How is Staking Taxed? : New Case Law | Mark J Kohler LIVE |

Five, four, three, two and one.

Welcome, everybody, to a live broadcast. My name is Mark Kohler, tax attorney, with Darren Charrington, a fellow tax lawyer and engineer, which means he's doubly nerdy. I'm a CPA and doubly nerdy. So we're going to knock this out. If you are doing any staking with cryptocurrency or want to. This broadcast today is to talk about how is staking taxed. Now, this is on the back side of our first crypto tax summit, which we held last weekend in Phoenix, Arizona. Now, if any of you attended, let me just say the recordings are going to be available, we believe as early as Monday or Tuesday next week. I'm sorry, if you did not attend, you cannot buy the recordings. We're doing our next summit in May. Now, some of you say we'll just sell the recordings. Well, guess what? Those recordings are not downloadable. And the laws are changing so quickly that we're saying those recordings are available until probably end of April and then, boom, they're off. Because we do not want to be liable for how the laws change and you relying on an old recording. So we're going to just. So for those of you that attended the summit, we're going to be holding a special webinar just for you to talk about staking and do more Q and A on that. But we wanted to come out live today on YouTube and answer some questions. There's a new case out. Forbes is making a big deal about it and some other platforms. So we got a lot to talk about, but, man, I don't even know where to start here. And Darren, welcome. Should we.

Let's talk about the new case. Is that okay?

I wonder if we should try to define staking first.

Yeah, let's do that.

Boy, that was easy. You were an easy sale.

I'm okay with that. Let's get some background first. Why not?

Okay, I'm going to. Should I write kind of what I did before while you describe it?

Yeah, yeah, for sure.

All right, so we're going to do a little Pictionary here, folks. Now, we're not talking about buying and selling cryptocurrency, trading, cryptocurrency, lending, cryptocurrency. We're talking about this term staking. And I like what you said, that people are using that term in vain. They're just throwing around. You talk about that.

It's really common in the industry for staking. Just be kind of thrown out anywhere, right? And so we've got these proof of stake networks, where that's kind of what people would call kind of true staking. Right. But liquidity provide liquidity pools use that term as well. You stake onto there or you stake onto these other, other things as well. So I think that's going to be really important as well. Defining exactly what we mean by staking and just recognizing that different protocols do it different ways and it does doesn't operate the same way on everything.

Yeah. And I'm going to say this right now as we begin this broadcast, that if I do not ask any of you to, I'm not going to be broadcast. There's people that just are imposters of me. Look at, there's one right there. Go back up. Look at it. People are already saying, hey, to participate, send the bitcoin here or there. That is not Mark Kohler. They are scammers. We're going to try to be blocking them as we go. I am not making any posts in this broadcast. I am not commenting, I am not doing anything here. So people, please do not respond to these scam artists out there. They are taking my picture and reposting.

So it's a complete scam. We will never ask you to send crypto during a live broadcast.

Hell no. So watch out for that. Okay, so here's what we're going to say is staking first. Yes, please. Okay, so staking, staking is a very broad term of you using your bitcoin or your coin, your tokens in a manner to create income. So some of you just buy ethereum, hold it and wait till it goes up in value. Some of you might buy dogecoin, somebody have a bitcoin. Some you buy litecoin and you're just holding. You're buying and selling and trading. But some of you are going to say, well, I'm going to take this coin or token and use it as collateral in some form or fashion to get paid for someone using my tokens. Now, I gave a very, very general term and people use that word staking to mean a lot of other things.

Right.

But let's do the pure staking. So describe it and I'll write it.

Right, so let's talk about it. Just a pure proof, proof of stake network. Okay, now let's just compare it to a proof of work network which is like bitcoin, where people will actually set up mining rigs and those computers or mining rigs will process blocks on the blockchain and process transactions.

You may have already lost people. So this is an engineer speaking what he's trying to say is out there, there are millions of people going out there and buying and selling and trading crypto. Now for those of you that don't know when you trade crypto, it has to be verified. There's this algorithm, there's a mine, there's a. These mining, what do you call them, warehouses or whatever they're called. Mining.

Mining farms.

Mining farms that are doing proof of mining. They're like proof of. You call that proof of stake of work? Proof of work. Okay, so whenever any of you are out there buying or selling tokens, and I know some of you techies out there are like Kohler, you're killing us. You're brutalizing the, the terms. I'm trying to put this in English so the average person understands it. I know I'm not using your terms and you think I'm totally an idiot. I'm trying to take what is in Darren's brain, in Darren's brain and put it into an 8th graders language that has never owned a computer. Okay, so don't beat the hell out of me here on chat. Right, okay.

All right, so we've got a network of computers. Yes, they're all connected.

And all these computers are proofing. Keep going. Right.

And when somebody wants to do a transaction and send currency or cryptocurrency to somebody else, that's going to be processed by one of these computers. And so it'll help create that record on the blockchain.

Okay, so this is all trading that's going out there in the world, in crypto world. Now these computers, you would call these mines, right?

Oftentimes they're referred to as nodes.

Nodes. Okay, no, see, look, it's. This is good. These are nodes and they're doing mining.

They're actually processing, processing, processing information processing, computers.

Okay, now let's say Mary Jones over here. Mary has a wallet with $100,000 of some token. We don't care what it is. Is that okay?

Yeah.

We could call a token or a coin.

Right.

Fair. Okay, so Mary has $100,000 in her wallet. She wants to make use of this money while she's trading over here. So she's going to be doing trading, but she wants to use this hundred grand wisely. And someone says you should stake.

Right?

Okay, what does she do?

Okay, so in proof of work, these nodes and computers, they just compete. Whoever's the fastest gets the reward, right? Well, we have some that are now switching to proof of stake. And with proof of stake, people don't delegate their coins to a node that's

ran by an operator.

