What To Look For When You Invest With Dan Hannum

NTE 73 | Investing Checklist

 

Investing is more than just saving for rainy days. It’s also one way to help you get ahead financially and achieve your long term goals. Joining Monika Proffitt on today’s show is Dan Hannum, the CEO at Hannum Capital Management and COO at ZenLedger. Dan goes through the list of what to look for when you invest, including having a great team and a great product that you would need or use. They also talk about scaling, DeFi, and non-fungible tokens (NFTs), showing people how to get involved, how they can use things, and how they can do it compliantly.

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What To Look For When You Invest With Dan Hannum

I’m here with Dan Hannum, the COO of ZenLedger. Also, it sounds like you were one of the early investors in ZenLedger. Is that right?

Monika, thanks for having me on. It’s a pleasure to be on. Yes, we originally invested in ZenLedger back in 2017 so it’s one of our first investments through our first fund.

How did you decide that they were such a good investment for you guys?

We highlighted a little bit of what we look for in investments in our last episode which would be nice for the audience if they want to explore deeper into what we look for when we invest. They met a lot of our thresholds on our checklist of having a great team, a great product that we would need or we would use, which is always a nice telltale sign if you have an early cohort of people that need something and see the value. That was some of the main things. Is this something that people will use or will people need this? The nice part about our business is if you’re a US-based investor, you need to file your crypto tax report.

That’s one thing I was taught as a kid. The two things that are certain, death and taxes. That and toilet paper. You could also have similar stability in toilet paper.

The goal of DeFi is to cut out the middleman and rent secrets in the process. Click To Tweet

We’ll see if we can branch out a little bit. It made a ton of sense. It was something that I was facing. I had Excel Docs, Google Spreadsheets and handwritten notes. It was such a duh-type moment. Crypto tax will continue to evolve. We’ll need software that can handle this and spit out your tax forms easily. The team and the valuation were great.

It sounds like you got on board. After investing, you started getting involved and getting your hands dirty in this.

ZenLedger was raising a seed round. Pat, the CEO of the company, was looking and speaking with the round of investors like, “Do you know anyone who would be interested?” Through that process, it became clear that I could add a lot of value and bring in not only additional fundraising but then it also became evident that the company would need a COO position to help once the capital came in. We needed to grow and scale in dev team, marketing team, sales team, etc.

It’s how you scale a business in the early days. You’ve got to be like, “We have three people. Soon, let’s be six.” Now, you’re twelve.

It grows fast but there’s a time where the CEO has to relinquish the title of doing everything and bring in people that can focus on aspects of the business so that he or she can then focus on other aspects of the business that are more important. Structure, organization and operations are something that needs to happen but it’s not the most glamorous or sexy item. Sometimes, it’s better to have the CEO focus on fundraising, where we’re going with the product and have somebody who can handle the day to day in addition to the macro of where the company is going. It’s been exciting to jump on board. The thing that I love is putting that structure and organization in place and seeing how we can scale the company and organization efficiently.

NTE 73 | Investing Checklist
Investing Checklist: The CEO has to relinquish the title of doing everything and bring in people that can focus on aspects of the business so that he/she can then focus on other aspects that are more important.

 

You talk about scaling and what you’re trying to do was to make it easier to be compliant. Give me a simple example of, what is the first headache that you felt was solved then you were like, “I can put my spreadsheets and my notes away now?” What was the first major headache for you that got solved?

It goes to the fragmentation of crypto. That’s something that we don’t see with traditional equity markets. For example, the average investor may have an E*TRADE account or a TD Ameritrade account. They’re logging on and they’re using that account. All of their transactions are happening through one account. When they come in at the end of the tax year, the brokerage will provide you with your tax reports and then you’re done. With crypto, since we’re so early and fragmented, there are about 400 or 500 different exchanges. If you’re using 10, 20 or 30, you can’t print off one form at the end that shows you what happened in that because you’re swapping tokens and assets between all of these different exchanges, which muddles the cost basis of that. That was the most impactful thing early on. It was realizing that you could track the cost basis across multiple exchanges and wallets. That’s what we originally built the company around is providing a way to do that. We’ve been able to add on better UI, UX, pricing and feature sets, etc. The main thing is always using multiple changes in multiple wallets and trying to track where I put those funds to where that went, where this went, how much it was at this time.

