As 2023 Comes to an End, Deloitte Anticipates Greater IRS Interest in Taxpayer Crypto Records

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Full-text transcript of David Berlind's Interview with Rob Massey, Blockchain and Digital Assets Practice at Deloitte

David Berlind: Today is December 4th, 2023. I'm David Berlind, and this is the Blockchain Journal podcast.

You know, when it comes to working with cryptocurrency – and that's any cryptocurrency, the end of the year is a special time of the year because so many people and organizations have been flowing cryptocurrency in and out of their different accounts and wallets and, the thing about cryptocurrency is its value is volatile relative to US dollars and other fiat currencies, and this can create a nightmare if you're one of those people who has to report it all to your tax accountant.

Joining me today, is Rob Massey. He is with the Blockchain and Digital Assets Practice at Deloitte, he is one of the leaders of that practice, in fact, the leader of the tax practice. Rob, thanks for joining me today on the Blockchain Journal podcast.

Rob Massey: Thank you for having me, David. This is great.

Berlind: Yeah, it's so good to have you because you're such an expert on the topic. And I just wanna kind of preface this with, I have my own tax accountant. And I said, "Hey, by the way, I've got some cryptocurrency stuff going on." And he just rolled his eyes and he was like, "Okay, when did you buy? When did you exit? What was the value?" All of that. And I was like, "Um...I don't know." He goes, "You need to keep track of that because it's gonna make my job a lot harder."

I can only imagine what that must be like for enterprises and other organizations, especially if they're dealing with multiple cryptocurrencies, they're taking payments, receiving payments, paying payments. I just can't imagine.

First, I'd like to start with, what is it that Deloitte is doing with blockchain. Because it may come as a surprise to many people that such a big consultancy is involved with blockchain and cryptocurrency.

Massey: Yeah, it's a good question. It's important when we started engaging in the space as a firm over 12 years ago, and that is because we saw a lot of our, our clients start to talk about it. And what quickly became apparent is that this blockchain and digital assets is transformative to 100% of our client base. And while it's still iterating and it's evolving in many ways, the impact is real. So we cover every segment of the ecosystem across all of our competencies. So it's important for us to serve not only the early-stage, crypto natives developing new tokens and protocols and DeFi. It's also important for us to serve the large enterprise who are engaging in this space and developing smart contracts. It's funds engaging, it's government agencies. We cover all the different ecosystem segments, as well as serving them across tax. In my example, right, I cover everything for tax for companies in this space, we cover regulatory, and we do build protocols. We help people build in this space. And so, everything that you might imagine that Deloitte might do in a traditional sense, we do for blockchain and digital assets.

Berlind: And sure, I can imagine there are a lot of enterprises out there that – they're seeing the train leaving the station. You pointed out that it's so digitally transformative that it applies to all of your clients.

Massey: Yeah.

Berlind: I like to joke with a lot of people because they say, "Oh, well – there's not really a lot of adoption here, there's a lot of negative headlines around cryptocurrency, it's kind of slow." And I'm like, "We're actually doing some research there, and we're finding that more enterprises and global brands are doing something with blockchain than not." I like to joke that in the automotive industry alone, it's nearly impossible to find a car manufacturer that isn't doing something with blockchain.

Massey: It's absolutely true. You may not see them deploying it at scale immediately, but there's a lot of experimentation. There's a lot of readiness. They absolutely – there's just an acknowledgment that blockchain and digital assets will impact the business. The question is, you know, where are they on the journey? Where do they need us? What do we need to demystify? What have we learned in our, many, many years of experience that can help them so they're not reinventing for the first time? So I think it's a great time to engage.

Berlind: Well, I'm glad you're here with us on the Blockchain Journal podcast because you're gonna help us do a little demystification for our audience.

And I wanna start off with – it's December, 2023. The year has been a very tumultuous year in the blockchain industry and for cryptocurrency. It's been swinging all over the place. The regulatory landscape has been shifting wildly. There have been all kinds of rumors. Some things have happened that they said were going to happen. Things haven't happened.

What is an enterprise going to do amidst all this uncertainty? Well, it's the end of the year. They have to do something, right?

Massey: Yeah, it's a good time to take stock of what you have done and make sure that you have your transactions captured so that when you're reporting something at your end – for book purposes and getting ready for tax purposes – that you have a firm understanding of what those transactions were so you're not backed into a corner.

