Bitcoin Users Beware: The Crypto Tax Crackdown Has Arrived

Traders Beware: The Crypto Tax Compliance Crackdown Has Arrived

US cryptocurrency traders, investors, and other market participants may think that assets like Bitcoin and Ethereum are so anonymous as to be untaxable, and some are about to get a painful lesson on how the technology really works. There is no identifying information in transaction or token data inscribed onto the ledger, sure, but you’re only truly anonymous if you’ve mined your cryptocurrency, bought it with cash, and transacted through dApps exclusively. This describes only the smallest fraction of crypto enthusiasts.

For the rest of us who have (for good reason) traded on larger and more centralized exchanges which also allow fiat depositing, it’s a sobering reminder that these friendlier platforms only exist because financial watchdogs allow them to. One condition of this tentative approval is that your crypto wallet must be associated with your real identity, due to KYC (Know Your Customer) and AML (Anti-Money Laundering) laws. For many traders, centralized exchanges reside at the root level of their crypto portfolio, and now that this nut has been cracked global tax authorities are completely plugged into the sector.

This is why so many in the US—over 10,000 in fact—are recent recipients of a letter from the IRSwhich says in so many words, “We see you, now pay up.”. Fresh on the heels of the recent G20 summit, where major global markets all agreed to follow the same set of FATF (Financial Action Task Force) rules, the IRS is now beginning a campaign to clamp down on US residents who have transferred or transacted cryptocurrency in virtually any way, shape, or form.

An Early Look at the IRS Letter

Those who already received the letter are familiar with its contents, but for those who will soon find it in their mail as the IRS digs its heels in, it’s good to get a preview of Letter 6174 and Letter 6173—both entitled Reporting Virtual Currency Transactions. The IRS is a bellwether for the tax climate worldwide on cryptocurrency, and to see it act so quickly, out of reporting season and with such a broad scope is a clear warning sign; market participants worldwide need to start considering the tax impact of their trades and transactions. While this standard will help pave the way for further integration with fiat money markets, the IRS’s tax scheme is also fairly comprehensive and requires negligent traders to do a burdensome amount of detective work.

Crypto traders must sort out which exchanges are relevant to the IRS (assume they all are) and the coins they have transacted in or held, classify these transactions and their respective realized gains (or losses) and then report them properly. You’ll have a mere one-month window to get compliant, the result for failure is an external review and fitting punitive action. Recipients of the more serious 6173 letter need to get in touch with an IRS agent within one day. Even for those who didn’t receive the letter and have a relatively short history dabbling in DeFi, the legwork required to prepare for the coming crackdown is daunting.

Prepare for Your Impending Token Taxes

If you have not accounted for cryptocurrency in your taxes, then the time to do so was yesterday. You may not have been in the first round of letters, but regardless if you’re included in the second or third rounds, collecting the requisite data now will save an enormous headache. The IRS is acting retroactively, so this recent event applies to everyone including those who have reported already. These traders should ensure that they’ve covered the full range of years required and have included transactions that might not have been considered taxable at the time. Many had previously only reported when they had bought into or out of fiat, and this is indeed relevant, as are transactions of crypto to purchase goods (real or digital), other crypto assets, and even stablecoins like USDC or Tether.

Basically, if any amount of Bitcoin, for example, is at any point anything other than Bitcoin then the IRS wants to know. These transactions are classified into Schedules and are quite intricate, covering ideas such as contractor payments in crypto, tax losses, assets sold for cryptocurrency, transfers between wallets and a dizzying array of other ideas. Accordingly, getting it right requires immense legwork, either done by yourself or by an accountant who you’ve paid big bucks to decipher countless exported exchange spreadsheets.

Better is to use of a service such as Bittax, which shoulders the full burden of tax compliance and reporting for cryptocurrency traders and investors across all their accounts. Bittax’s software uses blockchain to trace a user’s entire history of currency activity from day one, and it provides alerts on incomplete information for retrieval plus addresses that may have been forgotten. In what is essentially a turnkey tax solution for crypto, Bittax runs the full gamut of IRS-related activities including wallets, arenas, ICOs, and even goes so far as to issue one comprehensive report on the relevant years of activity, charged for each year separately.

A solution like Bittax is currently one of the most purposeful use cases for blockchain, as its utility provides tangible valuable, either in time saved or in the penalty of noncompliance. With ledger-based transparency that’s able to prove each trader has reported and signed the required affidavits, Bittax also gives crypto traders the ability to be confident in their compliance and focus on the market.

