Ep 73: Navigating Crypto Taxes with Attorney Claudia Moncarz: Demystifying Digital Assets

Claudia Moncarz is the founder of Moncarz's law firm, which focuses on helping people get out of trouble with the IRS. She has negotiated with the IRS to reduce over $3 million in taxes and penalties on behalf of her clients and is an AV preeminent rated Martindale hubble.

Claudia Moncarz learned about tax laws for cryptocurrency from her cousin and through the news. She realized that the IRS sees cryptocurrency as a digital asset, similar to a stock, and that any transactions involving cryptocurrency are taxable events. Claudia explains how the IRS is investing in technology and algorithms to catch people evading taxes, and that they are getting better at it. She also explains how sales tax is a local issue and that NFTs may be subject to state taxes depending on the state's nexus laws. Lastly, Claudia emphasizes the importance of having good records to reduce the chance of audit.

"Knowledge is power - with knowledge, we have power to plan and do all the great things we want to do, even with just a little bit of planning."

In this episode, you will learn the following:

1. How the IRS views and treats cryptocurrency differently than cash or other stocks, and the implications of this for the average person.

2. How the IRS is using massive funding to bring people into compliance with digital asset taxes.

3. The importance of having good records and understanding your rights as a taxpayer to prevent and navigate audits.

Connect with Claudia:

FREE TAX GUIDE: https://www.freeauditguide.com/optin1667658657840

Website: https://www.moncarzlaw.com/

Free Download:

The Words of Web3 - A comprehensive glossary of terms used in the space https://mailchi.mp/9d043022b5a0/words-of-web3

Connect with me:

Instagram: https://www.instagram.com/drbrooksheehan

YouTube: https://www.youtube.com/c/DrBrookSheehan

Twitter: https://www.twitter.com/drbrooksheehan

Transcript

[Dr. Brook Sheehan]

Hey, Dr. Brook here with another epic adventure through the wild, wild west of Web3. I am joined by my copilot Claudia Moncarz, who is the founder of Moncarz's law firm that focuses the practice on helping people get out of trouble with the IRS. This is a topic we have not spoken about on the show, so I'm very excited she's here. Her team and her have negotiated with the IRS to reduce over $3 million in taxes and penalties on behalf of their clients. She is also a frequent [Dr. Brook Sheehan]t seminars on topics including tax planning, representation in front of the IRS and doing business in the US. She has been named a rising star by the Super Lawyers and is an AV preeminent rated Martindale hubble, which is the highest rating available for lawyers. She's also served as an adjunct tax professor at Concord University Law School and taught income taxation and corporate taxation. She is also fluent in Spanish. Welcome to the show, Claudia. So excited you're here today.

 [Claudia Moncarz]
Thank you, Dr. Brook. I appreciate giving me the time to talk to you and to your listeners and give some of my geeky taxes. I am made of a tax geek, so give some of my knowledge to your listeners.

 [Dr. Brook Sheehan]
Absolutely. It's going to be a fun one. Like I said in the intro, we haven't spoken about this topic before and you are well distinguished when it comes to tax law and understanding and with cryptocurrency being such a brand new thing kind of brand new thing, right. I mean, it's only been for the IRS. Yeah, brand new thing for the IRS. And it's been around less than two decades and so there's still a lot of murkiness to be navigated through. And people like you are what help people like me and other investors in the space do this the proper way. But before we get into that, my listeners know that the first question I always ask my copilots on the show is, what is your intro story into Web3? How did you hear about this crazy digital currency space?

 [Claudia Moncarz]
Actually with my cousin, he's into trading and finances, so he started telling me about this and I got interested. And then when little by little looking in the news and all that, then I started to see how the IRS is looking at it. So that always got me interested in the spin that they put on it.

