The Breakdown - A Dangerous New Crypto Tax Policy Might Have Just Gone Into Effect

Episode Date: January 4, 2024

NLW covers the latest on 6050i, a provision from the 2021 infrastructure bill with major implications for the crypto industry. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Wednesday, January 3rd, and today we are talking about a very dangerous new provision that has seemingly come into effect. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Well, friends, if you were around at the beginning of the last cycle, you probably remember the battle around the infrastructure bill. It was in the summer of 2021, and basically the big dust up was around a pay-for provision

that would change the definition of a broker in such a way that lots and lots of people in the crypto ecosystem would have to report information about people that they didn't have any information on. Initially, crypto folks in Washington assumed it was a mistake. but they soon found out that it was not and was a pretty active threat to crypto from the Treasury Department, which led to the big battle around the bill and the coming together of the crypto policy movement for the first time in a really big way. Well, there was another provision in that bill that I did a show about back on October 2nd, 2021, in an episode called This Overlooked Crypto Tax Provision would be a disaster.

The issue that I discussed is now one that has come to light and has been dominating Twitter discourse for the last day or so. So basically what's going on is that the beginning of the new year has brought a new tax provision in that 2021 infrastructure bill into force. For our industry, there were two major changes to the tax code. The first, as I mentioned, was a change of the broker definition. It would require a wide range of crypto exchanges and infrastructure to KYC their customers and report their activities to the IRS. That change has been held up in the IRS and treasury rulemaking process but is still on the horizon. The second, which, as I mentioned, went largely under the radar at the time, is an update to tax code section 6050I.

This section requires anyone involved in trade or business to report cash transactions above $10,000 to the IRS. The update, which is now in force, expands that scope to cover all crypto asset transactions. Now, shortly after the infrastructure bill was passed, CoinCenter published a blog post explaining their issues with the change to 6050I. They wrote that the reporting requirement would be, quote,

difficult or impossible to obey. The original requirements contemplated in-person transactions, where it would be possible to check identification documents and make accurate reports. This is obviously unworkable for crypto transactions in a broad range of circumstances. CoinCenter also flagged that this provision could be unconstitutional in its entirety. The Fourth Amendment protects citizens from unreasonable searches without a warrant. 605OI functionally deputizes individuals to take sensitive personal information from each other and report that information to the government, all without a warrant or even suspicion of wrongdoing.

Now, CoinCenter backed up these academic concerns by superiors. the IRS in June of 2022. They pointed out that 605OI would functionally require them to provide a list of major donors to the government, chilling the right to freedom of association. Their lawsuit was dismissed last July, with the judge finding that CoinCenter could not bring their claims until the new provision was enforced. CoinCenter is currently appealing that decision. So let's get a little deeper into the specific so we can understand why these requirements are impossible to comply with currently. 6050I requires anyone who receives 10,000 or more in cryptocurrency in the course of their trader business to file a report with the IRS.

The report must include, among other things, the name, address, and social security number of the person who sent the funds. This report must be filed within 15 days of the transaction. Unlike most violations of the tax code, failure to make this report can be prosecuted as a felony, with a penalty of up to five years in prison. The first big issue is who this applies to. The law places the reporting requirement on individuals in the course of their trader business, not limited just to incorporated businesses. This seems to clearly apply to home miners and validators

operating as individuals. Day traders would also be saddled with this reporting requirement if they trade enough to be considered self-employed professionals. It could even extend to NFT artists. A big part of the issue is that we have no clear guidance on how broad this definition is. The second issue is how this information should even be reported when people attempt to comply. When a validator receives a reward from a blockchain, what name and social security number should be entered. If a professional trader buys a high-value NFT from a Dex, how will they get the required information from their counterparty? Making matters worse, we have zero clarifying guidance from the IRS on how these issues should be addressed. We don't even have updated forms that contemplate

digital assets. The only forms that exist is the same one used for cash transactions. Coin Center Executive Director Jerry Brito spelled out the unworkable situation these requirements produce. He wrote in a blog post, it's unclear what will happen. Will the IRS issue guidance or an updated form and submission process anytime soon? If not, people who receive qualifying amounts will find themselves in an odd position and will no doubt try to comply by notifying the IRS in any number of ways just to demonstrate goodwill. It's no doubt only a matter of time, before someone either buys a table sponsorship for our annual dinner or makes a contribution of $10,000 or more to coin center and cryptocurrency, and then we'll be on the hook for complying and

