The Breakdown - IRS Forks Up New Tax Guidance / DevCon Debates / Senate Pressures Libra

Episode Date: October 9, 2019

The IRS dropped quite the surprise today: their first new tax guidance since 2014. Unfortunately, it seems to indicate that chains forking and airdropping users coins (whether they want them or not) creates a taxable event. Meanwhile, DevCon5 is cruising along in Osaka, complete with Ethereum scaling debates, the imminent launch of Multi-Collateral DAI, and the announcement of a new, open version of Libra (although it's not exactly clear why people are excited about this). Lastly, the real Libra faced some headwinds as US Senators put pressure on Visa, Mastercard and Stripe to follow suit with PayPal and leave the Libra Association.  Watch: https://www.youtube.com/nathanielwhittemorecrypto

Welcome back to another Crypto Daily 3 at 3. What's going on, guys? It is Wednesday, October 9th. And we are flying through a bunch of different issues today. So first of all, we're going to be talking some new guidance from the IRS on cryptocurrency reporting, particularly with regard to forks. A lot of people kind of nervous about this one. Second, we're going to be popping over to Osaka to hear a couple pieces of news from DevCon. multi-collateral dye is coming, a new Open Libra project that has a bunch of people kind of yamering.

So we'll be looking at that. And then third, we're going to talk about the regular Libra. And specifically the latest round of challenges it faces, including senators, putting pressure on companies like Visa and MasterCard to withdraw from the Libra Association. But let's dive in on the IRS first. So this cryptocurrency guidance was not expected. It's the first time we've heard from them since 2014. as you can see here from at Crypto Tax Girl, who's a great follow in general for this whole side of the market.

And so what was going on? Well, Peter Van Valkenberg from Coin Center sums it up like this. He says, new IRS guidance is like, quote, owing income tax when someone buries a gold bar on your property and doesn't tell you about it. So what does that mean specifically? The bad, as they say here, any fork with new coins, for example, Bitcoin Cash or Ethereum Classic will create an income event for taxpayers. So this is their summation.

The new guidance suggests that a taxpayer will have a taxable income the moment that new coins from a hard fork are recorded on the newly forked blockchain and that the taxpayer has dominion and control over the cryptocurrency so that he or she can transfer, sell, exchange, or otherwise dispose. So that means that anyone who forks a blockchain can, without warning or notice, create new tax obligations for every holder of coins on the old chain. Same goes for air drops. Anytime someone air drops a coin to an address over which you have dominion and control, they will create a tax reporting obligation on your part. This is a very bad result. So obviously this has a huge number of people who are kind of either up in arms on it on the one hand or on the other just in disbelief that it's actually going to be enforceable and that it doesn't make any sense. So Marco Santori, the chief legal officer at blockchain, wrote this thread basically one of his classic 213 threads where he says, me, I'm not a tax lawyer, but I do think it's patently unfair to force.

individuals to liquidate, hard to liquidate coins just to pay taxes on income they never had control over receiving, and it's probably not worth all that much anyways. And he points out, Matt Corva put it better. So Matt Corva here says, scenario 491. Coinbase credits BSV to my account that I don't want, but they do it anyways. I do nothing with it. Coinbase in all U.S. exchanges, de-list BSV. I still have taxable income on an asset I didn't want, didn't manipulate in any way, and can't dispose of without 490 issues. Bruce Fenton, went off on this a little bit. He says, new IRS guidance on Forks is so bad, it's like a critical code bug. Maybe someone can figure out a way to exploit it, so the IRS ends up owing them money,

owning them money, or just melt it all down. Taxing Forks says income is completely unworkable. You can't foist income on someone. So this is really interesting, right? The idea here is that if you receive coins, all of a sudden, that's a taxable event, even if you didn't want it. And in particular, there's a lot of questions around just what it means to actually own the coins, right? And the implications for holding things on exchanges versus self-custody. Jameson Lop weighs in. He says, today's IRS guidance is a hot mess. What if you have keys but no software from which to spend the asset?

