheen's going to join us to discuss uh year and tax strategies. Um, things that everybody

strategies. Um, things that everybody should be considering when u wrapping up the year. We're going to cover tax loss

the year. We're going to cover tax loss harvesting, wash trading, and what's coming down the pike in 2026. So, uh, so let's get started. Uh, welcome, Sheen.

>> Yeah, thanks, Steve.

>> Thanks. Um, just one very quick disclaimer. U, nothing that, um, either

disclaimer. U, nothing that, um, either I or my guest say here is tax or financial advice. Uh, for more

financial advice. Uh, for more information and disclosures, please check out unchain.com bits and bips. So, Sheen, let's Yeah, let's get right into it. Uh, a lot of

people listening have probably been paying taxes on their crypto for years, but for anyone that is kind of new, can you just briefly explain how crypto um

falls u in line with current tax law?

>> Yeah, sure. So, cryptocurrencies like you know, Bitcoin or even NFTs, they're treated as property according to IRS rules. So that means whenever you cash

rules. So that means whenever you cash out or go from one crypto to another or when you earn crypto through staking or any type of rewards, uh those are

considered taxable event. Um I guess like one easy way for you to kind of think about crypto taxes is is kind of thinking about how stocks are taxes taxed. Uh so crypto taxes are very

taxed. Uh so crypto taxes are very similar to stock uh how how t how stocks are taxed uh with some exceptions.

>> Okay. Yeah. And um since this is kind of a year-end sort of tax wrap up, uh I would imagine we might have you back in the spring to talk about when it comes

to filing, but uh what are some of the things that people should be thinking about uh when it comes to sort of finishing out the year, especially in a year where I mean a few assets are up

but but a lot are down, >> right? Um I would say like number one

>> right? Um I would say like number one thing uh you should consider doing like especially in December is what we call tax harvesting. So basically I would

tax harvesting. So basically I would look at all the wallets and exchanges you have and go asset by asset and see which assets are below the cost basis.

Cost basis means how much you paid for it. Um if the value is below the cost

it. Um if the value is below the cost basis you could consider selling them and realize the loss and if you want you can buy it back uh in this year or next

year. uh depending on like you know uh

year. uh depending on like you know uh how you want to maintain the portion in the long term and when you realize those losses you can use those realized losses to uh offset your capital gains coming

from crypto and also like stock transactions u as a result you just you can end up paying less taxes uh on April 15th >> okay and and tax loss harvesting this is

something that is not unique to crypto I mean anybody can do it for for for any asset and and correct me if I'm wrong But I think there's a limit that you can offset up to $3,000 a year and then if

your your loss is more than that, then it can just be extended outward until you you reach the total. Is that

correct?

>> Uh so this is how it works. So uh let's say like you know maybe I I'll use an example that's probably the easiest way to kind of understand this. So, let's

say you sold an asset at a loss um and then you created let's say like $10,000 worth of capital losses and for the same year 2025 tax year, there's no capital

gains coming from crypto or stocks. In

that case, you can only claim 3,000 out of that $10,000 worth of total capital losses. The remaining 7,000 goes to

losses. The remaining 7,000 goes to future years. So in the future is if you

future years. So in the future is if you have any capital gains uh you can use those 7,000 to offset that uh capital

gain. Now same scenario let's say 10,000

gain. Now same scenario let's say 10,000 capital losses but let's say you have $8,000 worth of capital gains in 2025.

You can fully offset that $8,000 worth of capital gain using that 10,000. The

remaining 2,000 goes to next year. So

that's how it works. So in other words, it's not necessarily limited at the 3,000. It's limited at 3,000 if you

3,000. It's limited at 3,000 if you don't have any amount of capital gains, but if you have capital gains, actually there's no limit. Um, yeah, you can offset everything.

>> You can do the full boat. Okay. All

right. Now, thanks for that clarification. And and this kind of

clarification. And and this kind of leads into something I know we've spoken about a lot in the past. Kind of

crypto's sort of superpower in the sense that uh crypto is not banned from quote unquote wash trading as far as uh I can

tell regular stocks are regular securities are. Can you please explain

securities are. Can you please explain that that difference? And uh I'm also just maybe kind of to add to the conversation, talk about I know there's been discussions about changing this

rule, but it hasn't actually changed as far as I can tell. And

>> from what I can tell, it seems relatively safe now that Paul Atkins and what whatever h Yeah, it seems like given the given the current SEC's like

disposition with regards to most crypto assets, um wash sale seems to be relatively safe.

>> Yeah. So maybe it's worth kind of explaining what what a watch sale is for for at least for tax purposes. U a

[clears throat] watch sale happens when you sell a stock at a loss and you buy back the same stock within 30 days. Uh

if that happens, IRS does not allow you to take that loss uh because it's kind of considered like a paper loss, right?