 [Dr. Brook Sheehan]
Right. Oh, my gosh. Well, they definitely like to make sure that they get their lions cut share of everything. So they are going to make sure that people aren't just going to be running off with their crypto millions right. Without them taking a piece of the pie. So tell us from your perspective as a tax attorney, how are the crypto tax laws different than the average tax laws that people normally know? Right. Like that you pay your w two taxes on your tax, all of those things. How does the crypto stuff differ?

[Claudia Moncarz]
Actually, I don't think there is much difference in how there is, but it's more of how the average person sees it. I think that's where the difference and the disconnect comes, right? Because when you think about crypto, you think about currency and like cash and uses it to the average person and even to myself before I learn more about it, I would just think it's just equivalent of cash, like a dollar bill, right? But the IRS doesn't see it that way and for tax purposes they don't treat it that way. And as a matter of fact, they call it digital asset. They don't even call it digital currency, which doesn't a new change that they have for this year. So they basically see it as equivalent to a stock. Like if you have a stock or you have Amazon stock and you sell it, then you have to pay for that game, right. You pay taxes on that gain. It's the same thing with crypto. But it even goes a little bit further because if you go from one type of token to another, that is a tax moment that you have to pay that triggers a tax. And most people think about it or when you use a coin to then purchase a product, they don't necessarily think that that is a tax because that triggers a tax. I'm just buying something like I'm using cash in the form of cash to buy a book, a course, whatever it is and they don't think about it. So I think that's where the difference is. That's why it's not different per se, it's more of how the average person thinks about it. And that's why I appreciate you coming here because I think knowledge is power and knowledge we have power and we can plan and we can do all the great things that we want to do and even just a little bit of planning. I was talking to a friend the other day that is in Puerto Rico that I didn't even know this. You always learning that they have special laws in Puerto Rico that you can kind of end up paying no taxes if you investor, because if you move to Puerto Rico, make certain investments there, end up paying nothing on your gains, that's it. So you can always be learning all the tricks that you can do.

 [Dr. Brook Sheehan]
Oh my gosh, that is pretty wild. Okay, I want to hit on a few different things you said there and then we'll kind of move into a different section. So you say when I take my cryptocurrency tokens and let's say I buy a coffee at a coffee shop and I use my cryptocurrency to do that. Now typically what happens when I take my dollar bill or my Federal Reserve no. And I take it to the coffee shop, I pay a sales tax on that.

 [Claudia Moncarz]
Correct.

 [Dr. Brook Sheehan]
 How does that work with a cryptocurrency. Let's say I take some Ethereum and I go by my coffee with Ethereum. What is the tax percentage, do you know or is that just something kind of out there? How does the IRS know to tax me in that sale?
 
 [Claudia Moncarz]
 Well, there's different types of tasks. First of all, okay, there's actually at least 18 type of tax that they do. Income taxes, we all familiar sales tax that's at the local level. That's the state that's not the IRS that deals with it. So they still have to collect your sales tax. So that's separate. But for the IRS, how they will know or even just sell tax is that now they are required, all those exchange, they are required to report to the IRS all the transactions. Just like how you get I guess before. Now there's a new law that they didn't make it into effect. It was supposed to come into effect this year, but they postponed it where if you get more than $600 in venmo PayPal and all that, you're supposed to get a 1099, right? Similar to your W two just said I got this much money, right? So they use all that when you make your bank your little interest that you get in the bank and if it's a dollar, they send it 1099 saying you made a dollar. But all those documents, they have to send a copy to the IRS. So that's how the IRS will find out all about that. Even let's go back to the example of stocks, because I think most people are familiar with that, since that's been around for most of our lives. All of our life, actually, is that you'll get a statement that says you sold this, and that's what they'll be getting. And you have to tie it in to when you bought it, to when you sold it. Now there's software because it's becoming so problematic for people to now there's software that help you tie in those because that's how you find out how much you made because you may bought cryptocurrency or different tokens at different times in the year. That's where it also becomes like how do you tie it in altogether and how do you figure out what the actual gain is or maybe you have a loss on that.