One thing that is interesting in this space is that while you might be engaging in a transaction, it feels like normal course, it's got the same economics of something you did using traditional fiat currencies or securities or commodities. But when you insert digital assets into that transaction flow, it may change the nature of what you did. It may change the character of the transaction. It may change the sourcing considerations. And so, as we get close to year-end, companies re-evaluating, what did you do? What new transaction types? What kind of books and records? What kind of data? Make sure you have all that understood while it's fresh and top of mind to get ahead of it before you're backed into a corner year-end close or next fall thinking about submitting a tax return.

Berlind: I'm guessing that part of the preparation for companies that are getting into blockchain cryptocurrency in the first place, somebody has to sit them down and say, "By the way, get your record keeping in order right now."

Massey: That's right.

Berlind: "Don't wait till the end of the year to try to figure it out, don't have it scattered across lots of different spreadsheets" and things like that. That to me personally was very problematic, and I know out there, there are very few solutions that integrate all of that record-keeping into your existing record-keeping workflows for fiat currency.

An example would be... I know Deloitte had a little bit of a partnership with Bitwave, which specializes in doing that. And also SAP is releasing something they call the Digital Currency Hub, where they try to keep track of all of that with their existing ERP solutions, kind of integrated into their ERP solutions.

How much time do you spend with Deloitte's clients saying, "Hey, this is how you gotta set things up because if you're not, by the time the end of the year comes around, it's gonna be chaos."

Massey: Yeah, for sure. Contemporaneous books and records is a big deal. And there's very few mainstream ERP systems that deal with crypto gracefully. And so you're dealing – as you said, with the SAP Hub – Bitwave is a great accounting sub-ledger for blockchain, for digital asset transactions. And that feeds into the ERP systems. Taxbit also has a product.

And so we spend a lot of time saying, hey, when things scale, the markets really take off and they run and the transaction volume is extraordinary, you need to have a system in place to capture that data real-time and understanding again what are the transactions, make sure that's wired into the system, think about tax in advance.

So, for sure this is the time to make sure it's all buttoned up and that you've got the books and records but also your control frameworks in place so that you're not questioned later by your auditors.

Berlind: 2023, it's been a year of turmoil. As I said before, the regulatory landscape has been shifting. What are you thinking about in terms of where the IRS is right now? You must be watching the IRS very closely and then advising your clients appropriately given that.

Massey: Yeah, we have been advising clients on tax matters related to digital assets for many years. What's interesting is there's very little guidance. In fact, you know, 12 years for us in this space. While the IRS has published certain things, there's not a ton of guidance out there. And, the volume of transactions, the types of transactions, the nuances, the innovation is [at] an incredible pace. It's tough for the IRS to keep up.

And so what we do is we advise, these are the analogies, strategies that could work. Let's make sure that you're running to ground what we can in terms of developing sound positions and sound accounting methods. Make sure your books and records are buttoned up and then write it down. Make sure it's documented. What were the intentions of management? What is the level of support?

We have seen exam over time. The IRS, we've helped our clients go through IRS exam and it's really difficult given the nuanced transactions and lack of guidance. But what we've heard that the IRS is getting more engaged in the space. They have confirmed publicly that digital asset transactions are a top priority of theirs. We've seen an uptick in some exam activities so far, and they've publicly announced that they are going to be leaning in much more and that we expect more of our clients to receive notices in 2024 for historical tax years.

Berlind: Given the lack of certainty, is there a situation that could arise where an organization does everything you tell them to do, but they still get hauled in for an exam, and then the results of that exam could require additional steps in order to be in compliance? Or, are things in such flux that the IRS might look at the intent, look at the record-keeping, and say, you know what, you've... given the lack of certainty, you've done the best you can do. So we're gonna give you the green check and maybe next year. Like, how does that work? Because nobody knows what to do.

Massey: It's a good question. There's a lot of, there's actually a lot of discretion that happens under exam. And so when you're going through an IRS exam, you're gonna deal with the agents in the field, and they do have a certain amount of guidance that's put forth. And if what's been presented in a tax return lines up with the guidance that they think is appropriate, then that could be pretty smooth. If you have done something that is a little bit different or maybe hasn't been addressed by guidance, then you do your best to work through it under exam and talk through the analogies that you used and the case law that you've referenced that seems applicable. And if you can't reach [an] agreement, then you can either settle or take it to appeals. The interesting thing about digital asset transactions is that there just isn't a ton of guidance on [the]point. And this is really difficult under exam.

