The Adoption of Cryptocurrency In The World Of Taxation With Seth Wilks And Jared Zemp
Cryptocurrency has long been making its mark in many economies but there are still many issues fogging its existence. Today, Tracy Hazzard interviews the CFO and Executive Vice President of Revenue and Investor Relations of ProfitStance, Seth Wilks and Jared Zemp. They talk about what ProfitStance is all about and how it contributes to cryptocurrency tax accounting. Seth and Jared share their thoughts on complying with the IRS especially among business owners using it, and give their predictions on the future of taxes and crypto. Unleash your inner geek with these guys as they teach more about how their system will promote the adoption of crypto assets of blockchain tech.
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The Adoption of Cryptocurrency In The World Of Taxation With Seth Wilks And Jared Zemp
I have a cool and interesting company to some people. It might be a little geeky for others. It might be a little too in the financial tech whiz because we’re going to talk about tax accounting. It sounds fun and I love the two guys that I’m talking to, Jared Zemp and Seth Wilks. Both of them have such passion for what they’re doing and they’re bridging a great gap in the FinTech area for blockchain and cryptocurrency. I’m super excited to bring them to you. Let me tell you a little bit about Jared Zemp. He is a serial FinTech/EdTech entrepreneur. He’s a seasoned executive and a veteran educator. He serves as Executive Vice President of Revenue and Investor Relations for ProfitStance, a cryptocurrency tax and accounting platform for tax professionals and individuals. We’re going to talk a lot about ProfitStance, but they’re filling a very cool gap in the accounting resolution area. He holds a degree in business from Brigham Young University and he is a member of the faculty at LDS Business Colleges. He has six kids and a Pug and most of his free time are spent cleaning something icky off of his shoes. I met him in Utah and we had a lot of fun together.
This is the first time I’m getting to meet Seth Wilks. He is a licensed CPA in Arizona. He has worked both in the private and public accounting over the past fifteen years. He has extensive experience in domestic state in local and international taxation. He’s helped companies expand their international operations around the world. Over the past years, he’s dedicated his time to researching taxation of virtual currencies. I’m glad somebody is doing this because when you all go to file your tax returns next year, you’re all going to be thanking him. He is the CFO and Cofounder of ProfitStance, the leading cryptocurrency tax and accounting platform for professional advisors and crypto investors. I’m excited to bring you both Jared and Seth.
Jared and Seth, thank you so much for being here. I know it sounds weird to say, but I’m excited to talk tax accounting. What I find fascinating about it is that there’s so much controversy around it. It is like, “Should we be doing this? Is it this? Is it that?” There’s this whole controversy around crypto assets, in general, cryptocurrency and taxation. Tell me a little bit about how you got started in this and what triggered you to start ProfitStance?
First off, it should be noted that we aren’t the ones who started it. Our Founder, Corey, originally got into crypto back in 2010. He gave his friend $100 and he got 900 Bitcoin and then probably printed out his private key and ran it through the laundry and lost all that 900 Bitcoins. At the time, it was like, “It’s no big deal. It’s $100.” With forks and everything, it would have been worth $700,000 to $20 million at this point. I think that first experience whet his appetite for the industry. He started a mining operation with some investors. When it came time for him to give reports to his investors, he realized there was no good way to do reporting. Then, when it came time to pay taxes, he tried to figure out the taxes for the partnership, he realized, there’s no good way to do taxes so we put out feelers into the Twittersphere. It turns out, nobody else had a good way either, so he set out to make it.
When I found that this holds a lot of business owners back from having the cryptocurrency as a part of my payment processing from my clients. It holds us back because we start thinking about the tax implications. Does this complicate my business more? Is it even worth it, then at that point? Building something that makes that streamlined and easy makes me not have to think about that and makes it more likely that I will adopt that in the future.