That's run by an operator. So this is a separate person. Sometimes, you know, operators will stake their own coins. Okay? And when that node processes a transaction and receives coins for doing that, then the operator will take a fee, and then the rest of that will go to the people who are delegating or staking to that node.

All right, now, for you techies, you're like, darren, good job. For everybody else, you're like, I don't know what the hell he said. Can you put it in English, Mark? So let's say there's two other people out here, John and Tom. And John and Tom are buying and selling some sort of crypto. They're doing a transaction now while they're waiting for these nodes down here to process their transaction, they're waiting. So people don't want to wait. They want to get that money faster. And so in a split second of a moment, there's all. This is all happening sometimes in milliseconds, whatever. Right? Fair. Whatever.

Yeah, yeah, fair.

Okay. So all these transactions are going on, and while we're waiting for John and Tom's transaction to be finished, Mary's going to provide collateral that. You know what, if there's a problem with this transaction, I'll cover it. Is that a fair way of saying it?

Yeah, a lot of. A lot of systems will actually. They'll do what they call slashing. So if we get a bad node operator or somebody who's out there trying to mess with the blockchain and they're not operating it property properly, their currency and anybody who is delegated to that node is going to be slashed or you lose essentially your currency at that point.

Now, everybody. This is not a video on how to stake. This is not a video as to what staking is. This is a video to tell you that this process is a service. That's it. We are tax lawyers. We have got to sign your freaking tax return. We've got to make sure that you do not get audited, and the IRS comes in and freaking gives you a colonoscopy. We want to make sure that you are doing this the right way on your tax return. And the problem is, is out there in the tech world, everybody wants to throw around the staking word and say, oh, it's a reward. Oh, it's a loan. Oh, it's interest. Oh, it's this or, no, it's not even taxable because I just got a coin that's, you know, that's just sitting there, and I haven't sold it yet. So it's not taxable. Everybody wants to give it. Is that a fair statement? Everybody wants to call it something. Well and other than taxable.

In the industry, people. People throw out terms all over the place. It's not just the word staking. Right. Staking can mean multiple things in. In the crypto world.

Give examples.

Sure. So for liquidity, providing that's where you're going to be moving your. Your coins or tokens into a pool. So basically, we're going to pair, you know, Bitcoin with Ethereum, for example.

Okay, hold it. Now you're getting into liquidity. Just give us the general examples here.

Okay. Yep. Liqu. We have staking where you're going to. Instead of lending those tokens, you're going to wrap them up into some kind of contract or kind of a grouped representation of value.

Okay. A group contract, maybe.

Yeah.

Okay. Then we have wrapped.

Yeah, Wrapping, we call that.

Okay. I used to rap in the 80s, but I was.

We do have an attorney that did rap.

Yeah. Yeah. That's a heavy, heavy Kevin.

Heavy, heavy Kevi.

Heavy Kevi.

Yeah.

Okay, so group contract racket, we call it that. What's some other types of staking so that you guys out there that are techs are like, okay, they know what they're talking about generally. I mean, like, what. What's some other staking that people are like, oh, that's not taxed, or that's different.

Well, and we even have some things where, you know, for example, if we have some kind of a governance token, you have voting rights with that, and some chains will actually let you lend those voting rights or give those voting rights out. So you're not necessarily lending that crypto or the token itself. It's just those rights that go along with it.

I'm just going to say this now, everybody, I'm coming to a reveal. I'm coming to a point. Everybody. Don't go anywhere. Here's the point. And you're not going to like it, but I have a workaround. I have a solution. Staking is a business. That's the point. Staking is a business until the IRS tells us otherwise. And this is where all the accountants in the country And I know CPAs are watching right now. Tax attorneys are watching right now. What we are saying at our law firm and at our accounting firm is the safe path is to call staking a business. It is not lending. You're not getting a fixed interest rate. It is not a Dividend. You, you don't own a corporation. It is not a royalty, it is not a reward. You like to call it a reward, but you're earning a fee for providing collateral in some unique method. Staking is a business and if you do it as a sole proprietorship, which means you got to put it on a schedule C, all you accountants out there, we're behind you, we're going to put it on a Schedule C for our clients in 2021. Now if some of you are like, well, I'm not going to do that, then you're going to have to sign your own freaking tax return. I'm not going to sign it because we don't have any basis to say it's anything else but a business. Now there was a big lawsuit this. And now I've got a, I've got a solution here that Darren and I love to provide that really solves 95% of your problem. But if it's a schedule C and you have staking income, you might have a few expenses, not much, and then you're going to pay self employment tax. Okay, so Darren, tell us about this case.

Yeah, so there's been a lot of talk about this Tezos case. So there's a couple in Tennessee who is staking on Tezos and they receive rewards for that. Now they paid their taxes. And currently the way that the IRS treats staking rewards and the taxation on it is when you receive those coins, that is when you're going to be taxed. So whatever the value of that coin is on the day that you receive it is treated as income.

Okay, so this is income the day I got my money and I'm going to report it and I'm going to take any expenses I can and then I'm going to have net income and I'm going to pay self employment tax of 15.3%. Then state and then federal. And many of you are like, well my, my nodes are in Nevada, but I live in California. Don't care. You're still paying state tax in California. That's a whole other topic. And I hate to tell you this. You hate this. I know you hate to hear this, but good luck finding a CPA that believes you. You're going to be signing your own tax return and representing yourself in front of the irs. Unless you pay someone to buy into your idea. Just, just, you just can't wish it. So I live in California, but my, my rigs are in another state. Doesn't matter. You're a California resident, you're paying California tax. Sorry.

All right.

And that goes for any other freaking state. Okay. So that these folks are in Tennessee.

Right.

They actually claimed the income. They pay their tax. They paid it, and then they made a claim for a refund. What was the story?

Wanted a refund. So their thoughts aren't necessarily that they think it should be taxed differently. They're just. They want it to be taxed at a different time. And so rather than treating it as income when they receive it, they're saying that they're creating new coins through this process.