You know, the agents have some tools to work with, but we're all learning and evolving[in real-time in this space. And so the best thing you can do is address it as thoughtfully as you can contemporaneously, because if you're really doing your best to address it thoughtfully, here's all the rules we think are on point. Here's the case. Here's the analogy. Here's how our facts well documented, [and] well summarized, line up with these rules. And you have that written down at the same time of the transaction. Then when the agent asks about it that looks... You're starting off on the right foot because you cared. You took the time to get into it. Then if they have a different point of view, clearly you've got to work through that. But at least you've given it a good attempt and you've created as much grace as you can.

Berlind: You say that the agents in the field have received some amount of guidance. Does the IRS disclose that guidance to people like you as well so that you're aligned or do you actually kind of learn on the fly while you're sitting through an exam? "Oh, okay. That must have been the guidance that the agent got."

Massey: Yeah. The agents have some programs that they go through that we don't have visibility into. But the guidance that has been published by the IRS, things like the FAQs on the IRS website, it's not a very authoritative level of guidance, but it does show what they're thinking. We have had certain revenue rulings. We also had Congress weigh in the fall of 21 with things like information reporting. And we're seeing those Treasury regulations play out.

We saw proposed regs drop a couple of months ago and we'll see those in final form at some point in the future. But there is enough dialogue where you can kind of guess where they're going. And yes, you're right, we do learn under exam. We learn what are the field agents hearing. What do their programs feel like? The difference now is that with blockchain digital asset transactions, there's a fair amount of transparency out there.

Meaning, if they have visibility to your addresses, then they have visibility to all of the transactions that have hit those addresses, input and output transactions. And it wouldn't be uncommon for them to say, "Hey, can you reconcile all those input and output transactions back to your trial balance and then to the return?" That's what's different with digital asset transactions than we've seen in traditional business models.

Berlind: So you go to an exam, and I'm sure they cover a range of topics. What are the hot buttons when somebody goes into that exam, and what are you looking for? There must be a whole bunch of things that come up.

Massey: Yeah, and we try and get ahead of it, real-time with our clients or if they've not thought about it, we'll do maybe a post-mortem, if you will. But that first starting point, let's make sure that we have a complete set of data. Has anybody actually reconciled all of your on-chain data to your books and records and then to your tax return? That's a big starting point. So they look for completeness. Have you reported everything? Has every transaction that's at the ledger hit your books and records?

That's absolutely the first place. They look to see about the character of the transactions, capital versus ordinary. If you're using a lot of digital asset transactions in the ordinary course of business, have you paid attention to capital versus ordinary treatment? And that has a lot of implications, whether it's the rates that are applied or as you're crossing borders or personal holding company analysis, state sourcing, and all the rest. So we get a lot into character. Basis tracking, you alluded to this a little bit with your question with your CPA. Have you kept records about when you bought something, when you sold it, when you used it? Crypto-to-crypto transactions or crypto-to-fiat transactions, those are realization events. And that means that you've probably got gain or loss to the extent that there's a difference in value and we do see a lot of differences in value.

Have you really done your best to track the basis associated with each digital asset that you took on, that you acquired? And then the time that it was disposed or used, and then which accounting methodology, which tax accounting convention have you used, whether that is specific ID or FIFO or some other convention to make sure that you have all that. Well documented, well supported, and then reported.

Berlind: Okay, so when you've got your company – let's say an enterprise, not Deloitte – but a company that is engaging in transactions, you pointed out that all of this activity is pretty much public record, right?

Massey: Yeah.

Berlind: It's on a public ledger. And more than likely, the outgoing and incoming payments are going to and from vendors and customers.

it seems like that actually creates more transparency across all businesses for an organization, a government organization like the IRS. And it makes me wonder if they themselves, the IRS, would be building some intelligence around that to make sure that nothing's slipping through the cracks.

