Camuso CPA Managing Director Patrick // Web3 Accountant Radio Ep2 Transcript
Patrick Camuso is the founder and managing member of Camuso CPA. Patrick worked at Deloitte prior to launching Camuso CPA where he consulted with the world’s premier asset managers. Patrick, as an early adopter of Bitcoin, realized early on the revolutionary impact blockchain and cryptocurrency would have for society along with the accounting profession. Patrick pioneered the cryptocurrency tax and accounting industry with Camuso CPA.
In this conversation, we dive into:
1. What is the current state and future trend of crypto tax regulation in the US?
2. What are the common issues taxpayers face when filing crypto taxes?
3. How to rectify previous filing errors?
4. How the immutability of blockchain makes tax evasion harder?
5. Why did Patrick decide to enter the Web3 space？
6. What is the most important lesson learned in the Web3 space?
7. What is Patrick looking forward to in the Web3 space? And more!
__________________________________
Connect with Patrick & Camuso CPA👇 Linkedin: / patrickcamuso Website: https://camusocpa.com/ Email: [email protected]
Okay, hello everyone, welcome to the Web3 Accountant Radio, the podcast where we dive into the fascinating world of Web3 Finance and Compliance. I’m today’s host Diana and my partner is Wei Xiang. Hello Wei Xiang.
Hi Diana, we are very thankful to have Patrick here today with us. Thank you for having me. Yeah, today we have a special guest called Patrick Camuso.
Patrick Camuso is the founder and the managing member of the Camuso CPA. Patrick worked in Deloitte prior to launching Camuso CPA where he consulted with the world’s premier asset manager. Patrick, as an early adopter of Bitcoin, realized early on the revolutionary impact blockchain and cryptocurrency will have for society along with the accounting professional.
Patrick pioneered the crypto accounting tasks and accounting industry with the Camuso CPA. Let’s welcome today’s guest Patrick. Hello Patrick, nice to meet you.
Nice to meet you as well. Thanks for having me on the show, I appreciate it. Yeah, so could you please introduce yourself? Yeah, absolutely.
I’m the managing director of Camuso CPA. We’re a US-based CPA firm that works 100% with cryptocurrency and digital assets. We work both with digital asset investors as well as Web3 companies and we assist them with managing their accounting as well as their taxes.
Thank you, Patrick. And for Patrick himself, if you are talking about the intersection between taxes, crypto and finance, that is something that is on many people’s eyes recently, especially with the recent Donald Trump case or even where the Form 1099-DA has been finalized. And today we have Patrick here to give us a very deep dive into the form itself and also where the US tax regulation is heading into.
Many of my clients who I speak to, do ask how is Taxes like in the US itself, or there’s actually people in the US who are asking for the kind of overview in this direction because they want to see how they are able to have more crypto activity in the US. And I think Patrick is the very appropriate person to share this with us. Definitely, definitely.
So in terms of where we’re at with the US regulatory environment, up to this point, we haven’t seen a lot of tax enforcement from the IRS, particularly we haven’t seen a lot of civil tax enforcement. In fact, the Treasury just released a compliance report related to cryptocurrency just a few days ago. And they have even basically stated this themselves.
We’ve seen just under 400 criminal cases from between 2018 to 2023. But in this report, they’ve stated themselves that on the civil examination side, it’s basically been indirect and negligible in terms of the cases that they put forth. Now, I’m anticipating that in the future, this is going to change and that the 1099-DA is going to play an integral role in this because basically what the 1099-DA is going to do is require anyone that’s defined by these rules as a broker to start reporting transactions to the IRS on behalf of their customers.
So really, one of the big questions around the 1099-DA hinges on who is included in this definition of a broker. And that is something that we can get into more detail on. On the proposed regulations, they were trying to include everyone in their terms that are effectuating a transfer.
And the way that this definition reads, this could include both noncustodial on-hosted et providers, as well as centralized exchanges. In the final form of the regulations, what we’ve seen is that the noncustodial providers are not going to be included in the definition right now. But the IRS and the Treasury Department have basically reserved the right to examine that further and include these noncustodial providers in future definitions.
