In Oct. 2008—the same month Satoshi Nakamoto published the white paper that laid out the plan for Bitcoin—Congress passed legislation upping the tax reporting requirements for financial brokers. The new law said financial firms would need to start supplying the IRS and taxpayers with more detailed information on relevant tax documents (form 1099-B, in accountant-speak).
The issue was capital gains taxes. The new rule forced companies to calculate “cost basis”—the difference between sale proceeds and original purchase prices of certain assets (after accounting for fees or commissions)—on behalf of taxpayers, a necessary step for determining tax obligations. The goal: Eliminate guesswork—and the possibility of skullduggery—in tax reporting.
Why linger on this ancient history? Because Congress is about to bring the same tax regime to crypto. Legislators are hashing through a $1 trillion bipartisan infrastructure bill that would expand the definition of a “broker” to include any entity that effectuates “transfers of digital assets”—like Bitcoin—”on behalf of another person.” Pretty soon, many more 1099 forms will be flying.
The widening scope of that broker definition caused an uproar in the crypto world in recent months. Techies argued that the proposal would place nonsensically burdensome reporting requirements on entities that had no business distributing tax forms, like crypto “miners,” network node operators, and various software providers. As a Coinbase spokesperson put it to me, the new broker classification “is unnecessarily broad and could hamper U.S. innovation.”
But the government needs to raise revenue to pay for its ginormous infrastructure bill—and it’s looking to take a bite out of the $2 trillion crypto industry to do so. The Joint Committee on Taxation, a Congressional tax authority, estimates that boosted crypto tax reporting requirements could raise $28 billion through 2031; it’s not $1 trillion, but it’s something. (If any language in the bill changes, that figure could change too.)
Meanwhile, the Treasury Department is trying to assuage people’s concerns about the vague broker language. An official told Bloomberg last month that the tax reporting rules would not apply to entities it doesn’t consider to be crypto brokers, like software developers and hardware providers. Even the author of that part of the bill, Sen. Rob Portman (R-Ohio), said as much too. Policymakers would tweak the language to make everything clearer, but they’re too wary of jamming up the bill approval gears with last-minute changes. (A vote could come as early as tonight.)
If the government’s linguistic clumsiness is a letdown, the crypto set can at least rejoice over the government’s clumsiness on another matter. The government hasn’t yet gotten around to closing a crypto tax loophole that lets crypto traders dodge capital gains taxes. (There is a provision to close the loophole in a different bill.)
Here’s how the trick works. If a person sells an asset, like a stock, at a loss, they can use that to lower their capital gains tax obligations. The government deems this okay as long as people don’t repurchase the same (or a substantially similar) asset within 30 days—so-called “wash trading” rules. Because the IRS treats crypto as property, rather than equity, the rule does not technically apply to things like Bitcoin, and traders can game the system by booking crypto losses, writing down taxes, and then buying the digital assets right back up.
Austin Woodward, a CPA and the CEO and cofounder of Taxbit, a PayPal-backed crypto tax software startup whose product makes people aware of the tactic, doesn’t like to call this discrepancy a loophole. “The IRS has been aware of it, obviously, it’s just been lower prioritization,” he told me. “Digital assets are just moving so fast in general and the 1099 reporting in the infrastructure bill has just been a higher magnitude issue for the time being.”
If you’re looking to take advantage of the maneuver, be cautious. Michael Meisler, formerly the crypto tax lead at EY, warned in a post on LinkedIn that for anyone looking to exploit the wash trading trick, “it’s possible that the IRS could assert that no true sale had occurred based on case law,” even if that isn’t made explicit by statute.
“Taxpayers should be careful and consult with good advisors in this space if they want to play this game,” he said.
Robert Hackett
@rhhackett
robert.hackett@fortune.com
DECENTRALIZED NEWS
Credits 🚀
Federal Reserve Chair Jerome Powell has "no intention" of banning cryptocurrencies... A hamster named Mr. Goxx is beating Warren Buffett's and high-profile and Reddit-beloved Cathie Wood's investments... Coinbase is rolling out direct deposit over the coming weeks... Securitize has launched an alternative trading system for security tokens... Buy-now-pay-later company Affirm wants to bring cryptocurrency trading into its app... Two former special agents from the Internal Revenue Service (one of whom worked on the Silk Road case) have joined Binance... FTX has moved its headquarters to the Bahamas... Franklin Templeton is buying O'Shaughnessy Asset Management in the latest multibillionaire-dollar deal between investment companies... Ethereum and Polkadot cofounder Gavin Wood is pushing for a less "crypto nationalistic era"... Mastercard is dipping into BNPL, the increasingly popular tool that lets consumers slice up big purchases into small payments over time... Early Facebook employee turned SPAC king Chamath Palihapitiya says Bitcoin has replaced gold... Gen Z's favorite social network TikTok has launched its first NFT collection featuring the likes of Lil Nas X, entrepreneur and marketing guru Gary Vaynerchuk, as well as others.
