Dispatch #11 -2021
April 16th, 2021
Let’s start with crypto taxes as it is traditional tax week. For 2020, IRS Form-1040 specifically asks if you had crypto transactions, illustrating the IRS’ growing focus on digital assets. You are expected to track the cost basis of your coins and report capital gains accurately. Other items discussed in this week’s Dispatch include:
- Turkey bans crypto transactions
- “Pay me in Bitcoin” – CNBC’s Jim Cramer
- Mortgage originator to accept Bitcoin/crypto
- Headlines juxtapose large banks’ Bitcoin embrace now vs. prior dismissal
- Used auto prices hit a peak, but subprime auto delinquencies jump
- Vaccine penetration & re-opening: Data from Israel is encouraging
- Bitcoin School: Should you diversify your digital assets beyond Bitcoin?
For a PDF version of Dispatch 11 click here
Crypto taxes
Source: https://www.irs.gov/pub/irs-pdf/f1040.pdf
The IRS is clearly paying attention to crypto assets and one can claim that this focus further legitimizes the asset class. On the enforcement side, the IRS is seeking client records from exchanges as this article highlights.
Crypto taxes are a relatively new subject, and there aren’t too many subject matter experts. For example, The CFA Institute recently shared this Yahoo Money video of an EY tax expert. Typically, the CFA institute has its own material, but not on crypto taxes. Regardless, this six minute video is well worth a watch, as the EY expert touches on the basics and some recent IRS actions on crypto assets.
- You are expected to keep track of your coins’ cost basis even though exchanges/custodians/wallets are unable to because blockchains are decentralized.
- For active traders, this Benzinga article has a list of firms that track crypto portfolios to monitor your cost basis. I don’t recommend these services for long-term investors.
This is NOT tax advice, so please consult a qualified tax lawyer/CPA for advice.
Turkey Bans crypto currency transactions
This WSJ headline, “Bitcoin payments to be banned in Turkey after confidence drops in Lira” sums up the condition in the country. Bitcoin did drop about 4% on the news, and expect countries with poor financial management to continue to restrict usage.
Bitcoin acceptance is growing
a) Salary in Bitcoin: Nothing further needs to be added to the tweet below.
Source: Twitter
I did hear Cramer live on TV and he was clear that he’ll take his salary denominated in Bitcoin (not denominated in US$ and converted to Bitcoin). I know Cramer is full of hot air, but he does have a powerful platform to transmit his view.
b) Mortgage company to accept Bitcoin as payment.
The Home Loan Expert LLC became the first US mortgage originator to accept Bitcoin as a verified asset and for down payments, as this release from the company explains.
This is a continuation of the Dispatch #10 discussion of the progress on Bitcoin acceptance for large ticket items. To give banks credit, they are no longer reporting clients with crypto to the Financial Crimes unit, as this 2018 story from the UK highlights.
As I conduct my own house search, I continue to discover first hand how digital assets assessed. My two observations to date:
- I asked both my mortgage broker and real estate broker how underwriters treat crypto assets. Both say they have not been asked that question by a client previously. It’s a single data point but chalk up another point that we are early in the adoption curve.
- I spoke to the mortgage lending department of a local bank. They require crypto assets to be liquidated and placed in US$ deposits to be considered one’s assets.
Decentralized blockchains do pose difficulties for underwriters. For example, I could well have borrowed the Bitcoin/crypto in my wallet from a parent, and the banks have limited means to verify. I will continue to report on this subject and my key advice is to keep good records of your transactions.
Banks’ changing opinions on Bitcoin
The tweet below covers material I’ve flagged in earlier Dispatches (#9 – Morgan Stanley & #7 – JPM & Citi), but I like seeing the contrast in print!
car prices hit record high despite rising delinquencies
Source: Manheim Auctions/Bianco Research via twitter
Source: Forbes article via Twitter
It’s unusual to see this divergence in two data points that are closely linked. Subprime borrowers mainly purchased used autos, so it’s interesting that used auto prices haven’t soften.
Perhaps falling new vehicle inventory due to a chip shortage (see WSJ article) is adding to the price move. Regardless, it’s fair to assume that used car price rise is a transitory effect.
Covid vaccine efficacy & re-opening: Israel is an encouraging leader
There is still a lot of debate over vaccines, virus variants and how quickly life should return to normal. I was delighted to see this chart that shows remarkably low daily new covid cases in Israel as vaccine penetration rose — this despite earlier worries about re-opening too quickly as this article in February highlights. The latest news is encouraging if you’d like life to return to normal.
- Israel has dropped outdoor mask requirement.
- The country will fully reopen for vaccinated tourists from May 23rd. The reopening is for tour groups at this point.
- Full reopening of all schools.
Source: FundStrat, Johns Hopkins, via Twitter
Should you diversify you digital assets beyond Bitcoin?
I get asked this question frequently. It’s a longer discussion which also depends on the client profile. But I’ll leave you with a few snippets below that provide some context on the longer term performance. Most crypto currencies are likely to lose value vs. Bitcoin, and with more than 8K coins are in circulation, it is very hard to pick the handful of winners.
Source: https://twitter.com/jimmysong/status/1381797745292369922
Note: Jimmy Song is what’s known as a bitcoin Maximillialist (someone who believes other assets are far inferior to Bitcoin).
Picking the 4-year performance might be cherry picking the most supportive data. The following reply to Jimmy Song asserts that Ethereum (ETH) has done better than Bitcoin over different time frames.
Source: https://twitter.com/ViktorBunin/status/1381808196990476289
Let’s take the two sets of numbers at face value. I will only point out that there are thousands of new coins that have been created since Ethereum was launched, and few of them have come close to matching the performance of Bitcoin through a price cycle. Most haven’t seen a full cycle, which makes the analysis irrelevant. The key message is that it is hard to find the next Ethereum! Blockchains have winner-takes-all network effects, so unlike retail shopping and Amazon, I doubt we’ll get multiple large (market cap.) blockchains offering the same utility.
Stay safe and do reach out if you have any questions or comments about the material in this Dispatch.
Asi
Important Disclosures
| This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results. |