Clinton Donbelly @CryptoTaxFixerr

🚨CARF could change global crypto tax reporting by 2029. Clinton explains the part most people miss.

There are a lot of ideas we could come up with for how to structure a tax amnesty for crypto investors. The difficulty is that the IRS has to be fair to large numbers of other taxpayers who have failed to report other types of income. So the question becomes this: Why should crypto investors get a small slap on the hand when other taxpayers may receive heavier penalties, possibly for lesser infractions? That is the challenge in designing something like this. The typical levers the IRS uses in an amnesty plan are fairly limited. They can set a specific lookback period. For example, they may require three years of filed tax returns and six years of FBARs. Beyond that, they may decide not to go further back. If taxpayers come forward voluntarily and add the missing income, the IRS can apply the standard 20% underreporting penalty. They also have the ability to waive that penalty and choose not to apply an underreporting penalty at all for taxpayers who come forward. So the IRS does have some flexibility. But they are still working within certain constraints. One concern is that very large taxpayers with significant non-reporting could drive a Mack truck through these loopholes. That could happen. But the counterargument is that the person has now reentered the tax system, and in future years, they will be expected to pay their fair share. So there are trade-offs. It will be interesting to see what the IRS comes up with.

The biggest misunderstanding global crypto taxpayers, or U.S. taxpayers living abroad, have is twofold. First, many people think that if they are outside the U.S. and not working in the U.S., they do not have to report their income to the U.S. That is completely false. The U.S. is unique among countries in this regard. As long as you are a U.S. citizen, you are required to file a tax return and report your global income. So if you are sitting around a bar with people from other countries, sharing tax advice, do not listen to what they do. As a U.S. taxpayer, you are required to do something different. Second, crypto and digital asset investors often think they only have to report crypto activity if they traded on U.S. exchanges. That is also false. You still have to report your gains and losses from crypto investing with your tax return. The fact that you traded on non-U.S. exchanges does not remove that responsibility.

What should crypto taxpayers do if they skipped earlier years and are afraid to start filing now?

I was at the Consensus conference two years ago, and the IRS had six people there trying to learn more about cryptocurrency. This was the entire team from the cryptocurrency project office. I talked to one of the guys after the conference ended for the day, and I said, “Hey, let’s get a drink and talk.” He was really concerned about one question: How can we get more people to report their crypto income on their taxes? We were having that conversation, and I said, “Hey, I need to go use the bathroom.” When I came out of the bathroom, a guy recognized me because it was a crypto conference. He said, “You’re Clinton Donnelly. I know you. I need to talk to you about my taxes.” Right there, he told me he had not filed his taxes for about five years. So I said, “Would you be willing, in a confidential way, to have a conversation with someone from the IRS and talk about what is holding you back?” I told him, “Nobody is seeing anything. This is just to get your opinion. You could have an impact.” So he agreed. He came up, and we had a conversation. The IRS agent asked him, “What is holding you back from reporting your cryptocurrency income?” I still remember his answer so clearly. He said, “Because I am afraid you guys keep changing the rules.” And lo and behold, a couple of years later, they did change the rules. All of a sudden, they required FIFO-by-wallet reporting, and that completely messed up the calculations. There is still a lot that remains unclear. There still seems to be some vagueness around certain types of staking and whether they are taxable. DeFi transactions introduce a lot of complexity. People are not always sure when something is taxable and when it is not. The 1099-DAs have also introduced a complicating wrinkle into how to actually prepare a crypto tax return. Honestly, it is harder now to do a crypto tax return than it used to be. So this non-filer’s fear turned out to be well-founded. The IRS did change the rules. There are still a lot of things they have not decided. There is talk of de minimis rules and wash sale rules. There are still a lot of bottom-line issues that the IRS, or Congress, has not settled. And I think this paralyzes people. They do not know how to move forward in this world of complexity.

If someone is a U.S. citizen living in Portugal, Dubai, Thailand, El Salvador, or anywhere else, does the IRS still expect them to report their crypto activity? Absolutely. Living outside the U.S. does not remove your U.S. tax reporting requirement. Even if the country you live in does not tax crypto income, or has a looser tax structure, the U.S. still expects you to report your worldwide income. That includes your investing income. And yes, that includes crypto.