we'll have to figure out a way to do so. The really tricky nature of this requirement will become clear when someone makes such a donation, but does so anonymously by simply sending us Bitcoin or Ether to our public address. Who could we possibly list as a sender in that case? These are all questions that the Treasury Department has yet to answer. End quote. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if? It invites people in instead of leaving them out. It's on 24-7-365 and moves at the speed

of real life. Not everyone believes it. We've got our fair share of detractors, but that's the way it always is when you're building something new. Cracken is a crypto company that has been through the highs and lows of the industry, facing forwards towards progress throughout. And now they're inviting us to see what crypto can be. Learn more at crackin.com slash the breakdown. Disclaimer, not investment advice. Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, BVI, DBA, Cracken. Now, of course, maybe a good faith attempt to comply with unclear requirements would be enough to satisfy the IRS, but given that felony charges are the maximum punishment,

people shouldn't be put in that position. Bill Hughes, a lawyer at Consensus, wrote, As a practical matter, the IRS doesn't care about this reporting outside of the business context, but it is always something they can use to beat you to submission with. In other words, they don't care about it until they care about it, and then you are screwed. Now, to be fair, yesterday's alarm over this issue could be a bit of a premature overreaction. In their court filings in the Coin Center lawsuit, the IRS said that, quote, reporting requirements are not self-executing and will become effective following the promulgation of implementing regulations.

So in the view of the IRS, nothing will be enforced until regulations are passed. That again, it would be nice if this was published as official guidance for the industry rather than being buried on page 32 of a court filing. Crypto Tax Guy, a partner at Freed Frank, also notes that the IRS could make the requirements retroactive, so suggest it would be a good idea to, quote, keep good records and wait and see what happens. The maximum penalties are also slightly misleading. The IRS is able to bring felony charges, but only in circumstances where they can prove

intentional disregard of the requirements. Otherwise, the fine for failure to report is a modest $50. But ultimately what this comes down to is that we shouldn't be put in the position to be freaking out over unclear reporting requirements stemming from not fully thought out legislation. Either the IRS or the Treasury could have published clear guidance that enforcement would be delayed until regulations are created. Instead, people are put in this terrible position, where traders and validators are unclear on how to comply with IRS requirements. In the worst-case scenario, this kind of ambiguity would allow the IRS to bring a large number of felony charges against good faith industry participants. And while that's not the likely outcome by a long shot, it's also just

unacceptable behavior in a country that values the rule of law. This administration and bodies within it have unfortunately made an art of using legal ambiguity as a technique to delay this industry. This is just one more example of that. Gorilla Art Fair writes, show me the man and I'll show you the crime. Important. They are designing laws that can't be adhered to. not because they don't understand how defy and crypto work, but because they do. They now have a valid violation for almost everyone that allows them to pursue whoever they please. This is a perfectly logical strategy for an entity that is correct to understand Defi as a threat to its control of financial infrastructure. This is game theory. You are engaging with a superpower who correctly

sees your industry as an adversary. Fourth Industrial Revolution tech, i.e. Web 3 and Defy, is inherently detractive to the state and corporations. It disintermediates them. They're not going to like that. All other industrial revolutions were accretive to the state and corporations. This is an unstoppable force running into an immovable object. You do not consult law books for this. These laws are optics games so they can pretend they're following my rule of law while they attack. The state makes up the laws they'll make up new ones as needed. The alphabet agencies are supernational and extrajudicial. There are no rules. There is only dominant strategy. Now, if this bothers you, it is worth noting that the Crypto Council for Innovation believes that crypto voters could be a, quote,

key swing voting block in the upcoming election. According to a poll conducted by the CCI, 83% of respondents said they would prefer a candidate who, quote, wants to write clear rules for cryptocurrency. The poll was conducted in December and surveyed 454 U.S. voters. 89% of respondents said they viewed cryptocurrencies favorably. When asked to choose between Joe Biden and Donald Trump as president, 51% of respondents said they would vote for Trump.

Only 42% of respondents, however, said they would be more. more likely to vote for Republican candidates in Congress. The CCI report said, quote, this significant ticket splitting. Although the polling was focused on crypto policy, inflation and cost of living was the leading primary issue for surveyed voters, coming in at 31%. This could mean that the polling is simply showing that Biden is losing favor on economic issues rather than as a result of crypto policy choices. Former U.S. Senator Cory Gardner, who is now a CCI political advisor, said, crypto voters are here to stay and are sending a clear message. They want Congress to prioritize cryptocurrency regulation.