So that’s going to be looked at right now in the future. So as it stands right now for the 1099-DA, if you’re a centralized exchange and you’re custody funds, it’s very likely you’re going to have to start reporting on behalf of your customers. Now, what is the impact of this going to be? A few different things.
Right now, if you go on the IRS’s website, there is a 75% noncompliance rate according to the IRS when it comes to filing taxes for digital assets. And I can just speak to my experiences through my firm. Every single week, we’re still having clients or new clients contact us or prospective clients contact us who haven’t done their accounting for several years, several, several years.
And we have to go back, clean up all their accounting, and then file all of their back taxes. So this is extremely common. It’s in line with what the IRS is representing on their website.
We recently just completed an engagement where we had to go all the way back to 2013 for a client and do the accounting for 2013 all the way forward to the current tax year. So the noncompliance is huge. And this 1099-DA, once you start having third-party reporting on a large degree of these cryptocurrency transactions, it’s anticipated that there’s going to be more civil examinations as a result of the data being sent to the IRS and overall just more compliance from taxpayers who are receiving these forms and decide to finally get into compliance.
So the 1099-DA is going to be a big push towards compliance. And the big question in the U.S. is, in the future, are noncustodial wallet providers going to be included? Because there was a big pushback with that in the U.S. during the comment period with the proposed broker regulations. The inclusion of the noncustodial providers from the IRS’s standpoint is beneficial because they’re going to get more data on taxpayers, of course, but it can create a lot of issues in the U.S. in terms of people being able to even access these platforms.
A picture of Uniswap has to basically KYC everyone for U.S. tax purposes. The question becomes, are they going to go ahead and do that or are they going to start just basically gating out U.S. participants? So that’s a high-level summary of the 1099-DA. I’m happy to get into more details on it if you guys have questions on it.
Yeah, thanks for sharing. And I think this is a very big discussion. And I think one thing good is, with many of the industry stakeholders maybe contributing to consultations to say, for practical reasons, why noncustodial players should not be included.
And for the IRS, at least temporarily, to take a step back to say, in the meantime, this is not required. So I think this is a good thing. The other one is, with the 1099-DA out, a lot of the custodians or exchanges would be reporting the information for the clients themselves.
And for the clients themselves, I do hope that their reporting would tie with those of the exchange itself. Yes, that’s going to be the next biggest issue. I think the lowest hanging fruit for the IRS obviously are the non-reporters.
The next lowest hanging fruit are going to be people that are under-reporting their assets due to a tax position that they take. And this could be their accounting method selection or otherwise. And one thing that I’ve been seeing over the years that the IRS has disagreed with, and I have also disagreed with, have advised clients against for years, is the accounting method selection that a lot of people are choosing.
So in the past, what we’ve seen is a lot of CPA firms, a lot of self-preparers are touting using HIFO or LIFO or whatever is going to be the most advantageous accounting method selection from a tax perspective. The problem with this is that a lot of times what they were claiming on their returns wasn’t really matching their fact pattern in terms of how their funds were being managed on-chain. Now, as part of some of the guidance that’s coming out with the 1099-DA, we’re starting to see the IRS clarify that now.
And a lot of taxpayers are going to have to change their accounting methodology as a result of this. So in the past, a lot of people, maybe they’re trading across five or 10 different exchanges, five or 10 different wallets. At the end of the year, they need to sit down and do their accounting.
And maybe they’ve been purchasing a fungible cryptocurrency that they’ve been commingling across all these wallets and exchanges. Well, what a lot of people were doing was basically clicking HIFO on whatever accounting software they were using, and then going ahead and cherry picking the highest cost basis for whatever asset they sold. Now, maybe they sold an asset on Coinbase, but their highest cost basis of an asset purchase was on Binance.
And for the accounting purposes, they may match that cost basis with the proceeds, even if those transfers didn’t take place, even if those funds weren’t managed appropriately as they’re representing in their audit trail. So the IRS has finally come out. After years of me sitting here, scratching my head, watching people do this, the IRS has finally come out against this.
And notice 2024-28, I believe, they’re providing a way for taxpayers to start to correct this moving forward and providing safe harbors for them to allocate the remaining basis to these assets. But moving forward, it’s always been this way, and now it’s getting clarified. Default accounting method in the US for tax purposes is going to be FIFO, first in, first out.
