Understanding Digital Asset Reporting Requirements (Episode # 308)

0:30 Well, good afternoon, Michiganers. It is Tuesday, November fifth, twenty twenty four, otherwise known as election Day. So if you haven't made it out to the polls, I encourage you get out there and vote so that your voice can be heard. Of course, this. Is Tuesday with Tom, Michigan's only weekly intern at show where we do answer your questions about estate planning and a state settlement in Michigan. I'm your host, Tom Doyle, a state planning attorney, lifelong Michigan resident, an ambassador for all things good in this great state of Michigan. Welcome, Welcome to today's program. And I know, at least here in the Grand Rapids area, it's kind of a misty, rainy, gloomy kind of day. But don't let that stop you from getting out and having your voices heard by voting.

1:33 Last episode, I talked about the twenty twenty five increase in federal estate tax and gift exemption. So as you're looking for what's going to happen next year, I've talked about this almost a year ago, and I talked about it again the last episode. There's going to be some potential. Changes on the there's certainly going to be some increases in federal estate tax gift exempt for twenty twenty five. Also, though it's important to remember, there's going to be some dramatic potential changes in those same amounts in twenty twenty six. So I encourage you listen to last week's episode so that you have a better understanding about what the new exemptions are in twenty twenty five and what's going to be at least on the table right now in twenty twenty six. Today today we're going to talk about a little bit something we're going to talk about as understanding digital asset reporting requirements.

2:35 But please remember what I'm. About to discuss, as always during the program, is for educational purposes only. It is not intended to be legal advice. You need to work with your attorney and certainly in the case of digital asset reporting, with your tax advisor to determine what is appropriate for you and your planning. Understanding digital asset reporting requirements, well, if you're asking what's a digital asset, then this probably isn't anything that's going to be relevant to you, because if you own them, you will know what they are. But quite frankly, if you're looking at your tax forms, your ten ninety nine ten forty forms, you're going to notice a checkbox on there, and in that box you do have to indicate whether or not you received digital assets. So having some idea of what a digital asset is and what the reporting requirements might apply to you, but essentially, if you have a digital asset, you're likely.

3:54 Going to know that you have it. So what are they? Well, digital assets, And before I go there, you know a lot of people get, well, let's go there first. Digital assets a form of value. It's like cash, but they exist only in a digital form, only in a computer form, and they're protected by strong cryptography. So the idea is is that you have this digital money. Think of it in those terms. It exists only in a computer. It doesn't exist in the actual real physical world, but it's protected by cryptography so that it can be transferred to other people. People can't supposedly hack into it, steal it, all those good.

4:37 Kinds of things. They're going to be operated on what they oftentimes call a blockchain or distributed ledger or some sort of similar technology. And you don't really need to understand blockchain technology, just stibuted ledger. But it exists. It's all part of the digital world that's designed to manage and allow for the protection of and transfer of this digital assets. Oftentimes you might have heard of things like this a virtual currency or cryptocurrency or what they call ntfs and NFTs non fudgible token. So for example, you probably heard about bitcoin.

5:22 Bitcoin is a type of cryptocurrency. Bitcoin is actually a type of digital currency. And when I talk about NFTs, perhaps you've heard about these in particular because at some point in time over the last number of years, Donald Trump has sold if you will, NFTs. But in most situations, what an NFT is is, for example, I create a piece of art and it exists only in a computer. It's not on paper, it's not on you can't put it on my wall. It is totally in the digital world.