Okay. And so some accountant or lawyer got a hold of him and said, let's go to the Supreme Court. Let's fight this with right now. Well, I mean, yeah, this could go. This would go some way.

I think they're ready to go all the way.

They're ready to go all the way. So they got a hold of these guys. Sonic, someone got a hold of Wesley Snipes, and they said, let's claim a refund on this. Which is really the way to do it. I'll pay the tax. Right. And then I want to go to court.

I like the way that they're going about it. Yes.

Because normally some of you are going to go, well, I'm not going to pay this tax. The IRS can come after me. Well, guess what? While you're fighting in court, you're paying penalties and interest, and those taxes are racking up a big bill here. They said, we'll pay the tax. Now we're going to do it on your dime.

Well, and the other thing is, too, the IRS did offer a refund.

Yeah. Oh, can you do the bakery example before you do it? Do the bakery example.

Okay. So their argument, though, is it's not. It's not taxable when we create this property. It's taxable when we sell it. And so the idea is that they're bakers, essentially, and they're creating or baking bread, so to speak. And a baker is not taxed when he bakes the bread. He's taxed when he sells the bread.

Yeah. Now, this works for them in this case because they're saying. You've never said crypto is actual currency. You've said it is property. And it's. So it's a property, like a piece of bread. You never said it was like a US Dollar. So if that's what you're going to call it, we're going to call it that, too. And so when we sell the bread, that's when we'll pay our Tax.

Now, even if you're paid with property for services, though.

Oh, okay.

That's the counter taxable.

Okay.

And so this is where they're doing it as a very specific subset of staking. So if we're doing something else where people are using your coins or your rights to those coins and there's a transaction fee and you're getting part of that, that's not going to be affected with this case. This is just for true proof of Sake networks and those rewards.

Now, by the way, everybody, I'm going to repeat it again. Any post from me is a scammer. I'm not making posts. I'm not asking for anything. I'm not making any requests for Bitcoin. Corey, you're trying to block them, right? I mean, whatever you're doing, keep trying. It's so hard to stay ahead of these scammers. Now here, everybody, here's the interesting thing. So this couple in Tennessee pays their tax on the staking, then goes to court and say, I want a refund. And they were hoping for a fight. The IRS said, okay, we'll give you a refund. Yeah, they didn't want to fight this.

Right. And they said, it's a punt.

No, we're not going to take the refund. We'll see you in court. Now it's bumped for another year.

Yes. So you guys may have seen a lot of these articles and I, I don't know what the situation was or how they got it confused, but the court filings were made public last Thursday and yesterday there were a few articles that came out saying that, oh, it's all done and they have a ruling and the ruling is going to be released this Thursday or today. Right. And no, that's not the case. So, yeah, those tax filings were made available last Thursday and it, you know, disclosed the IRS offering the refund and all of this. They're going to have another conference here on the 10th to talk about how they're going to proceed. But pre trial doesn't even start until February of 2023. And the actual trial, I believe, is in May of 2023 next year.

So we're out of over a year. The IRS needs time to figure this out. So if you see. Here's our. You know, another major point of this broadcast today is if you see any articles out there that says staking's not tax or there's a big court case or whatever, these are journalists that don't understand the law. They, they're, they're wrong. The case is not even going till to trial until next year, so we'll see. Now, everybody, let's stick with the bakery idea. Yeah. Okay, now, everybody, I know you didn't like our answer that staking is a business. And when you earn staking dollars, it's not lending, it's not rewards, it's not a royalty, it's providing collateral, a service. And I'm telling you, no accountant is going to say it's not taxable and sign your tax return the easy way, the safe way to go is to claim it as business income. Now, there's a lot of questions here. We're going to grab these in just a moment, but let's just do one last example here. So let's say you have a bakery. Yeah. All right, so I'm a bakery. And you take it through us. We've got a sole proprietorship option, and I could run my bakery as an S corporation. So I'm going to take this and raise that. Okay. All right. So I am going to be. I have two options. Now, everybody, this is every realtor, dentist, doctor, lawyer, plumber, electrician, accountant, dermatologist, chiropractor, landscaper. You have a choice. You can either be a sole proprietorship or you can be an S corporation. And that could be an LLC taxed as an S Corporation. LLCs do not save taxes. If some of you are thinking, I'll set up an LLC in Nevada, it's not going to save you any tax. None at all. Now, if you're an S corporation in the state where you live, we can have some options here to save some money. So we're just going to use the bakery idea because we were just kind of going down that bakery. But this could be any small business. And some of you techies out there, I'm sorry if that's offensive. I just smart people, if you're in the crypto industry and you're saying this isn't taxable, I'm sorry, we're going to call staking a business. And that's what the IRS is trying. And here's the last part. Many of you are like, I want cryptocurrency legitimate. I want the value to go up. The only way it's going to get legitimate and the value is going to go up is if the IRS and the SEC say it's legitimate, and guess what? That means it's going to get taxed. You can't say it's legitimate and the value go up without paying tax. So it's kind of. You got can't have your cake and eat it too. So we're gonna play the game. We live in the United States. Oh, but my cryptocurrency is in, you know, Eastern Europe. Doesn't matter. You're taxed on it here in the US you'll go to jail if you're trying to hide your crypto in another country. I hate to tell you again. Well, it's on a wallet they can't track. I'm sorry. They will someday find out that there's a blockchain that's public and they will audit you and they will find it and you can go to jail for not reporting your crypto taxation transfers and your income. This is why we held a crypto tax summit in May. 20th, 19th and 20th. We're going to be in Miami doing a two day with block breakout sessions. We're going to do it better than we did in Phoenix and people love the Phoenix one. We're going to take it freaking to the next level and we'll answer your questions. Okay? I keep saying, Darren, Darren, Darren, take us through the bakery. What do we got?

