Do you have stock options that have grown to be a large position of your portfolio? Are you consolidated in a few investments?
In this episode of Steve’s Stock Stories, Steve Wolff and Greg Carroll, CFP® discuss a couple examples of concentration risk and some misconceptions about this type of risk. Within 15 minutes, learn about what concentration risk is, how it can occur, and how diversification may minimize some of this risk.
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WWM Financial is an SEC- Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where WWM Financial and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by WWM Financial unless a client service agreement is in place.
Wondering why the Stock Market is so volatile? How stable the US Economy is and how potential conflict has influenced the stock market historically? Tune in to listen to Steve Wolff, Managing Partner at WWM Financial, give his perspective on what has occurred and how history can provide us a little insight.
FREE Report: 5 Investing Secrets Every Investor Needs to Know
WWM Financial is an SEC- Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where WWM Financial and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by WWM Financial unless a client service agreement is in place.
What is happening with Russia, the stock market, and inflation? Is the stock market and economy still intact?
In this month’s Stock Market Update, Steve Wolff discusses what has occurred in January relating to the stock market, inflation, raising interest rates by the federal reserve, supply chain issues and much more.
FREE Report: 5 Investing Secrets Every Investor Needs to Know
Avoid making bad investment decisions, this little-known report reveals 5 better ways to invest in stocks.
Learn 5 simple steps to avoid making bad investment decisions.
DISCLAIMER:
WWM Financial is an SEC- Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where WWM Financial and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by WWM Financial unless a client service agreement is in place.
Don’t let reading a long and complex investment book stop you from understand bonds and how they can be affected. Steve Wolff (Founder and Managing Partner) and Greg Carroll, CFP® discuss their experiences during the 2008 Market Collapse and how not just the stock market and housing markets were affected but also the bond market.
__________________________________
FREE Report: 5 Investing Secrets Every Investor Needs to Know Avoid making bad investment decisions, this little-known report reveals 5 better ways to invest in stocks.
WWM Financial is an SEC- Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where WWM Financial and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by WWM Financial unless a client service agreement is in place.
__________________________________
Full transcription below:
Steve Wolff:
Hello, once again, this is Steve Wolff. And we’re ready for another episode of Steve Stock Stories, which are becoming pretty popular these days, surprisingly. Anyway today, we’re going to deviate a little bit from what we normally do. Normally we talk a little bit about stocks, hence Steve Stock Stories. However, we’re actually going to talk a little bit about bonds today because I’ve got Greg Carroll with me, who someone I’ve known for quite a number of years. We worked together, I think we started … what was it? Shearson Lehman or something.
Greg Carroll, CFP®:
Yeah, something like that.
Steve Wolff:
You’ve been in the business since, what? 1994.
Greg Carroll, CFP®:
Yes, sir.
Steve Wolff:
I’ve been in the business since 1986. So we’ve seen a lot of things happen. We’re going to talk a little bit about what happened in the 08 timeframe. Because everyone talks about how stocks are really risky and everything else. And people never really realize the risk that you can have in a bond. Before we get to the story and before we get to you, Greg, I have to have a little disclaimer here, otherwise the lawyers will chop my you know what’s off. And we don’t want that to happen.
Steve Wolff:
This whole Steve Stock Stories is just for informational purposes only. It’s not meant from one specific person or what they have in their portfolio. If you’ve got something that … any questions about what we’re saying, talk to your financial advisor or talk to your tax person or whoever it might be, who you talk with. Before you buy anything that we’re talking about. All right? So now that we got that out of the way, Greg Carroll, it’s nice to see you.
Greg Carroll, CFP®:
Good to see you, Steve.
Steve Wolff:
Yeah, I mean, we worked together at Shearson Lehman for, I don’t know how many years. Before you went off on your own.
Greg Carroll, CFP®:
Yes. I think about seven years.
Steve Wolff:
Seven years. Wow.
Greg Carroll, CFP®:
Yeah.
Steve Wolff:
Then Greg came back to us, what? Two years ago now?
Greg Carroll, CFP®:
Two and a half years ago.
Steve Wolff:
All right. So we’ve been working together for quite a number of years. At any rate, Greg, I know when you and I talked about what happened in the 08, 09 timeframe, 07. When they look like the banks were going to collapse. Talk a little bit about what happened to some of the bonds that you … or just tell us the story.
Greg Carroll, CFP®:
Okay. The good thing here, as far as your disclaimer goes, you can’t buy what we’re going to talk about because it’s no longer in existence. What we’re going to talk about is bonds that we purchased for our clients back in 2007 timeframe and they were the Lehman Brother bonds. They were A-rated, high quality bonds that you really wouldn’t expect to ever lose any money with.
