Public Key Podcast

Exploring the Complexities of Digital Asset Taxation and Crypto Accounting: Podcast Ep. 64

July 11, 2023 | by Chainalysis Team

Episode 64 of the Public Key podcast is here! Many individual users and institutional companies are still attempting to figure out how to accurately report their taxes and hold crypto and other digital assets on their balance sheets. Both areas are complex, and we bring in tax and accounting experts from TaxBit, Ann Jaskiw (VP of Engineering), and Austin Woodward (Co-Founder and Executive Chairman) to understand the nuances of effective digital asset and crypto accounting practices. 

You can listen or subscribe now on Spotify, Apple, or Audible. Keep reading for a full preview of episode 64.

Public Key Episode 64 preview: Why crypto designated as a property makes sense for tax purposes

Crypto and digital asset taxation and accounting still seem to leave many crypto goers and institutions looking to hold crypto on their balance sheets with sleepless nights.

In this episode, Ian Andrews sits down with experts Ann Jaskiw (VP of Engineering) and Austin Woodward (Co-Founder and Executive Chairman) from leading crypto taxation and crypto accounting software providers, TaxBit, to discuss the complex problem of crypto taxes. 

They explain the challenges of financial reporting and tracking digital asset transactions, the distinction between tax and crypto accounting, and explore the concept of cryptocurrency as property while leaving room for the potential of stablecoins being treated as currency. 

They highlight the importance of cost-basis interchange and lend their insights into the future of tokenization and the exciting developments with regulatory guidelines in the USA and around the world. 

Quote of the episode

“We don’t need crypto accountants; we just need accountants who can handle crypto.” – Ann Jaskiw (VP of Engineering, TaxBit)

Minute-by-minute episode breakdown

  • (2:35) – Austin’s journey to solve the expensive transaction fees problem, which led to the founding of TaxBit
  • (4:35) -Ann’s journey from thinking the Bitcoin whitepaper was impractical and Ethereum was difficult to build on into transitioning into crypto during the pandemic 
  • (7:45) – Why Tax and Accounting are not the same and how TaxBit was able to specialize in crypto assets 
  • (10:37) – The complexities of tax rules and regulations of web2 brands looking to enter into web3
  • (21:54) -The potential designation of crypto as currency or property
  • (29:45) – Where non-fungible tokens (NFTs) and real-world asset tokenization fit into the cryptocurrency and digital asset ecosystem 
  • (36:59) – The biggest challenges for companies that want to hold crypto and digital assets on their balance sheet and how TaxBit solves these hurdles
  • (41:15) – The cost basis interchange and the future of the TaxBit Network 

Related resources

Check out more resources provided by Chainalysis that perfectly complement this episode of the Public Key.

Speakers on today’s episode

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Transcript


 Ian:

Hey everyone. Welcome back to another episode of Public Key. If you’re a regular listener you know that I love having founders on the show, it’s one of my favorite episodes. Today, we’ve got a double count of founders. So I’m joined by Austin Woodward, co-founder and CEO at TaxBit, and Ann Jasky, who’s VP of engineering at TaxBit, but until recently was founder and CEO of Tactic, a recent acquisition. Austin, Ann, welcome to the show.

Ann:

Thanks for having us, Ian.

Austin:

Good to be here. I love the show.

Ian:

Yeah, this is exciting. It’s not often that we get to talk enterprise software in crypto and acquisitions and founders all in one place, so I think this is going to be fun today. Austin-

Austin:

And taxes and accounting, the favorite topic.

Ian:

Oh man, I shouldn’t have buried the lead there, actually. That’s a good point. Now Austin, I’m looking at your background and I can imagine why you founded a tax and accounting company. You were a senior leader in the finance organization at Qualtrics for a long time through that company’s big rise. But I didn’t pick up on where you stumbled into crypto, so maybe we can start there. How did you arrive at starting TaxBit and focusing on this complex problem of crypto taxes?

Austin:

Yeah, I started my career in traditional enterprise software, outside the realm of what’s become a big industry in digital assets and for me, being a CPA, boring accounting background, the call it benefits of the technology that was powering cryptocurrency was just so easy to comprehend. And so in 2017 at the company I was at, I was thinking about, wow, we spend a lot of money on middleman transaction fees. It takes us a lot of time to transfer funds cross border to global subsidiaries or otherwise.