Your Stake is at Stake

The widespread and enthusiastic campaign by the IRS leaves little excuse even for traders who believe they’re in good standing to neglect a checkup. Though it begins in the US, to understand how much global volume goes through centralized exchanges in G20 countries is also to realize how many millions of people need to get compliant before their own personal crackdown occurs. This may be an opportune time to lock in some holdings for network staking or a long-term investment, or for at least a year to avoid the higher capital gains tax bracket.

Overall the letter signals to investors that the IRS has finally created a template for crypto to exist in tandem with traditional finance, at least where taxes are concerned. This is typical of government, to first determine how a new idea should be taxed before it should be supported or even defined, but at least it’s a step in the right direction.

This post sponsored by Discount Currency Transfers

Fraud Disruption Technology making business Transparent

Pre IPO Swap  8/6/2019 -- New York, NY -- Pre IPO Swap has partnered with disruptive firm Transparent Business to tackle one of the biggest problems in Government and the Enterprise: Fraud and Overbilling.  As the world transforms from bricks and mortar to online and virtual, fraud and overbilling is a growing problem with few solutions, until now.  Transparent Business tackles this problem in a unique way, by installing a cloud based tool that monitors electronic activity in a non-invasive manner (they aren't recording all of your data, don't worry).  It's low cost and can prevent multi-million dollar overbilling situations.

This offer is for institutions only (Qualified Purchasers), if you'd like to learn more visit this page we've created about Transparent Business.

Here's a description of their product: Transparent Business makes every minute of computer-based work automatically verifiable. Save your state tens of millions of dollars by simply requiring state contractors to provide transparent verification of billable hours. The state will know the exact status and cost of every project and task, at any moment. Before Transparent Business, state auditors have had no tools to verify the accuracy of invoices based on billable hours. Many invoices for professional time have been paid based on the “honor system”, with some contractors “robbing the state blind”. Transparent Business gives state managers real-time information about the work performed for the state by programmers, architects, engineers, and other professionals, but does not intrude on their privacy. The tool is controlled by the worker, who can start and pause it whenever they wish, so only billable activity is documented. Transparent Business boosts productivity of billable time 15-40% by eliminating time wasters from the billing. We preclude contractors from billing the state for the time spent engaged in non-project related activity such as online shopping, playing computer games, chatting with friends, updating social profiles, watching funny videos, sending out resumes or even working for another client. The savings would come to the state at no cost to taxpayers, as contractors will bear the modest cost of complying, just like they have always absorbed other accounting costs. There’s also no risk, as Transparent Business is available from ADP, the largest payroll processing company and a component of NASDAQ and S&P. The proposed transparency requirement is not vendor-specific.

Their business plan is to create legislation that will mandate use of this product in Government, and not only in US.  The best part about Transparent Business is the active management and dialogue of CEO Alex Konanykhin, as displayed in his last email update, pasted here:

Last week, two shareholders independently of each other asked me why we are doing so much public relations, which made me realize that I had failed to articulate that as a part of our strategy to increase value of your stock, we are working on developing a recognizable, respected and valuable brand name. 

Brand power is the main reason most companies chose Salesforce.com over competitors with better and less expensive CRM solutions, and Silvina and I like to make TransparentBusiness similarly synonymous with the category of Business Transparency, globally.  The value of some brands goes into tens of billions of dollars.   We are far from getting into those numbers, needless to say, but we have already made important first steps in making TransparentBusiness brand valuable. Anyone who googles us will find many mentions of our company, in publications around the world. Quite a few executives already tell us, “yes, of course I’ve heard of TransparentBusiness”, which is a big difference from the days where we had to start every meeting by explaining who we are and what we do.   As we are just in our second round of financing, we seek the most cost-effective ways to boost value of our brand. Our objective is to assure that every $100K invested into brand development would increase the brand value of TransparentBusiness by at least a million dollars.   Most of this work falls on Silvina’s shoulders. As another step in this direction, Silvina gave an interview to EFE, the world’s forth largest wire service.  The report was distributed by EFE this past Saturday and has already been published in a number of publications internationally, including Hoy, La Vanguardia, El Confidencial and El Diario. More placements are expected throughout this week.

If you are an institution or Qualified Purchaser that is interested in Transparent Business see this page Transparent Business.

Meanwhile, Inside The Plunge Protection Team: Chaos

From Zero Hedge:

It was almost ten years ago that we first profiled the most important trading desk in the world: not one situated in any of the (increasingly empty) massive trading floors of the world's commercial banks located in either the financial district, midtown or Connecticut, but the one inside the 9th floor of 33 Liberty Street, the home New York Fed, the one which is also known in trader folklore as the "Plunge Protection Team."