For a lot of taxpayers that have been accumulating crypto over time and purchasing them at a low cost basis, this may not be the most advantageous accounting method selection, but it is going to be the simplest from an accounting perspective. And a lot of times, it’s what’s going to be necessary to keep you into compliance. Now, there still is an avenue for specific identification, but it requires a lot of forethought.
And the best approach to doing that is if you purchase an asset, say on a centralized exchange, you want to send that to a cold wallet that’s segregated from the rest of the tax slots associated with that asset. So that is the cleanest approach to specific identification. But what we’ve seen in the past is a lot of people are just jumbling it all together and not reporting it and representing their audit trail in relation to how their funds are being managed.
And moving forward, that’s not going to be permitted anymore. And I believe that’s going to be a huge issue for a lot of taxpayers. Well, Patrick, with regards to FIFO, because with FIFO, I think the issue that I’m looking at is how would a taxpayer be able to trace back where did… Last in, first out, it can be as simple as, oh, I bought it yesterday and then I sold it today.
But first in, first out, I would have to track, I’m not sure, X years ago, how much is the cost? And I can see the complexity plus what you mentioned where it’s quite common for people to trade over a few platforms. And as in from a high level perspective, we look at our portfolio across all the different platforms and we trade depending on which exchange give us the best price. But if you look at it from a taxpayer’s, I mean, tax filing forms perspective to be compliant, it’s not going to be so simple.
It’s not going to be simple. If they try to go to the spec ID route though, it’s actually going to be more complicated because they’re going to have to have that specific audit trail for each tax slot. Where if you’re taking a FIFO approach, you can just calculate it on a first in, first out basis, irrespective of which specific wallets they’re being held in.
But that is another huge issue, especially when we’re working with where we have to go back and clean up several years of their accounting is basically making sure that we have good data to establish their cost basis report. They may have purchased crypto several years ago on an exchange that’s defunct and they don’t even have access to the records or there could be crypto sitting out there in a wallet that they’re unaware of. So a lot of the work that we do goes into trying to get as much accurate data into our accounting as possible to build an audit trail that represents what their true cost basis is for these assets.
But that is a huge problem for taxpayers in the US is establishing their cost basis. And that really speaks to the fact that if you want to be doing things right from a tax perspective, you should be at least doing your accounting on a yearly basis, if not a quarterly basis, because then you’re going to be able to stay on top of all these purchases and establish your cost basis and all these assets. But if you’re going to have to go back several years, that’s something that we’re working with people on a daily, weekly basis.
And it’s no small task. And there is a burden on the taxpayer to be able to produce these exchange records or some form of documentation, because at the end of the day, from a civil perspective with the IRS, if you claim anything on your tax return, including a cost basis for an asset that you sold, the burden of proof is on you to substantiate that to the IRS. So we need to have some form of documentation related to that.
Thank you, Patrick. So the other question that I have with regards to this is, if today I have a Web3 exposure in the US itself, and I realize that for the past few years, I might not have been submitting my tax returns correctly, what do you think is the correct next step? Or what are the things that I can do to ensure that I’m on the right track? Do you have something like this? Because I think this is something that I think listeners to the podcast will be very interested in. Absolutely.
Yes. So firstly, if you think you haven’t been filing your returns correctly or doing your accounting correctly, the first step is to speak with an experienced accountant and tax professional that is deep into this space. So you can just get a handle on what is the right approach and what are you doing wrong.
And then from there, it’s going to get situational. Usually the first step is addressing things from an accounting perspective, going in and cleaning up all the accounting. And then what that does is, number one, it gives us clean accounting records, and that really gives us a clear perspective on the overall tax implications to what you filed versus what you should have filed.
If there’s material discrepancies, depending on what they are, we may need to go back and amend those tax returns. And there can be additional tax liabilities and interest and penalties associated with that. The good news is about the accounting method selection for the people that were applying specific identification under the guise of FIFO incorrectly.