It’s like herding cats at some point. I remember when I finally consolidated things. When Poloniex was losing its feet, I was like, “I’ve got to start thinking this through. This is not the same as an equities market. This is not stable, new and speculative. All of it can go away tomorrow.” I was like, “It’s time to consolidate, get some clarity, get that spreadsheet out, and all of that.” I know what you mean. That was a tough little jump for me in my crypto life. I was also thankful that I picked only 5 or 6 exchanges initially when I was like, “I’ll try that.” It was long ago but I finally hold it all together. I was like, “I don’t ever need to go back unless I’m going to do trading based on a tiny little spread. I do not have time for that.”

That’s the key. It’s tracking your sources. That’s something that is always a question like, “If I get into crypto, do I need to track every single transaction?” It’s like, “No,” but you need to write down that you used a Kraken, Poloniex, Gemini, etc. For us, as long as you have those sources, we can pull in what happened in that source. I wanted to pull that little disclaimer out there because it gets a little overwhelming for people who are like, “I don’t want to have to track every single transaction.” As long as you know what sources or wallet you use, our software can match what happened in between them for you.

You guys are also supporting a DeFi and non-fungible tokens in a way that a lot of folks are not top of their class. Can you tell me specifically how you define DeFi differently? How you distinguish it as separate? For our audience out there that don’t know what non-fungible tokens are, I’d love to hear what your definition is and also a couple of examples of ones that you can point people to research and learn more on the ground.

Fungibility means swapability. Click To Tweet

DeFi, in general, stands for Decentralized Finance. The goal there is to cut out the middleman and rent secrets in the process. I don’t think we’ve got there yet. We still have a bunch of middlemen and processes but the goal is to cut out the banks and brokerage firms and allow peers to trade back and forth between each other. The way that I would separate DeFi is from a centralized exchange perspective versus a decentralized exchange. On a centralized exchange, you’d have a Coinbase where you have Brian Armstrong, CEO, board of executives, five million employees and all that stuff.

You have on the dec side, you have a unit swap which still has a leader but has 3 or 5 people. Their entire platform is built around smart contracts and peers to operate. That’s the way we look at things from a centralized versus decentralized perspective but I still don’t think we’re “decentralized” yet. On the NFT side or Non-Fungible Token side, the way that I would define that is fungibility means swapability. $1 is a fundable asset. My dollar at the grocery store is still the same dollar at the gas station. A dollar is a dollar regardless of where it is. A non-fungible token which basically would add scarcity to a digital asset or items.

An easy example is sports memorabilia. If you wanted to know that you’re 1 out of 1 Babe Ruth baseball card, it’s just one. It’s a lot easier to track that on a Blockchain than it is with traditional methods. For example, we see a lot of counterfeit items in sports memorabilia because you can print off a logo and then slap it onto a picture and say, “It’s real. No one can tell the difference.” The non-fungible token means that you’re adding digital scarcity to an asset that would be able to be transferred without that same level of a 1 for 1 matching.

The opposite happened in March 2020 when suddenly the fed started printing money. That made the US dollar the furthest thing from a non-fungible token. There is no scarcity built into that thing. It’s more of like, “Print more. Let them use it. Let’s hope it works out.” It’s different than the non-fungible token approach. The non-fungible token approach would be like, “It’s losing value. It’s losing value. There are not very many of them. When somebody finally sees a scarcity, it will gain value. Let it go. We’ll see what happens.”

The uniqueness is the interesting part because the dollar can still go down to no value but your dollar is still a dollar either way you go. The non-fungible element is that asset whether it’s a trading card or a CryptoKitty which is an example of a bigger NFT, the value could still go to zero but there’s still only that one CryptoKitty. There’s no $9 million another dollar. There are a lot of analogies in there. Those are two exciting parts on the crypto side because they introduce another element of being able to track the cost basis of those things and how you’re receiving income. Some of these are non-fungible tokens grant you access to special perks.

NTE 73 | Investing Checklist
Investing Checklist: With security, you can have a light kind of exchange. With crypto, you can’t because you’re selling a piece of property and buying another one instead of swapping two identical pieces.