That’s a good point, especially for businesses using crypto. One of the major issues that we see right now is the lack of awareness and lack of compliance. As long as people aren’t compliant, aren’t aware, then they keep spending their crypto, no big deal. As awareness is increasing and compliance is increasing, people are realizing, “Every time I buy a cup of coffee, that’s a taxable event. I’m going to have to account for it at the end of the year.” Imagine, you have all these small transactions that add up and make taxes a nightmare at the end of the year. We’re afraid that that’s going to result in much lower liquidity and add a real barrier to people using crypto on a daily basis. One of the real advantages of having a solid, clickable button tax solution is that they can use their crypto without having to worry about the taxes at the end of the year.As long as people aren't compliant and aware, then they keep spending their crypto. Click To Tweet
That applies to business sites. If you’re selling a cup of coffee and you accept Bitcoin as payment, you’ve got accounting for thousands and thousands of these microtransactions and you have to track all of that cost basis. That, by itself, is a nightmare for business owners to even consider in, which has been a huge hurdle for people to adopt and accept it.
It has been for me because when I set out to start this show with Monika, we were talking about it. I was like, “Why don’t I be the first podcast platform to accept Bitcoin?” We said, “This will be easy.” The more I investigated it, the more it was impossible because of many reasons. Taxation is just one of the many. Thinking about the timing of my transactional processing and all of that was not there either, which is starting to come up and be better right now too. You have built a system that’s pretty simple. Can you explain a little bit about how ProfitStance works?
It’s simple. As an investor, you would come into our system, set up an account and you will then be able to link to most of your major exchanges and wallets through direct APIs so that you can pull all of your transactional details into one place. You can see all of your activity in one place and it’s very easy. From there, in the backend, we compute all of the gains and losses, apply the proper accounting methods and fill out the forms for you. The hardest thing for you to do is connect your exchanges and wallets and pull those things into your account.
That’s the complicated side on that end, but that still seems fairly simple in your process.
We had some conversations where we built the tool and we tried it out. We decided it looks too easy. We need graphs and we need more buttons so people understand that they’re paying for something of value. They put it in and it’s so simple. They hit a button and we give them a PDF with their tax form for two and a half minutes. We’re like, “No. It’s got to look harder.”
Thinking about the manual side of that, it is incredibly difficult. I used to have to track all of this on the product side of things. It’s what we call royalties. In tracking royalties, we would have to track all kinds of shipments and all kinds of levels in the royalties would shift over time. I can tell you that it was absolute auditing nightmares for me to even tell if I was paid properly. Let alone, if I was accounting it properly on the taxation side. That was real money. It was my salary essentially at the end of the day so I had to account for it. I think that’s there’s a lot of noncompliance going on because they don’t think of it and they think no one’s going to know and it’s not going to happen. When we get into the business side of it, we have to account for it because it is part of our revenue.
I’ve been a CPA for several years. Part of our process of testing our system is I have to go through and manually calculate some of these things so I’m literally pulling in. We’re not talking about thousands of transactions. We’re talking about 50 to 100 transactions across two achievers. It is not a complicated scenario, but it still takes me anywhere from 20 to 40 hours to go through and manually calculate that. If you think that I’m going to bill $200 an hour to find out that you have $1,000 or $2,000 capital gain, it doesn’t make any sense. There’s no way you could go to your professional tax advisor and expect them to put in that time because nobody can afford it. It’s not worth it for anyone.
I can completely see that.
We talked to our accountants and they say, “It doesn’t make sense for me to do it.” I pushed it back on them. I tell them, “You get all this worked out. You tell me the final number and I’ll put it in.” If it’s that tough for Seth, who has been doing it for years. He has a degree in this and has a career in tax, it’s not realistic to expect your average consumer to go home and calculate their own taxes and come back with one final number. It’s ridiculous and that’s where we play.
There are a lot of infrastructure issues going on in the crypto space. It’s a lack of infrastructure. It’s a lack of connection. It’s a lack of understanding. I went to try to take Bitcoin and couldn’t integrate it in with my system of how the speed of transactions. My website would time out. There are all of these little missing pieces all over the place. What are you seeing in terms of that in infrastructure problems with the taxation side of everything?
The easiest thing to think about is thinking about security. When you buy and sell stocks, you’re going through your brokerage account. At the end of the year, you get a report. It’s easy. It summarizes all of your gains and losses and then you can take that. You plug it directly to the turbo tax or give it to your CPA. You don’t really have to think about it. The other thing to think about is that if you decide that you want to transfer one of your stocks from one brokerage account to another brokerage account, there are rules in place that require them to send all of the historic information. What did you buy it for originally? When did you buy it? That gets sent automatically. None of that type of infrastructure or reporting exists within the crypto space.