What if you never sell or transfer the asset and it drops 90% in value? What's the value of the asset isn't even trading at the time of the fork? NIRAS, also from Coin Center, comes in and he says, did you remember to pay income taxes on these? And for those of you are listening, not watching, it's a list of these forks. Bitcoin New, Lightning Bitcoin, Bitcoin, State, Bitcoin Faith, Bitcoin, World, United Bitcoin, Bitcoin, Bitcoin, Bitcoin, Bitcoin, Bitcoin, Bitcoin, Bitcoin, Bitcoin, Bitcoin, Bitcoin, Bitcoin, Bitcoin, Bitcoin, Bitcoin, Bitcoin, Bitcoin, Bitcoin, Bitcoin, Bitcoin, Bitcoin, Bitcoin, and Bitcoin, Cash. So, obviously, a lot of, I think,

controversy here a little bit, a lot to be unpacked still. Now, there were some folks in the legal community who think that it's unlikely that the IRS is going to ding people for, you know, for these random small forks. But it opens up a lot of possibilities that aren't particularly wonderful. So, you know, I think for those who are frustrated by U.S.'s policy on crypto assets and its lack of clarity around whether they're commodities and, you know, property that can be taxed or securities or some other thing, this just reinforces that. But let's move on for now. I'm not a legal expert, so I don't really have a hot take on this other than seems kind of effed and like it's going to create more problems than it solves. But like I said, I'm not a lawyer. So let's move on in number two, DevCon.

All right. So DevCon, this is DevCon five. Biggest annual Ethereum event, kind of the epicenter for a lot of things happening in that extended community. And it's happening in Osaka. So interestingly, for me, me, I am waking up every morning to controversy and people being angry on Twitter instead of that happening later in the day. So right out of the gates, we saw a bunch of controversy on this post by Lee Kwan over at CoinDesk, who writes my first report from DevCon. And she says, she summarizes it thusly. She says, devs aren't blind to the risks, may not have as yet, but they know the questions. Leaders aren't looking to make choices for users. They proactively seek engagement with diverse users, input from Presswich, Dean Engeman, and Vitalik Bruteron, and more. But the article itself was named Scam or Iteration.

At DevCon, Ethereum Diehard still believe in 2.0. And this sort of, even though it was in quotes and it was referencing some other take, it created a huge amount of basically immediate frustration from the Ethereum community and then the relitigation of longstanding fights between Ethereum and Bitcoin. I've said this before. I'll say it again. I think that that sort of fight is almost entirely useless. I think it's a complete waste of everyone's time.

I think that it's possible to be interested in different aspects of this. I've been clear about kind of where I sit in terms of my interest as it relates to what Bitcoin is trying to do relative to the world, but that doesn't mean that I don't appreciate and I'm rooting for interesting. things to happen in other coin communities as well. So I had to say I was a little bit happy to see some other things push that particular relitigation of longstanding tribal conflicts out of the news. And for that, there are a couple things. So one, Maker Dow. So Maker announced that multi-collateral die was upcoming. I was going to be ready on November 18th. This is a huge deal. It's actually

way outside of the scope of just this three at three here. But basically the idea is instead of the only collateral being Ethereum or ETH rather, either they're moving to a system where potentially there'll be multiple, multiple types of collateral in the ecosystem kind of backstopping the stable coin. And so the goal of that is if you diversify the basket of assets that backstop multi-collateral die, you potentially are less subject to volatile swings in cryptocurrency prices. potentially you make it more stable. That's the idea. Now there are a lot of folks who are not interested in this because of one when it comes to other digital assets they see other things that

have been debated as even less stable, less liquid and more volatile than something like ether. And two, there's this whole question of non-digital asset collateral, right? So, you know, Maker has talked about the idea that in the future many, many different types of assets across asset classes could be used as collateral within the dye ecosystem, again, really reinforcing the stability. But then you get into all these issues as it relates to price oracles and the decentralization of those price oracles and so on and so forth. So multi-collateral dye is both a huge step potentially for what is one of the most important and largest, you know, kind of global stable coin projects, but is also not without controversy. So that'll be something

to watch. I have to give a little shout out to Mariano, speaking of dye. who gave a presentation all about how he survived 50% inflation using exclusively cryptocurrency. He made this amazing statement that he's never actually purchased cryptocurrency. He's only earned it. And he's been earning it since 2014. So you can see here on this slide from Amin posted it. But Bitcoin in 2014, capital controls in Argentina got paid in Bitcoin to avoid government converting USD to pesos. Ether, 2015, discovered Ethereum went all in.