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This is what we said back then:

Mr. Sack, 39 years old, is an economist who runs the markets group at the Federal Reserve Bank of New York. The group runs the Fed's trading, making it the bridge between the marble corridors of the Federal Reserve in Washington and the bustling trading floors of Wall Street.

The center of life in the markets group is a glass-enclosed conference room situated next to a small cluster of trading desks on the ninth floor of the New York Fed. It overflows with people for a daily 9:20 a.m. meeting run by Mr. Sack. A few stray pictures of Alan Greenspan, the former Fed chairman, still hang on pillars nearby.

The markets group grew enormously during the crisis, from about 225 employees to 400 people who monitor the markets for the Fed, manage its portfolio and run the many new trading programs it has started. The Fed holds more than 20,000 individual securities.

Of course, back then said "most important trading desk" was controlled by one Brian Sack, then only 39-year-old, who has since moved on to the far more lucrative pastures of DE Shaw. Sack was replaced in the summer of 2012, by the levitating market wizard, Simon Potter, who promptly realized that to crush the bears one simply had to crush the VIX specs, and the rest would promptly follow.

Then, in the end of May 2019, something unexpected happened: Simon Potter, arguably the most important trader in the world, manning the world's most important trading desk, unexpectedly announced his "resignation." Not only that, but Potter took with him the second most important person at the NY Fed's "Plunge Protection Team", the head of the Financial Services Group, Richard Dzina.

Simon Potter

What was odd, as we briefly noted two months ago, was the sudden and unexpected nature of this departure: it came from nowhere, and prompted some very delicate and substantial questions about continuity at the desk that has so far managed to keep the US stock market from entering a bear market since the global financial crisis over a decade ago.

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Now, thanks to Bloomberg, we have a much more detailed look into what transpired at the trading desk of the "Plunge Protection Team", and what we learn is that the past year said institution which forms the bedrock of support for the US capital market has been gripped by what at times is sheer chaos.

Why? Perhaps it will not come as a surprise to anyone, that the reason for said chaos is another career economist, in this case the "new" president of the New York Fed, John Williams (no relation to the Star Wars guy).

As Bloomberg details in a "must read" report, "an unusual level of internal tension broke out in recent weeks at the fortress-like Federal Reserve Bank of New York in lower Manhattan." This was prompted by the sudden departure of the two longtime officials mentioned above, which "shook staff, sank morale and drew attention to the leadership of the New York Fed under John Williams as he enters his second year at the helm." And yes, this is the same John Williams who two weeks ago prompted a mini market tantrum following one of the most epic communication fuck ups by a central banker.

As Bloomberg writes "the story involves Simon Potter, who ran the all-important markets desk, and Richard Dzina, head of the financial services group. Both were abruptly relieved of their roles in late May by Williams. Little explanation was given, but according to current and former New York Fed employees, as well as those close to the bank, the nature of the exits, by fault or design, seemed to be a warning: fall in line."

It is not clear exactly what the two titans of US capital markets had to "fall in line" for, but two things are certain - i) Potter did not "resign", he was fired by Williams, and ii) now that an economist with zero capital markets experience is in charge, and following his termination of Potter and Dzina, the world is one step closer to collapse as a clueless PhD hack is in charge of the most important market in the world.

The economist in question is John Williams, whom Bloomberg laughably described as "a widely respected and oft-cited monetary economist who ran the San Francisco Fed for seven years" which is amusing for a regional Fed that was at the epicenter of the housing crisis (granted under Yellen, not Williams, but still), and which is best known for incinerating taxpayer funds for such profoundly insightful research reports as "why is water wet" (we jest, but a real example of their cutting edge research was whether it was still worth going to college). In any case, when Williams was appointed for the top job in New York - a Fed which has a far closer link to capital markets than any other - this "raised eyebrows from the outset. A finance-industry background has traditionally been seen as a key qualification, something he lacked."

Bingo. And what's worse, Williams - in what was likely an ego tantrum - inexplicably fired the two most important people in his inner circle who have had their pulse on the capital markets for the past decade.

The consequences were immediate, and visible to all:

Williams, who during his San Francisco Fed days often mentioned his reluctance to pay too much attention to short-term swings in the markets, came under fire on July 18 after saying in a speech that central banks should act quickly “at the first sign of economic distress.”