It’s all on you to do it. That seems crazy.
If you have an advanced degree in Finance and have a week that you can dedicate to figuring it out, that’s awesome.
I joke on the show that I’ve done on another episode on tax. I am a tax geek, which is funny because I have an Art degree. Monika and I have Art Design degrees and yet, I care about the numbers. I’ve fired four tax attorneys and our tax accountants in four years. I’m tough on people. I’m sure you don’t want me as your client, but the reason is because they aren’t keeping up with this.
That’s a big part of the way we approach the market because we have two ways when we go to market. We have a tool that’s built for professionals. These are professional tax preparers who have clients with crypto. We have an individual tool so somebody can come directly to us and work with us. What’s happening is that there’s a huge lack of education. You fired four tax accountants over the last several years. What we’re seeing and we’re out there talking to CPAs is that these people don’t even know that there’s a problem. We’re trying to tell them that we have a solution to a problem they don’t even know exists. While a lot of what we’re doing is webinar, we are trying to educate as many people as possible that, “This is the thing. You need to be prepared because when you have a client that comes, you need to be able to speak their language and understand.”
That is a huge issue. Language is a big issue that I find and that’s why I fired many because of that language over royalty. They didn’t understand it. One of them caught me in a situation where I ended up paying taxes twice on the same money because it was deferred royalty. I was pissed. You get into this situation of not understanding the new language, but not understanding what’s missing. We were talking before about gross proceeds and cost basis and the requirements that this isn’t being tracked.
It’s very simple. If you think of that you buy Bitcoin for $100 on Coinbase, you hold it for six months and now it’s worth $150. You decided that you want to transfer it to your Kraken account. You send it over. Let’s say at the end of the year, Coinbase reports your gross proceeds and cost basis, but what do they report? Is it that you had a $150 of gross proceeds because when that Bitcoin left, that’s the fair value? Coinbase has no idea that you sent it to Kraken, to your own exchange. That’s not a taxable transaction, but Coinbase doesn’t know it. On the other side, Kraken only knows the fair value when they received it. That’s one tiny transaction. You multiply that thousands of times across multiple years and the whole thing blows up. There’s no infrastructure in place to support that kind of report. It all goes back to the individual.A lot of people are interested in the crypto market but are hesitant because they are worried about adequate reporting and other fears. Click To Tweet
Does the IRS even get it?
It is not a great example, but they’re getting it. We’ve been working with the IRS for the last year and a half. Every time there’s a new issue, the IRS wants to stay on base. They created what they call a compliance campaign. There’s a cryptocurrency compliance campaign and their job is to analyze all things related to crypto, best guidance and the best way to audit it. Everything you can imagine the IRS does, that’s the team that’s supposed to figure it out. We’ve been meeting with this team to talk to them about what we’re doing, the information we’re hearing from the industry and from clients. They’re sharing with us what they’re doing and they are getting it. The problem is they still don’t see a solution that can address the problem. They can go out and force regulations, but the exchanges are coming back and saying, “We don’t have the technology built-in to do what you want us to do.”
That’s a huge problem.
We have a client who received a letter from us a few months ago that said, “You owe us $150,000.” Long story short, he came to us and said, “What do I do?” We said, “Let’s take a look.” It turns out when we run it through our software, he only owes $7,500. By properly correlating his transactions between accounts, it reduced this tax bill by $142,500 and that’s a pretty big issue. Scott turns around and says, “I filed based on my reports that I got from the exchanges. It’s the exchange’s fault. They gave me bad information.” The exchanges then say, “We know it’s bad information, but this is what IRS makes us do.” It’s the IRS at fault. We went straight to the IRS and said, “What’s going on? Why is it this way?”
The long and short of it is that, if we’re going to be able to compare notes, exchanges between accounts, not just between Coinbase and Kraken, but between your exchanges in your wallets, all that stuff is difficult to coordinate and to correlate. That’s where there needs to be a disinterested third party that can work with all the stakeholders, pull that information and correlate it. That’s what we’re proposing to the IRS. We can come in and we can help with that correlation and be that middle layer, that enabling horizontal layer across the different technologies and across the different exchanges and wallets so that they can correlate the transactions. That makes all the difference in the world. For Scott, it made a $142,500 difference. He’s very interested.