Massey: Yeah, for sure. We're well aware that the IRS is working with their own vendors and tools to build analytics around whose addresses are these. And so that's, you know, new in this space and something that we should all be paying attention to. It used to be that, you know, your books and records were provided to the IRS when they were asked for them and you would provide them over there and they would do reconciliations to other data sources. They now have the ability to look at the on-chain data themselves associated with you using their own analytics tools and then ask questions. "Hey, what about that transaction? This transaction, is this address really you?"

And then – and it's the funny thing in this space is people move digital assets between addresses for various business reasons. So not only do you have to reconcile what was the transaction, but sometimes it's within the company, you're just moving it from a for a security perspective or you put it into a different custodian or whatever it is that may not be actually representative of a transaction but you need to make sure that you have the documentation to say, "Look that wasn't really a realization event that was just me moving the crypto."

Berlind: And that's where it gets tricky, right? Because the way blockchain kind of works, the way blockchain transactions work, it's not really easy to attach a memo to them –

Massey: That's right.

Berlind: Where [do] you note this stuff? I mean, sometimes there's a memo field, but you put something in it and it will cause the transaction to fail because you stuck something in there that didn't belong. So that's probably where the BitWaves and the SAP digital currency hubs come up.

Massey: You got it. They've built-in means to capture data and memo entries kind of back in the old days when those of us who prepared handwritten journal entries, you would write what it was all about. Yeah. Now we've got a means to attach, you know, some typewritten fields. What did this relate to? And keeping that on hand. There's also people who've built bespoke systems to track and document what were the intentions behind the transaction. What does it relate to? Lots of best practices out there.

As long as you're making a good attempt and a good rule of thumb is, ask yourself, if there was an agent kind of looking at you with a furrowed brow and they asked a question about that transaction, take a new look at what you wrote down. How does it look? Did you write enough? Does it have enough context? So, you know, you can imagine what it's like to go through exam. And if you can't, I'll let you know. And I'm happy to give you that background. But Imagine going through that process now and then ask yourself, have you done a good enough job writing it down?

Berlind: I could really imagine that the IRS would actually be favorable to a world that involves cryptocurrency and stable coins as opposed to fiat where they can see the transactions before they even come into an exam or even before a company is filed. They're getting all sorts of information ahead, whereas you just pointed out [that] typically the way things used to work is [that] you bring your books when you're asked for them. Well, now it's just all there in advance. So that seems to me like it would be a better world for the IRS to operate in.

Massey: I mean, the jury is still out –

Berlind: Yeah.

Massey: And we will see how it evolves over time. I think it's still early days but for sure. And other federal agencies have made statements much like you just described, right? The level of transparency we have on ledger-based transactions, [and] decentralized ledger-based transactions means that they have lots of visibility, making it easier for them to catch the bad guys sometimes. And that may play out with the IRS in a different – in many different ways, we will see. At the moment, we're just trying to make sure that we get everything captured and reported because the questions are quite real.

Berlind: You made me think of one "gotcha," which is when organizations are starting to get involved with blockchain or cryptocurrency... One of the things we've noticed in our research, looking at all the use cases out there, is that some of these projects are actually similar. There's a striking similarity to the way a lot of companies adopted cloud-based solutions. Oh, some little department over here saw a need, saw an opportunity. And they could just drop their credit card and suddenly they're working with some cloud-based solution. Off to the races, no worries. But meanwhile, the typical channels have been kind of excluded from that discussion.

Massey: Yeah.

Berlind: For example, the IT department or the CFO's office. So do you see any of that? I mean, I've seen some of that happening where a marketing department goes off and starts with some sort of NFT program. It seems to me that this is similar. Is that happening and how do you get that under control if you're in an enterprise?

Massey: It is. It is happening. And the example of NFT is very real. It's a marketing department. It's a business department. It's like, "Hey, we're going to reach customers differently. We're going to reach them more if we incorporate this NFT element. Let's just do it." But NFTs are a thing. And so you have to stop and ask yourself, what is this thing that you created? Is there some sort of a tax requirement? What about sales tax? What about VAT? What about what about the books and records? Have we dealt with KYC? AML?

