Two More Weeks of Tax Selling
Yesterday, I wrapped up a highly scientific twitter poll about crypto taxes in the U.S.
The final results showed that out of nearly 10k respondents, 19% had already paid their taxes, 17% hadn’t filed yet, but had the money ready to pay the piper, and 11% still needed to sell crypto in order to cover their massive 2017 liabilities.
The rest, of course, are either living abroad or planning to go to jail for tax evasion.
Ignoring the 53% who answered “you’ll never catch me”, this is one data point that shows how — with only two weeks left to file returns — a good chunk of prospective filers with liabilities to Uncle Sam (22% of my poll’s filers) still need to exit the crypto markets to cover their taxes.
This matches what I’ve heard anecdotally, particularly when you account for how few retail investors and their accountants know how to correctly report certain transactions.
Indeed, CoinDesk has been running a full series on crypto taxation this past week, and the punch lines have ranged wildly.
Here’s James Markwood of Cogent LG tacitly endorsing the omission of crypto-to-crypto trades for tax reporting purposes:
If Markwood is wrong, and more conservative views prevail, look out.
Many crypto-to-crypto traders have realized large gains in 2017 in dollar terms, yet may have been mentally accounting for performance in BTC terms for quite a while. That would mean many haven’t yet liquidated holdings to fiat to cover tax bills.
With prices down 60–80%, some may now have liabilities that now exceed the current value of their holdings. As such, many might choose to file extensions and instead eat late-payment penalties in the hopes that prices rebound in Q2 and Q3.
It’s risky: the U.S. government can’t margin call you, but they can send you to jail.
Say you are conservatively reporting crypto-trading gains already, though.
Here’s Omri Marian, a law professor at UC Irvine talking about how to deal with that stupid f@#$ing bitcoin cash fork:
How many people are oscillating between reporting BCH holdings as a capital gain with zero cost basis vs. a stock split vs. income? Who knows.
The details of crypto tax are a mess, and nobody is happy with the lack of IRS guidance, but directionally, just how big is the remaining potential selling pressure in the crypto markets?
My back of the envelope shows that $10bn would be a fair estimate for 2017 US tax liabilities.
Take the peak crypto market cap of $600bn in late December and assume that just $60bn of capital gains were realized worldwide in 2017. Half of that is probably attributable to US filers. With $30bn of US capital gains taxed at a blended rate of 33% (long-term cap gains and ordinary income rates) my uber-reliable twitter poll would mean you might expect an additional $1–2bn of additional outflows in the next couple of weeks to cover tax payments.
Even if you argue most of the tax selling is already reflected in the markets (because whales file early and smartly, a big assumption in this market, remember the bear whale?), that’s a lot of selling at 60–80% off the December highs.
At least this year, more people will be able to write off losses.
I Like Pictures
Feeling blue about taxes, at least Verge is up 40% today.
If only I had bought some dogecoin dark three years ago…
(h/t CoinMarketCap & OnChainFx)
The volunteer army at Messari is building a free, open-source library that anyone can use as a resource, so you can go down the crypto rabbit hole a bit more efficiently. Starting next week, we’ll start featuring one new token profile each day.
Interested in participating in this exclusive research group and slack channels? Apply to Eric Turner (firstname.lastname@example.org).