I would be very excited if I was that client of yours, being able to prove that very quickly. You mentioned before that you’ve been in DC a lot. You’ve been talking with what’s going on in terms of virtual currency regulations and other things. What are you seeing that you think is going to be coming forward?
The thing that I think is on the horizon is going to be the information recording. I won’t worry you with details of numbers and things like that, but essentially the Secretary of the Treasury already is about to designate cryptocurrencies as what they call specified security. Once they designate that, then they fall into the same gross proceeds and cost basis reporting that securities fall into. As soon as that happens, the exchangers and wallets and anybody who’s designated as an exchange will have to start reporting, but truly the technology doesn’t exist. They’re not being insincere when they say that.
I’m aware of a meeting with the Blockchain Association and the Treasury that took place. It was their first meeting together and they were getting to know each other. What they walked away saying is, “We want to provide information reporting, but we don’t have the technology and we can’t do it.” What we were talking with the IRS and the Treasury Department in Capitol Hill about is, “We think that there can be a solution. We think that there’s an infrastructure that can be built underneath all of these transactions to track that metadata, to create that reporting so that as an individual, you don’t have to compile thousands of lines of a spreadsheet and figure out what your gains and losses are. You should just get a form like you do a 1099-V and plug it in your tax return and go on your way.”
That sounds ideal. Jared, you’ve been a serial FinTech entrepreneur for quite some time. Are you seeing that there’s a lot more adoption going on of crypto assets, of blockchain technology? Are you seeing that like a tipping point in what’s going on in the business?
The tipping point that I kept my thumb on is the fractional ownership of larger assets. My career has been in private equity dealing with microcap companies. We found out that in the JOBS Act, creating the Reg CF fundraising and the Reg A+ fundraising and then the advent of all this blockchain and cryptocurrencies. These things are all coming together in playing a major role in helping your average Joe to be able to own a piece of mainstream America. It’s taking what only happened on the New York stock exchange, on large stock exchange for hundreds of thousands or for millions of dollars in filing fees and it’s bringing it down to your average investor and saying, “You can start a company and you create your own point. You can create your own stock. You can do a Reg A+ filing and you’ve essentially gone public for $50,000 that has $200,000 to $2 million in filing fees.”
We’re seeing a democratization of ownership. You can imagine that’s creating all sorts of questions around regulatory and your regulators are sitting back and saying, “We don’t want to step in. We want the industry to regulate itself as much as possible.” It’s not just that they’re government employees, but they are hoping that industry will regulate themselves to some degree. That’s what we’re talking about here is helping exchanges report better to their clients and helping clients report better to the IRS so that they don’t have to come down with a big stick.
It makes it streamlined and simple. This is a big problem over on another side of a business that I’ve worked on is the complexities of sales tax calculations for Amazon sellers, for instance. It’s an absolute nightmare at this low level of it so they don’t comply. We’ve been seeing all these rulings going on in all the different states. I’m sure you’ve been dealing with that on the accounting side. You see all of that happening because there is no choice but start regulating. The problem is the system is too complicated. How am I supposed to register with every single one of those states? Am I supposed to say, “I’m sorry, but I refused to take Alabama as a state because I can’t figure out how to get into their registry?” You can’t do that in the system. That’s where we see noncompliance happening. Having something that I call businesses that are bridges. You’re bridging where things are and where you would like them to be, you’re more likely to hit a compliance level than you are by regulating that.
The truth of the matter is, there are a lot of people still on the sideline, both from a business standpoint and from an investor standpoint, who are interested in getting into this market, but they don’t see the infrastructure in place yet. They don’t know that they’re going to be able to get adequate reporting. They’re worried about getting hacked. There are all kinds of fears.
They’re in that wait and see mode.
The regulatory part is a big part. A lot of people view regulation as a bad thing. Smart regulation, in this instance, will grow the virtual currency and blockchain markets. It’s one of those things that has to happen before we get mass adoption. I think that the system that we’re talking about could enable that type of adoption and we’re incredibly excited about it.