I mean, you just you just had it, but did you really lose it? Not really. So

uh so if you buy back the same stock within 30 days, you're not allowed to deduct that loss, uh IRS warns you to defer that loss to to future years by

making a basis adjustment. Now for

crypto, if you read the IRS, you know, tax code section 1091, uh the washell rule is applicable only for stocks and securities, but crypto is treated as a property according to IRS

rule as I explained earlier. So as a result technically speaking you cryp voice sale rule is not applicable to crypto transaction. This means um you

crypto transaction. This means um you know you could you know sell let's say bitcoin at a loss buy back the same unit um you know without having to wait that

30 days. Um but that said uh there are

30 days. Um but that said uh there are other rules in the IRS code that prohibits you from doing stuff like that. Like for example, you cannot, you

that. Like for example, you cannot, you know, sell a crypto asset at loss and buy back in the very next second because that type of transaction lacks the economic substance because you're just

doing that to create like tax losses which is bad. So the point that I'm trying to make here is that even though you don't have to wait that 30 days, I would at least wait like a reasonable period of time maybe like few days to

buy back the same coin if you want to maintain that position. So that's the the difference between like you know wash sale as it's applicable to stocks versus versus crypto. Yeah. It's not

applicable but but uh it doesn't mean that you could abuse the rule either.

>> Yeah. And I I was going to say I think this is where the whole this is not financial this is not tax this is not investment advice disclaimer um becomes really important. Uh I know we we've

really important. Uh I know we we've spoken about this in the past. So maybe

just to kind of drill down a little further like like it sounds like you need to have some sort of if the IRS comes it comes knocking if you did this and sold Bitcoin at a loss for instance

and bought it back a week later you'd have to have like some uh alibi might not be the right word but a plausible explanation for why this is an economic move like why this was not just simply

to to maximize um u how much of a capital gain you can offset like there has to be some sort of plausible story.

Is that is that kind of what you're you're saying?

>> That's right. Um uh you know I I haven't seen like uh audits related to you know this wash sales rule yet because these type of audits are very hard to conduct and hard to streamline because

everything is kind of based on facts and circumstance of like each taxpayer and each situation. Uh but you're right. So,

each situation. Uh but you're right. So,

if I were to sell something at a, you know, loss today and and buy it back on December 31st or like I don't know, like tomorrow, uh, I should I should be able

to like, you know, justify why I did that. And in in in some cases, it's it's

that. And in in in some cases, it's it's justifiable because unlike stocks, you know, crypto goes through like these huge swings like, you know, every day,

even every hour. So, is it justifiable in some cases? Yes.

>> Yeah. I mean, uh, you say someone could read a really great article on Unchained about Bitcoin being about to go into a new cycle right after they sold.

>> Exactly. Yeah.

>> And it would make perfect perfect sense for somebody to buy back in. So, so I certainly get it. Um, just just one more thing related to to the wash sale rule because I know it's been on the chopping

block in the past, but it has never actually been kicked out. Uh do you have any sense of what the future of it looks

like and uh how is uh to expand the conversation a little bit? How is this rule or just u tax treatment of crypto

being um impacted by either the Genius Act which went into law in July or um the various market structure bills that are being passed along the halls of Congress?

>> Yeah, war sales um has been a topic uh you know for a number of years right now. uh uh a bunch of you know draft

now. uh uh a bunch of you know draft bills uh you know have proposed uh to kind of eliminate uh wash sale rule um

uh the you know crypto being you know not subject to it um the genius act uh doesn't talk about wash sale rule because it it talks more about you know stable coins and etc. Uh but there's

like I would say like at least like a handful of bills uh that are you know somewhere in DC. I don't know which step they are in that says that you know crypto should be subject to the wash

sale rule similar to stocks. Um so I would say I don't know when those bills going to get momentum or it's going to get passed but um I don't think this this loophole that we we spoke about is

something that's going to exist forever.

I think um it's going to get closed down pretty pretty quick. Yeah, it's I mean it's it's kind of interesting when you think about it. It's it's sort of like almost an accident that cryp I mean maybe not an accident but like the wash

sale rule I I think of it more applying to things like cars or houses like like like very like esoteric like non-f fungeible goods where it's like I mean how could you sell a house and then buy it right back like it's just not

practical whereas in crypto treat it as property but these things are fungeible and relatively liquid. It's just

certainly a lot easier to do. So, I I can kind of understand why there's a bit of that mismatch and uh and everyone's trying to figure out the right way to handle this moving forward. Uh so,

couple more questions uh and then we'll we'll we'll move on to a little bit of what people should expect in the spring.

But I I do want to ask you um about just a few issues that I know come up a lot.