I actually am guilty of missing payroll in our Australia subsidiary a couple of times because the wire went out five minutes too late and you get that annoying warning saying, “Oh, you missed the cutoff deadline, it’s going to take two extra days to clear.” And so all of these stings started to accumulate in my mind of wow, digital assets, blockchain technology is ultimately going to solve this. So that was kind of the founding thesis of what attracted me to it and then started recognizing later on, and this was called the founding genesis of TaxBit, that cryptocurrency was never cryptocurrency, that’s an improper name. It’s crypto property and it’s property in 90% of the world’s countries. And so hence, a new era of software technology infrastructure, such as TaxBit and Chainalysis that’s needed to track property transactions and report on that in a compliant manner.

Ian:

That is awesome. We’re going to talk more about this topic of property as we get further into the podcast. But Anne, I’d love to hear how you came about this. Now, you’re a technologist until founding Tactic, it looked like you spent most of your career as a developer and then engineering leader. When did you first come in contact with crypto?

Ann:

Yeah, so to rewind there, there was a point in early on in my career where I thought I would be more of a mathematician and that’s where crypto always spoke to me. So I was involved sort of for more the academic angle of reading the white papers. So thought the Bitcoin white paper was very cool, but maybe not super practical at the time. Loved the idea of Ethereum, but it felt like it was just really hard to build anything and sort of stayed in tech and was doing a lot of data pipeline work for years. And actually, when the pandemic hit, I found myself with a lot of downtime and started catching up on all the crypto happenings and looking at practical applications of what was happening in the space of Ethereum specifically, as well as with other chains. And got really excited about all the various use cases and was actually mucking around with the project myself and got to the point where I was ready to make a real company.

And as you know, doing some of that, is forming a C corp getting spend management software up and running, just a lot of boilerplate. And quickly realized that if I was going to be building something on chain, just basic FP&A was going to be a nightmare, with all sorts of tokens floating around. And so that is how Tactic was born. And from a technical perspective, ultimately what we’re doing is taking messy data, cleaning it up and making it useful for people who are not used to interpreting blockchain data. And our thesis is we don’t need to make a ton more crypto accountants. We want to make existing data useful for accountants and finance people who are already good at their jobs and really coalesce those two worlds.

Ian:

I love that idea. We don’t need crypto accountants, we just need accountants who can handle crypto. It makes a ton of sense. Now Ann, before we jump away from your bio, folks should follow you on Twitter and I happen to notice your Twitter profile picture is a pretty unique one. Maybe you can share the backstory on how that came to be?

Austin:

Yeah, so it is in fact an NFT. It is actually the only NFT purchase that I have made. It was issued by the Ukrainian army about a year ago to raise funds. And I find it entertaining because I think it looks exactly like me, but it was not commissioned, I just bought it.

Ian:

I love that. We’re big supporters of the government of Ukraine and in particular, in their fight against Russia, so a worthwhile fundraiser and people, it’s great to keep awareness up on that. Now Austin, obviously you recently acquired Anne’s company, so maybe let’s rewind back a little bit. We talked about how you decided to found TaxBit what’s happened since the founding and then what led you into your first acquisition?

Austin:

Yeah, it’s a great question and there’s call it a half decade of history loading-

Ian:

It’s a big one, it’s a big one.

Austin:

We’ll keep it short and fun. So tax and accounting are actually not synonymous, country to popular belief. They’re two very different things with different, even buyer personas and audiences and software models. And so TaxBit started very much with a tax focus. Going back to the problem that I alluded to, this is crypto property. Property has cost basis attached to it and it needs to be tracked and reported. And so we built a brand and a name behind the tax side over the last five and a half years and then, call it about 12 to 18 months ago, during the bull run in 2021, 2022, institutions started to put digital assets on their balance sheet as a hedge against inflation or even as part of their product lines, to airdropping things for referral incentives and otherwise.