I can hear that and I can see that you are excited about it. You’ve got me excited about it too. I want to make sure that our audience out there can understand that you can use this now. They can try it. This is not in beta. You have it available for them to utilize.
It is available. The full production launch is on January 1st. We’ve gone through beta and it’s in the hands of our product advisory board. Our nationwide PR campaign hits the first week in January and we do a full rollout at that point.
It is a perfect time for 2020 taxes.Trust is the biggest factor in the velocity of an economy. Click To Tweet
We’ve been in conversations with the other foreign governments. We’ve been in conversations with several of the big four tax accounting firms and a number of regional firms. This is an industry-wide problem that hasn’t found a solution yet. Every time we open that door, we find that it’s not difficult to get the meetings because everyone’s looking for the solution. Many have tried to build their own solutions or have cobbled together a Frankenstein approach with different tools available online. There isn’t a good smooth in the door and help with the IRS solution yet. We’re excited. We’ve been working closely with consumers and with accountants to make sure that what we’re turning out here is a real top to bottom approach to how to get this done the right way.
Is there anything else that you would like us to know about ProfitStance or what you’re doing in the marketplace or what’s going on in Washington?
It’s interesting because a lot of what’s going on in Washington, we were there and we’ve met with several members of Capitol Hill Congress. We met with the IRS and Treasury. From the Capitol Hill standpoint, especially if you’re talking to the Democrats, they’re concerned about consumer protection, anti-money laundering and fraud. These kinds of things that protect the individual. Whereas, on the Republican side, it seems like they’re interested in encouraging industry to find a solution rather than overbearing regulation, which fits into the technical and what you would expect. I think in this case, they’re both right.
They are both aligned with finding a solution.
I know miracles to miracles.
Who would’ve thought that crypto is going to align the aisles?
Innovation is another big one. That’s still an issue because there’s a lot of regulation here in the US and it doesn’t apply globally. There’s innovation happening on exchanges with coins outside the US that we don’t have access to here. That’s a concern for policymakers too. The number one thing that they all asked for was more education, “Can you teach us more? Can we reach out with questions? Can you talk to my legislative advisors, my legislative director? Educate me on this because I feel like it’s changing every single day and I can’t keep up.”
That’s true. The people we were talking to, many of them are on the Blockchain Caucus. These are players who understand the space pretty well. The question they ask us is, “How do we educate our other colleagues?” Democrats wanted to educate other Democrats because they want to get them on board. The Republicans are the same thing. The people in the Blockchain Caucus are good. They get it, but they are still having a hard time educating everybody else. They’re asking the industry, “How do we do this?” We’re developing crypto in a 24 minutes course for policymakers so that they can get a better idea of what blockchain is, what virtual currencies are and understand that not everything is silk road. There are a lot of wonderful technologies out there that are based on this. This is where the future is going.
I want to stop apologizing and saying, “I’m building something on the blockchain but it’s not crypto.” I want to stop apologizing for that and say, “It is fractional. I expect that it’s going to be security but it’s not crypto.” You want to have that explanation going on there so that someday, we are educated enough to understand that there are differences in what’s going on in the marketplace.
That’s a great example. It shows that even though Bitcoin has been around for over a decade now, it truly is still new in the sense of people aren’t hearing about it. That education part is important. We can’t stress that enough and in our marketing efforts and help people understand the general market.
I’m curious to see in the future. It’s no secret to my readers out there that I am curious about this because I want to build a part of my podcast production house, my network that I have here. I want to build it on a blockchain because I want to allow fractional ownership. What’s holding me back are many complex things and many structures that I would have to build in. It’s not software and building in the blockchain itself, it’s how do I account for this at the end of the day? Do I have to issue K-1 to everybody? How do I do that in an automated and simple way?
It’s not without this tremendous burden to an organization. To try to do something cool sounds great, but logistically, if you can’t accomplish it, then what good does it do to anyone? I make their lives a nightmare by having an issue with this thing that they don’t know what to do with. It’s not helping anyone in the process, as cool as it sounds. That’s what holds us back from application and adopting what would be an amazing change and shift in an industry or innovation as you put it. It holds a bat.