With the remarks coming just a day before Fed officials entered a quiet period prior to their July 30-31 policy meeting, traders immediately took his comments to mean a more-aggressive rate cut was in store. The New York Fed issued a rare clarification walking back his comments later that day, causing another sharp move in the opposite direction.

As Bloomberg adds, the "kerfuffle prompted Ward McCarthy, chief financial economist at Jefferies, to say in a July 22 note to clients that “until proven otherwise, President Williams will remain a communication liability and a probable source of market volatility." This, again, is the guy who is in charge of the world's most important trading desk!

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The Williams fiasco It also caught the attention of President Donald Trump, who has been openly critical of Fed policy. He tweeted, “I like New York Fed President John Williams first statement much better than his second.”

Williams inability to communicate with markets aside, Bloomberg correctly points out that "as Williams reorganizes the leadership ranks and puts his stamp on the New York Fed, the ousters of Potter and Dzina leave the reserve bank without two of its most experienced hands."

For those readers who are unfamiliar with our historical obsession with Potter, Bloomberg gives a broad overview of his background:

Potter, who holds a Ph.D. in economics from University of Wisconsin-Madison, started at the New York Fed in 1998. As head of the markets desk, he oversaw the end of the Fed’s massive bond-buying program known as quantitative easing, as well as the unwind that began in October 2017.

Potter was also responsible for briefing policy makers on the state of financial markets at the Fed’s rate-setting meetings. He met with Powell about three weeks after he was relieved of his duties, according to the chairman’s calendar. A Fed spokesman declined to comment on the reason for the meeting or what was discussed.

Dzina, a former Army officer, began his career at the Fed as a bank examiner in 1991 before working his way up the ranks. In addition to leading the financial services group, he also managed a key network central to the U.S. payments system called Fedwire. He’s been described in conversations with those who know him as a steady hand who projected confidence and a team-first attitude. His oft-repeated credo was, “Mission First, People Always.”

So what caused the rift that led to the termination of Potter and his associate? Curiously, that's one thing that remains unknown. As Bloomberg writes, "it’s still unclear whether any specific disagreements prompted the removals. But those close to the New York Fed say Potter and Dzina, who were known for being strong-minded, did not align with Williams on issues related to managerial strategy."

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In any event, there’s little doubt many were surprised by how it all went down, Bloomberg notes. What is curious is that until now at least, the market was not aware that the two stalwart guardians of the S&P500, and the heads of the PPT departed after what appears to have been a clash of egos - and styles - with the current, and supremely clueless, head of the NY Fed. The market may be in for a very rude awakening.

Ironically, Potter's termination is something right out of Trump's pinkslipping of Comey:

Williams told Potter of the decision over the phone while the latter was out of town and was scheduled to travel to Hong Kong for a speech on regulatory reform, according to people with direct knowledge of the situation, who aren’t authorized to speak publicly.

And just like at the FBI, the NY Fed appears to be turning on Williams:

Employees put questions to Williams at a town hall-style meeting in June, two weeks after the departures, expressing their frustration over the message Williams seemed to be sending, according to people familiar with the matter. Williams responded by talking about the need for a cohesive vision among the bank’s top executives, without elaborating on the specifics of the decision.

Typical econobabble - lots of SAT words, little substance, and absolutely no clue what to do when the market crashes, which at this rate may come very soon.

* * *

Fast forward to today when the NY Fed has yet to announce who will succeed Potter and Dzina on a permanent basis. In the meantime, Michael Strine, the institution’s first vice president and Williams’ second-in-command, is managing Fedwire. Traditionally, the network is overseen by the first vice president, but was instead delegated to Dzina by Williams’ predecessor, William Dudley, when Strine was promoted to the role in 2015, according to Bloomberg.

To be sure, whoever replaces Potter and Dzina will have plenty to contend with.

On Wednesday, the Fed reduced its benchmark interest rate for the first time in over a decade and signaled more cuts may be in store later this year. New York Fed staffers have also been charged with looking into a new repurchase-agreement facility to provide liquidity to the banking system as cash becomes increasingly scarce. No less important are efforts to modernize Fedwire, which suffered a rare outage this year.

And then there is the risk of a sharp market drop lingering behind every corner, as the only thing that keeps the market propped up is the traders' explicit faith (and hope) in the Fed's ability to support it. The problem is that with Williams at the helm of the PPT, such an ability does not exist. And the moment the market realizes this is precisely when Potter will be so very desperately needed. Alas, at that very moment, Potter will be half a world away, sitting on a beach somewhere, collecting twenty zero percent...

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