Okay, in a bakery you're creating a product, selling goods, right? And so we're going to have all of the income from that bakery coming into whatever entity we're using, Right? So in this case it's a sole proprietor. We don't have an entity. This is just you doing it as a person. Now you're going to be able to take out all of your expenses and deductions from the company. So your, you know, whatever you spend for equipment, utilities, rent, things like that.

And now flour, butter.

Flour, butter, Right.

Okay. All right. And I make all this bread and I bring in 100 grand. I have 25 grand in expenses and I net 70 grand.

Perfect.

Okay, now what?

Okay, as a sole proprietor or as just a regular LLC, you're going to pay self employment tax on 100% of that, all 75 grand. Okay. And that's that 15.3% tax you have to pay for Medicare and Social Security.

Okay, then I have to pay state tax. If you're in a state, you live in a state. I don't care where your frickin your computers are at, you're gonna pay state tax and you're gonna average somewhere between 5 to 10%. I'm just gonna say 8% average.

Sure.

Okay, I'll put 8% over here. And, and then so in this example, 8% of 7,500 might be $6,000. Let's just say, for example Just. That's rough. Okay. Then I got federal. Now I don't know if you have a day job, W2 or whatever, but I'd say 20% fed. Let's just be moderate. Okay, so that's 10. So that's another 15 grand. Okay. So you got to pay these taxes on your bakery income.

Yep. All right, exactly how it works.

28, 20, 35, that's another 8. That's 43%. 42% plus. Woohoo boy. Exciting. Right, so you're paying 42% on your bakery income. Oh, by the way, we're going to come to the point. Same thing as staking. Now this will phase down when you start making over 150 grand or more. Well, 144 grand this year, but anyway. Okay, but Darren, we have an option. What can we do?

Yeah, we're going to set this up as an S corporation now. Okay. So same situation. We're going to get all the gross income in all the revenue.

Okay.

100 grand. Going to take out all of our expenses. 25 grand. And we're going to end up with our net income of 75.

But.

But now we're going to take that and essentially split it into two different groups.

Okay.

So we're going to have a W2 and a K1. Now on the W2 you still have to pay that self employment tax.

Now for most stakers, they're going to have a day job. Right. They're not going to have to take a big salary. But we got to take something.

Right? The IRS says you have to take a reasonable salary. Okay.

Based on your labor and effort.

Based on your labor and efforts. And so if you have another W2 somewhere else, we're going to bring that down a little bit more.

Maybe let's say 10% just to. That might be a little aggressive. Some of your accountants might be freaking out. But if I have a client that's literally doing nothing in the staking process, I'm going to just do enough to keep the IRS tax return happy.

Yeah.

So I'm going to take 7,500 in. I'm going to do seven grand. Just so my math is a little easier here. Okay. All right, so I'm going to take $7,000 in W2 and then everything else that would be $68,000 I'm going to take out as a K1 or draw or I can just reinvest it in the company which many of you are going to do. You're going to keep investing. Now what happens?

Okay. So now no self employment tax on the K1 Woo. Automatically 15.3% savings and no corporate tax

because it's an S corporation.

Right.

And no Obamacare. Right. Okay now everybody, we're going to field a few questions here in a moment. Okay? Now the beauty of this is you just saved 15% on 68 grand, which is going to push about $9,000. So you saved $9,000 by running your bakery or you're staking through an escort. That's the solution. We just saved 90% of the tax or 90% of FICA by just running it through this. Now what's cool about having an S corp, we're going to get all the write offs. Your chances of an audit go down. I can set up a 401k, I can do all sorts of kick ass things. This is really cool.

Absolutely. Opens, opens the door for a ton of opportunities.

Okay, now before we take any questions, do you have any final thoughts or comments on this?

One thought or comment on the biggest thing that the hardest thing is just the bookkeeping. I get it. It's hard to know exactly how much you're going to get on every day and all of that. And so a couple of options here. One, go ahead and just transfer it out to a different holding wallet and that's where you're going to hold it for capital gains. Right?

Okay. So taking it to the next level. I love it. Now we bring in the trifecta, something I've shot all sorts of many videos on. Okay, let's do this. This is your trust. Okay. And we're going to do the trifecta and we're going to split your life in half. And over here you're going to run your staking business and combine it with any other business you have. You might be a dentist or whatever. So you can do staking.

Right.

And be a consultant, whatever. Use the same S corp for all of it. And then as you make money staking, you're saying pop it out daily, weekly, monthly.

Yep.

Okay. Over here to an LLC for asset protection. Or it could just be another personal wallet.

Or just a personal wallet. Yeah.

Okay. And I'm going to move my staking revenue right out.

Yep.

Then this is capital gain and this is business income. All right, I like it. Okay, people, that is a solution. All right, Corey, we're going to take some questions here. All right? Now by the way, if some of you need an S corporation, you're like, get me going. This would be effective for almost all of 2022. You can call our law firm. I'm almost afraid I don't even. This is not a sales pitch, promo video. This is how we're trying to help people here. But if you want to contact our law firm, I'll just give you the website, kkos lawyers. And you're going to want to use the paralegal service just right out of the gate. It's cheap and easy. It'll be under $500. Use our paralegal service to get your S corp going. Now, I would start out as an llc, see how your staking goes. Then you can always convert to an S corp later in the year. But if you don't do your LLC now, I can't come back to an S corp later. If you want to meet with one of the attorneys, you can make an appointment with this brainiac guy here. He's out about a month, but in the next three to four weeks, you can meet with him, get the paralegal setup going, and then pay for a tax consultation and get your trifecta built with this fine gentleman, Darren Sherrington.

And as long as you get the LLC started, that gives us a lot of flexibility to be able to change it later on and make adjustments as we need to.

All right, I'm going to have fun here. We're going to go to shellynn31. She, he or she says if you pay taxes on the reward for staking, when the value goes up and you sell it, do you get taxed again? Go ahead.

Yeah, yeah, you do.