started working at Maker 2016 and got paid initially in Eith. 2017, dog fooding our stuff, paycheck in Si, July 2017, die starting January 2018 to this day. I've had a chance to actually be with Mariano, and he's talked through that process, but pretty cool stuff. I mean, he's kind of on the vanguard of what it looks like to actually live off this and living in a place where it's been really valuable for him. So, you know, kudos for that presentation.

Really cool. I can't wait to see the larger, the YouTube video or the follow-up. But then one more thing from DevCon, just because I find it really, the conversation around it, interesting in some ways. So Lane Reddig here says, seeing hashtag Open Libra publicly announced for the first time is sending shivers down my spine. I'm so excited about this initiative to lock the door open for Libra Tech. And it goes in. And so basically the idea here is that a consortium of companies, so you can see some of the folks who are involved here on the screen. For those of you who are listening, it includes folks from Cosmos, Democracy Earth, Web 3, Vulcanize, a huge

array of different people who are basically trying to bring a version of Libra to market without the backing of Facebook and an open version. And so this produced actually a huge number of responses. So one of the responses that I didn't really have an example of here is some people who were frustrated because they weren't sure why this random new project was on the main stage when so many other things were, you know, kind of shunted to side rooms. That's kind of internal conference politics. I don't really have any idea about that. But it was one more of the, one more of the types of antagonism that was, that came after this. Then you add Vlad Zamfir over here saying, shame on us for lending our legitimacy to Libra. And a lot of people were

agreeing. Some people were disagreeing. But basically, uh, there, the Vlad's argument here is that Libra is inherently kind of an authoritarian project and a project that reflects the current control system of the of the world as it is today and that this it doesn't just rest it out of the hands but it has the political implications of of legitimizing it right so that was one set of critiques you had Linda from Scalar Capital who says among other things in her reflections about DevCon, skeptical of Open Libra since Facebook and company distribution was the benefit, right? So this is one of my questions immediately too, is like, what is the value of like a fork of Libra when you rip out the two billion potential install base? And this is, I think, key.

Like, the reason that Libra is being taken so seriously and in not a great light necessarily by governments around the world is, as compared to things like Ethereum and Bitcoin, is that built-in install base, right? Like, you know, Bitcoin set of users and hoddlers don't really scare the folks in Congress and the folks in the Senate, but two billion installed users that could immediately be using a not pegged to the U.S. dollar, even currency, is scary, right? So I think that there's a, that built-in install base is a huge part of the centerpiece or the underpinnings of what makes Libra such a powerful and important topic of conversation right now. So I tried to get kind of some clarity on this.

So I said, okay, so Open Libra. I've read one, why it's a distraction, two, why it legitimates authoritarianism, three questions about why Libra matters without Facebook's network, and four questions about leadership that relates to the kind of presenter of the project and what they have or haven't delivered on their past project. So these are all things that I've read. Whatever, I don't really have a stake in any of them, but that's what I had seen.

But I've read nothing about what the team believes is so good about Libra that it needs an open version. And so the Coinbase article said the idea for Libra and its technology was not only brilliant, but likely to become the currency of the Internet. So the question is why, like, what are they trying to capture here? I find it really, I think it's important, right? Because to the extent that the argument is that this is a distraction or a waste of time, you know, it's getting main stage coverage at the major event of one of the biggest crypto assets in the world, really the one of the two biggest crypto assets in the world, unknowably,

and is referencing this project that has, you know, lit up the entire universe of conversation in our space. What are they trying to achieve? What do they think is so important about Libra that those other crypto assets can achieve? You know, is it the idea of a stable coin, a basket of currencies? What is it, right? It feels to me like if we're going to have any conversations about this, We need to understand, and perhaps they said this in the presentation, it just wasn't reflected in the article.