Steve Wolff:
A rated, basically, for those who don’t know means what?
Greg Carroll, CFP®:
Well, you’ve got a bond rating scale, which starts at AAA rated. Government bonds would be considered AAA rated, all the way down to A, B and even C and below is junk bonds. These are pretty high on the ladder there.
Steve Wolff:
They’re pretty high quality.
Greg Carroll, CFP®:
Yeah. Anything with an A, A plus, double A rate is high investment grade bonds.
Steve Wolff:
Okay.
Greg Carroll, CFP®:
You’re just going to buy those, collect your coupon, your semi-annual interest payments, until it matures and you get your money back. But we ran into this thing called a great financial crisis. A lot of things happened in the financial services industry. One of which was the bond rating services, Moody, Standard & Poor’s. I can’t remember if Duff & Phelps does bonds or if it’s more real estate. But they’re the ones that actually give these ratings to certain bonds.
Greg Carroll, CFP®:
Apparently they weren’t doing their homework well enough to actually understand what some of the bonds; what the real risk was in those bonds. The way the financial services industry was evolving, they didn’t understand how intertwined globally some of these banks and financial services companies were with different aspects all around the globe. There was a kind of a kink in the armor early that year in February, I think when Bear Stearns ran into some trouble. Didn’t raise a lot of red flags, but a few people started to notice. Then later that summer … what was the treasury secretary’s name back then?
Steve Wolff:
You’re trying my-
Greg Carroll, CFP®:
Geithner? Anyway-
Steve Wolff:
I don’t know.
Greg Carroll, CFP®:
Very smart young fellow.
Steve Wolff:
It was Geithner, actually.
Greg Carroll, CFP®:
Something like that. He was a very smart individual.
Steve Wolff:
I can’t remember what I had for breakfast this morning. You asked me about 20 years ago or however long it was.
Greg Carroll, CFP®:
That was a long time ago. Anyway, he realized there was some serious issues with a lot of the big banks and they had to call an emergency meeting with the treasury, the heads of all the banks, JP Morgan, Bank of America, Merrill Lynch, all of them.
Greg Carroll, CFP®:
But apparently Lehman Brothers was the one bank that may have been the most leveraged and the most in trouble during a financial Blacks Swan event.
Steve Wolff:
And by leverage…
Greg Carroll, CFP®:
Well, it means that for every dollar of assets they took in, they were investing 40 times that.
Steve Wolff:
I heard it was even higher than that.
Greg Carroll, CFP®:
Yeah.
Steve Wolff:
I heard it was something like 80 times.
Greg Carroll, CFP®:
Yeah. It was astronomical.
Steve Wolff:
Right.
Greg Carroll, CFP®:
It should never have been that high. I don’t know if it was public knowledge how levered they were.
Steve Wolff:
Right.
Greg Carroll, CFP®:
So they were kind of the sacrificial lamb at one point in September. I remember talking to one of the large wire-house firms that my partners and I worked at. I called them early, about a week out from them going bankrupt, Lehman Brothers-
Steve Wolff:
When you’re talking about the wire-house firms, you’re talking about the well known companies, I don’t know specifically. But the Merrill Lynches, the UBS’s, the Morgan Stanley’s et cetera, et cetera.
Greg Carroll, CFP®:
Correct, correct.
Steve Wolff:
Okay.
Greg Carroll, CFP®:
I started noticing the prices come down on these bonds, that bonds are priced at a hundred is par value. That’s what you buy them at when they’re issued and that’s what they mature at. Based on a hundred, sometimes they go down to the mid nineties, maybe, up to 105 based on the interest rate environment. But these things were going down big.
Steve Wolff:
The bonds really are priced much like a certificate of deposit is, CD at a bank. You buy X amount of dollars worth, and let’s say you buy $10,000 worth of a CD. You get your interest payments along the timeframe that the CD lasts. When it matures, you get your $10,000 back or whatever that amount is.
Greg Carroll, CFP®:
Right.
Steve Wolff:
So supposedly it’s similar to a bond. Isn’t that how it works?
Greg Carroll, CFP®:
Very similar. Yes.
Steve Wolff:
Okay. So, go ahead.
Greg Carroll, CFP®:
So I noticed these bonds, the price was falling dramatically. I mean, they were at like 70 cents on the dollar a week out from the actual bankruptcy. I didn’t know how to call my clients tell them I have an A-rated bond that seems to be in trouble, but we can maybe get 70 cents on the dollar. I was calling for advice back to New York, the people that are supposed to be helping us kind of collaborate on these types of issues.