You’re mirroring exactly what’s happening on the government side because the SEC wants to treat it one way. The IRS wants to treat it one way. The CFTC wants to treat it in a different way. Nobody is on the same page yet. As a business owner, how are you going to know? How can I issue a claim? I do want it to have ownership in my network. How do I comply with that? What kind of disclosures do I need to go through? There’s got to be a clear set of rules. Jared alluded to this, it can’t be some process that costs hundreds of thousands of dollars or millions of dollars like an IPO would cost you. It’s got to be something that allows the small business owner to be able to catapult into business and allow that kind of ownership. Jared had said it before too, the fractional ownership. That’s such a huge thing.
It’s great. I think there’s a tremendous value. Honestly, there were two parts of a blockchain that excited me. It was Steve Wozniak that excited me the first time about it. That was the idea of creating value being maintained through a smart contract. I got a lot of my value and my business came from royalties, but the collections were a nightmare. We are creating a smart contract and related value. That would have made it easy for me to do a lot more business and help a lot more companies if that could have been maintained for me. Instead, I was like, “I’m done with this. I’m going to move to a different marketplace.” That’s a shame as well. You look at that from one side, but the other side of it is that I have creators on my platform and I want to reward them because I want to operate my business differently. I want to operate it with creative and innovation value. Yet, I can’t do it because the system is too complex and the reporting is not there.
All of my podcasters at the end of the day would be like, “Please help me out because I don’t want to deal with this on my tax side.” That would be terrible if that was the net result. This is where a lot of us are waiting and see and we’re sitting in this position. Bridge builders like you at ProfitStance, what you’re doing there and building that bridge between where things are now and where things want to be in the future, that’s an essential part of the growth of any innovative, disruptive industry.
Tracy, I heard an interesting podcast. I’ve listened too many, I can’t remember which it was, but they basically alluded to the idea that smart contracts thrive in environments where trust is difficult. They said, “The irony is that this has come full circle. One of the areas where trust is difficult is in drug deals and illicit arms trade. Instead of everyone showing up with guns and bombs and doing this big exchange that you always see in movies, in the future, we’ll be done through smart contracts.” I’m not trying to encourage underground here, but when you’re running a show called the New Trust Economy, I think that’s exactly what we’re talking about. Wherever trust has difficulty, that’s where smart contracts thrive. What’s interesting to me is that trust is the biggest factor in the velocity of an economy. If you can break down trust barriers, then transactions happen much faster and it has a real multiplier effect on the entire economy at large. It’s not just the speed of a transaction, but breaking down trust barriers so that you can engage in a relationship and in a contract. I agree with you 100% that trust economy is everything.
As I was sitting here thinking as you can’t get a less magnification of distrust going on between the IRS and businesses and individuals. They desperately need something that has trust taken right out of the equation. We just say, “This is what it is. We’ve got to trust that system. We’ve got to trust that process. We’ve got to trust the forms that are coming out because there’s no reason for us all to go into these details.” I thank you both for coming on. I appreciate it. All of our readers, make sure that you can connect to ProfitStance everywhere in social media as well as on their website and where they are. I look forward to bringing you a new episode where we explore the trust and we explore whether or not there should be trust. Explore new, amazing blockchain and bridging technologies like ProfitStance. Thank you all. I’ll be back next time with another New Trust Economy.
About Jared Zemp
Jared Zemp is a serial FinTech/EdTech entrepreneur, seasoned executive, and veteran educator. He currently serves at the Executive Vice President of Revenue and Investor Relations for ProfitStance, a cryptocurrency tax accounting platform for tax professionals.
He holds a degree in business from Brigham Young University and is a member of the faculty at LDS Business College. With six kids and a pug, most of his free time is spent cleaning something sticky off his shoes.
About Seth Wilks
Seth Wilks is a licensed CPA in Arizona and has worked both in private and public accounting over the past 15 years. He has extensive experience in domestic, state and local, and international taxation. He has helped companies expand their international operations around the world and over the past two years has dedicated his time to researching taxation of virtual currencies.
He is the CFO and Co-Founder of ProfitStance, Inc., the leading cryptocurrency tax and accounting platform for professional advisors and crypto investors.