 [Dr. Brook Sheehan]
I could see that would be very messy, especially for a lot of people because one of the investment strategies I tell a lot of listeners is first off, this is not investment advice, I'm just educating, we're just having a conversation. But one of the things a lot of people will do is dollar cost average. So you are making a lot of small purchases throughout the year at different price points and things like that. So I imagine it could be very problematic and thank God for software that helps in that situation. However, what happens if people are not utilizing an exchange for a purchase? Say I take my own hot wallet or my own cold wallet. Let's just take Ledger, for example. Ledger is a really well known cold wallet that people can store their cryptocurrencies on. If I take my ledger and I take it to that same coffee shop and I make that coffee purchase, will the Ledger submit documentation to the IRS? I'm not trying to do tax invasion. I don't want to give off that idea. I just want to kind of understand.

 [Claudia Moncarz]
How do we work with any company, any change, any of those that are based in the US. They will be required to submit documentation to the IRS. And actually in the bill that was passed less than a year ago, where they gave all this funding to the IRS, and I know that they pass a bill in the Congress to take away that funding from the IRS most likely won't pass in the Senate, and the president is not going to sign it. So you're stuck with the IRS having this massive funding. So it is what it is. But they actually put in the bill, which most people know what they are going to use that money for. And one of the things that they are going to use it for is to bring people in compliance for digital assets. So they already are. So maybe not this year. They're not going to figure out how they're going to catch you, quote unquote, or how they're going to make you come into compliance. But they will eventually have all this massive funding. And one of their big projects is going to be this. I don't remember about ten years ago, their big project for the IRS was foreign accounts. There was a big thing in 60 Minutes and there was a whistleblower from the Swiss bank that says a lot of Americans have money abroad and they don't report it, and they just use a credit card and they pay for all their stuff when they're abroad and they pay taxes that way. And that was their pet project. And the IRS did all these things. I even have a friend that used to work for DOJ, and he went down to fly there to get all documents. It's crazy. So that was their pet project. They got a lot of money through that. Right. And I see the same pattern. I see it with crypto, probably. That's why I also got interested, because I see the same little pattern happening. They start little here by there. So this, I think, is going to be their next big project, digital assets, and figuring out how they can make sure that taxpayers are paying for any game. Because as us. Citizens, we get the benefit of paying taxes on our worldwide income, right. Anything in the whole world.

 [Dr. Brook Sheehan]
Yeah, I don't know if that's a blessing or a curse.

 [Claudia Moncarz]
Yeah, I don't know.

[Dr. Brook Sheehan]

It might be both. Who knows less about being in the United States, but then also a curse.

 [Claudia Moncarz]
Because it will trust you that they.

 [Dr. Brook Sheehan]
Will get you in some way or another. Wow, that is pretty interesting. And with that being said, you did talk about the whole coming at you with the 1099 for any over $600 in Venmo or PayPal. So I imagine that that is also going to come down in the works that you and I are transacting in crypto. You're babysitting my child or I'm babysitting your child and I'm just paying you in crypto and we're transferring back and forth. There's going to be no tax on that right now, correct?

[Claudia Moncarz]
 Yeah, they may not see it now, but eventually I've been in conference where even DOJ has this crazy algorithms in bank accounts so that they catch foreign that money that's not being recorded as income. That was a while ago. So I'm sure the algorithms are even better. Like we use technology to make our lives easier. The IRS now is getting a lot of funding because I guess one of the good things, good or bad, I guess the IRS is very archaic. They still have a lot, their systems are still very out of date. I mean, you can e file a tax return, but that's it. You can't send anything electronic to the IRS, anything else, like other documents. So they're getting better, but that means they're investing in their computers and their algorithms to get better at catching people. I've been doing this for 20 years and I think out of that I only had one client that actually was evading taxes. I think time is just people don't know. That's why I say knowledge is power because you just made a mistake. You don't mean to make a mistake, you don't mean not to pay your taxes or anything like that. You just don't know that you have to, right?

