Crypto taxes are hard on buyers but great for startups
Good morning, and welcome to Protocol Fintech. This Monday: the tricky questions and big opportunities in crypto taxes, EU regulations on anonymous transactions, and Janet Yellen’s pro-innovation take.
Off the chain
KYC and AML have come to crypto. Thanks to rules taking effect in early April, Coinbase customers in Canada, Japan and Singapore will have to provide information about recipients of their crypto transactions. In the U.S., Coinbase is part of a group working on technical means to comply with FinCEN’s Travel Rule. Crypto was never that anonymous, strictly speaking: more pseudonymous, if anything. And the dots from the virtual world to fiat are proving easier and easier to connect.— Owen Thomas (email | twitter)
Crypto is taxing
Tax time is stressful, even more so for filers who dabble in crypto. The IRS has deemed virtual currencies property since 2014, but reporting your digital assets transactions for tax purposes is still a fairly new concept. The rampant confusion is a market opportunity for some.
More and more people have to deal with crypto at tax time. TurboTax, which is used by millions of taxpayers, saw a whopping 362% jump in customers who reported crypto transactions on their taxes from 2019 to 2020, when the IRS added an explicit question about virtual currency transactions.
- Nearly 40% of them are millennials, but Gen Z is “getting in on the action,” TurboTax said. The share of 18- to 24-year-olds reporting crypto has climbed from 14% to 17%.
- Despite the volatile nature of most digital assets, taxpayers have been cashing in on their crypto. In 2020, 60% of filers saw gains in their crypto holdings, up from 45% the previous year, according to Intuit.
- The typical dilemma faced by crypto tax filers is “they don’t know when it’s a taxable event,” Lisa Greene-Lewis, a TurboTax CPA and tax expert, told Protocol. What should you report and how? Should it be recorded as income or capital gains? What if you bought or sold NFTs?
The IRS won’t forget. Last week, the IRS issued a reminder about a “virtual currency question” they must answer on most tax forms: "At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?"
- That question can be “a little vague for people,” Greene-Lewis said. The recent IRS reminder says you need to check “yes” if you received crypto as payment for goods or services, from mining or “as a result of a hard fork” (like the protocol change that led to the creation of bitcoin cash) or selling virtual currency. No need to report if you bought or HODL’d your crypto.
- If you’re paid for your work in crypto, that must be reported as income. But if you sell that crypto after it appreciates in value, you will have to pay an additional capital gains tax.
- The rules on capital gains are complicated. But one key principle is if you sell an asset less than a year after buying or receiving it, you will likely pay more. That applies to crypto, too.
What about NFTs? NFTs exploded as the new hot market of the crypto realm last year. This is the year when the tax implications of buying and selling CyberPunks and Bored Apes are expected to become clearer.
- An NFT artwork could be considered a collectible, which means an owner would have to pay at a higher tax rate when it is sold. But the IRS “has not issued any guidance” on how NFTs should be taxed, said Greene-Lewis.
- The IRS has guidelines for what is considered a “collectible,” which includes “any work of art” and “any rug or antique.” On NFTs, Buckingham Wealth Partners financial planner Jeffrey Levine told CNBC, “I don’t see how it’s not a collectible.”
- But the lack of clarity has led “countless stories of NFT traders asking for help across social media because they are desperately looking for tax guidance,” Reconcile CEO Jaimin Desai wrote in CoinDesk. “I can guarantee that 95% of NFT traders don’t know how much they owe.”
There’s a booming business in crypto tax prep. TaxBit and CoinTracker are unicorns after raising hundreds of millions of dollars. But maybe the real market will be in refiling taxes after some of these questions get sorted out. “The toughest issue is just they don't know how it's going to be taxed,” Greene-Lewis said.Give us the details.
A MESSAGE FROM WORKPLACE FROM META
The last two years have seen deep, significant changes to the world of work. The COVID-19 pandemic has shifted business leaders’ focus from maintaining their bottom line to the front line. Employee experience has become more important than ever to keep good workers happy – and to keep them within a business.
On the money
The European Parliament is likely to vote on blocking anonymous crypto payments. While existing laws state that payees need to be identified in bank transfers over $1,099, lawmakers want to scrap the minimum when extending the law to crypto.
Ukraine is raising funds with a new NFT collection about the Russian invasion. The collection is titled “Meta History: Museum of War,” where illustrations from an artist are tied to the date and time of significant events in the war.
Binance launched a “Learn & Earn” crypto rewards program. The crypto exchange said every KYC-verified customer who reads articles on crypto assets, watches videos and passes the quizzes will be eligible to earn a predetermined amount of crypto.
Crypto.com will use its Oscars ad time to talk about Ukraine. The crypto exchange has partnered with the International Committee of the Red Cross, and says it will match donations to Ukraine up to $1 million through March 31.
Leumi will become the first bank in Israel to allow crypto trading. One of Israel’s largest banks, Leumi partnered with U.S. blockchain firm Paxos to launch crypto trading, pending regulatory approval.
U.S. Treasury Secretary Janet Yellen wants to regulate crypto, but not necessarily in a restrictive way. “There have been benefits from crypto and we recognize that innovation in the payment system can be a healthy thing. We would like to come out eventually with recommendations that will create a regulatory environment [for] innovation,” she said in an interview with CNBC. (Tell that to Libra?)
Michael Chobanian, founder of Ukraine’s Kuna Exchange, wants the EU to investigate Binance over its ongoing Russian business and the possibility that sanctions evasion is happening through the exchange. “I’m not the court, but [the EU] should investigate. If [Binance is] innocent, I will say [I'm] sorry. If Binance is [not], then [the EU] will have to deal with it,” he said in an interview with CoinDesk.
Kenyan Central Bank Gov. Patrick Njoroge thinks that while crypto could be viewed as an investment, it’s still too risky. “I think that is why we say for every person who wins something, there are hundreds who lose,” he said in a speech.
“DeFi & the Future of Programmable Money” is on Wednesday. The event, hosted by TechCrunch, will feature SEC Commissioner Hester Peirce, Osmosis Labs co-founder Sunny Aggarwal and Sommelier Finance co-founder Zaki Manian.
The FTT Lending 3.0 event also happens Wednesday. The event will be held at County Hall, Westminster, in London, and broadcast live. Major payments companies like Citi and Marqeta are slated to attend.
Expensify’s earnings call is set for Wednesday. EXFY’s average estimated EPS is at $0.08, down 86% from last quarter.
The U.S. House hearing on overdraft fee elimination is set for Thursday at 10 a.m. ET. The Subcommittee on Consumer Protection and Financial Institutions will hold a hybrid hearing titled “The End of Overdraft Fees? Examining the Movement to Eliminate the Fees Costing Consumers Billions.”
The Innovate Finance Global Summit will start next Monday, April 4. The two-day conference will be held at Guildhall in London, and will feature speakers from the FCA, Klarna and a16z.
A MESSAGE FROM WORKPLACE FROM META
Businesses are placing more priority on ensuring there are clear lines of communication for frontline workers to raise issues — something that’s vital given 43% of employees told McKinsey one of their fears about remote work was a reduction in collaboration with colleagues.