There is notice 2024-28 that’s going to be coming out here in a few days. And that is going to provide a safe harbor and a way for taxpayers to transition from their incorrect reporting method to their correct reporting method. I don’t want to get into the weeds on that too much, but basically at a certain date, they’re going to have to look at all of the assets that are remaining in each one of their wallets, be able to say what the original costs of those were, and then assign a cost to that wallet that’s going to get allocated for the remaining sales in the future.
And then going forward, they’re going to either have to do FIFO or spec ID correctly. So it somewhat gets situational, but really at a high level, the steps are going to be first to look at your current accounting and with someone that understands all the details related to this, and then really say, okay, here’s where you’re going wrong. Here’s the things that you’re doing incorrectly.
Maybe it’s your accounting method. Maybe you’re applying the wrong tax treatment to a specific protocol. Maybe another huge thing I see that’s a huge error is there’s no due diligence a lot of times done on the accounting itself.
So a lot of times people will come to us and their calculated ending basis does not match what their actual holdings are across wallets and exchanges. So these types of issues, they can affect one year and they can also carry forward into multiple tax years. So the first step is to just get all of your accounting up to date, get it correct, and then start to look at, okay, given the errors that were made, are these material? Is there any transitional relief for the errors that you made? And then in many cases, we may need to go back and amend those tax returns.
I think one of the things that’s very interesting is that all of this is on-chain and as time passed, the IRS is getting smarter with better tools, but your records on-chain don’t change. So there’s one thing between what you say, what you write and what the IRS can see on-chain and together with what custodians and exchanges are reporting. So I think with the immutable feature of a blockchain, that is where a lot of the findings might come out and with such issues and regulations coming up is definitely way better for a Web3 company to actually start doing this earlier.
Like what you say, to contact somebody who knows the stuff, because maybe you can hide for another, I don’t know, six months or one year, but this is not going away. And all the information is on-chain versus a cash transaction that we have in a web2 world. Exactly.
I’ve been at this in Camuso CPA working with investors and businesses since 2016. And what I can say is like back in that earlier era, like the 2016, 2017, 2018 era, it was even more of a misconception then than it is now, but people still hold it now where they believe that they don’t have to pay taxes or the IRS doesn’t understand crypto, but like you said, this is a public immutable ledger. And if you’re committing tax fraud, in many cases, there may not even be a statute of limitations depending on how severe it is.
So it is in client’s best interest, of course, to be reporting all their cryptocurrency transactions, because you may be dealing with an audit or some scrutiny either now or in the future. And there can be other reasons that they need to report as well. You know, if you’re going to be making large purchases or you’re going to be trying to get a mortgage, a lot of these things are going to come back and your tax return is going to become a bottleneck to that.
So absolutely, you need to be reporting. The IRS is definitely going to start ramping up on the civil side. We’ve seen this year some headlines in regards to criminal proceedings.
The biggest one being the first purely tax criminal case was back in, I think, January or February. We started hearing about that. And that was with Frank Algren III, who basically overstated his cost basis to underpay his taxes across like three or four years of tax returns for about like four or five million in Bitcoin.
He’s out buying mansions and all this type of stuff with the money. And now, for each false tax return he’s filed, he’s facing three to four years in jail for that. So on the criminal side, the penalties can be severe.
And what we’re going to see in the future is on the civil side, people are going to start getting penalties, interest, back taxes. And there’s nowhere to hide. These transactions are completely on the blockchain.
And all the IRS has to do is, if you’re in a non-custodial wallet that you believe is anonymous, it’s not. It’s not anonymous. At best, it’s pseudonymous.
And all the IRS has to do is tie your identity to that wallet address. And then you’re on the hook for all those transactions. And they’re becoming increasingly more sophisticated and have more data to be able to do that with.
So the 1099DA plays into that. The G5 agreement, where they’re sharing data with a lot of other countries, plays into that. The John Doe wallets play into that.
They’ve been collecting data for a long time. They’ve been partnering with different software providers, chain analysis being one of them. They have RFPs out to a lot of the crypto accounting softwares as well.
So they’re really positioning for the next stage of this now. And they’ve been collecting a lot of data that they’re going to use against taxpayers who have been underreporting. Yes.