Stable coins. They're becoming much more popular and while they're all kind of mentioned as uh they're all worth a dollar, they're all worth a dollar, but prices fluctuate and there's times when

they can significantly deviate from their pegs, um people are using them in everyday transactions. Are there any

everyday transactions. Are there any special um treatments uh tax treatments for stable coins or anything that anything that people should keep in mind when it comes to transacting in in

stable coins? So for for tax purposes,

stable coins? So for for tax purposes, every crypto asset is is treated as property, including stable coins. Um, so

yes, you're right. You know, some of these stable coins could be uh uh not necessarily, you know, pegged, you know, onetoone for the dollar. And if that happens, you still have to capture that,

you know, tiny gain or loss. But

generally speaking like unless you do like you know hundreds of thousands of transactions you know these like uh minor fluctuation kind of round up to zero because in in in a tax return you

cannot put like you know multiple decimal phases. Um but that said even if

decimal phases. Um but that said even if you don't have a gain or loss you're still required to report your stable coin transactions uh on 8949.

uh let's say for example uh you used I don't know maybe like 5 USDC to buy a cup of coffee um you still

had to report that on form 8949 uh even though that may not result in a significant gain or loss uh because again stable coins are treated as property so that's how uh stable coins

should be reported on taxes >> and there's still no the minimist exemption I know that's something I think even um Senator Lumis had been speaking out as recently as a few months ago to so that I guess people can avoid

having to um put on tax forms if they bought a cup of coffee with with USDC.

Uh but there's still no dimminimous exemption as far as >> right there there's still no dimminimous exemption. Um people are talking about

exemption. Um people are talking about $600 threshold, you know, in some cases thousands and and etc. Um yeah, there's still no dimminimus. Um, but yeah, I I

mean I'm a proponent of, you know, having something like that because that would, you know, increase the adoption and people will start using stable coins and even other coins for like day-to-day purchases and etc. >> And and one more question before we take

a quick break, but uh I'm curious if there's any we've spoken a lot about different and in your intro, you spoke about a lot of different ways that people can um I guess incur tax generating events for lack of a better

term. um airdrops and and and and

term. um airdrops and and and and staking and passive income so on and so forth and uh and how they're treated.

But I'm curious um the world of crypto is always evolving. Are there any sort of new or novel forms of like like tax generating events that people should really be aware of um as they're getting

ready to finish out the year?

>> Yeah, I think uh a new one uh is this like ETPs, exchange shared products. Um

so obviously you know if you're buying like a ETP like in other words ETF or something like that you just buy it from a broker uh it works very similar to stock you know you have a cost viz you have you're selling something and that

results in a capital gain or loss. Now

there's a there's a little hidden piece here. Uh these granto trusts can only

here. Uh these granto trusts can only hold uh like you know digital assets um in inside this trust and periodically

they dispose of these digital assets to cover like fund expenses you know paying their employees and etc. Now you have to go to the fund website you know download

the statement and calculate your allocable share of uh bitcoin or whatever the digital asset disposed at the fund level to figure out your own

gain or loss. Uh so that's something very hidden because it's not captured by the broker. The broker is only capturing

the broker. The broker is only capturing when you sell your ETP interest at a gain or loss, but the broker is not capturing your allocable share of gain

or loss that the fund spend uh in terms of Bitcoin. So that's like a very uh

of Bitcoin. So that's like a very uh nuance thing. So something to keep in

nuance thing. So something to keep in mind. Uh basically the idea is that if

mind. Uh basically the idea is that if you traded like ETPs, if you have ETFs, there's there's a second step that you need to do in addition to relying on the 1099B that you are getting from the broker.

>> Wow, that does sound quite complicated.

I guess that's why people need to uh um well I would I would imagine I guess that's why people really need to be careful when it comes to filing their taxes and uh and seek out professional

advice uh if uh if necessary. Okay, a

very quick break and then we have a few more questions. Look, if you're deep

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notes. Just scroll down.

So, I want to turn a little bit to what what to expect in the coming year. Uh I

know that um there was some recent guidance that came out from the IRS and and actually no I think it was from the infrastructure bill back in 2021. Yeah.

>> Where exchanges like like Coinbase and Kraken and and Robin Hood etc. are going to have to start issuing a form called 1099DA.

U I believe starting this this this coming cycle. Um can you explain what

coming cycle. Um can you explain what that is? And um I I know you you've

that is? And um I I know you you've spoken a lot in the past about um some of the benefits but also some of the limitations of especially this year's form that is going to be received by by

investors.