There's a lot of considerations when you're adopting these new business models. Make sure you're spinning it all the way through. The thing with digital assets is it's new for everybody. So you can no longer assume that you know what your neighbor across the hall did. You know your neighbor in accounting. You can no longer make assumptions about how they're going to treat something. You got to go and talk to them. "Hey, what are you going to do with that NFT?" And they say, "Well, this is what I'm going to do." "What are you going to do for tax?" And we have a conversation. "Hey, should we go talk to legal?" "Yeah, that's a really good idea." The controllers group.

Getting everybody together to talk, and sometimes that's a lot around the Zoom room. A lot of times it's filling a conference room, but it's a heavy degree of collaboration between departments in the enterprise, but also among advisors. We find ourselves collaborating a lot within Deloitte, crossing the competencies, but also with other advisors, importantly law firms, surrounding our clients to make sure that they have what they need in place.

Berlind: You mentioned VAT, so let's go there for a minute. That triggers the international aspect of this in my mind –

Massey: Yeah.

Berlind: And I can imagine that for those multinational companies out there – number one, we're not just talking about the IRS, now you're in a variety of jurisdictions around the world, all of which have different regulations when it comes to dealing with cryptocurrency. How does that complicate the scenario for Deloitte when it's advising its clients?

Massey: Yeah. Looking at the jurisdictions that are relevant is very important. And cross-border transactions are common in this space, just like every large enterprise. But when you're using a digital asset different than fiat, you have to stop and ask yourself the question, "OK, what is it? What is that thing that we're using?" And we do have that silly question, "What's the thing?" It comes up a lot. And then you put the jurisdictional lens on it. What is the transaction type? How could that asset be classified there?

And then you put the lenses of direct tax and indirect tax with VAT, you find that the application does vary a lot by jurisdiction – if they have a VAT regime. And what you find is a spectrum of digital assets. Those which are more money-like have a greater chance of being exempt from VAT when they're less money-like than they have a less chance of being exempt from VAT. So I say more money-like.

Berlind: Is that fungible versus non-fungible?

Massey: Partially. So you think about stable coins and mainstream crypto that's used as a means of payment, then that would be the more money-like category. Then when you move away from it, tokens with some amount of utility or governance feature or a digital representation of a thing. You might do a look-through analysis, and then going across to an NFT. And so the application of VAT may vary by digital asset type, but also then within an enterprise, if you're dealing with some of each, then the mix of VAT transactions is going to be relevant to your ability to recover VAT on others.

It's complicated. Indirect tax, VAT abroad, and then sales tax here in the US is a big hot topic as it relates to NFTs for sure. A lot of great, cool business models coming from NFTs and tokenized real-world assets, but you got to put the indirect tax lens on top. Big deal. That's not the IRS, by the way. That's each state. The applicability of state of sales tax is at a state basis. Very different than the federal rules that we have. And so you've got to address it piece by piece. VAT tends to be addressed on a country basis, but we don't have that regime here.

Berlind: No. Okay, well, just the fact that you rattled off all of those different token types, like you were talking about, you know, real-world assets tokenization, you talked about utility governance, you know, transfer of value cryptocurrencies that are typically, you know, where they're typically used for that. That alone is worth, you know, just this video to many people, it's so... It's such an unknown world and just to be able to carve it up and say, "Hey, look, you've got different things going on here and you have to think about that in advance because you might create a token and you have to think is, is that going to be utility token or you can use that for transfer of value? How's it going to work governance? What is governance?"" There's so much to learn. This is where a lot of enterprises and a lot of global brands are in the dark and just trying to get their heads wrapped around this. So.

What are the key takeaways? If you could advise people out there who are not your clients – maybe they will be one day – what should they be thinking about here? End of the year, what do they really have to get done?

Massey: Yeah, I would start with a value, you know, to turn around and say, what have we done lately? What have we done historically? And put that transparency lens on it. We talked about the transparency related to the different digital asset transactions, but also there's transparency around if you're using a public GitHub repository or any sort of sharing – coding repository, then a lot of times that may be viewed by the IRS as well. And so think about transparency in total and say, "Look, what have we done that's viewable to external parties and what does that narrative look like if we're asked the question?"

Clearly, you want to make sure you have a comprehensive set of books and records. Everything is reconciled, but even though you have everything together, test the narrative by saying what external information may be out there. What have we said publicly, whether it's a speech, whether it's a whether it's a tweet, [or] any other social media channels, but think about that chain and if any development has been done in a public repository.

