Good morning, and welcome to Protocol Fintech. This Monday: Burning questions about crypto earnings, Kraken’s SF exit and Robinhood’s crypto wallet bust.
Off the chain
Are we endangered by a “finance gerontocracy,” as Peter Thiel suggested at Bitcoin 2022 last week? He particularly fingered Warren Buffett, Jamie Dimon and Larry Fink as members of this dangerous group. I don’t know about all that, but when you search for Thiel’s age — he’s 54 to Dimon’s 66 — Google suggests that you instead ask the question “Is Peter Thiel a child?”
— Owen Thomas (email | twitter)
The crypto tax knowledge gap
Almost no crypto investors know all the situations in which their token-trading activities are taxable, a survey conducted by Wakefield Research for tax-prep assistance firm CoinTracker says.
While the Internal Revenue Service issued specific guidance in 2014, and updated it once again in 2019, the fast emergence of new crypto products and services has left the U.S. government a few steps behind. But a large number of crypto investors aren’t even aware of the existing guidelines.
Crypto tax ignorance is widespread, and that’s a problem both for taxpayers and the government. In the survey, when presented with a number of possible situations where crypto could be taxed, 97% of respondents got at least one answer wrong.
- In fact, there are seven types of taxable crypto transactions: trading crypto for fiat, spending crypto, exchanging one type of crypto for another, earning interest, receiving staking rewards, generating mining income and receiving airdrops.
- One of the biggest problems spotted by the survey was that most crypto investors didn’t know that trading one type of cryptocurrency for another is a taxable event, likely because they haven’t experienced similar transactions in the non-crypto world.
- “It’s very rare for a U.S. taxpayer to have dealt with a scenario where they’re trading one equity directly for another — like, no one ever trades Facebook stock directly for Google stock,” CoinTracker co-founder Chandan Lodha told Protocol.
- Another factor: Taxes get exponentially more complex when a user transacts crypto over multiple exchanges, which is common. The higher the number of exchanges, the more difficult it is to track taxes across the board.
- It doesn’t help that crypto exchanges don’t typically provide tax forms showing annual capital gains and losses, largely for the above reason. But starting in the 2023 tax year, they’ll have to figure it out.
People think that they know what they’re in for, but chances are they don’t. Despite the obvious gaps the survey revealed, 54% of survey respondents felt confident in their knowledge of crypto taxes.
- So even though some crypto investors think that they’ve been tax-compliant and think they know how to file, emerging use cases may present obstacles.
- “The data suggests that it’s not because users are trying to evade taxes, or get around taxes using cryptocurrency,” Lodha said, as 74% of survey respondents said that they wanted more information on how crypto taxes work from the exchanges they use.
- Instead, it’s more about the complexity inherent in crypto and some key differences from savings and investment scenarios most taxpayers are familiar with. Your bank might have given your grandparents a toaster, but airdropping tokens isn’t covered by the regulations that governed that kind of marketing gimmick.
Washington has a crypto tax agenda. As part of Biden’s 2021 infrastructure bill, IRS crypto reporting requirements in 2023 are going to be easier for crypto investors and harder for crypto firms.
- Under the new requirements, crypto exchanges, custodians and other services must follow existing broker information reporting rules, which means that they must issue Form 1099-B annually, which details all transactions conducted.
- Biden is also eyeing crypto taxes as a way to bridge the budget gap in his new budget proposal, which means that there might be clearer rules down the line, as the budget “seeks to modernize rules for reporting on digital assets,” according to Ernst and Young.
- Some members of Congress have also drafted crypto-friendlier tax bills, such as the Virtual Currency Tax Fairness Act, which would exempt small transactions from being taxed. The tax-fairness proposal has already garnered bipartisan support.
Since crypto is growing, crypto tax advice and compliance are growth fields, too. As a relatively new sector, cryptocurrencies are likely to be met with waves of new regulation and legislation, as the government tries to figure out how — or even whether — digital assets fit into the existing tax system. It’s a good idea to get a handle on what you’re on the hook for now, before it changes once again.
— Lindsey Choo (email | twitter)
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On the money
Blockchain analytics led to the takedown of “Welcome to Video.” Crypto-tracing techniques proved crucial in the sexual exploitation case, where law enforcement traced currency flows on the blockchain to unravel a web of criminal ties.
Kraken shut down its San Francisco headquarters. CEO Jesse Powell said in a statement that “numerous employees were attacked, harassed and robbed on their way to and from the office,” and called the city unsafe.
The EU hit Russia with a fifth round of sanctions, including “high-value” crypto transactions. In addition to a full transaction ban and freeze on four more Russian banks, the EU has moved to ban any “high-value crypto-asset services” to Russia.
Blockstream and Block are partnering for a bitcoin-mining facility. The two companies are reportedly planning to use Tesla’s Megapack tech to build a new solar- and battery-powered mining operation.
The Clearing House is increasing its general transaction value limit to $1 million. Users can now transfer up to $1 million on the RTP network, an increase from $100,000 previously.
Wen shareholder value?
Robinhood said it’s given a crypto wallet to every user who wants one, with millions on a waitlist. But its stock dropped Friday after Goldman Sachs said the online brokerage faces a rough road ahead. Shares were down about 8% in late morning trades and have lost 39% of their value this year. The stock is 87% below the all-time high of $85 it reached in August shortly after its IPO, propelled by its growth in crypto trading revenue.
“We believe this lack of clarity around the path to profitability will prevent the stock from re-rating higher,” Goldman analysts wrote. The analysts said recent data pointed to user growth that “remained depressed” and pointed to worries of a crypto slump, which could have a negative impact on Robinhood.
Coming up
JPMorgan Chase and BlackRock’s earnings calls are set for Wednesday. JPM’s average estimated EPS is at $2.71, down 19% from last quarter. BLK’s average estimated EPS is at $9.22, down 12% from last quarter.
Morgan Stanley and Goldman Sachs’ earnings calls are on Thursday. MS’ average estimated EPS is at $1.80, down 13% from last quarter. GS’ average estimated EPS is at $8.79, down 19% from last quarter.
Citigroup’s earnings call is also set for Thursday. C’s average estimated EPS is at $1.98, down one percent from last quarter.
New York Fintech Week 2022 starts next Monday, April 18. The five-day conference will feature industry keynote speakers, including BlockFi co-founder Flori Marquez and NovoPayment co-founder Anabel Pérez.
How is the infrastructure rollout going — and what does it mean for tech? Join Protocol’s Issie Lapowsky and a panel of experts on April 21 at 9 a.m. PT/12 p.m. ET to explore how the infrastructure bill rollout is going and what it means for you.A MESSAGE FROM CHECKOUT.COM
The cryptocurrency world is maturing and is increasingly being driven by utility, pragmatism and empowerment. Checkout.com sees the potential for cryptocurrency to not only transform the way people transact, but also reinvent the dynamics of the entire digital economy.
Thanks for reading — see you tomorrow!