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Though few understand Bitcoin, IRS wants cut—and Happy Tax will help


Beth Ewen

Illustration by Jonathan Hankin

Though few understand Bitcoin, IRS wants cut—and Happy Tax will help Long before most people have even figured out Bitcoin (or other forms of cryptocurrency) the Internal Revenue Service is targeting those who profit from it to get their cut. One franchised tax preparation firm, Happy Tax, is aiming to be the first to help taxpayers comply with the law.

“We try to stay on the cutting edge wherever we can,” says Mario Costanz, CEO of Happy Tax, the three-year-old firm with 157 franchisees.

Its new division is called CryptoTaxPrep.com, which Costanz calls the first crypto-specialty tax practice to assist crytocurrency traders.

Earlier last year, Costanz said, Happy Tax started accepting crypto for franchise fees, although the potential investors who wanted to use crypto ultimately changed their minds. By then, he had already started diving into crypto’s potential and figuring out how Happy Tax could gain a foothold.

“The more we looked at it, there are a lot of people that own crypto,” 5 million in the United States, he says. “There’s a big misconception in the sector that they don’t have to pay taxes on it, and the reality is the IRS requires taxes to be paid on all income.

“So we got really deep into research, making sure we understood it, and it’s a relatively complicated process to reconcile. Because unlike a stock trade, there’s no broker sending you a 1099-B to tell you your stock transactions.”

Wildly volatile

But let’s back up a bit—what is Bitcoin, also called ether or cryptocurrency or digital currency? It vaulted last year from a “fringe area of Wall Street interest to the most talked-about asset in the financial world,” intones the Wall Street Journal. “The currency, essentially a digital form of money with no government or central bank behind it, started 2017 trading around $1,000, then shot to near $20,000 as individual and
institutional investors alike ramped up speculation on its rise.”

From its high reached in December, the Journal noted, the price was chopped almost in half over the next month—this is one
currency that is wildly volatile.

The IRS is among the entities that are most intensely interested in crypto. Last November, the IRS won a victory in its court case versus Coinbase, which is America’s largest Bitcoin exchange. Coinbase was ordered to provide identification information for users who conducted transactions worth more than $20,000 on its platform between 2013 and 2015. Coinbase had said that period accounted for 8.9 million transactions by 14,355 account holders.

Coinbase and other players argue that anonymity is one of the advantages of using crypto, but this latest case deals a blow to being anonymous. Peter Van Valkenburgh, director of research at Coin Center, told Investopedia.com the ruling from a San Francisco court sets “a bad precedent for financial privacy. Without better rationale for why these specific transactions were suspect a similarly sweeping request could be made for customer data from any financial institution.”

The Internal Revenue Service believes, however, many more people are trading than paying taxes. For 2015, the IRS said only 807 people declared bitcoin for taxes whereas the user numbers (5.9 million) and transaction amounts ($6 billion) from 2013 to 2015 would suggest many more owed money.

'They don't have a clue'

Back to Mario Costanz at Happy Tax, who said he invested in technology and marketing and hiring and training of a division of CPAs who can service those taxpayers, “because so many regular people barely know what it is and the accounting profession and the franchise world, they don’t have a clue,” he said. Happy Tax “is grabbing a little extra niche in the marketplace to serve our customers. Five million people is not something to shake a stick at.”

Happy Tax already has an unusual business model, calling itself a virtual tax preparation firm. Clients come to Happy Tax by using an app, and then franchisees will meet with the client, go through a questionnaire, and then send it to centralized tax preparers who work for Happy Tax corporate and finish the tax returns, then have the client electronically sign.

For crypto tax returns, the first part of the process is the same, but then preparers reach out to the client to link up all their wallets and exchanges to reconcile the transactions. Instead of a couple of hours to generate a return, it might take a week or so. Happy Tax has four buckets of services that cost $100, $200, $300 or $500. For CryptoTaxPrep.com, “all we did is create a new bucket, $700 for the crypto
accounting,” because of the additional work involved.

Costanz expects the numbers to get much, much bigger—when we spoke in early January crypto had just surpassed $619.7 billion in market capitalization, up from $17.7 billion one year before—a 3,362 percent increase, as Costanz pointed out.

An energetic CEO with a way with words, Costanz was kind enough to explain the technology behind the trading of cryptocurrency, called blockchain. “Blockchain technology is part of the future; it’s just as important a technology as the internet. It’s going to eliminate many middlemen in many industries.”

Essentially, he continues, blockchain is like a railroad track. “So if I was going to send you a Bitcoin it will go over that railroad track. And each one of those rungs on the railroad track is called a node, and they’re all going to verify this Bitcoin, and all of those nodes between me and you, which are essentially just computers, they all have to verify the block. They all run a computer algorithm to make sure it’s the proper transaction that I’m sending to you, and if they all agree then it’s guaranteed accurate.”

And by the way, he says, the IRS is watching. Will crypto be a target? “Yes, 100 percent,” he says. “They’re not just going to turn a blind eye to all these profits and all this income. I feel the enforcement efforts are going to get greater as time goes on.”

Beth Ewen is editor-in-chief of Franchise Times, and writes the Continental Franchise Review® column in each issue. Send interesting legal and public policy cases to bewen@franchisetimes.com.

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