On.

On a different tax. Only on the gain, only the gains. Right. Only on the appreciation.

Give us an example. How much?

Right. We'll get $100 worth of rewards. Okay.

All right. So you claim your $100 and that's your income. Let's say you earn two coins with that, whatever it is. Yeah, fair. Okay. So I have $100 worth of two coins. Now, this is tricky, Sherilyn, because you're going to claim the $100, take write offs and maybe net $70. I don't care what you net. I don't care. You got two coins and you paid the tax on those based on the value of $100. So we're going to say you got two coins worth $50 each at a microsecond of a moment.

Right.

Then I'm going to move those coins. Right?

Yeah.

Over here. And then what happens?

Right now, they're going to go ahead and appreciate. Okay, so let's say they double, go up to 200.

Well, do three, 300 so you have two coins. Then they both go up to 300 each overall. Overall.

So I have 150 each.

So my basis is $50. Because you claimed that income over here. Now my basis is 50. Let's say they don't go up in value. Do you pay any more tax? No, but if they go up to 150 and Darren said times two. So you have $300 worth of coins. Now based on two coins, $50 each in basis, you're going to pay tax of 300 minus $100 in basis on the two coins. You'll pay tax on $200. But this is short term capital gain. This is better than over here. This is taxed differently. So you get taxed on the staking side in a worse way. And then we're going to move the coins over here and get short term capital gain.

If you hold it longer than a year, then you drop it into long term capital gain.

I love it. Okay.

And so you get taxed one way on the first portion and then on the gains, you're going to get taxed a different way.

Okay, Rohan. And you want us to do El Hexagon or Rohan or both. Alhexicon says I'm staking a coin called Hex. We love Hex. We know what you're doing. I get 10,000 USD worth of that coin every month. Can I make an LLC for tax purposes? You can make an llc.

You can.

Is it going to save you tax? No, no. But tell them what to do with that llc.

Okay, so for Hex, this is going to be a little bit different than this type of staking. You're not. Hex is interesting. So it's more. It's more kind of a. It's not necessarily a wrapped token. You essentially burn your Hex and you get a smart contract and then at a later date you're going to unstake and get more Hex back.

Is it subject to SE tax?

I would treat it as capital gains for a lot of that. And I think that's where, you know,

you, you could tell me this before the event starts. So you're saying Hex is not.

I can talk about it. Yeah. It's not. It's not. It's a different way of staking than your typical proof of stake network.

Okay. Okay.

So it acts kind of more like a. It's an interesting one.

All right, so we are going to say this. We are not going to talk about Hex today on a separate, separate live. We're going to say how Is hex staking? Yeah, we're going to call it hex

staking and get some actual background and some definitions behind it.

Okay, so the proof of stake that we've been talking about is not what hex people do.

It's a little bit different.

Okay. All right, so that's to answer Hell Hexagon's question. Setting up an LLC is not going to save you taxes. It may provide asset protection, and taking that LLC and turning it into an S corp is not going to help you either in a HEC situation. Now, for other people out doing proof of stake, you set up the LLC now. And if you are making ten grand a month staking, you certainly will save by making an S election. Everybody, here's the. What I'm trying to say. LLCs don't save taxes. LLCs allow you to convert it to an S corp later. What you might need. All right. Okay, next question. Okay, we have got P. Johnson. What about having Bitcoin on BlockFi and earning more Bitcoin as interest? What is that? I'm a female. Thank you, P. Okay, that's lending.

Yeah.

Okay, so in a lending situation, if we go back to our trifecta, is lending a business? People? Go ahead, you tell them, yes, lending is a business. I thought it was passive.

Depends on what you're lending, but yeah, it can be passive.

It can be. Okay, let's answer her question. Is blockfi lending interest or business?

Income Times, we'll treat that.

Oh, we don't know. We need more info from her.

No, no.

You've got bad news. You want to say. This is so complex.

I love it.

I'm not mad at you. This is so complex, it's crazy. Okay, people, let me say this. Let's back up and P. Johnson, everybody. What we're trying to do is your accountant or tax lawyer decide what the freak you're doing. Is it business, trade or business or is it passive? If it's passive, it's either got to be interest or it's got to be short term gain or long term gain. That's where our position stands right now. If it's not interest or short term or long term, we're going to default as to a trade or business, and you're going to have to decide. I'm going to run it through schedule C or I'm going to. That's a. I'm going to put sole prop. Sole prop. Schedule C, or I'm going to run it through an S corp, which could be an LLC taxed as an S Corp. And we decided beforehand that's our case. Unless the IRS says otherwise. It's going to be interesting. Short term gain, long term gain, or a trader business. Right. Do you want to say P. I'm not going to answer your question and say, I don't know.

I'd run it. Safe route is to run it through an S corporation, treat it as a trade or a business until the IRS says otherwise. Now, a lot of this, and this is where staking isn't just thrown around as a term. You know, interest, for example. It's thrown around all over the place.

Yeah. People are. Oh, you're getting paid interest. No, you're not. You're getting paid a fee. Right?

Right.

Unless you have a promissory note that I've loaned you my money and you're giving me a fixed interest rate as if you were loaning someone a car loan.

Right.

It's not interest, is it? Right.

And that's. That's the thing, is this type of lending does not qualify under the legal definition of interest.

When you do block fi.

Right. When we're lending cryptocurrency as property.

