Douglas C. Borthwick, Chief Business Officer INX.co discusses the confidence in currency, crypto or cash and Finance specialist Mitch Kramer compares the cycles of inflation and the tax and investment opportunities they represent.

Episode Transcript

Intro:

Welcome to the Practical Tax podcast, with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz, LLP, a tax law firm.

Disclaimer:

The information contained in this podcast is based upon information available as of date of recording and will not be updated for changes in law regulation. Any information is not to be considered tax advice or legal advice and does not form an attorney/client relationship. Further, this podcast may be construed as attorney advertising. You should see professional consultation for your individual tax and legal situation.

Chip Franklin:

Welcome to Practical Tax I'm Chip Franklin. That's Steve Moskowitz. Steve, how are you my friend?

Steve Moskowitz:

Doing great Chip. How you doing?

Chip Franklin:

I'm doing well.

Steve Moskowitz:

We're talking about taxes and all kinds of things. So of course it's a happy time.

Chip Franklin:

Yeah. You know what it is interesting, is that it's really amazing to me how few people understand taxes. I think I read that there's like three times the number of pages in the tax code that are in the Bible. I mean, it just goes on and on and on. And I mean, you guys must spend a lot of time just keeping up to date?

Steve Moskowitz:

It changes. Congress changes the law, but then the courts interpret what the Congress said. So when Congress says, "You can deduct X?" Well, what's included in X? And then the next court goes ahead and makes a decision that adds on to that. Then the next court makes a decision, that's an opposition to that. And what a lot of people don't realize a lot of times, let's say you come to me, you come into my office, say, "Steve, I want to deduct X." And I say, "Well, Chip, there's a hundred cases on X of equal rank, equal power. And 70 of them say, you can deduct it. And 30 of them say that you can't." What do you do? Because, on a tax return, you deduct it or you don't deduct it. So if we choose to deduct it and the IRS chooses to audit it, the initial lawyer say, "Hey, IRS, doesn't recognize that, disallowed." But when you take the case up higher, usually what'll happen is the appeals officer will offer you something called hazards of litigation.

So let's assume what you did, that you deducted 100,000 and 70 cases say that's a good deduction and 30 cases say, can't deduct it. Normally the settlement officer say, "Okay, I'll offer you the 70% and you can see it on the 30%." And then your choice is, do you want to go for all of it in tax court? Or do you want to say, "Hey, 70 is pretty good and let's end it here." [inaudible 00:02:26] hazards of litigation. See that's why with an audit, an auditor is more like a light switch. Yes or no. The switch is either on or it's off. Once you go above the audit level, it's more of, there's a dimmer switch and it's well, are we maximum brightness or are we off? But usually we're somewhere in between.

Chip Franklin:

Life is a dimmer switch, that's for sure. One of the things, about three or four years ago, you and I were talking about cryptocurrency. And it's funny, because I have friends that dismiss it out of hand, they go, "Ah, I don't have any confidence in that." And well you trust money. Actually my great grandmother, before she passed, had some Confederate currency and I have to laugh, because it's just paper. And you ask yourself about cryptocurrency and where that's headed and this blockchain technology, all this. What it means, is that I think most people just don't know what it is. And obviously you have to know what it, is because it's subject to all the same tax regulations that money is. So joining us right now is Douglas Borthwick. He is a chief business officer at INX.co. And he's nice enough to be with us here to try to get to the bottom of this. Douglas, say hi to Steve.

Steve Moskowitz:

Hi, how you doing?

Douglas Borthwick:

Hey guys.

Chip Franklin:

Great to meet you. So let me just ask you this. If cryptocurrency was a person after this last year, how would you characterize his health?

Douglas Borthwick:

I'd say he is got a little bit of COVID. I think [inaudible 00:04:09]

Chip Franklin:

[inaudible 00:04:11] This is an opportunity too, right?

