The crypto tax nightmare is far from over
Illustration: Christopher T. Fong/Protocol

The crypto tax nightmare is far from over

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Wednesday: the ongoing crypto tax nightmare, Silvergate’s earnings, and a fight over the definition of “exchange.”

Off the chain

Block is all about crypto, down to the name. But the company seems to have recalled the importance of its original business, Square, as of late. A new Square Stand, nine years after the original one helped the payments startup transcend its dongle origins, comes alongside software improvements and international expansion. It might be enough to distract from jitters about the Afterpay acquisition and that shareholder lawsuit over the Tidal deal: Block shares, which have fallen by half in the past six months, rose more than 5% Tuesday.

— Owen Thomas (email | twitter)

Crypto’s taxing question

Think it’s safe to stop thinking about crypto taxes, now that the filing season has wrapped up? Think again. Crypto has grown enormously over the past few years, which means it’s likely to be a bigger part of the tax picture for more consumers. And crypto taxes have proven to be a point of contention for lawmakers, as they go down the tricky path of figuring out how to get the government a piece of a burgeoning financial sector without burying it with regulation.

Crypto taxes saw an explosive growth, and there are no signs of slowing down. According to statistics from TurboTax, the number of people with crypto transactions nearly quadrupled from tax year 2019 to 2020, up 362%.

  • Figures for 2021 aren’t in yet, but since it was a big crypto year, it’s safe to expect the number to increase even more in the most recent tax year.
  • Millennials make up almost 40% of filers reporting crypto transactions, but the percentage of Gen Z crypto filers increased from 14% to 17%, signifying a continued shift in demographics as crypto’s popularity grows.
  • Kristin Smith, executive director of the Blockchain Association, told Protocol that it was also natural for Gen Z consumers to become increasingly interested in crypto because of their understanding of the internet. “This is a way for them to control their assets in a way that they just aren't able to do with other types of investments,” she said.

The U.S. is eyeing crypto as a revenue source. With the Biden-backed Infrastructure Investment and Jobs Act and the proposed budget for the 2023 fiscal year, the White House is looking toward crypto to bridge a revenue gap.

  • The infrastructure law passed last year takes aim at crypto tax reporting requirements, mandating annual reporting from digital asset brokers. While it makes taxes easier for crypto investors, crypto firms will now have additional burdens.
  • Crypto lobbying groups still think that tax reporting requirements remain unclear, specifically on the definition of “brokers,” and want Congress to clarify in the hopes that they will limit the definition to centralized exchanges.
  • “What we don't want is other entities who are very important to the process, but don't actually possess customer information … to all of a sudden put them on the hook for these types of requirements,” Smith said.
  • She added that there are still unresolved issues around crypto lending and staking rewards that need further clarification from the IRS.

Lawmakers themselves are still figuring it out. There seems to be a fine line between wanting to cash in on the flourishing crypto sector and reaping its economic benefits, and restricting it with regulation.

  • While the new crypto tax requirements could bring in up to $28 billion over the next decade, a harsher crackdown on crypto through tax rules could be seen as stifling. There are examples abroad.
  • India’s crackdown on crypto taxes has led to a major decrease in crypto trading volume, and has even caused its largest crypto exchange, WazirX, to relocate its headquarters to Dubai in search of friendlier tax laws.
  • The new capital gains tax of 30% on crypto transactions, along with a 1% tax deducted at source, proved to be too much for India’s growing crypto sector.
  • Republicans in Congress have introduced the Keep Innovation in America Act, which would define the term “broker” so that entities without customer information would not be bound by tax reporting requirements. It has some Democratic co-sponsors, including Bay Area Reps. Eric Swalwell and Ro Khanna.
  • The Virtual Currency Tax Fairness Act has also drummed up significant bipartisan support.

Digital assets are here to stay, and lawmakers need to move faster. The crypto sector seems prepared to pay its fair share of taxes. But the complexity of tax reporting for some types of transactions — like NFTs purchased in blockchain games — is already burdensome. Some broad simplification seems overdue, as well as clarity about fast-evolving areas like crypto rewards and staking. It’s bad enough to have to cough up money in April. Not knowing how much you owe makes tax season that much worse.

— Lindsey Choo (email | Twitter)

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On the money

On Protocol: Mastercard's Raj Dhamodharan isn't afraid of the blockchain. Instead, he sees plenty of opportunity.

Silvergate Bank reported a 93% increase in revenue. In its first-quarter earnings call, the crypto-focused bank announced a major increase in year-over-year revenue, but saw a significant dip in the dollar value of transfers on its Silvergate Exchange Network, used by its institutional crypto customers to move fiat money.

The IMF thinks Russia could use bitcoin mining for sanctions evasion. The International Monetary Fund said in a report that bitcoin mining could allow countries to “monetize energy resources,” but maintained that the magnitude of the evasion could be contained.

The Secret Service has seized over $102 million in crypto since 2015. The federal agency said that the nature of the blockchain allows for tracing of wallet addresses in investigations, leading to a seizure of over $102 million in 254 cases so far.

FTX’s derivatives proposal will get a CFTC hearing on May 23. After the 60-day public comment period closes on May 11, the CFTC will hold an informal hearing for the FTX proposal to directly clear the trades of its derivatives customers.

Overheard

India’s Minister of Finance Nirmala Sitharaman thinks crypto’s biggest risk is its potential use for money laundering, but there’s no surefire way to regulate it right now. “I think regulation using technology is the only answer. Regulation using technology will have to be so adept that it has to be not behind the curve, but be sure that it is on the top of it,” she said at a seminar.

The SEC’s battle with the crypto industry over the definition of “exchange” is far from over. “Far from technology neutral, these amendments will serve to entrench incumbents who have legacy centralized business models and amount to a de facto prohibition on the decentralized finance models that have arisen,” Delphi Digital general counsel Gabriel Shapiro tweeted.

Apollo CEO Marc Rowan thinks that the blockchain industry is going to revolutionize finance. “Many of the rails or the technology or the platforms or the systems that support what’s happening in NFT are actually the precursor to changes in our financial system and we ignore them at our peril,” he said in an interview with Bloomberg.

Just one question for …

Céline Dufétel, CFO, Checkout.com

What’s your outlook on crypto payments?

We definitely believe in the space and believe in serving those clients and making sure that our capabilities are strong in the space. That being said, we're not believers that cash is going away or credit cards are going away, and the world will have multiple ways of transferring value. If you look at our merchants today, we don't see immediate demand for accepting that payment method right away, but that's definitely a capability that we think over time may be relevant.

Then there's other things like the ability to settle merchants in stablecoin for instance, which are capabilities that we're investing in and developing. One of the interesting points there is the ability to settle 24/7 relative to what you can do with fiat.

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Thanks for reading — see you tomorrow!

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