6:03 Well an NFT, and if I want that to be protected, I put it out there as an NFT, which because of cryptography that's being involved, it only exists in this partitical digital world. It cannot be copied, so somebody can't just make a copy. Right now, if I just take a photo and I put a photo out on the internet, so may can make a copy of that photo. Well, if I'm creating a unique piece of art, think about in those terms. I don't want someone to seem to be able to make a copy of it, because the value to me perhaps is because there is only one of them, or ten of them, or however number there happened to be of them. So I want it to be protected where it can't be copied, it can't be substituted, it can't be divided, and they can represent a number of items, but oftentimes it's artwork. And you perhaps have heard in the new use over the last year, it's kind of hard to avoid it that the Trump family, apparently along with others, is starting up what they call a cryptocurrency exchange. And a cryptocurrency exchange is simply a place that you go online on your computer or on your phone where you can buy and sell cryptocurrency, for example, where you can buy and sell bitcoin. So that's a kind of basic rundown of what we're talking about when we talk about digital assets. But the truth of the

7:33 matter is you have likely been involved in some sort of digital currency for most of your life and didn't even know. So think about this. If you write a check, a check is not cash. A check is not dollar bills, five dollar bills, ten dollar bills. It's a written iou. If you will. And when that check gets too as it did, it's becomes digital currency, meaning what the check itself today doesn't go from your bank to somebody else's bank. They simply process it, turn it into internally in the banking system, if you think about it, digital currency that then gets transferred someplace else. Or another example, let's say you're going to do a wire transfer. You've got let's say you've got a daughter who's in Florida and you want to send her some money, or you have a grandchild who might be traveling somewhere and you want to send them some money. Well, you don't normally put thousands of dollars in a box and you send it off to them.

8:42 You're going to go to your bank and you're going to say to your bank, I want to send my son some money once send my daughter somebody and they can do that. It'll be done digitally. You're not they're going to take money out of your bank account. But think about this. In reality, your bank account at the bank, it doesn't have five thousand dollars in cash sitting in it. Okay, it's digital. Okay, it's backed up by other cash, but it's truly digital. And then they're going to take your digital money that's saved at the bank and they're going to send that through the through the internal banking system to the bank account for your son or grandchild. So you're already involved in much of a digital world. But really what we're talking about here, this whole idea of digital assets, is where you're not involved with a bank. There is no bank involved, there is no When banks are involved in theory, there's cash, there's money, literally money that backs up what that bank has to have. But in a digital world, there is no bank, there is no cash, there's nothing backing up this digital asset. It's simply a form of assets that can be transferred back and forth between individuals for different things. And because there's no bank involved, because

10:16 there's no government involved, the reason that the IRS requires you to check that box on your tax return is because there is no physical record that somebody can go look at to see did you own it? What did you do with it. Now, with that having been said, digital asset digital transactions, a few will So we're talking about certain things are going to happen where you're going to have to have certain reporting requirements. So among digital asset transaction, things are like selling digital asset. I own bitcoin, and I sell my bitcoin to somebody else. Or I create that artwork online and I sell my artwork to somebody else.

11:03 I have sold a digital asset. Maybe somebody is going to give me a digital asset as payment for goods or services. Maybe somebody is going to pay me in bitcoin for work that I did for them. Now, our office doesn't currently accept bitcoin or digital assets cryptocurrency for. Work that we do. I know there are some law firms that are beginning to do that. There are some other companies out there that are beginning to accept cryptocurrency. If you will, as payment. So if you receive them as payment for goods or services, that's going to be an asset transaction, or perhaps acquiring new ones through what they call mining or staking. And that's really the process by which and it gets very perhaps kind of complicated, but that's the process by which new cryptocurrency gets created. It's not a bank that creates it.

12:02 There's a computer process that goes through where new digital currency can be created. So if you acquire one through this process of creating digital currency, that's an asset transaction, or perhaps obtaining one through what's called a hard fork, and that's simply where cryptocurrency splits in two. So think about stock. You probably have heard about this, at least I might own stock in a company and then the stock split. So where I had one hundred shares, now it's going to split, and now I have two hundred shares, Okay.

