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Crypto tax refresher as regulatory scrutiny spikes

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!

Source: Foxbusiness

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.

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.

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Crypto taxes, Turkey bans crypto, Bitcoin acceptance, used auto price, vaccines & re-opening, diversifing beyond Bitcoin

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.

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.