 [Dr. Brook Sheehan]
Yeah, it is true. Like I had shared with you before we hit record my prior background before going into healthcare. I am a practitioner now, but was accounting. And so we would prepare the books and do all this stuff to be sent out to the CPAs and the tax accountants and those kind of guys that were preparing the tax returns and there were some times they were coming back and what about this? You have this money in this bucket, this needs to be allocated to something else. And it was just a simple mistake. It wasn't anything like where like cooking the books or trying to mess with things. And I do believe that the average investor, somebody who's just taking some of their funds and dollar cost averaging, whether it be into stocks, traditional stocks on the stock market or into crypto, aren't trying to turn around and not pay their taxes. But I also think it's important. Like you said, knowledge is power to understand what is a taxable event. So this conversation with you taught me that a taxable event is using my cryptocurrency at a coffee shop and a taxable event is taking bitcoin and transferring it to Ethereum, that's a taxable event.

[Claudia Moncarz]
Correct.

 [Dr. Brook Sheehan]
And so, knowing those things, you can be a little bit more proactive in how you choose to utilize your different assets.

 [Claudia Moncarz]

And also it could be a tax benefit, because if you had a bad investment year or a bad month, you may have losses that you can figure out how to use them to cover up for some of your gains. So that always works toward the benefit of the IRS having that knowledge. It works through your benefit to how to reduce your tax. Maybe you had a bad year, but that can go against some of your other investments that did. Well.

 [Dr. Brook Sheehan]
It's interesting because more recently, with the economy, the state of the economy, and people talking about the stock market being down and everything, I know that there's a lot of really astute business people who are doing what is called tax lost harvesting. Is that kind of what you're talking about, where you're taking the loss to help offset any of the gains that you had in the prior year so that your tax, what you owe or what you don't owe is less.

 [Claudia Moncarz]

Yeah, because the IRS still hasn't caught up with a lot of things. It's really hard to do that with stocks. There's a lot of rules that prevent you to do a lot of that. Like, you sell and then you buy it so that you make it, you create a loss. But in crypto, they still haven't issued regulations yet about it last time I checked. So there's still a little bit more playing room with tax planning to do a cryptocurrency and all that.

 [Dr. Brook Sheehan]
Wow, okay. See, I'm learning too, but I think.

 [Claudia Moncarz]

They're going to start putting regulations soon, though.

 [Dr. Brook Sheehan]

I do agree with you. I do believe that regulations are coming, especially with the current state of the entire crypto space and so many things falling apart and imploding. I won't get into a deep, deep rabbit hole, but part of it for me, feels like it's also a big, huge governmental play to get their central bank digital currency out in the marketplace. And people feel a lot more comfortable with that than utilizing bitcoin. And I don't know that there's a lot of I don't see a lot of positives with the CBDCs, but that's my own personal thought process around that. But changing gears, moving on, you did mention earlier about they changed the term this year from virtual currency to the term digital assets. And I know that a big part of that was because NFTs aren't really considered a cryptocurrency. They are a digital asset. It's a piece of artwork or a piece of, like a property, right. Or just having a digital tag on something you own in the physical state. I'm having a hard time understanding I guess it would be in the same way that they're taxing cryptocurrencies but how would they be taxing? If I own a piece of digital real estate in the Metaverse, am I also paying property taxes in the Metaverse.

 [Claudia Moncarz]

On that property that I own, they haven't gotten? That will be a state issue, and it will be interesting to see if the states get that far to say that they have a nexus with that. I never thought about that, but that would be interesting. And I could see the states trying to do that, especially states are losing money when a lot of people move from there, like New York and I know California are losing money. They have baking, so they have deficits. So it'll be interesting to see if they do something like that. But for the IRS, if you think about it, like, let's say and it is an artwork, right? So if you think about it, if you had an artwork and you pay for something with a valuable piece of artwork, that's a taxable change. So that's why they're opening the because you can actually take my pencil, right? And I can tell you you're going to give me some because as a barter, right, we're bartering for things. You're going to give me medical and I'm going to give you my pencil. Obviously your advice is worth more than my pencil, my pen. But that's the concept that we're exchanging something for something, right? So that's why they're bringing the concept of bartering. Because a lot of people also don't think about when they barter, they exchange things that's taxable in that they're trying to also go into the gig economy and all that. Because a lot of in the gig economy, freelancers, they use digital currency, bitcoin, they use digital currency. They may exchange NFT. They don't report it because they don't think about it. When you exchange, you don't think about it. It's not cash, right? But it is under a tax law, a taxable event that trades tax. Maybe, maybe not.

