Byte Me: the taxman cometh

The minefield of what a cryptocurrency is might have been able to remain comfortably in the realms of the philosophical, if it were not for the relentlessly grounded and literal approach of the US Internal Revenue Service.

  • By Costas Mourselas, Lewis McLellan
  • 17 May 2018
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Over the past year, cryptocurrencies have been assets, commodities, currencies and securities. The picture is complicated further when one considers the possibility that it may not be possible to paint all cryptocurrencies with the same brush.

For tax purposes, the IRS considers cryptocurrencies to be property, and as such, requires users to pay income tax and capital gains tax on money earned on them.

Simple, you might think. But while many investors would be prepared to pay capital gains tax on what they realise (i.e. sell for fiat currency), the IRS wants to tax gains in value for every transaction.

So, if you buy $1,000 worth of bitcoin, use it for a year buying and selling other cryptocurrencies, then cash out $5,000, the IRS won’t be happy with simply taxing your gain of $4,000. Every time you paid for something with your bitcoin, be that a cup of coffee from one of the incredibly rare retailers that accepts it, or purchasing other cryptocurrencies, you would owe the tax on the change in value in your holdings as realised by that transaction.

For day traders, this involves reporting on thousands of transactions and, given the often substantial differences in cryptocurrencies’ value from exchange to exchange, it’s a nigh on impossible task.

And that’s scarcely the half of it. In August last year, a new cryptocurrency was created by hardforking bitcoin’s blockchain. In plain English, that means that some people decided they wanted to create a new version of bitcoin with subtly but crucially different rules. Rather than start from scratch, they simply adapted the existing bitcoin code. The effect of this was that everyone who owned bitcoin suddenly also owned bitcoin cash. This is not, in itself, especially unusual. What is unusual is that bitcoin cash now has a market cap of almost $22bn — making it a colossal windfall for users and surely a completely new type of income on which to be taxed. We are through the looking glass here, discovering whole new problems of tax law and accountancy.

It’s a pity then, that the people on the cutting edge of crypto (and it will feel just like a cutting edge when the IRS comes calling) are more or less precisely those people least inclined to play ball with the taxman.

Bitcoin’s origins are fundamentally anarchist: political, rather than economic. The crowd can govern itself, they contend. Central bodies, whether a bank mediating payments or a government, are opportunists exerting control on our behaviour to enrich themselves.

With this background, it is little wonder that the arrival of 2018 tax day caused a wave of anger among crypto OGs. While the cryptocurrency market wasn’t born this year, the recent astonishing growth means that this was the first in which serious amounts of money were at stake.

They may also be at the cutting edge of tax evasion if rumours are to be believed. One well-known cryptocurrency investor was hacked very publicly during a livestream on the eve of tax day. While there’s no verifiable evidence to suggest the investor did anything underhand (beyond a couple of deleted tweets and the serendipitous timing), the nature of cryptocurrencies is such that, with private keys held anonymously, it’s possible to hide cash. If he didn’t do it, somebody else probably did, goes the thinking.

‘Bankers against bitcoin’ take to the streets

Consensus, probably the largest gathering in the crypto calendar, took place in New York this week. Some 8,500 of the best and the brightest minds in tech descended on midtown Manhattan to discuss, with absolutely no sense of personal irony, decentralisation. Snoop Dogg tagged along too for reasons that remain a mystery.

The event was briefly blockaded by a protest purportedly consisting of “Bankers against bitcoin”, holding up such signs as “Paper checks use less electricity”, “We opened all those fake accounts on accident” and “#savejamiedimon”.

The “protest” was organised at the behest of a cryptocurrency mining company to promote the idea that the pernicious “consumer abuse” i.e. a bank's business model, is under such threat from cryptocurrencies that they will soon be organising their own protests to stifle the industry’s development. We’ll believe it when we see it, rather than when you pay people to pretend it’s happening.

An opportunity you simply can’t miss

This week, US regulator the Securities and Exchange Commission released a fake initial coin offering website, demonstrating some of the popular tricks used by fraudsters. ICOs are a means of raising capital by issuing cryptocurrency, offering benefits like revenue streams or a means to participate on a new platform.
While ICOs have attracted some seemingly talented individuals, the lack of regulation and low barriers of entry have also drawn plenty of fraudsters looking to take your hard earned dollars, or, erm, cryptocurrencies.

The SEC’s Howey token highlights the tendency of ICOs to draw a false equivalence between the size of a potential market a currency is trying to target and its actual value. Just because you’re making a coin for the luxury travel industry, doesn’t mean the industry wants to use your coin, or that your coin’s market cap is anywhere near the value of the industry. Or that your coin is worth anything at all, really. The SEC even included the super popular countdown clock, warning investors that they will miss out on bonus tokens if they don’t buy soon.

The concept is great, and the latest example of regulators engaging with the youthful cryptocurrency community in an entertaining fashion. Elsewhere, the head of the Commodity Futures Trading Commission has taken to signing off some of his tweets #cryptodad, to the delight of the community.

Ether indices

The Chicago Mercantile Exchange this week introduced two indices for ether, the second biggest cryptocurrency. Other firms like trueEX have demonstrated an interest in ether, and it’s a positive development for interested investors.

Putting the lawless, unregulated nature of some exchanges to one side, introducing benchmarks and products for different cryptocurrencies will allow investors to take alternative exposure to the space.

Rather than just betting on bitcoin becoming a popular store of value, investors will soon be able to take a position on the potential of ICOs and the future of the Ethereum platform, for example. If more cryptocurrency derivatives do come to big exchanges though, it should be interesting to see how much margin clearing houses demand.

  • By Costas Mourselas, Lewis McLellan
  • 17 May 2018

All International Bonds

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 JPMorgan 381.18 1768 8.35%
2 Citi 352.10 1516 7.71%
3 Bank of America Merrill Lynch 303.24 1307 6.64%
4 Barclays 273.33 1144 5.99%
5 HSBC 225.32 1243 4.93%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 BNP Paribas 56.71 230 8.32%
2 Credit Agricole CIB 44.23 207 6.49%
3 JPMorgan 34.02 99 4.99%
4 UniCredit 30.28 160 4.44%
5 SG Corporate & Investment Banking 29.88 150 4.39%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 JPMorgan 13.16 82 8.27%
2 Goldman Sachs 12.58 64 7.90%
3 Morgan Stanley 12.18 55 7.65%
4 Citi 10.09 71 6.34%
5 Credit Suisse 6.93 38 4.35%