Steve Wolff:
This is with the firm you’re with.
Greg Carroll, CFP®:
This is with the firm. And they told me, “No, Lehman Brothers is going to be okay, it’s going to be okay.” I said, “All right.” They get paid a lot of money to tell me that kind of advice. Later in the week, though, the price was down to 60 cents on the dollar. I didn’t know what to do, so I called New York again. They told me the same thing and I said, “I am hearing that Lehman could go bankrupt.”
Greg Carroll, CFP®:
With a bond holder, it works a little different than a stock where dependent on … there’s a lot of different levels of bonds in every corporation. There’s senior secured, senior unsecured, and then a bunch of subordinated debt. So depending where you’re at on that hierarchy in a bankruptcy, you might get 10 cents on the dollar, 20 cents, 30 cents in a bankruptcy scenario. These were senior unsecured debt. I was saying, I just didn’t know that I want to hold onto these. They talked me into holding on. And the news came out over the weekend, that Lehman was going to go bankrupt. So on Monday morning that caused a major onslaught in the stock market. I mean, just the ramifications were far and wide. I mean, it was-
Steve Wolff:
And of course, all this was precipitated by what happened in the real estate market.
Greg Carroll, CFP®:
Yes. That was a big catalyst to it. Yes.
Steve Wolff:
Yeah. I mean, this was that movie, I don’t know what the name of the movie was.
Greg Carroll, CFP®:
The Big Short.
Steve Wolff:
Yeah. It was that at The Big Short where this one particular person at … I don’t remember what institution he was at. But, he actually did some research into what was going on because everybody seemed to be getting a loan, no matter how much you made. I mean-
Greg Carroll, CFP®:
Right.
Steve Wolff:
A guy was making $30,000 a year and he was getting a $600,000 house. He knew something had to be wrong. So when he went out to investigate all of that, he realized that these places where they couldn’t afford them.
Greg Carroll, CFP®:
Right.
Steve Wolff:
Okay. And all these mortgages, they were underwater.
Greg Carroll, CFP®:
And a lot of those houses were just empty.
Steve Wolff:
Absolutely. So that caused all these people … especially the ones who were leveraged. And leveraged, let’s go back to stocks for just a minute. Leverage is the thing that really can kill you.
Greg Carroll, CFP®:
Yes.
Steve Wolff:
In the 1929 stock market crash, it’s exactly what happened. Individuals were buying three and four and five times and maybe more of what they actually had the cash to buy. It was legal. Well, when things went down, they had to come up with money because they were borrowing it and they had to come up to pay off the debt. Well, to pay off five times what you had when you didn’t have that to begin with and everything’s crashing around you, that’s what happens in stocks. Well, the same thing can happen in bonds. And that’s exactly what was happening right?
Greg Carroll, CFP®:
Right. Yes. So, I think one thing that the financial crisis did do, it did kind of clean up the system a lot, the bond rating agencies are doing a much better job. The banks are in much stronger position, I think-
Steve Wolff:
Today.
Greg Carroll, CFP®:
Today. So when you buy an A rated bond today, again, you can feel very confident that that bond should come to maturity and get all your money back. You should have a lot more confidence, but you got to know that things can happen with a company. Not necessarily with the market or the economy as a whole, but a company could have their own Black Swan event. Which could cause it to be downgraded and then you do lose price.
Steve Wolff:
Any company can have an issue. If they do have an issue, then your bond … let’s say they’re going bankrupt, like you said. It can happen to any company. Then your bonds are not going to be worth a whole lot. I mean, I don’t think a Sears bond was worth a whole lot at the end.
Greg Carroll, CFP®:
Right
Steve Wolff:
So, that can happen. I guess the point, again, is that it can happen in stocks or bonds. So you have to really know what it is that you own.
Greg Carroll, CFP®:
Right.
Steve Wolff:
There’s a big difference between buying a company, like, let’s just say Johnson and Johnson. By the way, you can buy that today, but don’t buy it just what we’re saying. But there’s a big difference between a Johnson and Johnson and XYC biotech company.
Greg Carroll, CFP®:
Right. Yeah.
Steve Wolff:
But back then, it’s funny, I had a very similar experience to what you’re talking about when I had the Lehman bonds. Fortunately, I didn’t have it for a lot of people. But I had the Lehman bonds and it looked like things were going bad. Of course, I called our big wigs in New York and they said, “Oh, no, no, no. Everything’s going to be just fine.” Well, I listened to them, unfortunately. Unfortunately it was a learning experience for me and for my clients. But it was not easy to tell a client, “Hey, you’ve got a bond here that you’re pretty sure is going to be okay till maturity, that’s going broke.”