 

That’s how you are providing tax support to DeFi, NFTs, as well as run of mill crypto here and there. People with multiple exchanges and people that have been like, “I’ve been doing this. I don’t know how to be compliant. I hope nobody knows I’m doing this. The more years go by, the more trouble I might be in because I’m not sure.” There was a box on the tax forms sent out that was like, “Right at the top. Do you own any cryptocurrencies?” That’s a big step. It came out in 2019 taxes. Bitcoin has been around for many years and it took them a long time to figure it out but now they have, they’ve cracked that whip so here we go.

We’re seeing a ton of increase even that question has gone from 2019 was on the Schedule 1. I’m not getting into details but a form within 1040. It wasn’t required for every taxpayer if you met certain standards. In 2020, it’s on the top of 1040 whichever US American files. Even that changed from Form 2 or 3 to the top of Form 1 for 2020. It is going to be massive in the compliance rate of people that are in crypto who are filing.

You said something that I was trying to understand better. I’ve sold real estate. I’ve invested in real estate. I know these markets quite well and I’ve invested in the stock market. I’m wondering how the crypto is taxed like real property. Is it an ordinary income or is it tax like a house? You said it’s a thing. I was trying to understand that even if you lose money, you can still end up taxed on crypto where that’s not the case if you have losses on a securities transaction. In the stock market, people put money, you lose money and you sell, there’s no tax event there. In the crypto market, there is.

I’m happy to dive in. It goes back to the IRS and how they treat crypto. The first guidance that came out was back in 2014 and they call it 2014-21. If you go on Google, you can read exactly what they came out with. To think that that was in 2014, we haven’t had much guidance since then. To get back to the point, the reason why 2014-21 was so valuable is they treated crypto as property instead of a commodity, security, stock, bond, etc. By classifying it as property, that’s what creates a lot of what we referred to like the cost-basis tracking.

With security, you can have a light kind of exchange. With crypto, you can’t because you’re selling a piece of property and buying another one instead of swapping two identical pieces. It creates a lot of challenges. The biggest thing to take away is that any crypto-to-crypto transaction has a taxable element to it. That’s what creates, not only the difficulty in tracking those things, but can add to the confusion of the difference between a capital gain or a capital loss, a short-term capital gain or a capital loss and then regular income that you’re earning in crypto.

A dollar is a dollar regardless of where it is. A non-fungible token basically adds scarcity to a digital asset or items. Click To Tweet

The takeaway here is crypto is taxed higher than your regular income, equities and securities, short-term gains and long-term gains. It’s the most highly taxed asset class available to US investor. Is that correct?

I would say so especially with the way that it’s treated. In the next years, if we have more of these that are classified as securities, then those get treated as securities which give you more flexibility, rights or optionality to handle taxes in different ways. The IRS has not provided additional guidance in many years. They’ve provided small guidance but still, in 2021 or 2022, they come out and say, “This shouldn’t be a property. We don’t believe that it should be counted as a property in itself.” As the IRS continues to learn more about crypto, what it is, how it’s being used, we’ll see updated guidance. With that guidance, we could see better clarity and optionality of how to handle your taxes as well.

It sounds like you know a lot about how everyone should handle their taxes but in terms of ZenLedger and your expertise, you’ve gone from high-level hedge fund management and founding to in the weeds and tiny little details, knowing every single thing. You’re an accountant without a CPA license. What are the 1 to 2 things that you think our audience needs to know about crypto, being compliant and the intersection with taxation in America at this point? I realize we do have an audience overseas and I apologize, this is so US-based but we were focusing on US tax this time. Do you have any specifics that you’re like, “Everybody asks me that. I have to answer this one again?” What would be the most helpful?

A crypto-to-crypto transaction is taxable. That’s one that takes a little bit to get your head around especially because we have a lot of people that come from a securities background or they’ve invested in stocks and they’re like, “That doesn’t make sense.” The other one is it’s much easier to be compliant now than it was back in 2015, ‘16, ‘17, ‘18 and ‘19. One of the big things that we take very seriously is being able to provide a lot of people the comfort that they need to get into this asset class. Going back to 2015 or 2016, there were a lot of people that had high networth individuals that didn’t want to bother with crypto because they didn’t want to get audited.