What makes it so important? And that's not super clear to me. So anyways, I think, you know, Open Libra, it might just be a flash in the pan conversation, but there are a lot of folks who are involved in that group, that consortium or whatever, of people putting it together. So maybe we want to keep an eye on. But with that, let's turn to our final topic of the day, actual Libra. So just in our ongoing, you know, tracking of what's happening with Libra, the most recent challenge for them. So Friday of last week, PayPal officially withdrew from the Libra Association.

You know, David Marcus earlier in the week had almost kind of created some narrative space for them saying that there was going to maybe be some flux as people, as they've really found mission-aligned partners. And now you have two U.S. senators, Brian Schatz, Democrat from Hawaii and Sherrod Brown, Democrat from Ohio, sending letters to Visa, to MasterCard, and to Stripe about withdrawing, right? And saying they basically said, this is their quote, it is chilling to think what could happen if Facebook combines encrypted messaging with embedded anonymous global payments via Libra. In what could be viewed as threatening language, Shats and Brown say participating firms, such as Visa, Stripe and MasterCard, basically heightened regulatory scrutiny overall as a result of Lever membership. If you take this on, you can expect a high level of scrutiny from regulators not only on Libra-related payment activities, but on all payment activities.

So this is a pretty aggressive stance. Now, the sources, the provenance of this shouldn't surprise anyone who has watched Senate hearings. Both Shats and Brown have been pretty clear and outspoken in their consternation for this project. but it still is, you know, a ratcheting up again of the pressure that is on Libra. We also saw from the Bank of England some new rules, basically that Libra would have to follow to launch in the UK. This is a little bit less clear the impact.

I mean, in some ways, you have to think that to the extent that people are saying, hey, these are the set of criteria you have to meet, unless it's completely unmeatable, that's potentially a good sign for Facebook, right, as it tries to bring this to market. Now, for those of us who are worried about surveillance, it may not be such good news, right? So significantly, this is from the Coin desk article, the Bank of England says it needs access to be able to monitor payment chain information as one of its conditions. You know, Facebook is fighting this fight everywhere right now as it relates to the encryption of its messenger. And so on the one hand, they're fighting to be able to do end-to-end encryption on, you know, WhatsApp and on Facebook Messenger. And on the other hand, they're potentially just handing over this huge amount of financial information, you know, to governments who want to surveil it.

So this to me is kind of like right down the pipe of why people are so nervous about something like Libra in coordination with the government surveillance apparatus. Finally, you know, I don't want to necessarily read too much into this because people move and change jobs all the time, but the block was reporting that Simon Morris, who's the head of product at the Libre Association, had left after just five months. This is just kind of reported from noticing things on LinkedIn, so we don't really have any understanding of why that might be. So again, this is added just in the context of kind of a quick update about what's going on there, but I don't want to say for sure that this is anything other than a person making a decision

that relates to Vactors that might have something completely not to do with the viability of the project itself. But anyways, it continues to be headwinds for Libra, which on the one hand, I think that they must have expected. But on the other hand, I think really reinforces just how it is the most kind of high-profile tightrope act in the entire world right now as it comes to trying to do something new, but play within the old set of rules. And it's abundantly not clear whether they're going to be able to do it. But for now, that is it for our Crypto Daily 3 at 3. Thank you for watching. If you are watching, thank you for listening, if you're listening.

For those of you who are watching, don't forget, you can get this via whatever podcast app you love most, pretty much. Facebook or, sorry, Google, Spotify, iTunes, hopefully Pandora soon. Yeah, and anyways, guys, thanks as always for listening and watching, and I will see you tomorrow. Peace.