And so this accounting problem was starting to surface of hey, I’m an SEC filer and gap accounting has some weird logic at the time, we’re going to talk about, call it FASB influence and other policy changes that are on the horizon later in the show. But they needed a software solution as Ann alluded to, that accountants could intuitively understand to be able to just close their books, to simply be able to have this asset on their balance sheet. And so just looking at, call it the similarities of what we had done successfully in tax, we said, hey, we have the DNA, our founders are CPAs, they have accounting backgrounds, they’ve been SEC reporters for the majority of their career. And we wanted to go and pair that with the best technologists, Ann’s mathematician background, all of these great engineers and leaders that have built really robust accounting technology to go and solve the problem.

And so from that perspective, it was a perfect match. So we could bring tax and accounting under one hood and offer, call it that one throat to choke integration for enterprises, institutions or anyone dealing with digital assets to have both, a tax and accounting serviced under one roof.

Ian:

It’s really interesting. So I had not picked up on the problem you just described until we had the head of strategy from Bang & Olufsen on the podcast recently. And they’ve launched this incredible NFT collection, they call it DNA, it’s tied into the 100-year anniversary of the company. They’ve done some really exciting stuff with artists and musicians and I look at that and I go, oh, it’s a brand loyalty, consumer experience, customer experience kind of project. But the actual reality when you get into it as well, okay, they’ve built and deployed their own smart contracts to mint and issue the NFTs. It’s pretty complex project, I think there’s five distinct contracts and multiple stages to the NFT like generation and then acquisition.

In order to deploy those contracts, you got to have Ethereum. If you ever want to update those contracts, you have to have Ethereum. And so they ran into exactly the problem you’re talking about. It’s like, well, we’ve got to go as a company, procure Ethereum and now it’s an asset that we have to represent correctly on the balance sheet.

Talk to me a little bit about where you’re seeing demand and interest for the combined tax and accounting solution. What’s the profile of a typical organization? Is it like Bang & Olufsen, somebody new into crypto, or is it all the crypto businesses that have launched in the last few years?

Austin:

Yeah, it’s the combination of the two, Ian and so we can share a few client examples. The large brokerages obviously, to your point, their revenue monetization model is taking fees and a lot of times those fees are in digital assets and they hold crypto on balance sheet. And then brokerages also have 1099 tax reporting obligations to their end clients. So we service call it, both sides.

But the Web 2.0 Companies dabbling with loyalty and other I think really innovative projects. To your point, it’s not as simple as just going and saying, “Oh wow, this could be a really cool thing with product market fit here.” There’s this whole regulatory regime on policy aside, that is right now as we currently are recording this, holding the industry back some, where there’s not clear rules for some of these things. And when you’re a public company, you only can take so much risk.

And so there’s just a lot of projects that are sitting in staging and sandboxes and beta testers waiting for that flip of clarity. Fortunately, accounting is one of the areas that actually does have clarity. So we’re fortunate from that perspective and we’re implementing software that can take off the property reporting obligations from these, big SEC filer type companies. So these are all the way from Fortune 500 down to retail brands, a lot of those restaurants and others that are direct to consumer businesses that want to incentivize loyalty.

Ian:

Ann, I’m curious, you mentioned early in your career that data processing was one of the big problems you were working on from an engineering standpoint. And I’m not an accountant or a tax professional, but I have to imagine that’s one of the biggest challenges here, is a gigantic data acquisition processing and integration problem that you all are trying to solve. Is my guess right there?

Ann:

Yeah, I think that’s exactly correct. It’s interesting, so blockchains are sort of paradoxically transparent and opaque in the public ledgers. You can go and download the six terabyte e-chain onto your laptop, but it is so opaque, in that it is impossible to make sense of it without some sort of tech-enabled process.

Ian:

And talk to me a little bit more about that. I mean, I’d love to hear some of the technical details of how you’re solving that problem. I love the blockchain paradox. I’m going to start borrowing that phrase I think.

Ann:

Yeah, so I think maybe to go back to an example, you were talking about an organization that was holding Ethereum. Let’s talk about step one there, which is getting Ethereum. That means you have to go onto a centralized exchange. So you might be logging into a product like Coinbase, maybe using a custodian like Anchorage, and that’s sort of step one of you’re ACH-hing money into a centralized exchange that’s a US dollar. Then you go and then you actually buy the Ethereum at a given price. Then you might be moving it into a multi-sig safe, like Gnosis, might be into a person’s individual meta mask, it might be somewhere else. Meanwhile, the price of ETH is changing. You have transaction fees, you have gas fees as they’re called, floating around. And it’s just a lot of complexity in a lot of different sources.