This issue could be a deciding factor in tight races, offering a unique opportunity for any party ready to earn their trust. Brett Quick, head of governmental affairs for the Crypto Alliance, said in a statement, Crypto voters are not just a niche group. There are a diverse and influential group that could shape the 2024 election landscape. This underscores the need for nuanced informed policymaking, since these priorities could very well tip the scales in closely contested races. Ron Hammond, the director of governmental regulations at the Blockchain Association,

did a long thread updating the state of crypto in D.C., and he discussed the election dynamics a little bit as well. He wrote, right now, many in D.C. are expecting a rematch of 2020 of Trump versus Biden. But given the recent setbacks in the courts for Trump, anything can happen on the Republican side. Remember, Trump was no fan of crypto under his administration, similar to the current. For Congress, Senate Ds will have a tough time defending their majority. This, along with the real threat of a Republican presidential win in 2024, will push the Senate to focus largely on general administration confirmations. This will take away from voting on bills. Watch Senator Brown. The most important race in crypto is Ohio's Senate race. Sherrod Brown is the chair of the Senate

Banking Committee and has been a major obstacle for crypto legislation progressing. That could change in 2024, but in the meantime, he is running in a more Red Ohio. Now, interestingly, even the discussion of ETFs has gotten political. A new report from TD Cowen research suggests that ETFs would be approved by the SEC as a, quote, political necessity. The research note published on Tuesday said, to us, this is a political necessity as the agency needs to cement its role as a crypto regulator before Congress considers broader crypto legislation. We also believe the agency does not want to lose a legal challenge to its refusal to approve Bitcoin ETFs. The note also pointed out the chess game going on in Washington around crypto legislation. The report assumed

that Patrick McHenry would be highly motivated to push his preferred set of crypto bills through Congress before his retirement at the end of the year. T.D. Cowan thought that movement on the bill was unlikely this year, but there is a window of opportunity for dealmaking during the lame duck session following the election. With that in mind, the report said, to get the Senate and White House on board, the SEC will need to be the lead on investor protections. On the stable coin bill, the research note added, we see this as less of a political lift than crypto market structure, though the hurdles remain significant. It will depend on how much Republicans are willing to give in to democratic demands. Meanwhile, elsewhere in ETF land, Mad Money's Jim Kramer appears to have a

New Year's resolution to take another look at Bitcoin. After spending most of last year holding an outspoken bearish view, Kramer appears to have capitulated. In a CNBC appearance to discuss the recent price action, Kramer spoke to the quote, clearing event of Sam Bankman-F's conviction, an ETF application as a positive way to enter the year. He said, you can't kill it. The late Charlie Munger, who was brilliant on so many things, was blind to this. Despite suggesting the ETF launch would be a seldom news event, Kramer added, it's a reality. It's a technological marvel and I think people have to start recognizing that it's here to stay. is a remarkable comeback that was unexpected, except for all the bulls who turned out to be right.

When discussing the endless jawboning and attacks from the SEC Chairman Gary Gensler, Kramer simply said that it didn't work. Now, of course, this produced a ton of jokes about Bitcoin needing to sell off now, given the inverse Kramer theme. But ultimately, Kramer isn't talking to the average Bitcoin user. He's talking to their parents or even their grandparents. And so those sentiment shifts are interesting to note. Still, markets are showing a little bit of skepticism.

Crypto stocks are off to a rocky start this year. After following Bitcoin up in pre-market trading, the first trading day of the year saw some gnarly drawdowns. Coinbase fell by 9.8% on the day, with Bitcoin miners' Marathon Digital and Riot platform suffering similar declines. Micro Strategy was one of the few crypto stocks up on the day, recording a 7.9% gain. Now, of course, after suffering massively in 2022, last year saw crypto stocks outperform Bitcoin. Coinbase quintupled in price while Marathon almost managed a 10x. Singapore-based research firm 10x said in our Thursday report that crypto stocks appeared over overvalued compared to Bitcoin to close the year. While Bitcoin had a solid run in the fourth quarter,

multiple crypto stocks doubled in the year's final weeks. Now, the question, of course, is whether this is just a natural mean reversion after crypto stocks became overextended? Is it representative of traders moving out of Bitcoin proxies and looking to take positions in the ETF? Or is it part of a larger phenomenon? Everything in tech was down yesterday with the magnificent seven seeing $238 billion in combined value wiped off their market cap. So maybe it was just part of that broader trend. In any case, this year continues to be off to a rollicking start, and I am here for it. I want to say one more big thanks to my sponsor for today's show, Cracken. Go to Cracken.com and see what crypto can be.

Until next time, be safe and take care of each other. Peace.