Greg Carroll, CFP®:
Yeah, that’s a tough conversation. It’s not like with stocks, it can move around a lot in price and always do. Bonds are supposed to be pretty steady. On the statement, they don’t move very much.
Steve Wolff:
Right.
Greg Carroll, CFP®:
But they do move, but they do move.
Steve Wolff:
We’re at a timeframe right now, we’ve actually been in a bull market for bonds almost my whole career, since 1986. And actually probably started during 82 or 83-
Greg Carroll, CFP®:
Right.
Steve Wolff:
Where the interest rates were extremely high and coming down. Well, why is that a bull market? Because as interest rates come down, prices on a bond goes up. We’ve talked about this before and some other things. So I’m not going to explain why, but that’s what happens.
Greg Carroll, CFP®:
Yes.
Steve Wolff:
Okay. Now we’re on the other side of that, where interest rates were almost at zero. Now it looks like because of what’s going on here with inflation, the fed is now talking about raising interest rates. Now you’ve got a little bit of a headwind for bonds. So those existing bonds could drop in price again. But they should last to maturity, where you’re going to get your money back.
Greg Carroll, CFP®:
Yes, exactly. So it’s not the same as the company going bankrupt. But yeah, you could see depressed prices for a while until they get close to maturity. So you just want to be aware of that. I mean, if they’re paying a good interest rate and you’re comfortable with that. The bonds highly rated and you’re still going to get it at maturity or your value back, you can hold onto those.
Steve Wolff:
Right. And it always comes down to know what you own.
Greg Carroll, CFP®:
Know what you own.
Steve Wolff:
Know what you own. If you do that, you’ll probably be okay. Look, there’s always something that can happen. All right. There’s not a person I know who’s honest who hasn’t lost money in stocks, for sure, and probably in a bond, too, if they’ve been in there long enough. It happens. You just got to make sure that you know what you own and that’s a good case for diversification.
Greg Carroll, CFP®:
Absolutely.
Steve Wolff:
You wouldn’t want to have everything you own in a Lehman Brothers bond at the time.
Greg Carroll, CFP®:
No.
Steve Wolff:
Okay. That’s another thing too, and this is another topic that we’ll get into with Greg at another Steve Stock Stories, but about concentration risk. Where you have everything in one company or one bond or one thing. That’s where you can get really hurt.
Greg Carroll, CFP®:
Absolutely. Yeah. Was it Peter Lynch said, “Buy what you know.” But you can buy too much of what you know, sometimes. If you’re too concentrated, there’s a big risk there to.
Steve Wolff:
Right. Or if a person works for a particular company and it keeps getting more and more stock options and shares of stock, et cetera. And all of a sudden, that person has 85% of their net worth wrapped up in one company. Those are things we’ll … I don’t want to get too much into that. We are going to talk at that again with Greg because he’s got another good story and that one’s more on stocks than it is on bonds.
Greg Carroll, CFP®:
Yep.
Steve Wolff:
So, anything else you’d like to tell people about what your experiences shown as far as bonds are concerned?
Greg Carroll, CFP®:
I think, what you said earlier, know what you own and if you ever have questions, talk to your financial advisor, your CPA, whoever your advisor is that you’re entrusting to help guide you. You need to ask those questions. Don’t be afraid to ask questions.
Steve Wolff:
Right.
Greg Carroll, CFP®:
Because the more you know, the more you’ll understand different movements in prices of bonds and stocks. And the more comfortable you’ll be able to stay the course.
Steve Wolff:
Right. I know I have some clients who always say, “I know this is probably a stupid question.” If you don’t know the answer to the question, it’s not stupid.
Greg Carroll, CFP®:
Absolutely.
Steve Wolff:
Now if you ask it 10 times, maybe that’s stupid, but-
Greg Carroll, CFP®:
And Steve never counts.
Steve Wolff:
But if you really don’t know the answer, ask us. We’ll be more than happy to tell you.
Greg Carroll, CFP®:
Always happy to repeat it.
Steve Wolff:
So anyway, appreciate it. This is another Steve Stock Story. I’m Steve Wolff, Greg Carroll. We really appreciate you just listening. For those who are seeing this on video, watching us, we’ll see you next time. Thanks. Bye, bye.