Okay. Okay. Wow. Okay. And by the way, Kelly says I've got my wife watching, lol. She gets mad because I love this stuff. I love it. Thank you, wife, for watching. You know, we're nerds. You know, we're kind of rock stars in the nerd world. We kind of are proud of that. Okay, Two people are together. Oh, two questions together. Steve says, I'm a software engineer. I worked until August W2 pay format, went S Corporation and now do consulting. Okay, so let's go look at his little situation. He's over here. I'll even put it in red. He is consulting over here in his S Corporation. See? Consultant. All right, small gains of 70 grand. Okay. He netted 70 grand. I'm not going to say income. He said gains, which means that's net income withheld 20 grand. Bought truck, brand new of 73 grand. Own my home and truck outright. Next question. Massive bill looming for the short term gains. Just wondering if I can claim my truck even though I wasn't an S Corp at that time. Okay, now I'm confused because you said you bought a truck while you were an S Corp is how I assumed that. So you're saying you bought the truck before you started your consulting business now, and he's saying I've got short term gains over here, but he wants to write off his truck that's over here against his short term capital gains. Oh, Steve. Okay, I'm going to restate that for everybody. Steve is a consultant. He had a W2 beforehand. He quit his job, became a consultant. Now he has 70 grand net income. He bought a truck. Now that's good. Could the truck be a write off in the S Corp? Yes, to some degree. I don't know how much. Because if he's working from his house, being a consultant for people in, you know, foreign country and he never leaves the house, I can't write off 100% of that truck. I may not be able to write any part of that truck. I have other videos, I have other podcasts, I have other videos on, I mean articles on how to write off a truck. So I am liking your point, Steve. You want to try to write off that truck on this side of the equation. That's where the truck gets to be written off maybe against your 70 grand of net income from being a business owner. Has nothing to do with your W2. Everybody. You getting that? See, your small business is separate from your W2 and a small business is separate from a short term capital gain. Okay, now he's saying I want to take these write offs against my massive short term capital gain. Well, I would love to tell you it's okay, but Darren said I can't. So it's all Darren's fault. So is that okay?

Can I say that it's totally my fault?

Steve, You're SOL and I'm not talking statute of limitations. Yeah, you're going to pay some tax over here on this short term capital gain. And I hate to tell you, your short term capital gain rate is your same as your W2 tax rate. RIP the band aid off, pay the darn tax. Come to our crypto tax summit, continue to learn how to invest properly. Steve said small chemistry. Oh, small cap gain. Yes. Stock held. Sold stock in February, bought truck in March. Well, if you have a small capital gain, what are you complaining about, Steve? You freaking got 70 grand net. You bought a truck. The truck. Okay everybody, here's an important point. I don't care if you bought the truck before you started the business. I can contribute the truck to the S corp and write it off. If the truck is really used in the business for you getting in your truck and driving around farms being a consultant or driving around 80 mile, you know, 800 miles a week being a consultant. But if you're sitting in your frickin house in your home office and your truck's sitting out back in the house, I mean in the garage, I can't

write off your truck has to be a business vehicle.

Yeah. Anyway, so I love where. Here's what I'm going to say to Steve and all of you out there with small business owners, as small business owners, meet with your cpa. If your CPA is not rocking your world with some good ideas, please keep consuming my YouTube videos, my articles. Come to the workshops, study, make an appointment with Darren. We have a $1200 tax review trifecta strategy session. You're going to get an hour and a half with Darren. He's going to go through your tax returns and that's where he's spending his time. Not all the whole time on the phone call with you. He's going to go through your tax returns. He's going to build you a trifecta. He's going to give you a plan for 2022. And so Steve, get on Darren's schedule for something like that. I can't answer all your questions in the broadcast, so. But we're trying. Okay, next question is Simon Frank, I'm going to just shut up and let you answer this.

Okay?

What's the difference between an LLC and an S Corp?

Perfect. I love it. LLC do not provide tax savings. Okay? We use an LLC for legal protection. And so if there is some kind of liability with the investment, like a rental property for example, where somebody can slip and fall or there's a loose handrail, we'll put it in an llc. Taxation remains the same but in that situation you're going to be protected from that liability. Now an S corporation will have the same legal protection. Okay, but now from a tax perspective, we can split that net income into the W2 and K1. And now we can start saving on self employment tax.

I like your answer. I'm going to repeat it a few because sometimes saying it over again in a different way helps. LLC are for asset protection and partnerships. LLC are good. They're a great tool. They are perfect for holding a rental property, protecting you from the tenant. They're great for running your little landscaping business, your consulting business. But once you start making, and I'm going to say net, not gross, this is your net income, your take home. Once you start taking home more than 30 to 40 grand, the LLC ends up costing you. You want to convert it to an S Corp. An S Corp gets you the same protection. But you're able to split your income into W2 and K1. Now I've got YouTube videos, LLC versus S Corp. Why do an S Corp when to switch to an S Corp, I got like probably six to eight videos. Get a bucket of popcorn and a Diet Coke within an hour, you're going to totally understand this. But S Corp save taxes and they save self employment tax. They give you the same protection. There you go. Right? All right, Al. Oh no. Where are we going? Okay, we're going to Rohan. I think you guys missed my question. We didn't miss it, we just didn't take it. But we'll do it. Okay. Rohan says on Olympus Dao and similar daos like Time Wonderland above. Just wanted to know how staking is taxed there. They also have a wrap option. Is that taxed differently? By the way, I'm consulting with guys on daos. I understand the decentralized autonomous organization structure and I buy real estate in the metaverse. We are opening an office with a consultant in Upland and DCG World. Is that right? Dcg, dtg. I can't remember the other metaverse. So Rohan, we're not slouches. We understand the metaverse, we understand daos. His question is, if I do staking in a dow versus staking in my personal name, I don't think. I don't see how a dow changes staking, do you? I just staking a staking. And a wrap was staking. Can you go up to the Wonderland question? Because you said Wonderland had a question similar. Do you see a Wonderland? Okay, go up from there and see if you see a Wonderland question that provides more info.

So with. With Wonderland and these types of platforms, essentially what they're doing is you're trading your coins for another token or coin. Okay. So you're wrapping it into this new property. And now everything that grows inside of that new property, when you unwrap it, you're now going to be able to get the increase from that.

Okay. And that's a form of staking again, I guess. I don't know.