International reporting could duplicate 1099-DA reporting. This is an interesting issue because there is an international tax agreement called CARF, the Crypto Asset Reporting Framework. The IRS was actively involved in developing it. The purpose of CARF is to report taxable crypto events to the country where the taxpayer lives. For example, say a French taxpayer invests through a crypto exchange in another country, such as Brazil. Under CARF, Brazil would first need to know that the person is a French taxpayer. Then Brazil would send year-end information to France about that person’s capital gains and trading activity. The idea is that every country stays informed and can tax the capital gains generated by its own taxpayers. So far, the United States does not participate in CARF reporting in any meaningful way. But the U.S. was one of the signatories to the initial CARF agreement. That consent to the agreement did not mean the U.S. was actually going to participate in CARF reporting. However, in September 2025, the Treasury Department made a recommendation to the White House to issue an executive order that would bring the U.S. government into CARF reporting. That would require CARF reporting for activity connected to U.S. taxpayers. In practice, it would also apply to foreign persons investing through U.S. exchanges. If the U.S. participated, we would also receive similar information from foreign countries about U.S. persons using foreign exchanges. But there is a conflict here. In his first month in office, President Trump issued an executive order instructing Secretary Bessent not to participate in international organizations or activities where taxpayer information about U.S. persons would be shared. That position is significantly at odds with participating in CARF. Yet a year later, the Treasury Department submitted a recommendation to the White House to move forward with it. I personally submitted a letter to the White House opposing the recommendation. I argued that it was contrary to the administration’s America First initiative and recommended that it not be signed. Surprisingly, I got a letter back from Donald Trump last month thanking me for the letter. Now, honestly, it was a form letter. But what I found interesting is that they sat on it for about nine months before sending it to me. I had another friend who wrote a letter to Trump and received a response within about a month. Mine took nine months. I think that is because it was routed around to different people before they responded. So I take that as my ability to participate in government. Anyhow, I think CARF is a disaster. It would create international digital asset reporting. It would cause traders’ activity on foreign exchanges to be reported back to the U.S. government. It would become very difficult to hide activity using foreign exchanges. It would be ugly. Let me know your thoughts.

Will the U.S. really share your crypto gains with foreign governments? Clinton’s opinion on this....

MiCA legislation is basically Europe’s version of CARF. That is the way Europe has complied with the CARF agreement through the MiCA regulations. The CARF framework basically obliges exchanges in countries that have signed onto CARF to give information to other countries that are also participating in CARF. If another country is not participating in CARF, then there is no exchange of data. What this means for the U.S. is that a company like Coinbase would generate a 1099 for U.S. taxpayers. It would also generate a CARF-type document for non-U.S. taxpayers and send that information to their home country. For example, if a French taxpayer invested through Coinbase U.S., Coinbase U.S. would send a CARF document to the French government reporting that individual’s earnings. Now, surprise, surprise, the format and content of the 1099-DA is basically identical to the CARF agreement. Any company that has already put the process in place to generate a 1099-DA would have to make virtually no changes to send that same type of information to a foreign country. So from an operational standpoint, it is a small matter to participate. However, the U.S. is unique in this area. I think the best way to look at this is as a power struggle inside the financial sector. The U.S. is the financial leader of the world. That is a major goal for the U.S. government, and they focus hard on maintaining that position. They want dollar dominance. They want people around the world to invest their money in the U.S. So they create incentives that reward foreigners for investing in the U.S. Some of those incentives include no capital gains tax. Another incentive is that there is no reporting back to home countries on many investing activities in the U.S. The U.S. is not going to tell the French government what a French taxpayer is doing in the U.S. That basically makes the U.S. the largest tax haven in the world. If you invest in U.S. stocks and bonds and make a profit, the French government would not know. If you invest in U.S. real estate and make a profit, the French government would not know. If you have a business and are making money in the U.S., the French government would not know. So why would the U.S. suddenly disclose information about your crypto gains in the U.S. to a foreign government? That would be inconsistent with the broader way the U.S. government operates. If the U.S. did that, it would diminish its position as the world’s financial leader. I think that goal is too important to the U.S. government. That is why I do not think CARF reporting is ever going to happen in the U.S. It would mean surrendering authority to the larger global AML regime. “AML for thee, but not for me” seems to be the U.S. government’s posture here. It remains to be seen, but I do not think we will see any real decision on this until probably 2029.

🚨Crypto wash sale rules are coming. Larry Zlatkin, the Vice President of Tax at Coinbase said the crypto wash sale rule is coming, and I have said this before: I believe the wash sale rule is a tax on stupid. The wash sale rule basically says that if you recognize a loss, or tax-harvest a loss, but then rebuy that asset within 30 days before or after the sale transaction, you are deprived of claiming that loss. That can be really painful if you had a big loss, but you still believed in the asset. The thing is, this is robbing Peter to pay Paul. There is no real gain to the IRS from depriving someone of that loss. Once it happens to a person and they see it on their 1099, they never do it again. The way stock investors handle this is by using multiple brokerages. For example, let’s say someone owns ABC stock and it has gone way down. They want to recognize the loss. They sell it in their Fidelity brokerage account, but then they rebuy it at the same time in their Vanguard account. The two 1099s they receive do not reveal that there was actually a wash sale transaction. The only way the IRS knows about it is when it happens on the same exchange or brokerage, because then the exchange reports it as a wash sale. So investors learn pretty quickly to use multiple exchanges or brokerages. For crypto traders, this is even easier. You bought it on Binance. You sell it on Kraken. No wash sale is reported. Would you manually report that? Nobody is going to volunteer that information. The IRS cannot figure it out on its own. So I think this is just a tax on being stupid. And I think the tax code should be smarter than taxing stupid.