Ian:

You made my head hurt, just walking me through that example. I’m getting a little sweaty thinking about filing taxes again next year after the last few months. We had my colleague Roger Brown, who leads our global tax efforts, on the podcast recently. And a lot of our work is with the tax authorities who are trying to understand what’s actually happening in crypto and how does that impact both personal and business taxes of folks that fall in their jurisdictions. Anyone listening in the US, you probably in filing in the last couple months, had to check a box. “Yes, I own some crypto.” I assume everyone listening to this podcast probably owns at least a little bit, but I definitely felt like going through that process that I wasn’t sure I had done everything right.

And so Austin, I’m kind of curious, I actually don’t know in your business, how much is retail versus, or individual versus corporate filings on the tax side. But is that really the goal, is to solve that and is that possible to give me some confidence what I’m filing that I’ve filed correctly? Is that possible given the current state of tax rules, SEC regulations, FASB guidelines, do these things even support most people being able to file a correct return?

Austin:

Yeah, it’s a great question, Ian. And again, I think it’s important that we delineate between tax and accounting here, two different standard setting bodies. So tax is the IRS and the US governing agency. And then accounting is the Financial Accounting Standards Board, the acronym, FASB. And so on the tax side, this is exactly why TaxBit was founded, is, I was an accountant looking for my tax form. I was trading on these large brokerage firm’s platforms and I’m like, where’s my 1099? I go to Fidelity or Vanguard or Schwab, I’m handed exactly what I need to report. And it’s a composition of, it’s called, tax information returns. And you get one from your employer, a W-2. If any of you invested in real estate or part of an investment entity, you get a K-1, you get a 1099-B. And all of these forms are the tax exact details that you should file.

Well, crypto, they weren’t issuing those forms. There was no such thing. And for the first time ever, this need arose, that fell completely on us as individual retail users shoulders, to go and figure it out on our own, pay for it and then be on the hook for doing it properly. And so that just didn’t sit right with me or our early founders at TaxBit, we said if this industry’s going to be a thing, information reporting, it has to originate top down. It can’t be bottom up. And what I mean by that, the enterprises, the institutions, the brokerages, need to push tax forms down to their users, the same way that every other industry works. It can’t just be the individual users reporting up to the government on their own accord.

And so fast-forward, the infrastructure bill passed about a year and a half ago, and sure enough, the 1099 mandate was passed into law. We’re still awaiting the effective date of that regulation, but the Utopia world in is you can go and use digital assets as you wish, as an everyday retail user and never think about taxes. Because by January 31, just like every other aspect of your financial wellbeing, you’re going to be given a form that tells you what to report and that cost basis and those gains and losses and income calculations are captured on the backend and subsidized by the institutions profiting from the movement of digital assets.

So, that’s what I think, coming. In the meantime, the IRS took this intermediate step, added that question, that is very bold and scary, on the front of form 1040, and they said, all right, individuals kind of go figure it out. But behind the scenes, IRS has been paddling like ducks, really calm on the surface, but underneath really getting ready for broker level reporting and to start to enforce that at the broker level as opposed to the individual level because then it’s very easy to know what individuals should have reported.

Ian:

I look forward to that moment. I hope it’s in time for next year, where we get that balanced out. But I feel like the industry is moving so quickly. Every day I’m learning about a new layer one protocol or fancy tech to bridge from one chain to another. And this is where my uncertainty about, did I file correctly or not? Recently, Circle introduced their multichain bridge tech so I can have USDC on Solana and then instead of transferring it through a bridge, which has some risks associated with, like it’s the most hacked component of the crypto ecosystem by far. They’ve implemented a mechanism across all the places where USDC is supported, that’s kind of a burn and reissue feature that they control and is therefore likely to be more secure.

And in my head when I read about that, I was like, that’s awesome, great user experience, way simplified, seemingly lower security impact, but if this becomes the defined way to move between L-1 chains, are we creating taxable events for everybody? And so just as one example of things that have emerged only in the last few months, I’m curious how you approach both the tech momentum and if you have any specific input on what Circle’s done, I’m curious about that too?

