Dispatch #25 – 2021
July 30th, 2021
This is a holiday-shortened edition of the Dispatch that provides a mid-year tax refresher for US readers. The key message is that YOU are responsible for keeping track of the cost basis and calculating gains/losses. There’s rising bipartisan support to crack down on crypto tax avoidance and the just-passed Infrastructure Bill assumes $28bn from better crypto tax enforcement. Full discussion line up follows:
- Crypto tax refresher
- Exchanges lower futures leverage available to clients
- Debt service moratoriums ending
- BITCOIN SCHOOL – short liquidation
The Dispatch will be off next week
Crypto tax refresher
We are more than halfway through 2021, so let the headline below from this CNBC article incentivize collecting your crypto trading data. If you haven’t done this already, download the entire transaction history from your exchange account. Keep this backed up, as this will be your proof of cost basis.
To repeat the Dispatch’s key message: YOU are responsible for tracking and reporting capital gains/losses. This is particularly true if you move coins out of the exchange wallet for better security. Don’t you pay for gains and claim losses for your stock trades? Crypto should be no different, except that your exchange/custodian is unlikely to provide a 1099 form like your stock brokerage does.
However, even though crypto exchanges haven’t historically provided 1099s to clients, the IRS is gathering transaction data from the exchanges. The IRS has ramped up “John Doe” warrants to gain access to records at Coinbase, Kraken and other exchanges as this legal newsletter lays out. A portion of the article is below with highlights by the Dispatch.
Crypto to fund the Infrastructure Bill!
This week’s Infrastructure Bill provides proof of the government’s focus on crypto taxes. The mainstream headline above from Fox is somewhat intimidating, but what this really means is stronger reporting rules on crypto exchanges. How that translates to an incremental $28bn in tax revenue is one of the wonders of Washington!
The takeaway, once again, is pay your taxes just like you do with gains from any other asset. This Coindesk article has more details about the infrastructure bill.
FTX & Binance lower futures leverage to 20x
Two of the largest exchanges offering crypto derivatives have announced a substantial reduction in the leverage available to traders. Binance, the world’s largest crypto exchange, and FTX have said they are lowering max leverage to 20x from the 100x previously available. This Businessinsider story offers more details. The tweets below are from the respective leaders of Binance and FTX.
This is an encouraging trend, but 20x leverage on an asset that exhibits annualized volatility near 100% is the wrong combination. You typically want to leverage assets that have low volatility and steady appreciation. Think of your house with the typical 20% down mortgage, which is 4x leverage.
These leverage futures were only available to non US residents. However, just this week, Binance announced restrictions for residents of Germany, Italy and Netherlands.
Government debt service moratoriums set to end soon
The 1.75m mortgage borrowers currently in forbearance is the largest by dollar value. While that’s a small 3.5% of total mortgages, it’s large, relative to the current 1.37m house national inventory as this Fortune article explains. This program is set to expire at the end of September.
At the same time, 30 million student loan borrowers will have to resume loan servicing at the end of September. The average payment is $400/month according to this Fortune article. Democrats in Congress are pushing to extend the moratorium again to 2022.
Finally, the eviction moratorium on renters expires today (Saturday) as Congress failed to extend protection. It’s not like Congress was surprised by the deadline, which they have known for months. This is estimated to place 12m families at eviction risk.
The government’s failure to extend the most pressing program — rental eviction for mostly lower income families — may suggests that the other program will also sunset as currently scheduled. All three of these programs have been extended three times from the original Cares Act schedule. Collectively, the end of these programs could become a short-term headwind for real estate markets and a longer-term headwind for consumption.
BITCOIN SCHOOL – Recent liquidation of bitcoin shorts
The recent rally caused shorts to be liquidated
The Dispatch has previously highlighted how falling bitcoin price leads to long futures positions liquidation. The opposite can happen when prices rise, as it did this past week. The chart below shows the notable liquidation of bitcoin future shorts. In stock market paralance, this is essentially a “short squeeze”.
Bitcoin short futures liquidation
Source: The Block Crypto
However, as the chart below illustrates the recent short liquidation was small compared to the long liquidations in May.
Bitcoin all futures liquidations
Source: The Block Crypto
Stay safe, enjoy the summer and do reach out if you have any questions or comments about the material in this Dispatch.
|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.