In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses the John Doe summons just issued to popular crypto exchange, Kraken, and why IRA Financial clients have nothing to worry about.
In early May, the popular cryptocurrency exchange, Kraken, came under an IRS attack on cryptos. Essentially, this summons that was issued wanted information about individuals who were investing in cryptos. In this special edition podcast, Adam Bergman will talk about the summons and what it means for crypto investors.
What was the John Doe Summons?
First off, a John Doe summons is a broad summons that does not target specific individuals. Instead, it simply asks for information about a certain set of taxpayers. The IRS had issued a broader summons against popular exchanges, including Coinbase and Kraken, in which Kraken fought back. Essentially, they thought it was too broad. The IRS amended the summons to only include individuals who have at least $20,000 in crypto transactions from 2016 through 2020.
The next question is why did they do this? Obviously, the IRS is all about taxes and the almighty dollar. They want to ensure every American is paying his or her fair share in taxes. As you may have noticed, one of the first questions on IRS Form 1040 asks ““At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
As you may know, cryptos are considered a capital asset, just like stocks or real estate. You must pay capital gains tax when you sell your cryptos. The John Doe summons is meant to ensure Americans who transacted with any cryptos are paying their taxes on the gains they made.
Therefore, if you meet the requirements of the summons, Kraken sent your info to the IRS. Keep in mind, this doesn’t include your personal info, like your name, social security number, etc. They would simply provide your activity on the exchange. The info is used to determine how many people are investing in digital assets and the number that are reporting it on their taxes.
IRS Attack on Cryptos – What Does it Mean for You?
Again, since there’s no personal info being shared with the IRS, you don’t have anything to worry about from this summons. Of course, if you bought and sold cryptos personally, you do need to think about the tax implications. If you had gains, you must report them to the IRS and pay the taxes due.
IRA Financial clients have nothing to worry about. Why not? Because our clients use retirement funds to invest, either through a Self-Directed IRA or Solo 401(k) plan, there are no tax implications. The IRS will not come after you when using a tax-advantaged retirement plan to invest on Kraken, or any other crypto exchange. You can buy and sell cryptos as much as you want with retirement funds without tax. Taxes are deferred until you make a withdrawal from the plan. Further, if you invest with a Roth account, taxes will never be owed on qualified distributions.
How Does the IRS Know I Use Retirement Funds?
To be honest, the IRS doesn’t always know at a glance if you are using retirement funds to invest. To use IRA or 401(k) funds to invest with Kraken, you generally need to set up an LLC, which is owned by your plan. The exchange account is opened in the name of the LLC. The problem with that is the IRS doesn’t immediately know that the LLC is owned by a tax advantaged plan. If ever questioned, you simply need to show this to the IRS and that will be it.
On the other hand, if you use a partner exchange, and invest in cryptos with them, you do not need to set up an LLC. Your account can be opened in the name of your retirement plan. The IRS immediately knows that there are no tax responsibilities for that exchange account. It’s one of the best reasons to use IRA Financial to invest in cryptos, such as Bitcoin, on an exchange.
Should you be worried about the IRS attack on cryptos? The jury’s still out for personal investors. However, if you are using retirement funds to transact, there is nothing you need to fear from this John Doe summons. So long as your plan remains within the rules and the cryptos stay inside your IRA or 401(k), there are no tax responsibilities for you. It’s one of the many reasons to consider using retirement funds to invest!
As always, we hope you enjoyed this episode of Adam Talks. A quick reminder that Adam Bergman will be speaking at the Bitcoin Conference in 2021, which takes place on June 4-5. Please check it out! Don’t forget to check out our SoundCloud page for all episodes. Adam will see you next time with another episode!