Austin:

Yeah, no, it’s a constant evolution of new technologies that are coming. And I guess, I’ll speak from the regulator’s viewpoint, take the technology aside and they’re really looking at, was there a increase or decrease in value? And that’s just it. It’s that simple. And if there’s an increase or decrease in value, every asset of our lives typically is reported as a taxable event. And so when we’re dealing with stablecoin, which I’m very bullish on, I am looking forward to, hey, there is no increase or decrease of value. Going back to my prior statement of cryptocurrency is not currency. Well, can it be for stablecoins? And I think that there is regulator appetite there, at least with the regulators with whom we work with.

So as long as those stablecoins truly are stable, unfortunately the industry has not done ourself any favors with some of the stablecoin collapses that have proved that well, maybe these aren’t truly pegged, in some instances. So there’s a whole other process that we’ve got to get through to vet which coins are legitimate and stable versus not. But I think that’s where hypothesizing, predicting forward here, where the industry’s going to be going is there’s going to be a bifurcation of, hey, these are CBDCs, truly stable currency vehicles that can be used just like currency is today. And these are the other asset class, called digital assets that have an increase or decrease or fluctuation in value that need to be reported. And then again, those reporting obligations are constantly going to be looked at, scrutinized and fall on the brokers or the ones facilitating the movement.

Ian:

It seems awfully scary to me, but you seem to have a handle on it, which makes me feel better. If smart people are thinking about this, I can remain a total novice when it comes to tax and accounting. Ann, I’m curious, one of the things that I’ve been hearing a lot of people get very excited about since the most recent Ethereum upgrades is ETH staking, which seems like it will be a precursor to more people carrying ETH on the balance sheet. And I think there’s the simpler way, maybe more complex technically, simpler logistically to stake, which is run your own node, load it up with 32 ETH and you’re kind of off and running. But there’s all these liquid staking protocols. How does that play in from a data collection and analysis perspective? And is that a thing you’re even seeing demand for on the accounting side yet, or is that so far out on the bleeding edge that’s not really a feature yet?

Ann:

Yeah, so I think the answer there is we’re definitely seeing demand across the board for all sorts of different protocols and use cases. And our engineering team stays very, very busy supporting everything we can for our clients. So that’s the quick answer. I think with ETH staking specifically, it’ll be interesting to see what comes from that from a regulatory perspective and we’re sort of waiting to see what that call is.

Ian:

Yeah, there’s a lot of people I think, are seeing a huge amount of profit potential there. That may go away entirely depending on how some of the SEC regs play out, right?

Ann:

Yeah. And then there’s a question too, of am I “staking” on a Coinbase or a Kraken, or am I running the node myself and what does that actually mean for the asset?

Ian:

Yep. We did a podcast last year with the team from Alluvial Finance who are building kind of this thing called the Liquid Collective, which is an open liquid staking protocol. And that just adds, I think, another layer of complexity on top of this. So it’s a protocol issuing you a secondary token, which then trades widely and is itself an investible asset, which then could be also earning some interest, depending on what you decide to do with it. And the complexity just becomes wrapped three times over, I guess.

Austin, I’m curious, we started the conversation, you brought up this topic of cryptocurrency as property rather than something else. And I think this is one of the most hotly debated things going right now in the US market of, what is crypto? And most of those conversations are is it a commodity or is it a security? In certain countries around the world though, the decisions already been made. We had the CEO from the largest domestic exchange in Malaysia on the podcast recently, and he was explaining in their country it’s all securities. And in fact they make exchanges who want to list them, do a new listing filing in much the same way, if you wanted to take a company public. Which I thought was a fascinating approach that had some benefits, but maybe make the case for this designation as property and what that kind of then means for anybody who’s interested in using your software.

Austin:

Unfortunately, none of this stuff is called intuitive. And so there’s actually different regulatory bodies that have their own definitions of what this is. And so in the US yes, right now the hot topic is security commodity. That’s the SEC branch of logic flow of what it is. The IRS then has their own definition, where it’s property. And if you think about property though, securities and commodities are classes of property. So it doesn’t matter as much, although there is some little tiny nuances down underneath on how you calculate things.