In this stock market update, Steve Wolff (Managing Partner at WWM Financial) discusses what has occurred in December. He discusses Jerome Powell and the Fed’s stance on interest rates, Covid and its variants and how the market has reacted. He also discusses small cap stocks to large cap stocks, the unemployment rate, and the US economy.
FREE Report: 5 Investing Secrets Every Investor Needs to Know
Avoid making bad investment decisions. This little-known report reveals 5 better ways to invest in stocks.
Have you made a mistake with cryptocurrency and not planned for the taxes? Learn how to understand the tax implications surrounding cryptocurrency without understanding the tax code. This little-known podcast helps you understand your taxes from trading cryptocurrencies.
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FREE Report: 5 Investing Secrets Every Investor Needs to Know Avoid making bad investment decisions, this little-known report reveals 5 better ways to invest in stocks.
WWM Financial is an SEC- Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where WWM Financial and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by WWM Financial unless a client service agreement is in place.
__________________________________
Full transcription below:
Steve Wolff:
Well, welcome to today’s podcast on cryptocurrency taxation. I’m Steve Wolff. I’m here with my partner, Catherine Magana. We’ve got a special guest here today who actually knows something about crypto taxation, because we certainly don’t and that’s Josh Cahan, who’s a CPA, graduated from University of North Carolina in Charlotte and with, I believe it was a finance taxation degree. Is that right?
Josh Cahan, CPA:
Accounting degree.
Steve Wolff:
Accounting degree, and then you started your own firm. Tell us a little bit about yourself, Josh.
Josh Cahan, CPA:
Sure. After graduating from college at UNCC, I just went on to work at several accounting firms to kind of get my feet wet and just decided to go off my own. I’ve been doing it for over 20 years now.
Steve Wolff:
All right. How long have you actually been doing crypto?
Josh Cahan, CPA:
That has really started around 2017. That’s when I really started to get into it and that’s had a huge impact on investing and now it’s kind of growing and growing as you can tell right now.
Steve Wolff:
Exactly. Well the crypto market’s been growing. Let’s get started a little bit. The first question I have is, why does somebody need a special CPA for crypto taxation?
Josh Cahan, CPA:
That’s a great question, Steve. One of the biggest things about taxes is, they usually have guidance and people have been doing taxes forever and it’s pretty straightforward for the casual person doing tax returns. But now with crypto taxes, there’s not a lot of guidance. There’s a lot of gray area and that is one of the main parts that I get clients is they say, “Well, I know I’m supposed to be taxed on income, but how do I do it?” That’s really the start of a conversation from there.
Steve Wolff:
When you say guidance, you’re talking about from the IRS.
Josh Cahan, CPA:
Exactly. Correct.
Catherine Magaña, CFP®:
Josh, what is the number one myth or misconception that people have that are investing in cryptocurrency when it comes to crypto taxes?
Josh Cahan, CPA:
I think the biggest thing about crypto is all the noise that you have in this crypto world, if you want. You get information from the government that don’t want it. You have big investors like Warren Buffet that say it’s bad. There’s just a lot of miscommunication and misinformation, so people don’t know. They get all this news from the media saying, there’s hacks and scams and people are losing Bitcoin or Bitcoin is down 50%. There’s a lot of negativity and misinformation. I think that’s one of the big things that when you look at the crypto world, it’s not all negative. There’s a lot of good to it. I think that’s one of the misconceptions is that, people don’t take the time to really learn about what it really is.
Catherine Magaña, CFP®:
We see now a lot of big companies, I was just reading Microsoft, PayPal, Whole Foods, Starbucks, Home Depot, Etsy are taking payments now from Bitcoin. Can you elaborate a little bit about that, maybe on the other end of it? Obviously that’s a transaction if you’re buying a good and the taxation on that.
Josh Cahan, CPA:
Right. This is kind of the part that really doesn’t make a lot of sense from tax purposes, because if they want to use this coin, you’re basically saying you have a taxable transaction. For me, it’s one of those things that people have to take in consideration that, it’s not just like buying a car with cash. If you’re buying a car with Bitcoin, there’s an extra step and you have to kind of report it. That’s kind of where I come in to advise you saying, “Hey, you need to report, this. This is what you need to do.” It’s just an extra step.
Steve Wolff:
Josh, what happens if you don’t report it?
Josh Cahan, CPA:
Well, you’re supposed to, that’s the big thing. As my advice to a CPA, when you’re dealing with it, just know what you’re supposed to be doing and go to see an advisor and you’re supposed to report it because it’s a taxable transaction. Go ahead.
Steve Wolff:
How does the IRS know about your crypto in the first place?