12:43 It doesn't mean suddenly it's worth one hundred percent more. It usually means, okay, my hundred shares is now two hundred shares, where they're all total the same amount that I owned before. Same thing with cryptocurrency. There can be situations where the currency splits, if you will, and in that case, you are obtaining additional cryptocurrency as a result of that split. Another dig digital asset transaction would be something like where you are exchanging them for property, good services, or other digital assets. So whenever they're being exchanged for if you will, services or perhaps actual property, maybe you're gonna buy a car and you're gonna use bitcoin to buy the car, okay, or you're gonna use them to buy other digital assets. Maybe I'm gonna take my bitcoin and I'm gonna use my bitcoin to buy that piece of artwork that NFT is at out there. Again, another example of a digital asset transaction, and quite frankly, any other disposition of a financial interest in a digital asset, that's kind of a catch all broad any dist disposition of any interest that you had in a digital asset. Now, so those are all examples of digital asset transactions that

14:19 we're really talking about here today. So the reporting requirements, that's what we really want to have a conversation a little bit about today. If you're involved in any of those sorts of transactions, you have to report all income related. To the transaction. And the way you go about then determining calculating your gainer loss because there might be capital gains tax. Just like owning stock. If I own stock and I sell my stock for more. Than I bought it for, I might be subject to a capital gain. Same thing if I go out and buy bitcoin as an investment, think about it, and I sell my bitcoin for more than I bought it, same concept, or I'm going to have capital gains And so the way you're going to calculate your gainer loss or the tax form you're going to use reporting all of these different transactions is really going to depend upon what type of transaction you are involved in. So, for example, gainer loss from selling digital assets, well, gainer loss from selling digital assets is just like gainer loss from selling stock, gainer loss from selling gold, gainer loss from selling other physical assets.

15:33 So there's an IRS Form eighty nine forty nine which has to do with sales and other dispositions of capital assets. That's going to be the form that you will have to report the gain or loss that you receive from selling the digital asset. If you received a digital asset is a gift. If somebody gave you a digital asset as a gift, the IRS says on form seven oh nine, you would have to report the gift that you received that was a digital asset. So somebody gives you a bitcoin or gives you an NFT, you have to report that to on form seven o nine. According to the IRS, if you receive any sort of digital asset as compensation for services or disposed of any digital assets that you held for sale to customers in a trader business, then they have to be reported as income just like any other income gets reported.

16:43 So if I my office decided, hey. We are going to receive payment of out for our services with bitcoin, if we could set ourselves up to do that, somebody could use bitcoin to pay the. Bill that we send them. If we do that, that's going to be income, just like any other income that we have, and it's going to have to be appropriately reported on the correct IRS form where all of our income gets reported as part of our tax return. If it's for services and I'm not a company, it might be some sort of ten ninety nine that or tenth it's going to get reported on my ten forty. I think that's going to be on schedule. See if I'm not mistaken as part of the ten forty that I do. Now, if you're an employee and you were an employee who got paid with digital assets, maybe I decide to pay staff by using bitcoin.

17:42 I'm not going to write them a check. I'm just going to use bitcoin to pay the staff. Well, in that case, the staff that's income. Those are wages that have to be reported. And similarly, if they worked as an independent contractor and got paid, So the guys who's doing plumbing work for me at my condo and I pay that plumbing. Work with bitcoin. That would be compensation that would be paid. They would have to, depending upon how they are structured, might have to report on schedule ce of income that they received or profit and loss. If it's a solo proprietorship, what sort of tax return You're going to have all of those kinds of things, and the employee has to report it as income and wages. That's their responsibility. So you can have these transactions. There is nothing illegal on its face about using bitcoin. There's nothing illegal on its face about using NFTs or using different types of digital assets.

18:56 Because bitcoin isn't the only one that's out there. It's not the only cryptocurrency. There are a number of other cryptocurrencies being created, but bitcoin is the one that you probably are the most familiar. It's not illegal to use it, but you do have reporting obligations, and obviously if you don't fulfill your reporting obligations to it, that's the problem that you are creating. That is the problem that you're creating for yourself because you haven't appropriately addressed the income or report the income that you receive. Just like anything else, I mean, it happens every day right. We have people every day out there that are in a cash economy.

19:42 They only receive payment for their services in cash. They have an obligation to report that income that they get. If they don't, they have a problem with the IRS because they're potentially engaging in tax fraud. Same kind of it's just a different type of if you will asset that's being involved. So if. If you are involved in any of those transactions, then you have to report them and you're going to. Have to look at the different forms that you do this. So the bottom line of all of that, of all of that is to understand that you're going to have to report it on your tax return.