Douglas Borthwick:

It's a flu. It's a little bit of achy arms and legs, but I think that it's something that is going to come through, 99% of the time and even more than that. And this is a passing phase. We've seen this so far twice, where you see prices come off significantly. This is a very, very early technology. If you were to look at the price of Amazon in the first, let's say three years of its existence, the price is going to look very similar. It goes all the way up and it collapsed and it went all the way up and it collapsed. But in the end, it came through, it's shown through. If you look at cell phones and their adoption in the United States, same thing for 10 years up and down, adoption collapses. Everyone's talking about how it's going to give you brain cancer. And now there's 2.4 cell devices per person in America. So what I'm saying is, new technology, it gets [inaudible 00:05:06]. It gets pushed around, but this one is certainly here to stay.

Steve Moskowitz:

And if you saw Jeff Bezos's first office.

Douglas Borthwick:

Oh I did. Yeah.

Steve Moskowitz:

[inaudible 00:05:15] that tells the story. I saw a picture of it. It was a rinky dink little thing. Well, he did okay.

Chip Franklin:

Well the same with the internet. I mean, when the internet was coming along, nobody envisioned how it would control commerce the way it does today, speaking of Bezos.

Douglas Borthwick:

On March 10th, I think it was in 2000. When you saw the absolute collapse of the.com era. People said, "Internet's over, it's done." That was the newspaper headlines. Now, it wasn't done. I mean, the way that I look at cryptocurrency right now, or the crypto space, I'm driving an I95 and I'm in Connecticut. Now, there's been a car crash down in Florida. Yeah, there is, but it doesn't affect me and how I'm doing. And that's the net of it. You can't point to one big company going under and saying, "They're all stuffed." Because, everyone's got a completely different business. My company doesn't do any lending or borrowing. We don't do rehypothecation of client assets. And it's the guys that did that and use leverage, they're the ones that are in trouble.

Chip Franklin:

What percentage Steve, do you think of the people watching us right now, have no idea what we're talking about?

Steve Moskowitz:

A large percentage. And part of it is based on age group. And I've seen people make incredible amounts of money and I've seen lots and lots of clients where let's say their kids are into crypto and they start using terms. It's almost like the kid has broken into another language. He hears about something drop, "What you drop?" The parents looking off, "No, no, no, not that kind of drop." Or, "What do you mean blockchain? What do you mean a fork?" "Go in the kitchen if you want a fork." "No, no, it's not that kind of fork."

What is a currency? A currency, is something that somebody has faith in. So if I took anything, if I said, "Chip, I'm going to hand you this tissue and this tissue, the next time you need a tax return, done, I'll accept that in payment." And then you to the grocery store. And you say, "Well, I need to buy some groceries right now. And I don't have any currency with me, but I have this tissue and you see, Steve will accept this tissue as payment for the tax return." The grocer says, "Oh, well, I need my tax returned on. I'll accept the tissue. And I'll give you the groceries." This tissue has become currency.

Chip Franklin:

Yeah. Sure. [inaudible 00:07:45]. Go back real quick. And the history of currency, you used to trade a cow for some wheat. And then you got to a point where, all right, we're going to have paper currency, but it's got to be backed by something. It was backed by gold and then silver. And then when Nixon took the Dollar off the silver standard. Then it became all about confidence. So Douglas help us here. And I do want to get to the taxable part of this too with losses, Steve, because there were some losses incurred this past 12 months. And we'll get into that in a second. But please explain to just a little bit about blockchain technology in a way that people are kind of a 101 for people that are trying to understand this.

Steve Moskowitz:

Use some of the secret words.

Douglas Borthwick:

Well, first I'd say, when you talk currency and you're talking about your hanky, you're really talking there about national currency. Rather, the cryptocurrencies are currencies that could be used for specific uses on the blockchain. Now, what is the blockchain? I think of the blockchain as being, there's lots of different train tracks. And I remember when trains came to America, there was different gauges. You'd have one line using the lines this wide apart, another one this wide apart, we all had train sets when we were kids. And there's lots of different train tracks that are out there. These are called blockchains. There's the Bitcoin one. There's Ethereum, there's Avalanche. There's a Algorand, all kinds of these names. Now, if you want to put a train on that track and for that, I mean, let's say a security token or a digital security or you want to put some information on that track, you have to pay a currency. And that currency, if it's on the Bitcoin train track, you have to use Bitcoin. If it's on the Ethereum line, you have to use Ethereum, that's your gas fee. And so [inaudible 00:09:27]

Chip Franklin:

But I don't hold them Douglas.