Debits 🐻
September was a brutal one for stocks (as it usually is) and crypto... Bitcoin fell more than 8%, Ethereum dropped 12.5%, and Cardano was off 24.5% over the prior 30 days, as of late afternoon Thursday... The third quarter on the other hand was by and large green for the digital assets... Crypto skeptic Saule Omarova has become the subject of widespread concern in the banking lobby over her nomination to become the Comptroller of the Currency... One of the top Commodity Futures Trading Commission's top officials is reuniting with Securities and Exchange Commission Chair Gary Gensler... Gensler reiterated this week his belief that "people will be hurt" if crypto markets aren't properly regulated... U.S. regulators have nabbed two people for an alleged $1 million wash trading scheme that involved meme stocks, options, and exchange rebates... Ethereum developer Virgil Griffith has pleaded guilty to charges that he violated U.S. sanctions law.
FOMO NO MO
Corporate executives are really good at trading stocks. Between 2015 and 2020, U.S. executives' share buys beat the S&P over the next 12 months by five percentage points on average, Bloomberg Businessweek reported Wednesday in its latest cover story, citing a TipRanks analysis. Sure, some of that may be a mix of luck and perfect timing, but new research shows that insider trading may very well be in full bloom in the U.S.
From the article:
No one is claiming to know if Filler or any of the other TipRanks stars are taking advantage of nonpublic information. Poker legend Doyle “Texas Dolly” Brunson made five final tables in his career, after all, and it’s possible to get lucky enough to flip a coin and hit heads a bunch of times in a row. Plus, insiders will always have a better general sense than others about how their company is doing. But a growing body of research suggests that many insiders are trading well thanks to something more than luck or judgment. It indicates that insider trading by executives is pervasive and that nobody—not the regulators, not the Department of Justice, not the companies themselves—is doing anything to stop it. “There is a lack of appreciation for the amount of opportunistic abuse that exists under the current system, the amount of egregiousness,” says Daniel Taylor, a professor at the Wharton School and the head of the Wharton Forensic Analytics Lab. “Most Americans today believe the stock market is rigged, and they’re right.”
BUBBLE-O-METER
2.7 million
In December 2020, Miami mayor Francis Suarez tweeted an offer of help to a San Francisco venture capitalist looking to set up a Silicon Valley in the Sunshine State's second-most populous city, Miami. Some 2.7 million impressions and hundreds more tweets later, Suarez's offer has turned into an entire movement—albeit one that still has plenty of skepticism, as Benjamin Wallace of New York Magazine's Intelligencer reported this week.
THE LEDGER'S LATEST
Bitcoin has another major pollution problem brewing by Shawn Tully
From Lil Nas X to the climate, Kalshi wants to let investors bet on it all by Declan Harty
How a mythical $1 trillion coin became everyone's favorite solution to the U.S. debt problem by Nicole Goodkind
Correction protection: Surprising ways to cushion a portfolio during a downturn by Jessica Mathews
OZY and the demands of due diligence in Zoom times by Lucinda Shen
Robinhood should empower young investors, not take advantage of them by Derek Horstmeyer
China's Bitcoin ban could be a buying opportunity by Chris Morris
How sustainable altcoins aim to challenge Bitcoin's dominance by Declan Harty
Meet the International Science Reserve, the IBM-led project to prepare the world for future catastrophes by David Meyer
(Some of these stories require a subscription to access. Thank you for supporting our journalism.)
MEMES AND MUMBLES
No need to fear, stock market investors: The McRib is back. On the heels of the S&P 500's worst month in 18 months, McDonald's has announced the McRib is coming back, and that has historically meant some pretty good returns in the equity markets.
This issue of Fortune’s The Ledger was assembled by Declan Harty, who you can follow here.