Josh Cahan, CPA:
Well, they can subpoena records from whoever that gets these transactions, and I’m not a technical person, but basically the transactions can be easily traced if you have the right information.
Steve Wolff:
Is that because of the blockchain technology?
Josh Cahan, CPA:
Exactly. It’s all open out there. Anybody can see it. You might not see exactly who it’s going to, but you can trace where it’s going. That’s one another big misconceptions, if you will, that the IRS can’t find it. Well, they can, they don’t really want you to know that. But they can find it if they want to.
Steve Wolff:
So big brothers, a lot they’re watching. Is that what you’re saying?
Josh Cahan, CPA:
That’s exactly. It’s just a harder step to get, but it’s not like cash where it’s gone, it’s harder to trace, but if the Bitcoin, it’s out there on the internet where you can trace it.
Catherine Magaña, CFP®:
Is there any software or something that people could use to kind of track some of these types of investments using the cryptocurrency that you know?
Josh Cahan, CPA:
Yes, there definitely is. It really kind of depends on what platform you’re using, what kind of trading you’re using. The problem is, there are so many different ones out there. There’s so much new technology and investment vehicles in this world that it’s hard to keep up with.
Steve Wolff:
It’s funny you said that because as I was preparing for this particular podcast, I was looking, everything has its own language. Every business has its own language. I started looking at things like Airdrops and Hard Forks and then DeFi and NFTs and mining and staking rewards and all that. I have no idea what most of this stuff even is.
Josh Cahan, CPA:
Right. Most of that stuff is new. To try to get the government, that is typically slow to react to these things, to give guidance is the problem. The other thing is, when people come to us, they need us to advise them. I think that’s important for us as advisors to say, “Look, there’s a way that we can knock out the noise and focus on what’s good for your investment types.” I think that’s important for all of us to understand that, there’s a different terminology and it’s new, but it’s coming and it’s here. It’s going to be here for a while, so we might as well kind of learn to live with and actually help our clients.
Catherine Magaña, CFP®:
I think it’s interesting because, once again, going back to the transactions and if more companies start using Bitcoin or different cryptocurrencies, then the investor really needs to track and have records. Because once again, they’re going to be tax consequences on this and the IRS is going to want to get paid or they’re going to their taxes on that. I just think it’s interesting in what’s to come. I definitely think the reporting or having somebody that’s working with you to help you navigate through this is definitely important. Could you mind sharing a little bit about maybe I guess, a lot of people that own cryptocurrency or Bitcoin, or also there’s this Stablecoins, perhaps there’s some interest and they obviously need a report on that as well. Do you mind commenting on that a little bit?
Josh Cahan, CPA:
Sure. I guess just for a general purpose is when we’re talking about taxable transactions is, if you go and buy Bitcoin with Fiat or cash, that’s not a taxable transaction. If you use Bitcoin to buy a different coin, then that is a taxable transaction. Now, it’s a lot easier to buy these coins now than it used to be. You can have a lot of transactions that you’re buying that you’re accumulating these coins, where you don’t have to pay taxes. That’s your point of the Stablecoins and interest. There are coins that you can stake, if you will. That is a taxable transaction that you need to record. It’s kind of just like dividends or interests on a regular money market.
Catherine Magaña, CFP®:
Just making sure people understand, like you didn’t just buy this Bitcoin and let it go. Obviously, there’s other factors and things that you want to bring to your CPA to work with you and help you make sure you’re reporting. Because I think once again, sounds to me that a lot more people are investing in this type of currency and it’s just making sure that they understand what’s the tax consequences.
Josh Cahan, CPA:
Definitely. Especially when the interest rates are a lot higher than what you can get at a bank or savings. I mean, it’s nice.
Steve Wolff:
It seems like record keeping is really crucial here and correct me if I’m wrong. Well, actually, maybe I should ask the question. If you buy something on one platform, first of all, can you sell it on another? And if you do, how do you track all this?
Josh Cahan, CPA:
That’s a good question. When you transfer a coin to a different exchange or wallet or whatnot, it’s not a taxable transaction right there because you’re just moving funds to a different vehicle basically, or a different platform. There’s nothing taxable there. It’s just when you sell that coin or you swap it for a different coin, that’s when it’s becomes taxable. Now the tracking, all these softwares for the tax softwares, they can use different technology to bring that transaction into the computer software where it can match the transactions of the buying and the selling. Like right now, there’s tax softwares that do a really good job about that. Every year they’re getting better and better about it, because there’s just so more transactions. Yes, it’s almost impossible to do it without tax software.