But so really in the US, the tax rules are clear, the designation that this is property and then NFTs are now deemed collectibles. Or at least there’s now a logic tree to go down to see if it meets that definition of a collectible, which is another form of property. And so property’s this overarching layer that encompasses a lot of different assets, but the concept of property goes back to what I was saying, is there an increase or decrease or fluctuation in value, and at which point is that taxed? That increase or decrease or realized, as how the IRS refers to it.

And so yes, other countries as well, the majority of them have a similar concept of a fluctuation in value being a reportable taxable event. Most countries call that property, others call it something else. But I do want to delineate that that’s different from the SEC and registration and money transmitter and all of these other requirements that fall out based on the regulatory clarity that we’re all seeking from the SEC as to security versus commodity designation.

Ian:

Okay. So you’ve taught me something here that both securities and commodities are considered property by the IRS. I probably should have known that before filing my taxes. But then what is the alternative? If it wasn’t considered property, what would it be?

Austin:

From the IRS’s lens?

Ian:

From the IRS perspective.

Austin:

Property can be a lot of things. Like again, your house is property from the IRS. Anything that fluctuates in value. And so from the IRS there’s a few alternatives. There’s one currency and currency, unless you are an FX trader that has high volume thresholds and other things, you were not taxed. If I go to London and exchange British pounds for US dollar and then go and exchange it back, that difference is minuscule. And I’m not an FX trader, so it’s currency, so it’s just ignored. So currency is one designation, and then there’s a lot of other asset classes out there that fall into different sections of your tax return that you go through.

Ian:

I could imagine making a case, and admittedly as we’re finding out on this podcast, not my area of expertise, but I could imagine making a case though, for why it would be advantageous for it to be treated as currency rather than property. That could be fairly significant in terms of tax benefit at the individual level.

Austin:

Usually. And the requirement of tracking all of this kind of goes away. You’re not tracking your Fiat use on an everyday-

Ian:

Not at all.

Austin:

For tax. Obviously for personal budgeting and finance. Absolutely. But when you go to the grocery store and spend something, it’s like, oh, no, there’s no taxable event because my dollar increased or decreased in value. Whereas, Bitcoin there is. You go and spend something at the grocery store, well, now you’ve got a cost basis associated with that, and then the value of what you just purchased fluctuated from that basis and you need to report it. And so yeah, there’s a big consequence of using property as currency in this new digital asset world.

Ian:

Does it then leave open the potential that something like Bitcoin and Ethereum are property, but a stablecoin is currency, is that a path that you could imagine the industry heading down?

Austin:

That’s exactly what I was alluding to earlier, was two designations here. A stablecoin can be a currency vehicle, and then digital assets are everything else that fluctuates in value. And I hope that’s where the industry goes because stablecoins have so much value and it solves the use cases that I talked about at the beginning of the show as to why TaxBit was founded. Transparency, immutable ledgers, speed, efficiency, elimination of the middleman. And so yeah, we’ll see where that goes, Ian, for sure. But I know regulators and us, across the industry, have been talking about that for a while now.

Ian:

Well, and it seems like then the thing we’re hearing about in the world of NFTs right now, recently had the head of strategy from OpenSea on the podcast. And what they were describing is they’re anticipating the next two years is all about bringing utility to NFTs. So an evolution or maturation from personal profile pictures, suddenly your NFT comes with a real world object, like a pair of sneakers that is linked, and it’s almost like your NFTs a claim ticket, or your NFT gets you into a special social club. Like your Soho Club membership in New York is suddenly tied to an NFT that’s tradable. What does that do in terms of this property versus currency designation? That sounds like it probably falls on the property side?

Austin:

And I love those use cases too, because think about memorabilia. How do you know authenticity of maybe Nike publishes one of 100 new LeBron shoes. And you can attach an NFT to that to show, no, these are the legitimate one of whatever that were printed. And so I think there’s so many use cases there that we’ll see. And it’s an interesting question to where right now, collectibles are a part of the property umbrella and NFTs kind of go through this matrix flow to determine if it’s a collectible or not. And if it’s backed by a real life object, typically, yeah, I bought a shoe, I go and resell that shoe. Technically, that’s a disposition of property that you should report, but I think that that’s one of those things, where the same way that babysitters don’t report cash income as income, that probably there’s not a lot of self-reporting going on, on those real world items. So it’ll be, I think, fascinating to see how that plays out, the convergence of this technology with real life goods and applications. And that gets interesting, for sure.