They didn’t want people digging through their K-1s, W-2s, real estate, and all that other stuff. They’re like, “I can make some money but it’s not worth it.” There’s no more excuse now. You can put money in as much as you want, put it wherever you want, and use platforms like the ZenLedger to ingest your sources and then we’ll spit out your tax forms for you. At one point, compliance was a hindrance to crypto adoption. From a tax perspective, it no longer is. We have software, tools and teams to make sure that whether you’re investing in crypto, crypto real estate, stocks and whatever, you can easily, quickly, and accurately get in and out and be done. That’s been advantageous.

NTE 73 | Investing Checklist
Investing Checklist: A crypto-to-crypto transaction is taxable.

 

I realize that there are a lot of people that have wanted to be in crypto or they’re curious about it. I’ve had friends call me from Amsterdam and say, “What’s all about this Bitcoin stuff? Should I get your book? Is that what I should read?” I’m like, “We can talk about that.” At least I can give them why Bitcoin has a different relationship to value than other currencies. I can tell them you can buy a fraction of it. You don’t have to buy the entire amounts. You don’t worry about that part. I can tell them where the onboard. I’ll say onboarding and offboarding or on-ramp and off-ramp. I can send them in some directions for that. I’m not going to be someone’s wealth management professional. If they start going, “What did you trade in?” I’ll be like, “I don’t know.”

We’ll go back and forth on that stuff then maybe when they start trading, at least that headache will be taken away. Once people take that leap and not everybody has someone to tell and take the leap but once they do, it’s important to maintain that they’re going to be compliant and not going to have that worry. Doing a new thing with money is doing a new thing with money. Whether you’re first getting into real estate versus getting into equities options, futures or whatever, crypto is going to be that plus a lot of technology differences. If the platforms aren’t well put together, intuitive and beautiful like ZenLedger, you’re going to be like, “Nevermind, I’m going to knock them out. We’re not worried about it,” which is not exactly the best way to go. I’m glad you’re available.

I like to toot my horn every now and again but we offer a valuable resource. You highlighted another element that we feel strongly of is the education piece of showing people how to get involved, how they can use things and how they can do it compliantly. When I first started, the Bitcoin that I first bought was Craigslist. There wasn’t a Coinbase. People don’t realize how far we’ve come in years. Even back in 2015, there weren’t multiple exchange rate that you could get better exchange rate. There’s no competition on the fees that you’re paying. As we continue to build the infrastructure, we’ll continue to onboard more crypto use, but you highlighted a big piece. The compliance side of it is a big thing but the general education and awareness of how you can get in.

Compliance and ease of use equals onboarding and more people involved in crypto which I feel like you’re fighting the good fight and I appreciate it. Thank you so much for what you guys are doing. I’ve got to figure out my relationship with ZenLedger myself. I’m glad you guys are there because I’ve seen some tax places come and go. I’ve even interviewed them on this show. I can’t say they’re all gone or anything. There are plenty that are doing great but you guys is a new space and there’s a lot of open space for you to compete and to add value to the ecosystem. I want to say thank you for helping to bring more people into the crypto space. We need them. We need interest there. We need people to know what blockchain is, and that’s awesome. Thank you so much, Dan. Do you have anything else you’d leave us with before we sign off?

Thank you. You’ve done an amazing job with your show over the years of giving people like me the platform to show people that crypto has tools and resources, and it’s worthwhile to explore into. I appreciate you lending your microphone over to me to talk crypto tax for a little bit. We’re always happy to help out. One last show that I’ll plug in is we also have what we call Fully Prepared Plans. In addition to your do-it-yourself options where you come in, you import and then you’re done, we also offer Fully Prepared Plans in which you can work directly with a tax professional on crypto and non-crypto accounting. That’s something that we’ve seen especially for the not older demographic but people that have generated wealth whether you’re 30, 40, 50, or 60 that have another business and assets. They want to have someone be able to handle all of that. A lot of these accountants are not getting sophisticated within crypto specifically yet. If you need someone who can handle your crypto and non-crypto accounting, we can provide that as well and we’d love to be able to support you.

I’m so glad people know about you and ZenLedger. I appreciate you telling us about this. As much as taxes is the most boring thing to ever talk about, in this case, it wasn’t. It’s helpful and I didn’t want to fall asleep or anything. Thank you for having ZenLedger and for bringing it to the market. Thank you, guys.

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