 [Dr. Brook Sheehan]
Well, I guess then, would it go back to the whole because let's say I bought the Mona Lisa, I'm going to pay sales tax on that purchase of the Mona Lisa, like physically buying that piece of art. When I go in and purchase an NFT, let's say I purchased a Board Ape and I use my cryptocurrency for that purchase. There's not a sales tax transaction on that.

 [Claudia Moncarz]

No, because you're getting confused. I think that is the IRS, right, that's feral. But the sales tax is either a sales or a use tax. And that's at the local level, at the state, at the cities, right? So I just think you're not paying a sales tax there because the cities, the cities are like, it was only until recently that they started state saying, oh, whenever you buy something in Amazon, even though you're buying it online, you have to pay a tax. And the reason why they're getting for instance, because that's where it started, where you have to pay taxes when you buy an Amazon is because Amazon decided to open a warehouse in that state. So that's how they got the nexus. So if you're still in the cloud, there's still no good tax law that says that they have a nexus because they have to have a connection the state to tax you for the sales tax.

 [Dr. Brook Sheehan]
Well then sorry.

 [Claudia Moncarz]

Okay, so there has to be a connection. Maybe whoever is being sold, if it's headquartered in that state, maybe they'll get a connection to the sales tax. I haven't seen and it hasn't popped on my radar of any sales tax for NFTs. But that doesn't mean it's not in the woodworks in the states they're looking how to do that.

 [Dr. Brook Sheehan]

So I guess you're right. I am connecting two different sales taxes. State income tax or tax in general. Like bigger tax is the IRS. When I purchase that Mona Lisa, the IRS is not getting any tax from me for that purchase.

 [Claudia Moncarz]
No, but they may get a tax from the buyer for that purchase if they made a gain. Like maybe they.

 [Dr. Brook Sheehan]

Disconnect. So on the seller side they would get okay, that doesn't make sense on NFTs, but they would only pretty much get their tax on the sale of that NFT. So if I sold you aboard Ape, I will pay taxes on that gain. Like if I bought it for $500 and I sold it to you for $1,000, I'm getting taxed on that $500 gain.

 [Claudia Moncarz]
Correct. But if you created it, then you're paying tax on more than they are proud of, the whole thousand, unless you can show what your cost for creating that is.

 [Dr. Brook Sheehan]
So would that also be the case then for because when people create NFTs and then I create one and I sell it to you and then you go ahead and you sell it to your cousin, I get like whatever my royalty rate is. Right, let's just 10%. So you sell it to your cousin for double the price you bought it for me, so I get 10% of that sale price, then I pay taxes on that 10% also.

 [Claudia Moncarz]
Yes. Because it's like royalties and a book, right?

 [Dr. Brook Sheehan]
Yeah, that's true. That's true. Okay, I got all the dots connected in my mind. Thank you, Claudia, that was very helpful because I definitely was going California versus the entire United States when I was getting confused with that.

 [Claudia Moncarz]

But like I said, I wouldn't be surprised if they get the next. They just have to make a connection because if they rule in state tax it's the connection, the nexus. And like for Amazon and actually the history of Amazon picked to their headquarters in Washington because it was one of the few states with no income tax. And they used to fight internet, like any sales tax on Internet sales for the longest time. But once they realized that they needed those warehouses to deliver faster they stopped fighting it. And now because of the warehouses, which makes them deliver faster, you and I have to pay.