>> Right. So this whole 1099DA ruling kind of came out of the infrastructure bill passed in 2021. Uh the TLDDR is that uh the government wants you know

centralized exchanges to act very similar to stock brokers. Um so if I'm a user at the end of the year I get a tax statement um showing my gains and losses

so I can easily file my taxes. Um so

that's in theory I mean if you know in theory it sounds really good but in practice it's going to create like a lot of issues. So so starting 2025 this this

of issues. So so starting 2025 this this tax year meaning like in January you know 2026 planning year uh if you sold anything in a centralized exchange like

you know Coinbase, Gemini and Kraken and etc. you will be getting this brand new form called form 10998 showing only your proceeds. Like for

example, let's say you sold a bitcoin for 100,000 and you paid 50,000 but in this tax form in the first year it will

only show 100,000. It will not show the cost basis. So I think a lot of people

cost basis. So I think a lot of people going to get confused when they first receive this tax form because it's a brand new form that they have never received. uh and then secondly it will

received. uh and then secondly it will overstate your gains because it's not going to have the cost basis. So then

you had to go to your own books and record codes or you had to rely on a crypto attack software to figure out the the cost basis.

>> Yeah.

>> Now yeah go ahead go ahead Steve I was going to just just to follow up um just two quick things. I believe in 2026 though they're going to include cost

basis there. But um but but going back

basis there. But um but but going back to 2025 I mean one question that will inevitably come up is say I have two Bitcoin at Coinbase and how do I know

and I bought one at 25,000 I bought one at 50,000. How do I know which one I

at 50,000. How do I know which one I sold?

>> Yeah. So in in in that case it comes down to your books and records. Like

let's say in your example you're using something like coin tracker and you have picked ho as your accounting method highest in first out in that case you

can marry your highest cost basis with the proceed statement issued by Coinbase and that will result in the gain or loss. So in other words exchanges are

loss. So in other words exchanges are not reporting cost basis for the 2025 tax year. you get to input the cost

tax year. you get to input the cost basis based on on your own books and records.

>> Yeah.

>> I wonder how that's going to line up then with the next year when the I mean is the exchange actually going to be keeping track of which Bitcoin is sold and I could I can imagine there where there's mismatches where um like like

they don't the exchange doesn't know that you use ho method and and whatever.

I guess that might be a problem for for next year.

>> So yeah, let me break down the 2026 year because that's where I feel like uh issues going to get even more amplified.

So for the 2026 year, exchanges will report proceeds and cost basis for transactions that happen only inside the exchange. So going back to my example

exchange. So going back to my example before, let's say you sold a bitcoin in 2026 for 100,000 and you bought that

bitcoin in let's say Coinbase in 2026, same year for 40,000, then you will get a complete 1099A.

But um if you transfer in that bitcoin from let's say your self-custody wallet or Kraken to Coinbase and sell it on Coinbase, your DA will not show the cost

basis. So you will still have those uh

basis. So you will still have those uh missing cost basis issues. So that

that's that's that's one issue. Uh issue

number two is what you just said. There

will be mismatches between what you see on the DA versus your own books and record/cryptotax software. Because think about this. I

software. Because think about this. I

mean maybe you have been using ho on your cryptot tax software but you have not probably not set up that hypo account economy method on your uh coinbase. So coinbase is selling

coinbase. So coinbase is selling something else but according to you in your head you're selling some some some other unit that results in some some some different gain or loss. Now you had to reconcile.

>> Yeah. The third thing is so there are like seven different types of transactions that exchanges are not reporting to you on the DAS like stable

coin transactions under 10,000 they're not reporting to you you got to rely on your own books and records NFT transactions on 600 you got to do your

own records wrapping lending um and and most importantly like if you use a centralized but a non US exchange let's say like binance.com or something like that. They're not going to send you a DA

that. They're not going to send you a DA because they're not US-based, but you still have to report those things. And

then the last but not least, the DeFi stuff. It's it's all your

stuff. It's it's all your responsibility. Um, and then you had to

responsibility. Um, and then you had to keep your own books and records. So, so

the point is that DA is going to show just a very partial truth of like, you know, what you did in a given year. Uh

but these forms still have a lot of gaps and now you had to marry that truth that's on the DA with your book books and records and and hopefully everything ties when you file your taxes.

>> Gotcha. And um ju just to wrap up here uh any other last minute advice any anything that our viewers and listeners should be paying attention to as we get

ready for the year to wrap up?

>> Yeah, so a couple of things. Uh we spoke about Texas harvesting. So consider

doing that to save uh you know tax bill because don't wait until April 15th. By

that time you're already late. Uh the

second thing is that if you're using a centralized exchange, make sure your accounting method is set right now because if you don't set an accounting method like HIO FIFO, LIFO starting

1126, they're going to default you to first in first out which may not be ideal. So, I encourage you to go to the

ideal. So, I encourage you to go to the tax centers of each exchange and make sure that economy method is set correctly.

>> Okay, great. Well, Sheen, um, we'll have to have you back. Thanks for, uh, taking the time to speak with us. Uh, thank you to everybody for for watching and listening. [music]

listening. [music]