Depends on the. And that's the thing is that different protocols wrap differently. And so if you really are trading, essentially we might be able to treat that as a trade which is taxed into a new token. So you could treat that as a capital gain. You pay your gains at that point, and then when you unwrap and convert back into whatever currency you had on the other side, you could treat that as a taxable event for gains as well.

Yeah, when you unwrap, it would probably be taxed. And when you trade into the wrap, that would be taxed, but it's all capital gain. But if you see. But if you're staking you're not. See, with these strategies, I think you're really doing a buy and hold strategy. Whenever you buy and hold, it's capital gain. If you're getting paid for some sort of collateral, some sort of proof, real

staking, you're keeping the coins, right?

Yeah.

A lot of these ones, they act more like a trade. Right? You're trading into this system, you're going to lock it up for a certain amount of time sometimes. Or if you unwrap or end your stake too soon, you can have penalties, but you no longer own your previous tokens and coins. I want to own a new new cryptocurrency.

Okay, Sarah says this and Sarah, I appreciate your patience. This is a common problem right now. Sarah says. So I really, really just want a consultation with any of you guys about taxes for real estate. I speak real estate conferences around the country. I love real estate. I'm not just up crypto world. I have called and left messages. Are you guys just so busy that it's impossible? If so, maybe could you refer someone? Every tax preparer as I have spoke with disagrees with you on some things. Just looking for direction. Well, Sarah, I'd love you to throw and I'll do it right now. Sarah, I want her next comment. Sarah, tell me where someone disagreed with me because I'll take it on all day long, especially in the real estate world. So, Sarah, give me an example of a disagreement from some other bozo accountant out there. I'd love to hear it. But I will say this for all of you trying to get through my. Our director of operations, Chantelle, she's on our with Susan. There are executive committee. Chantelle said we could only answer half of our phone calls just on Monday. We are so busy right now. We are trying to do our best. A referral. It depends on what you're looking for. And I'd love to try to refer you, but everybody just keep trying. Give us a call. Call a couple times during the day, see if you can get through. I'm going to send an email. I'm going to. I'm going to try.

This is dangerous.

I know.

We're gonna swamp somebody here.

Okay, Sarah has a question. They all tell me, I cannot write off what we legitimately pay our children. Bull crap. Bull freaking crap. Sarah says that accountants are telling her she can't write off what we legitimately pay our children. Okay, so you're telling me people, you own potato farm and your kids come out and work on the farm and you pay your kids for Working on the farm, I can't write that off. You're telling me that if you have a New York City deli and your kids come work at the deli after school and you pay your kids, you can't write that off? You're telling me that if you're a real estate rental property owner and your kids come out and work on the rental property and help paint and clean the property and do landscaping, you can't write that off? Who on the planet would say that? Now what I'm afraid of, Sarah, is that you haven't framed it that way or you're going to just bad accounts. Because if you're saying I want to pay my 2 year old, no, you're not going to be able to pay your 2 year old. You're trying to pay your 15 year old 50 grand. No, you're not going to be able to pay your 15 year old 50 grand. But can you legitimately pay your children all day long for working in your business? Absolutely. So Sarah, I just. That blows my mind because that's fundamental 101 taxation that you can pay your children for working in your business. Now, I'm again concerned that you might have said I'm having them polished shell casings in the business or cleaning the dishes after dinner at night. That's not a write off. But here, I want to tell you to do this, Sarah, buy my book for 15 bucks. There's a whole chapter on paying your kids written by a legitimate CPA lawyer. And I teach classes to other CPAs on this and I'm well recognized for these strategies. Take the chapter on paying your kids, walk it into the accountant and go, tell me where I'm wrong, Sarah. That might help. I don't know. Okay. Chris, Daniel says hi. Mark and Darren, thanks for setting up my LLC last month. I'm working towards the trifecta. What's my next priority? Trust IRA or converting to S Corp? We still are under 40k a year after tax moment. At the moment. At the moment. Okay. So sorry, I didn't know what ATM meant. He's at the atm. Is that kind of a. That's an online thing. Okay. Chris is kind of asking, hey, based on these three sentences, tell me what to do next. Bless your heart. Yeah, give it a shot.

Okay, so first of all, if you're under 40k on your LLC, we don't need to convert it to an S corporation yet. Okay? S corporations, they cost money to maintain. There's extra filings and so that's why we wait until 40k. Now, as far as next priority goes, setting up a trust is a fantastic idea. Okay. Especially if you're married, if you have kids, you want to make sure that you have everything lined up so that when you die, you know where everything is going to go and you're not leaving people behind with a mess.

I like them. I like. And then you say an ira. I love the ira. I'd love you to be funding a Roth IRA every year. I'd like you to be funding your health savings account. I'd like just getting going on Acorns. A little Roth IRA on acorns. I love that.

Especially if you're doing crypto.

Oh, I got to take Josie Wales.

Definitely have to get some of these accounts going.

Keep going. Josie Wales. Anybody that's a Clint Eastwood fan that goes with Josie Wales, I got to take that one. Okay. Now I may have taken a bad question here, but I love his profile there. Okay. Josie Wales says, what if your rewards are locked for a year? How do you pay tax on something you can't sell?

Perfect.

Ooh, what do you got for that?

Yes. So you have to actually have essentially control or dominion of the asset before you're going to be taxed on it.

Yeah.

Okay. So if you can't access it, you can actually convert it to US dollars. And that's kind of the big thing. You haven't been paid yet. You haven't been paid, so you don't pay tax on it.

It's like you're a landscaper. I went and mowed your lawn all summer long, but you're not going to pay me till December. You're not taxed till they pay you in December. So folks, if your rewards. I love how you call them rewards because your, your fees, you're getting paid fees. Hate this frickin reward thing. You're getting paid a service fee for providing collateral with your money if they're not going to pay you till X months later, or you don't have control or access to that money till X months later, or those coins or rewards or whatever the hell you pay tax when you get them.

Exactly.