Ian:

Yeah, there’s a company out there called Dibs, and their whole business is basically to warehouse and protect fancy sneakers, a piece of art that people are collecting with no intent to ever use or wear, but for value appreciation. But they want it to be liquid enough to trade, but they don’t want to suffer the risk of putting it through the postal service and the box gets destroyed or someone steals it, or any of these things. And so Dibs has come up with this model where they handle all the storage and security, air-conditioned, perfect warehouse in a guarded vault. And then they issue you an NFT. And if you ever do want to redeem it, you kind of burn the NFT and then they deliver the item back to you, which seems like an interesting model.

Related to this, real world assets have been a thing that I’ve been hearing everyone talk about. So tokenization of maybe real estate or certainly, government bonds. I know there’s a couple projects going on right now. Is that on your radar at TaxBit? What’s going on when you hear these real world asset tokenization projects?

Austin:

Yeah, Ann, do you want to jump in and start on that one?

Ann:

Yeah, so I think the quick non-satisfying answer there is that we’re constantly thinking about new use cases all the time and spend a lot of time listening to our clients. So the demand is definitely there, without giving too much away.

Austin:

I’m a big believer in bullish on tokenization. I’ve called it the tokenized economy for several years now. Where I do believe, if you look at how inefficient some of our ways of life are, for example, I own a vehicle and how many of us have gone and searched for that one piece of paper, the title, to have to go and sell that to another person? Many of us put it in the glove box of our car, how safe is that? And you pull it out and you go and you hand it to someone and they sign, and now that vehicle’s theirs, really? That piece of paper represents ownership? It’s like, whoa, that should be tokenized. There’s actual property rights associated to this title. Like property, Land is so many things where these assets can be actually immutably verifiable and transparent.

And so I’m a big believer. I do think we have some time before us, as far as regulators getting clear and allowing this to happen. But I think that’s the promise of digital assets. And digital assets in a sense, have just been this Trojan horse, getting ready for this moment to merge the real use case of tokenization of real world assets and not just speculative vehicles.

Ian:

Ann, going back to you, I’m curious, and maybe this is from when you were first getting Tactic off the ground. What were some of the biggest challenges that when you talked to companies who wanted to hold crypto on their balance sheet and were kind of uncertain with what they needed to do? Maybe talk through some of those challenges and the solutions. And if today that’s evolved a little bit from when you were first getting started at Tactic, what’s improved? What would you recommend to folks who are contemplating this today?

Ann:

Yeah, I think so. Even if you rewind 18 months, two years, a lot of people wanted to do the right thing and follow the rules, but they just didn’t even know where to begin. So resources weren’t there, there weren’t nearly as many crypto savvy finance people. FASB hadn’t made as many recommendations. And so really, we would have people come to us and not say, “Oh, we want this product.” They would say, “We need a product that tells us exactly what to do, please help us.”

So I think one of my favorite early anecdotes was talking to a head of finance at a crypto company and asking, “Hey, how are you planning on doing your taxes?” And we hadn’t actually built the Tactic product yet. And he looked me in the eye and he said, “We filed an extension because then just didn’t even know where to begin.”

Ian:

Now fast-forward to today, are things better today than they were 18 months ago?

Ann:

I think yes, absolutely. And I think a lot of that is a function of the technology that’s being built. So the reality is if you don’t have a piece of software like the TaxBit accounting suite and you have more than a handful of crypto transactions, it’s pretty impossible to actually try to figure out what your books are supposed to look like at the end of the month. So you have prices floating around, different sources that I discussed. I know I gave the example that you said made your head spin, but without doing that in a tech enabled way, just no way to do it.

Ian:

Yeah, it’s a good thing you all are out there. One of the things you launched, I think it was last year, was the TaxBit Network. And I think one of the key features here was cost basis interchange, like cost basis is the nightmare of my personal tax filing experience. And Austin, talk a little bit about what TaxBit Network is and what you all have been able to pull off with that.