That is where you start. And then since you're using that muscle say what are we doing next? What's on [the] radar? What is what is exciting? What's on our roadmap for different business models, maybe different jurisdictions? Because you're already exercising that muscle, analyzing these transactions, what do they represent with the tax lens and the legal lens, the accounting lens. Take that energy and now go forward. Establish that cadence of real-time collaboration across the different segments. That's really what... we think that's best practice, right? It's just a continuous stream of conversation. And if there's anything in the past that makes you nervous, Why not a mock exam? Test it, right? We employ, we have a lot of people that come out of the IRS, ex-agents, and they help us under exam. Let's do a mock exam, let's test it. What does an IDR feel like? How does your documentation stand up? So it's not a bad time to test the readiness. How good of a job have you done?

Berlind: What, you're making me think that organizationally, most companies don't have a lot of people within their organizations that understand all of this, especially as it relates to cryptocurrency in the blockchain world. It's one thing to deal with the other traditional finance world. So do you see any patterns here, or do you recommend where companies should add a few people whose job it is just to kind of rein all of this in? Because I can't imagine adding this to the plate of existing people who just are unfamiliar with it. You need to kind of like have some specialists or something, somebody who really understands it so that you're not missing anything or are people just flying by the seat of their pants.

Massey: The evolution of the departments in a traditional enterprise that look after this space is interesting. It's hard to be told to go and figure it out. It's really hard. And it can be very scary to people, right? There's a ton of narratives out there that are really scary.

What we find is there are usually humans in the organization that are into it. They appreciate the level of innovation. It's become a hobby to study it and read about it. And what you'll find is that they're raising their hand, saying, "Hey, I'd like to do more of this. I'd like to take on a role to assemble a cross-competency community even within the company to make sure that we're talking."

The patterns have been fascinating. Where there's somebody that is a person to a tax, somebody to accounting, somebody illegal, and they're forming communities within the organization, we're seeing people step up and take on leadership roles.

To your point it can it's really hard and it's heavy and it's hard to add something that's really that heavy onto someone's already full plate. So, organizations [are] creating space for certain valued individuals in the enterprise so like raise their hand and do more it's a great opportunity to take on some leadership and you know flex your ability to show that you do have the aptitude the horsepower the interest to take this provocative topic give it a level of care and move it through the enterprise.

That tends to be the pattern today as it's becoming mainstream, as you're seeing communities formed within the enterprise. It's great, it's great. Not everybody wants to do it, that's okay. It's hard to be told to engage in this space. But those who do show the interest, give them that ability, give them the support. And at the leadership level, acknowledge, "Hey, this is a hard topic, it's important to our business. I as a leader should support that group that’s forward-thinking not just so they can advance the enterprise, but so they can keep me out of trouble from a regulatory sense" right? You need somebody who's really in it.

Berlind: Sure, well, and for those people who are having a difficult time, they can always turn to you, right?

Massey: (Laughs) In the sea of variables of blockchain and digital asset[s], I think I'm the constant. I've been doing this [for] a long time.

Berlind: Yeah, wait, how long is that now?

Massey: This is year 13. So yeah, a long time. And of course, I'm happy to take questions. I love supporting this space. We have 2,000 people in Deloitte that work in this space across all the different competencies.

Berlind: Wow.

Massey: And we're all here because one, we enjoy it, but we do see the transformative impact in our clients. Love supporting in this space. Super fun. Great to collaborate.

Berlind: Well, at the end of this video, we're gonna flash up a screen that has your contact information on Twitter and LinkedIn.

Massey: Okay.

Berlind: I know you're very active on both of those social networks and so you'll be easy to find. Rob Massey, thanks very much for joining us here on the Blockchain Journal Podcast.

Massey: Thanks for having David. This is a great conversation. Thanks for all you're doing in this space, by the way.

Berlind: [We] greatly appreciate it. We're just getting started here and I'm sure we'll disappoint somebody But hopefully, we'll just keep learning and improving We've been speaking with Rob Massey. He's a leader of the blockchain and digital assets part practice at Deloitte I'm David Berlind [with] Blockchain Journal you can see all of our content at blockchainjournal.com Or if you go to youtube/@blockchainjournal you can find all of our videos like this one and other ones. Thanks for joining us We'll see you at the next podcast.