And with the rise in digital asset prices, it’s highly motivating for them to get all this in order, especially as we speak now, Bitcoin is reaching an all-time high. Yeah. But before we continue this professional conversation, way further, thanks a lot, Patrick, for sharing your deep experience.
And I think sometimes when we have such conversations and we talk about fines or putting people into jail or being convicted, this might feel very far until it happens to yourself and suddenly it’s no longer very far. So maybe we can have Diana to ask a little about the other side of Patrick, the Patrick that not everybody gets a chance to see, but we are so lucky today. Okay.
So let’s go to today’s free talk session. And I have a few personal questions lined up that I am particularly excited about. So the first question is why did you decide to enter the Web3 space? Sure.
Well, I kind of just found myself in the Web3 space, I would say. I started my career at Deloitte and there I was working in the financial services space. So I was working with mutual fund companies, hedge fund companies, private equity companies.
And the experience that I built there actually translated very well into the skills that we need as crypto accountants, because I was dealing with large unstructured datasets. They weren’t crypto back then, they were securities, but we were having to apply financial adjustments to these large unformatted datasets, such as like watch sales adjustment, TOPS adjustments, PFIC adjustments, those types of adjustments. So basically my whole career, I’ve been analyzing large datasets of financial transactions.
And while I was building that, when I was building that experience at Deloitte, I have an accounting and finance degree. I was just deeply interested in the financial world and understanding our countries along with the world’s financial system, learning about the Federal Reserve and inflation and all the money printing really sort of led me down this rabbit hole of getting into precious metals. And then from the precious metals, that’s really basically how I discovered Bitcoin was, you know, deep into some random forum related to like gold and silver and all that and, you know, economics.
And someone posted the Bitcoin white paper. And what I will say is like when I read the Bitcoin white paper, it basically clicked for me immediately. What helped, I think, was having an accounting background and understanding that, you know, sort of at a fundamental level, this is an accounting technology, a triple ledger accounting technology.
And then understanding, you know, the fixed supply, just with the finance background and my hunger for knowledge, but that really led me to realizing the opportunity for Bitcoin. So like many other people, you know, I bought it, I told everyone about it. And then a few years passed by and I started having a lot of people I told ask me tax questions about it.
And that led me down the rabbit hole of basically starting to research, you know, what are the tax implications to Bitcoin? And then I just quickly realized, you know, this is kind of this is going to be a huge problem for everyone as we start to grow this industry and have more market entrance. So that’s when I started my firm in 2016, where, you know, I was serving mainly back then Bitcoin investors and Bitcoin mining companies. And, you know, some people were maybe getting paid in Bitcoin, that becomes me.
But back then it was really mainly like Bitcoin investors and Bitcoin mining companies. And then I basically have just grown with the industry from there through all the iterations of, you know, the ICOs and the Ethereum ecosystem growing, DeFi, NFTs and Web3. So I really have just, you know, sort of grown with this ecosystem.
And I fundamentally believe in decentralization, Bitcoin as, you know, an alternative asset class. Oh, OK. So you think that Bitcoin assets will have some benefits than the traditional assets? Yeah, I think, you know, the fixed supply as well as the ability to self-custody it, I think are the two the two strongest points for Bitcoin.
And that’s what drew me to it. OK, so can you share one key experience or lessons you have learned in the Web3 journey? I think our listeners were very curious about it. Yeah, you know, what I would say is the biggest lesson I’ve learned is that due diligence is key.
And that is key for when it comes to your accounting or your taxes. And, you know, as a professional in this space, you need to be a constant learner and you need to have a fundamental understanding of several different things of, you know, whatever the asset or the protocol or the form of business that your client is conducting. You need to understand that.
And that’s going to come with a lot of nuances in this space. And then you need to understand the accounting and the tax implications associated with that. And, you know, starting from the ground level in this industry, I’ve had to really learn and build those skills the hard way a lot of times because the answers aren’t always out there and readily available when we’re dealing with new assets and protocols over the years.