One of the challenges with the current law is what happens when you donate cryptocurrency. Donating crypto can be a great way to avoid capital gains tax, especially if you were planning to donate anyway. The best approach is often to donate your oldest assets, the ones that have gained the most. If you donate those assets directly, you do not pay capital gains tax on the appreciation. The charity that receives the crypto does not pay capital gains tax either. So it can be a very effective strategy. You avoid the capital gains tax, and you may still be able to claim a charitable donation based on the fair market value at the time of the donation. But a couple of years ago, the IRS issued guidance saying that if you donate cryptocurrency, you need a qualified appraiser to appraise the value. That creates a real problem. Qualified appraisers for crypto are extremely hard to find. I looked into this myself. At the time, to my knowledge, I could only find two people in the United States with that certification. I even looked into getting certified myself. The training requirements were significant. You had to learn how to appraise things like lampshades and old cars before you could even be qualified to appraise the value of cryptocurrency. Cryptocurrency has daily price movements recorded publicly on places like CoinMarketCap. I mean, this is nuts. I think it was silly guidance from the IRS, and we need legislation to fix it.

Should Crypto Traders Keep Everything on One Exchange for 1099-DA Reporting? Our latest blog cryptotaxaudit.com/blog/should-cr…

Larry Zlatkin, the Vice President of Tax at Coinbase, recently testified before the House Ways and Means Committee with a series of proposals he believes are needed to improve the tax situation around cryptocurrencies and digital assets. One of the things he argued, and many others have argued, is that small transactions should not be taxed under a de minimis exemption. Senator Lummis has also included this in her Digital Asset Tax Act bill. Her proposal includes a de minimis exclusion. As I understand it, individual transactions with less than $300 in profit would not be taxed, as long as the total annual aggregate of those excluded profits does not exceed $5,000. That sounds nice, but I think in reality, it works very poorly. Here’s why. In order to prove that those gains were not more than $300, you have still placed the burden on the taxpayer to track every single transaction and calculate the capital gain on it. That is the very complication you are trying to escape. If you do not track all of them, you cannot prove that the larger transactions, the ones above the de minimis threshold, were handled correctly. So I think it is a false argument that this simplifies the taxpayer’s life. A simpler way to do this would be to create a basic exclusion for digital assets. For example, a $5,000 exclusion has been discussed. You would simply subtract $5,000 from your net digital asset capital gains. Think of it as similar to how people handled the business use of a home deduction. Initially, taxpayers had to prove the square footage, how much electricity was used, and all the other details. It was burdensome. Most taxpayers were terrified of it, and many had bad audit experiences. Eventually, the IRS created a safe harbor, which effectively gave taxpayers a simple $1,500 write-off for home office expenses. I think that is exactly the better approach for digital assets. Instead of pretending taxpayers can avoid tracking everything with a transaction-by-transaction de minimis rule, create a clear safe harbor that actually simplifies the process.

Trump signed the peace deal. A tense week has ended with a chance for peace. Now the world waits to see if it holds.

Can the IRS tax robots? Andrew Yang says AI and robot labor should be taxed to help fund basic income. Clinton says there’s one big problem with that....

Former presidential candidate Andrew Yang, who is now the CEO of a company called Noble in California, has made a proposal about artificial intelligence and job loss. His argument is that artificial intelligence is going to cause a lot of people to lose their jobs. If people are no longer able to work, they will need some kind of compensation. He refers to this as a Freedom Dividend. To pay for this, Andrew Yang has proposed taxing robots. The idea is that robots should be taxed because they are the ones displacing human labor. I disagree with his position, but I think it is worth discussing. This is basically a socialist proposal. Andrew Yang is very creative at repackaging some of these ideas, which is why I think it deserves attention. The U.S. Constitution, through the Sixteenth Amendment, gives the federal government the right to tax income. Robots do not have income. Therefore, you cannot tax a robot’s income. What they would likely do instead is tax the services rendered by the robot. But now you are getting into a serious level of complexity. At the federal level, you can tax a company on the income it generates. But trying to tax that company differently based on the type of labor it uses is a very difficult position to support. And ultimately, let’s face it: anytime you tax a company, the company adds that tax to the cost of the goods or services it sells. So the person who ends up paying that tax is the consumer. That means the more you tax companies, the more you may need to increase universal basic income payments so people can afford the higher costs created by those taxes. That is the vicious cycle being created here. This is the fallacy of a socialist government strategy. It assumes that the federal government is a more efficient distributor of wealth than individuals themselves. I think that is a fundamentally flawed principle. Rather than creating new taxes and then redistributing the money, the focus should be on eliminating waste and reducing how much taxation is needed in the first place.