Austin:

This goes back to our original thesis that consumers, retail users, you and I, should never have to ultimately, think about our taxes and self prepare them. But right away, immediately have to pay for them on top of that ourself, right? There’s no aspect of our life where it’s like, “Hey, I’m an equity trader. I need to go pay $500 a year for this one asset class that I use.” It’s like, no, Vanguard gives me a form and I just put it into TurboTax or hand it over to my accountant and I’m done. And so the TaxBit Network was step one in that evolution where it’s like, okay, we can go and get a consortium of the industry’s leading exchanges and brokerages and work with them to subsidize and make all tax forms to end users, such as you and I. And so that’s been in effect for the last couple of years.

This last tax season, TaxBit actually, the product is entirely free. No upgrade, no bells and whistles attached, unlimited transactions. And so we have $0 in monetization from retail users at TaxBit, which is something we’re super proud of. And we work entirely at the enterprise institution level. And so as this has evolved, the concept of sharing cost basis from one broker to another, I transfer something from Gemini to Coinbase, for example, has become a hot topic. Where even the IRS and the infrastructure bill said that that is going to be a requirement. That it exists in the equity world today, if I move something from Schwab to Vanguard, Schwab has to tell Vanguard what I moved and what the basis was.

And so the same requirement will hold true in digital assets, and there’s a whole user experience benefit as to why these brokerages want to do that. Coinbase would love to show the cost bases that came from Gemini because now users can actually see gains and losses and tax loss harvest and actually trade more effectively on the Coinbase platform in this example than I’m sharing. And so TaxBit, we said, okay, we have all of the technology, we have all of this data. We can connect this ecosystem and the cost basis puzzle together by working with the network that we have to be able to do so ahead of the requirements for customer experience reasons. But ultimately here down the road, to fulfill these requirements and make the appropriate filings with the IRS and other bodies, as even OECD and European countries are going to be following this similar type model as well.

Ian:

That that cost base is interchanged to me feels like a huge deal to have worked out. And it’s a little bit awesome. I mean, people talk a lot about the travel rule, this anti-money laundering tactic, which is kind of sharing similar information. It’s like funds show up at an exchange and you have some idea where they came from, assuming that it was another regulated entity that sent them. And same thing, when you send funds on, you need to know where they’re going. It sounds like you’re solving a more complex problem, and you’ve actually got it in production now, which is further along than a lot of the travel rule implementations that I’ve been exposed to globally. So bravo with that.

Austin:

Yeah, no, and absolutely it’s called a super set of the travel rule requirements. Travel rule’s typically $10,000 and up. Well, cost basis is there is no de minimus threshold right now. If you have a 25 cent gainer loss, that cost basis has to be reported and transferred. And so yeah, there’s a lot of data and a lot of network that needs to be connected in order to make that possible. So something that, yeah, it’s been in the works for years and it’s only going to continue to evolve. So people like you, Ian, you said at the beginning of the show, “How can I just not worry about my taxes”? Well, all of that interchange of information will happen in the background, even without you knowing. So that way at the end of the year, you’re given a form that’s complete

Ian:

And it’s free. So it’s a no brainer

Austin:

And it’s free. That’s how it should be.

Ian:

For everybody out there.

Austin:

That’s how it should be.

Ian:

I love it. All right. Last question before we wrap. And Ann, this one is probably for you. When we look to the future, what’s the most exciting stuff coming on the TaxBit roadmap? What are you really excited coming over the next couple months?

Ann:

Oh boy. And I only can say one thing?

Ian:

You can say as many as you like. Let’s break some news here. The whole roadmap, let’s unfurl it.

Ann:

Oh man. We have quite a few things in flight right now. I think, providing support for more chains all the time is really important. I think especially as we see various ecosystems flourish. More nuanced support for NFTs, we’re just talking about the various use cases there. More integrations. Data is king, so integrating with anything and everything. And then as you know, new regulatory guidelines roll out. Being there, hand in hand with the regulators and helping our clients make sure they’re drawing inside the lines.

Ian:

Amazing. I’m excited about all three of those things, Austin, Ann, this has been a ton of fun. I learned a lot. I’m still very far from expertise in either of these domains or tax or accounting, but I feel a little bit less dumb as we end the episode. Thank you.

Austin:

No, I appreciate it. Ian.

Ann:

Thank you so much. It was great meeting you.

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