But I’ve seen a lot of clients that have come to me that, you know, have worked with accountants or other professionals that weren’t doing their full due diligence, whether it’s on, you know, fundamental due diligence checks related to their accounting or not doing their due diligence on fully understanding the nature of a protocol that they’re invested in or how, you know, the flow of funds for a certain type of transaction that they’re performing. And I can see how a lot of times that hurts the taxpayer because, you know, they get bad advice. So I think one of the biggest keys that I’ve learned in this space is that you have to have a fundamental understanding from first principles of anything you’re advising a client on and the due diligence is key.
You know, you can’t just go and just rely on like an article you read online or, you know, take a CPE course and just sort of just rely on all the information there. This type of stuff is changing every day and you need to be constantly taking in the information and making sure that you’re applying it correctly to each client. Okay, so have the fundamental of the accounting is very important for entering this area.
So I think for you, the Web3 area will be very fascinating and interesting. So what are you looking forward to in the Web3 finance or compliance? So what I’m looking forward to is, let me think about that. What am I looking forward to in the Web3 space? Number one, you know, the new market entrance I think is really interesting because one thing that I’ve seen like being through several cycles of this is that each cycle is different and each cycle begets basically new blockchains, new protocols, new assets, new ways of doing business.
So, you know, that’s really what is really the biggest interest to me because usually there’s going to be sort of new tax considerations and accounting considerations that arise from these new ways of doing business. One example of that can be, you know, one of the emerging trends are real-world assets being tokenized and bought on-chain. That is going to come with many different tax considerations and accounting considerations.
One that I touch on related to that are the sales taxes component to a lot of these assets. If you bring them on-chain and you sell them in the form of an NFT, a lot of people are overlooking the sales tax component to that. So I would say that’s what I’m most looking forward to is just watching the next, you know, this next cycle, the next iteration of the market and some of these new trends that are going to bring novel tax and accounting related questions that professionals like ourselves are going to have to grapple with.
Thank you. Thank you, Patrick. Like I think just now you mentioned, I just want to say I feel like in terms of the Web3, when you talk about due diligence, the ability for you to continue understanding new technology includes the requirement for you to have the interest, deep interest to speak with professionals, because this space is moving so fast.
Like what you mentioned, different chains or different L2s coming up, just, I mean, Ordinals or Runes were not around so popular previously, and then this year it was such a craze going on.
So the due diligence point that you mentioned is very exciting and we are very lucky that I would feel to be in a next new cycle itself. Last December with the bitcoin ETF coming up for us to reach where we are today. If prices have been sluming since December, now we will have a totally different conversation all together. So it is a very good and interesting time to be around in the web3 space especially in this cycle.
This cycle and the etf itself has really elevated the industry. I have seen a lot more interest from web2 professionals and investors in the space itself. So I am really excited. It has brought in a lot of money from the institutions and many of the institutions are into it. Even now for politics and how Donald Trump is adding on to.
Even at the bitcoin conference where I am going to that in end of July, Trump is going to be there so is RFK. You are right, the ETF has elevated this to have institution focus and bitcoin and cryptocurrency have political focus as well. It is really the next stage and the institution adoption and political interest is something that were basically dreams years ago in earlier cycles and I really love seeing this and am really excited for the future.
Ok thanks you for your sharing and this is the end of todays talk because the happy time flies very quickly and to our listeners, thanks for tuning in to today’s web3 accountant radio. If you enjoyed today’s radio please subscribe and leave a review for us. So do you have anything else for our listeners Patrick and Wei Xiang
I think on my end thats it. I appreciate you guys having me on and if anyone wants to get into contact with me, you can find me on LinkedIN or my website at camusoCPA.com happy to speak with you if you have any questions or need any inputs at all.
Thank you Patrick itself. For me it is thanks to Patrick for being on the show and for listeners itself, if you have US tax exposure, Patrick is definitely the correct person to speak to and you can find the details below. The other thing that I want to give a shout out to and I am very excited about is the Web3 Accountant we are working on a 2024 Global Crypto Tax Report that will be out sometime in August and Patrick himself has contributed significantly to the US portion of the report itself and we are very excited to announce it next month and this is something to look forward to and if anybody have any comments to the show or nominate people to the show, just reach out and I will see what I can do to bring people onto the show.
Thanks to Patrick and all of you. Have a nice day.
Thank You very much.