TBI’s Compression Algorithm
Japan’s Monex Group is considering buying Coincheck, the exchange that lost $500mm in NEM earlier this year. Although the company compensated its 260,000 (!) affected customers, it’s come under scrutiny from Japan’s Financial Services Authority. Monex is the country’s third largest online brokerage, and CoinCheck is currently the fifth largest crypto exchange with about 9% of March Japenese trading volumes. The acquisition would be on par with eTrade picking up Kraken here in the US, and it serves as a countermove to Monex rivals SBI (obtained a license to run a crypto exchange, and is a large investor in Ripple) and Line (applied for a crypto exchange license in January). Monex shares jumped 23% on the rumor. Reuters
CoinDesk’s Bailey Reutzel writes about Crypto Rico. Her profile of last month’s conference makes for a pretty savage takedown piece. Mixed feelings on some of the specifics, but agree with the punch line: “That’s how [shady characters] thrive. They count on us to be polite.” Said another way, it usually doesn’t pay to be a critic, particularly in markets like these. Worth the five minute long read. CoinDesk
Bloomberg does an excellent profile on Binance. The lede alone has some staggering information: in eight months, founder Zhao Changpeng grew the company to the largest crypto exchange by volume with 8 million users and $200mm in profits last quarter — despite having no physical address or bank account. The company’s loose KYC policies and high withdrawal limits “make it difficult to deter everything from money laundering to market manipulation”, but the company also offers some of the industry’s lowest fees and best uptime and liquidity. Its recent move to Malta could come with access to the country’s banking system, and maybe a home for CZ? The founder lives out of a suitcase, never spending too much time in any one place. Bloomberg
USV’s Albert Wenger had one of my favorite Cambridge Analytica takes. It’s easy to “exit” an application when there are substitutes available, but not so easy if we lack alternatives. One reason is that many apps become more useful the more data we pump into them. Albert proposes a clever regulation — with precedent in the EU banking system! — that would require any software service with 1mm+ users to provide its customers with personal API keys to easily transport and permission access to their data. These keys could conceivably allow for better operability between social apps, telephony, etc. Most people would still default to Facebook, but the option to exit would help keep the data monopolies honest. Albert’s Blog
Authors of paper at the Financial Cryptography found kiddie porn on the blockchain. In a Wired opinion piece, three US academics downplay the argument that node operators could be at risk, given “most crimes and regulatory strictures turn on your knowledge that you’ve done, or are doing, something wrong.” It’s the same legal precedent that protects social media companies from liability around user’s defamatory statements or online marketplaces from liability for listing counterfeit goods. Intent matters. But at scale, could this become a new attack vector? With enough kiddie porn appended to the bitcoin blockchain, it could be considered “reckless disregard for the truth” to run a full node and keep a copy of these transactions. Wired
Quick Bits (Don’t read that, I read it for you)
+ Surprise! Canada’s BMO bans bitcoin and Local Bitcoin volumes spike from $1mm to $8mm within one week.
+ Bitpay raised a $40mm Series B from Menlo Ventures and Aquiline Technology Growth; the company was processing $2bn in annualized transaction volume in December.
+ For those who like the enterprise blockchain circle-je…I mean…consortia, the Enterprise Ethereum Alliance is now up to 335 members, while Hyperledger sits at 231. Just think of how many pilot press releases that will lead to!
+ Google banned “crypto jacking” web browser mining applications from Chrome, after an internal audit found that 90% of extensions were ignoring Google policies. Symantec had previously found an 85x increase in crypto-miners in 2017.
The Powers That Be
+ Seoul is launching a crypto to fund its social programs such as transit and youth initiatives.
+ A tax expert outlines ways in which active traders can save on their US taxes by applying for trader tax status…but it’s only relevant if you’re truly day trading.
+ Japan set up a new 500 person agency to address cybercrime.
+ JPMorgan blockchain lead Amber Baldet is leaving to start a new venture outside of the bank.
+ Coinbase board member and former DoJ prosecutor, Kathryn Haun, joined the board of bug bounty startup, HackerOne, to assist with “bridging the communications gap” between the startup and policymakers.
+ Vitalik live-tweeted a panel with Roger Ver & Samson Mow and called Craig Wright a fraud. Both were glorious. His ETH monetary policy jokes aren’t as funny.
+ The SEC arrested founders of that Floyd Mayweather-backed ICO for fraud, surprising no one.
Did I miss something big?
Send me the link, your twitter handle and your best imitation compression algorithm write up. If I really whiffed, I’ll include your bit tomorrow (with attribution).
Hit me up when I’m in your city!
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