Steve Wolff:
Which software do you think is the best one to use?
Josh Cahan, CPA:
Like I said before, though, it really depends on you, what you’re investing and how you’re doing it. One of the better ones is Koinly, spelled with a K instead of a C and that’s good for individual investing. That’s one.
Steve Wolff:
K-O-I-N-L-Y?
Josh Cahan, CPA:
Yeah, that’s one. There’s some other ones that I use just for my purposes, like Lukka and Ledgible and then there’s CoinTracker and Cointrader and ZenLedger. I mean, you really have to know your investor and you need to know what coins and platforms they’re using because different ones specialize in different items.
Steve Wolff:
I know this hasn’t been around very long, the whole cryptocurrency thing, but has it been around long enough? I’ll get it out. Has it been around long enough that you’ve had the IRS maybe come to you and say, “You can do this or you can’t do this,” or are they still kind of in the dark about what’s going on?
Josh Cahan, CPA:
Well, they do have some notices on the IRS webpage, so that’s kind of a guidance. It’s very loose in a lot of things that are happening now. There’s just a lot of things that like the NFTs that are out and there’s a lot of gray areas. But from one perspective they do say, “Hey, this is taxable and you got to record it.” But the gray areas are, “well, we don’t know exactly all the time where to put that.” Even the question on the tax return this year was confusing that you had to mark if you were dealing in transactions with crypto, which makes sense. If you read it, you’re like, okay. Then if you go into it further, they’re saying, “Well, if you’re just buying it, that doesn’t really count,” but that doesn’t make any sense because you are actually doing something. Even they are really kind of confusing and that’s why it would be great if the miscommunication, if they could get it clear and hopefully they will within a couple years.
Steve Wolff:
I’m a little curious, if a CPA or your tax person doesn’t really have a background in this, how do they do your taxes?
Josh Cahan, CPA:
Right. I guess this kind of goes back to what we are supposed to do as tax return people. Basically, you’re giving us the information and we report it. We have to take your word for it. Now of course, over the years, the IRS has put more and more pressure on professionals about making sure that’s the right information, but it’s really up to the individual to make sure that they know what they’re investing in and at least record it on a tax software and get it to the appropriate people or ask questions.
Catherine Magaña, CFP®:
Josh, do you mind talking a little bit about the cryptocurrency tax rate? Obviously, the fluctuations in current cryptocurrencies and potentially maybe investors don’t realize that there might be paying ordinary income or do you mind just elaborating a little bit on that just with the tax return?
Josh Cahan, CPA:
I guess real quickly, and we’re talking about investors right here, not traders or people doing business that, that’s their business doing trading. It’s more you and me just casual investors. Basically, you kind of follow the capital tax rules for that. Kind of depends on whatever income you’re in, that you get the tax preferred long term capital rates, either zero, 15 or 20, or if you’re short term, then you’re just ordinary income tax rates.
Catherine Magaña, CFP®:
I was thinking that’s important to know, especially if you bought in and then you traded, obviously the market, the fluctuations, that investment. So just making sure that they understand potentially it could be ordinary income.
Josh Cahan, CPA:
Exactly.
Catherine Magaña, CFP®:
And being able to pay that tax later.
Josh Cahan, CPA:
Sure.
Steve Wolff:
It sounds like the IRS is trying to treat this like any other transaction as far as capital gains, losses, et cetera, is that right?
Josh Cahan, CPA:
Right. I mean, what they really want is people to report this. Because I think there’s another misconception that everybody is making tons of money in crypto, which is not really true. It’s just so new that they don’t know. They’re trying to see what people are doing because you can invest a small amount of money in crypto, keep trading it a thousand times each month and that’s a million dollar transactions, but it’s really not. It’s only a thousand dollars. You’ve kept on trading over and over again. They’re saying millions of dollars. Well, it’s not really because it’s only a thousand dollars trading back and forth all the time for an individual. They get these big numbers in their head that maybe some people do it, but the actual gain or loss is probably minimal.
Josh Cahan, CPA:
That’s when I’m seeing a lot of people come to me and say, “I got this IRS notice. I’ve traded three million dollars in crypto, and there’s no way I’ve only invested maybe five grand.” I was like, I know. That’s why you have to put all this documentation. You have tens of thousand of line items on the tax return saying, “That was a dollar, that’s another dollar.” Hopefully they can see that not a lot of people are doing that. There’s not a lot of dollars there. It’s just, I guess the transaction part of it, because a lot of people that invested early want to hold it so they can even make more money later on.