20:28 There's a box there. If you don't report on your. Tax return and you are engaging in different transactions relative to these digital assets, and you fail to check that box, you are potentially going to have problems with the IRS because the law requires that box to be checked and you didn't check it, that's going to create problems for you. So, no matter what you've done, no matter what digitalizet you're engaged in, always check with your tax and financial advisor to be sure that you are complying with the.

21:08 Latest IRS guidelines. And again, as I said, nothing illegal about using digital assets, just like there's nothing illegal about using cash. There's nothing illegal about writing checks. There's nothing illegal about doing online transfers. Many of us today on our phones today, on my phone, I've got Apple Cash. I have an Apple phone. My son who's off in Saint Louis might need some money to do something that I have him doing for me. I use Apple Cash to transfer the money to him. Okay, there's nothing illegal about all of these different endeavors. The problem you come into is when you have reporting requirements and those parting parents also have tax.

21:55 Considerations with them. So you've got the reporting requirement one, you also have the potential tax issue that goes along with that that you will have potential problems if you're not fulfilling those obligations. Of course, amand and I are not your tax advisors, so you need to work with your financial advisor tax advisor if you're going to be involved in digital assets. Now, obviously, from an estate planning standpoint, if you do own digital assets, they need to be accounted for in your estate plan.

22:52 How are those assets going to be transferred to somebody else? We're going to have a whole conversation about that. But a man and I would be to have the opportunity to have that discussion with you if you have digital assets as part of your state plan, or simply to protect your loved ones by putting together your state plan, a mending a current plan, or. Assisting you in settling in a state. All that information about consulting with us, whether it's going to be a zoom call, or whether it's going to be an in office consultation at either our Grand Rapids headquarters or our East Lansing meeting location, all of that information can be found at our website, Doyle LAWPC dot com.

23:38 So head to Doyle LAWPC dot com. You'll find all that information on how to schedule a consultation, what information to send us. Et cetera, et cetera. While you're there. If all you are looking for is an individual document, let me just give you an example. Someone contact the office the other day they had a parcel of real estate that was being sold. The title company was saying. Hey, you needed an updated certificate of trust so that the trust can sell that real estate. You can actually go to our legal store where you have the ability to order different legal documents online, such as a certificate of trust. It'll walk you through what information needs to be sent, how you make payment. We can prepare the document and we can send it to you via email so you can print it at your end. Of course, once you receive your information, if we have a conflict in representing you, we'll let you know that. Or if we need more additional information or we're unable to meet requests, we're certainly going to do that. It's not that you just put information in and a document comes out. When you submit information through the legal store, it is coming to us. It is coming to the attorneys in the office who we are reviewing it and making sure it is something that we can do for you before any work gets done.

24:58 But it is a it is an option for you. Folks who are looking for individual legal documents as well. Again, all of that is available at Doyle LAWPC dot com. Well, I think that's going to be it for today's show. Again, just a reminder I start out the program. If you're still with me, reminder, don't forget to vote. Get out there, make your voice heard. That's a great thing about living in this country. Not every country that's out there has the opportunity for the citizens to be involved in electing the people who are going to be running the country.

25:50 Well. As always, if you have a comment about the program, perhaps a topic that you'd like to have me discuss, or questions that you'd like to have answered, head over to Tuesday with Tom dot com. If you haven't been there, go take a look at it. It's been a while if you haven't looked at Tuesday at Tom dot com for. Quite a while. Over the last year, major changes to the website much improved, much easier to locate information. You actually have the ability to search the website for a topic. So maybe you're looking for information on I don't know, pick something certificate of trust. Type in certificate of Trust. It'll give you the list of the dates and podcasts where I talked about different certificates of trust. You're also going to find at the website that there's now a little microphone icon. If you click on that microphone icon, you can actually leave me a voicemail, So you can do that if you have a question or a topic that you'd like it to have me discuss, or you can always send me an email, and that would be Tom at Tuesday with Tom dot com.

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