61% of crypto investors don’t know about the new IRS 1099-DA rules. That’s not a small gap. That’s a tax return disaster waiting to happen.

Another subtle distinction that came out of this case is the difference between rewards that are directly received and rewards that are given to a custodian. In the case of Cardano, the taxpayer stakes his tokens to a validator. The validator serves almost like a custodian, although ownership is not transferred. The validator is the one that receives the reward tokens through the staking process, and then those rewards are given to the taxpayer later. The IRS addressed a popular argument around staking rewards, which is that these rewards are self-created property. This is the argument being used in Jarrett’s case involving Tezos tokens. The self-created property argument goes like this: when a baker makes a cake, he is not taxed when the cake comes out of the oven. He is taxed when the cake is sold. The same idea applies to a car manufacturer. The manufacturer is not taxed when the car is built. The tax event happens when the car is sold. So the argument is that staking rewards are self-created tokens or self-created assets. They should not be taxed until they are sold. But the judge disagreed with Paschall, the taxpayer. The judge said these were not self-created tokens. The validator was the party that received the tokens through the staking process, not Paschall himself. That was an interesting distinction brought out by the judge. Again, this entire case is non-binding on other Tax Court decisions. But this is probably the first time we have seen a staking case decided in Tax Court. So this is a very interesting development.

Clinton Donnelly @CryptoTaxFixer

a week ago

🚨The U.S. Tax Court came out with a decision in the case of Paschall v. Commissioner, Tax Court Memo 2024-26. Paschall was staking Cardano, and he took the position that his staking rewards should be taxed when they were sold for dollars, not when he received them. This is how

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🚨The U.S. Tax Court came out with a decision in the case of Paschall v. Commissioner, Tax Court Memo 2024-26. Paschall was staking Cardano, and he took the position that his staking rewards should be taxed when they were sold for dollars, not when he received them. This is how his audit went down. The auditor disagreed. Paschall took it to Tax Court and defended himself. Now, about 85% of U.S. Tax Court cases are petitioned by the taxpayers themselves, or what lawyers call pro se in Latin. That is very common. But he actually went to Tax Court and represented himself against five IRS lawyers. He made his own case, and the judge decided against him. The judge said the rewards had to be taxed at fair market value when received. I am going to dig into this in a second, but first, a couple of comments. First of all, this is a memorandum decision. That means it is the decision of one judge and does not bind all judges in the U.S. Tax Court. There are, I believe, about 13 judges in the U.S. Tax Court. On more important decisions, the full court deliberates together. But this was just an individual decision. It is non-binding, and it is this judge’s opinion. This opinion reinforces IRS Revenue Ruling 2023-14, where the IRS said that income occurs when a taxpayer gains dominion and control over validation rewards, and that income is measured at fair market value at that time. In Paschall’s case, he had about $25,000 of taxable gain that the auditors accused him of failing to report. On top of that, there was about a $5,000 penalty. So those were the stakes. I looked at the arguments, and I felt that the taxpayer made a strategic error during the negotiation process of the court case. He made an agreement with the IRS that the rewards became his when they were awarded. In other words, he acknowledged that he had dominion and control over the rewards at the time they were awarded. I believe that was a fundamental mistake. And this is why it is good that this is only a memorandum decision. Particularly with $ada, and this is also true with other coins, when you are staking, the coins you give to the validator cannot be sold until they are taken out of validation status. Those are the coins you are staking. Secondly, the rewards you receive from the validator keep accumulating. But the moment you take your staking rewards out, and this is definitely true with Cardano, although not with all validators, you receive your staking rewards only when you withdraw from the validator altogether. To do that, it takes a couple of validation periods before the rewards are fully received. But the issue is this: when you take your money out of validation, you stop receiving validation rewards. You are going to miss a period of time. In Cardano, that period is called an epoch, where you are awarded every five days for having been with a validator for that period. Once you take your staking rewards out, you can no longer participate during that period. This speaks to the legal issue of constructive receipt under the U.S. Tax Code. The judge in this case acknowledged that issue and actually gave a nod to it. The tokens are income to the taxpayer when they are constructively received. But the taxpayer never raised this issue. In my opinion, in the Cardano situation, the rewards are not constructively received until you leave the validator and actually receive them. You cannot get them any other way unless you withdraw. When you take your coins out of the validator, that is a significant financial and disruptive event. You no longer receive validation rewards for a couple of epochs until you can reinvest. That has a significant implication in my mind. That is the position I would argue if I were taking this forward to Tax Court or to appeals.

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