Steve Wolff:
If you wanted to gift crypto, is there a limit to how much you can gift without paying taxes?
Josh Cahan, CPA:
Well, it’s just kind of like the same gifting rules that we have for everything else. I mean, I think it was like 15 grand that you can actually gift to somebody without having a tax return done. They follow the same rules and that’s basically what we’re looking at for most of the tax transactions. If they don’t have something special for crypto, then it falls back into what there’s normally a taxable item.
Steve Wolff:
What about something like the non-fungible tokens, the NFTs? I’m glad that was funny.
Josh Cahan, CPA:
No, it’s not funny because it’s one of those things that, like you said, it’s new and they have no guidance on really how it should be taxed. You kind of have to fall back and say, “All right, what exactly is this? Is this a digital asset or not?” Without getting too complicated, there’s not really a clear answer. You could go between capital gain or collectable tax rates. It really depends. You have to look at the transaction and that’s just for investors, that’s not a special classification for dealers or people that are in the business of dealing with art. It’s a lot.
Catherine Magaña, CFP®:
I mean, I know obviously there’s different states, we’re obviously in California, but is there anything that we should be thinking about on a state level or is it just kind of state by state, we have to look?
Josh Cahan, CPA:
It’s definitely state by state, but it’s also, most of the states either follow the federal, so it’s like one of those other things. It’s just, well, if it doesn’t classify it as anything, then you just treat it how it normally is treated each state, unfortunately. Although the Federal’s kind of a mess already, I would hate to see the states get involved to make it even more so.
Steve Wolff:
I know the answer to this question and you probably have a bias, but should people be trying to do this on their own, as far as doing the taxation in reporting?
Josh Cahan, CPA:
They can. I mean, if you have one or two trades. I mean, you just have to know what you’re doing. I mean, it’s like anything else, you have people that are way more computerized and savvy than some other people that say, “Hey, I can do this and import all these information,” but other people don’t and they don’t want to have the time either to deal with it or just don’t want to do it, because it does get tricky and it’s unusual and it’s unclear too. If you feel uncomfortable, there’s many taxation people or softwares that you can go to. It’s just that it’s beneficial if people would have like advisors that would say, “Hey, this is a good person to do it.” Instead of just kind of going off on their own without help. With all the noise and information out there, it’s kind of hard sometimes to just pick up and say, “All right, I’m going to Google.” Then you just have to go through the process of finding out. I’m happy that you’re trying to have people educated on what’s going on because it’s an interesting place.
Steve Wolff:
All right. We’re also trying to educate ourselves because this is so new.
Catherine Magaña, CFP®:
Josh, you mentioned it earlier, but the IRS, the rules are always changing. You might do it this way this year and the next year it could be a little different. Just in general, things change over time. That’s why I think even for us, in our business, and dealing with clients and different rules and regulations that come down our way, it might be one way one year and the next year it’s different. So just having a professional staying on top of it like yourself, I think is extremely important.
Josh Cahan, CPA:
Yes, definitely. I totally agree with you. It will always be changing.
Steve Wolff:
Bottom line, do you have any parting thoughts for us as far as what to do with your taxation of crypto?
Josh Cahan, CPA:
I think one of the things is just try to get as good information as you can. Try to focus on the good part about it and not just the crazy negativity that’s usually in the media. I think that’s one of the big things. Also, I think most people realize that when you make income, it’s going to be taxable. There are people that don’t want to do it, and some people or most people I think, want to do it. They want to not be in trouble with the IRS. It’s a pain and it’s not fun. It’s one of those things that, Hey, just take care of your business and live your life without someone else watching over your back.
Steve Wolff:
I know I said that was kind of the last question, but you just got something going in my brain. In the beginning with crypto, it seemed to me that people said, if you were a criminal, you could do crypto and get away with all this stuff. But it seems like you can’t because everything is tracked. What’s your comment on that?
Josh Cahan, CPA:
Yes. I mean, I’m not into the criminal investigation part of everything, but yes, it’s definitely, I think more and more people are realizing that, Hey, it might have been easy to get that, but now that you have it, they can watch you. So it’s going to be hard to get rid of it. I think it’s like you said, the traceable part is huge and I think more and more people are going to realize that it’s going to be difficult. It’s not going to be easy.
Steve Wolff:
Well, we really appreciate you coming on today. And this is Josh Cahan, who is a CPA in what city in North Carolina?
Josh Cahan, CPA:
Charlotte, North Carolina.
Steve Wolff:
You’re in Charlotte. So you get to see all the good basketball games.