[Dr. Brook Sheehan]
So got it. Yeah, it makes sense because then they have a physical location in that state, so they have to collect like I'm here in California, so they have to collect the California sales tax, which I do see every time I make an.

 [Claudia Moncarz]

Amazon purchase or I'm in Florida, and I have to pay it too, because warehouses here, right.

 [Dr. Brook Sheehan]

Yeah. I guess at that point with Amazon, they're everywhere. You're going to pay it in every state. Oh, my God, this has been such a fun conversation. Is there anything I didn't ask you about tax law that might be good for the listeners to at least have an understanding or knowledge about?

 [Claudia Moncarz]
Well, like I said, the big thing is because the IRS is putting a lot of funding into this particular digital assets, I think the big thing is obviously have your understanding, but have good records because they are going to deploy audits, more revenue agents for this. There will be more audits on this. And if you have good records that you can tie it in when you buy it, when you sold it. And like I said, now with software, it's so much easier. Good records have everything. If you get caught in an audit, is okay because you have the records to show it's. Okay. And I don't audit where you go back to zero the same amount, because sometimes Cris may not have the records themselves, but if you have good records sorry. If you have good records and you can show that everything, if you keep up with, like I said, good records. And always, if you get any letter, the other big thing, if you get any letters from the IRS, open them. Yes, I know a lot of people. It's funny, but I have clients that come with, like, a stack of letters that they have not open, and they miss their own protections because we have rights as taxpayers. We have a Bill of Rights. We have a Bill of Rights in the Constitution with the Iris. We have a Bill of Rights of ten rights that we have. And you're going to lose some of those appeals rights, whatever, to tell them that you need to. So don't get afraid. I understand it's scary, but I got into myself letters, and even though I've been doing this for 20 plus years, I had to admit, when I saw one letter, I paused for a second before I realized that I could fix this easily.

 [Dr. Brook Sheehan]

Oh, my gosh, she's taking her own advice as well.

 [Claudia Moncarz]
Yeah.

 [Dr. Brook Sheehan]

People keep really good records in the event of an audit. They make your life so much easier as well that you're able to just be able to go through everything and get them through it.

 [Claudia Moncarz]
And for them, too, I think having the battle is the insider that you get is scary. Totally. They're a scary entity. For better, for worse, for people.

 [Dr. Brook Sheehan]
Yeah.

 [Claudia Moncarz]

Awesome.

 [Dr. Brook Sheehan]

Claudia, I know you have something for our listeners today and then let everybody know about that. I will also link it in the show notes and then how they can stay in touch with you and stay connected and reach out to you if they need you.

 [Claudia Moncarz]

Yes, we have a free guide, www free auditguide.com and in there you can get it 24 tips that I give that we use in both our audits and our clients to prevent it. And there's some particular to crypto in particular, so that just to help you, just because once more, I'm a true believer that knowledge is power. So that's why I appreciate you giving me your time and your space to get this information because if we have the knowledge that we can avoid a lot of the headaches. And if you go once more to www free audit guy, you can get in there and also you can sign up to our newsletter from my firm and we send out just to let you know what's going on and just to give you advice. I'm a teacher at the end of the day too, so I love to teach everybody and just knowledge about it, definitely.

 [Dr. Brook Sheehan]

I love that so much. Thank you so much for spending some time with us here today and sharing your wealth of knowledge around the topic of tax and laws and crypto and how we can all stay safe and well financially. So really appreciate that. Claudia, thank you so, so much. And for those of you on this ride with us, we're pulling into the station and I'll have you exit to the right. See you on the next one.

 [Dr. Brook Sheehan]

You made it. Congratulations. That wasn't so bad, was it? I hope you laughed and learned a little bit more about this Web3 universe and how simple and fun it can really be. Would you be so kind as to leave us a review and share it with your friends and family? It would mean so much to get this out to more people as we embark on the greatest transfer of wealth that has ever happened in human history. Can't wait to see you on the next one.