Or have access to them.

Now, we do have to kind of clarify between being impossible to convert it and being impractical. Right. Just because you might have to take an extra step, it doesn't necessarily mean that it's not convertible. But a common example is maybe for like a, say a paycheck.

Right.

If I get a paycheck just because I don't cash it doesn't mean that I wasn't paid. Okay. So if you have the ability to convert it, it's taxable.

Okay, I'm going to take this last question and I'll let Darren choose one last question. I'm going to take Kelly's because it's back on paying kids. Kelly says, mark, I'm paying my kids under age 18 with a family management company. So I'm going to use the same diagram I just used for Daniel. What we do is we create a little sole proprietorship here and we pay. This is all in my book. Get it on Amazon. It's legit. No one's throwing me in jail for writing this book. It's legit. So you can pay your kids under age 18 for legitimate work in the business. You have an S corp. Maybe it was an LLC you taxed as an S corp. Okay? And Kelly says, now listen, everybody. They also, not only did they fund their roth and their HSA, Kelly is also funding a 401k. We call that a solo 401k. Because I'm going to assume Kelly did not say they had other employees. They have a S Corp with a 401k. 90% of our clients with an S Corp and a 401k is a Solo 401k. So I'm sorry, Kelly, if you're telling me it's a group 401k, it's a question for another day. But if I'm going to assume Kelly said, I have an S corp and I'm funding my 401k, obviously they make more than 40 grand, so they're doing that. And then they said, Kelly says, what's the plan, the smart plan to put away extra and will they for my kids and will they not be able to contribute after tax due to high compensated employee due to owner of the business? Well, Kelly, I'm going to try to say something here that you're going to love to hear. I'm going to assume you're talking about yourself as the highly compensated employee. All right, guess what? Your kids are not under the highly compensated employee rules with a solo 401k when you're the only employee. So, Kelly. Oh, it's a group. Oh, damn it. Okay. Your plan for your kids. Okay, everybody. I was hoping Kelly was a solo 401k, so if he was a solo 401k, Kelly, male or female, then I would just keep. I actually, I don't even think I'd put the kids on the 401k anyway. But he says it's a group 401k. All right. So what I do with my kids, I just max out their Roth. Let's max out the roth. Every kid can put away. What is it, six grand this year. Let them just do their six. And you can do that. Embarrassed. We were just crunching other numbers today. Yeah, six grand, that's what the kids can do. Just have them each do their Roth. I probably do a Coverdale for the kids, too, for college or any sort of education. And that's another two grand. So you're really dropping away. Eight grand per kid, but you still pay through the solo at the sole prop. You're good. But if you have a group 401k, you. Yeah, you got a different ball of wax there. Okay, you to choose a question.

Okay, let's see. Go up. Corey, there's one by. Okay, so there's one by Phil's crib. Yeah, it was an American flag for the picture.

It's American flag picture. There we go.

Okay. So he says, say one makes a million on the squeeze. If they bought homes or real estate, say, would they still have to pay full capital gains?

Ooh, wow.

I wish the answer was no. Well, now there's a couple situations where it might work out.

Yeah. We could talk opportunity zone.

Opportunity zone is a great option. You'd still have to pay the capital gains, but it's going to be deferred in that case. Yeah, but typically, just buying regular real estate, you might have a loss on that real estate, but typically you're not going to be able to use it against your cryptocurrency gains. And so unfortunately, the answer on that one is no.

If you. I hope you didn't make the million already, because I would say do a charitable remainder trust. Go watch my video about charitable remainder trusts. If you already made the million on the squeeze, really, your best option is probably an opportunity. Because if you're already interested in buying real estate. Yeah, that's a good sign. We like to see clients that make money in crypto go buy real estate. And we like clients that make money in real estate to go buy crypto. Do a little both. So if you're over here making money on crypto and you made some big money and it sounds like capital gain, I don't know if it's short term or long term. You could take it and go do an opportunity zone, which is a real estate play, and defer the gain.

Yep. This has to be in a specific geographical area. Government set these aside because they want people to come in and Revitalize these areas, but it'll defer the gain until 2026. And the gains on the new property, if you stay in for 10 years, those gains are going to be tax free.

Yeah, I love it. And if you, if any of you out there are saying, well, I'm going to make a million dollars, please go watch my video video on charitable remainder trusts. Huge, awesome, awesome, awesome strategies. If you're gonna make a million, I'm gonna say it just to be safe. If you're gonna make a million dollars or more and you hope to this year on the sale of crypto, we all are still hoping for a little run this year, right. If that run hits and you get a 2 or 3x return and you have a million dollars in crypto gains, don't sell it. We contribute it to a charitable remainder trust. You sell it tax free and we create a stream of income from this for the rest of your life. Now that's the easy summary. Go watch my video video on charitable remainder trust. Just Google Mark Kohler. I have a part one and a part two. Really focus on part two. Charitable remainder trust. If you're gonna make a million dollars this year and you gotta do the trust before the million hits, I need about two to three months to have it ready to go.

You can't sell it. Let the trust sell it.

Yep. Let the trust sell it. All right, everybody. Thank you for being here today. Darren, thank you.

Thanks, Mark.

You're a genius. I mean, seriously, this is awesome. We wish everybody the best. We love the American dream. Making money, trying. Thanks for being here. I'll be here next Thursday. No, well, I don't know. Where will I be next Thursday. I might actually be in California speaking at a real estate conference. I just realized. Or I might be in Cedar City training our accountants. I think. I don't know. Maybe we'll be here next Thursday.

Never know where you are either.

Please subscribe to me on YouTube and hit the bell, icon. Whenever I go live, you get a ping. That's the easy way to do this. Also, you can get to my website, markjkoler. Com. Sign up for the newsletter. You get notices on upcoming events, upcoming articles that we're releasing and upcoming and videos we just released. Thanks, everybody. Keep living the dream. Don't give up.