tax

IRS tax bill will swipe creditors of any ‘meaningful recovery,' says FTX

FTX Trading said the firm “never earned anything anywhere near the amount” that would justify a $24 billion tax bill.

A proposed $24 billion tax bill from the United State IRS will likely suck up any “meaningful recovery” that was meant for victims of FTX, according to the bankrupt crypto exchange. 

The United States tax authority has been trying to chase tax arrears from the crypto exchange and its sister firm Alameda Research since May this year. The IRS initially claimed $44 billion across 45 separate claims against FTX and its subsidiaries in May. 10, but recently brought that number down to $24 billion.

However, in a Dec. 10 filing to a Delaware-based bankruptcy court, FTX said the claims put forth by the Internal Revenue Service were “meritless” and would also impact the funds meant to reimburse impacted FTX users.

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IRS tax bill will swipe creditors of any ‘meaningful recovery,’ says FTX

FTX Trading said the firm “never earned anything anywhere near the amount” that would justify a $24 billion tax bill.

A proposed $24 billion tax bill from the United States Internal Revenue Service (IRS) will likely suck up any “meaningful recovery” that was meant for victims of FTX, according to the bankrupt crypto exchange.

The United States tax authority has been trying to chase tax arrears from the crypto exchange and its sister firm, Alameda Research, since May. The IRS initially claimed $44 billion across 45 separate claims against FTX and its subsidiaries on May 10 but recently brought that number down to $24 billion.

However, in a Dec. 10 filing in the U.S. Bankruptcy Court for the District of Delaware, FTX said the claims put forth by the IRS were meritless and would also impact the funds meant to reimburse affected FTX users.

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Australian tax data shows a growing desire to hold crypto for DIY retirement

Australians are increasingly adding cryptocurrency to their “self-managed super funds” as a means to secure their retirement life, according to newly released data.

Australians are increasingly looking to cryptocurrency to secure a peachy retirement, with allocation to the asset class from self-managed retirement funds increasing 400% in just four years — and the growth rate surpassing stocks and bonds. 

As of the quarter ending in September, the nearly 612,000 self-managed super funds (SMSFs) are holding a total of $658.6 million (992 million Australian dollars) worth of cryptocurrencies, show statistics released on Nov.

The latest figure is a 400% increase from the same quarter in 2019, which closed out at just under $131.5 million (198 million AU).

In Australia, self-managed super funds — also known as private superannuation funds — allow individuals to control how their retirement funds are invested.

Crypto tax provider Koinly’s head of tax, Danny Talwar, told Cointelegraph this makes crypto the “largest growing asset class in SMSFs.”

In comparison, listed shares — representing the largest allocation category for SMSFs at the end of the last quarter — grew 28% over the same time.

However, total SMSF allocations to crypto saw a slight 0.8% drop from the quarter ending June 2023 and a 2.4% drop compared to the previous year.

Crypto allocation amounts within all SMSFs per quarter since September 2019.

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Biden wants to double capital gains and clamp down on crypto wash sales: Reports

The Biden administration reportedly wants to apply the wash sale rule to crypto, which would end a strategy in which a trader sells and then immediately buys digital assets for tax purposes.

U.S. President Joe Biden’s upcoming budget proposal has a few surprises for crypto traders and investors, including a proposed doubling of capital gains for certain investors and a crackdown on crypto wash sales. 

The Biden administration is set to release its fiscal 2024 budget plan on March 9, which is reportedly aimed at reducing the deficit by almost $3 trillion over the next decade. It also includes changes to crypto tax treatment with the aim of raising around $24 billion, according to newsreports.

One of these proposals includes an end to a strategy in which a crypto trader sells assets at a loss for tax purposes, known as tax-loss harvesting, before repurchasing them immediately after, according to The Wall Street Journal.

Such a strategy is not permitted when stocks and bonds are involved under current wash sale rules. However, crypto is currently not under these same rules, as digital assets have not been classified as securities.

Now it appears that the U.S. government is looking to change that.

Speaking to Cointelegraph, Danny Talwar from crypto tax software firm Koinly commented:

“This is an inevitable consideration for the U.S., which, if implemented, will see it on par with other jurisdictions such as Canada and Australia, where crypto wash sales apply.”

“If the rule is applied, the timing is significant as many crypto holders who entered the crypto space on the back of 2021 market peaks are suffering from heavy losses,” he added.

Related: What is crypto tax-loss harvesting, and how does it work?

The Biden budget also proposes to nearly double the capital gains tax rate for investors making at least $1 million to pay 39.6% on long-term investments, up from the current 20% tax rate. It also plans to raise income levies on corporations and wealthy Americans, according to Bloomberg.

Update Mar. 9, 4:19 am UTC: Added clarification that the increased capital gains tax rate applies to a certain subset of investors, according to the Bloomberg report.

Tax attorney breaks down the MicroStrategy Bitcoin sale

MicroStrategy’s recent sale of a portion of its Bitcoin treasury holdings puts cryptocurrency tax-loss harvesting into the spotlight.

Business intelligence firm MicroStrategy made headlines ahead of New Year’s Eve as the sale of a portion of its Bitcoin (BTC) holdings drew the attention of industry experts and critics.

A regulatory filing with the United States Securities and Exchange Commission (SEC) on Dec. 28 detailed the first time the firm sold some of its BTC since its high-profile adoption of the preeminent cryptocurrency as its primary treasury asset.

MicroStrategy made waves in the industry in 2021 as it began amassing significant holdings of BTC, with founder Michael Saylor touting the asset as a superior store of value to fiat currency as a primary reason for the move.

Given Saylor’s role as a staunch Bitcoin proponent over the past two years, MicroStrategy’s decision to sell some of its BTC drew attention across the industry. However, the company’s SEC filing outlines clear intent to generate a tax benefit.

MicroStrategy’s subsidiary MacroStrategy bought 2,395 BTC for approximately $42.8 million between Nov. 1 and Dec. 21 at an average price of $17,871 per BTC. It then sold 704 Bitcoins on Dec. 22 at an average price of $16,776 per Bitcoin for $11.8 million, highlighting its intent to reduce its tax bill:

“MicroStrategy plans to carry back the capital losses resulting from this transaction against previous capital gains, to the extent such carrybacks are available under the federal income tax laws currently in effect, which may generate a tax benefit.”

Cointelegraph reached out to international tax attorney and CPA Selva Ozelli to unpack MicroStrategy’s Bitcoin sale and the reasoning behind it. As she explains, selling cryptocurrencies for a profit in America would require the payment of capital gains tax:

“Some investors choose to reduce their capital gains in a given tax year by selling some of their digital assets at a loss. This is called tax-loss harvesting.”

Ozelli said that the practice is common for individuals in the cryptocurrency space, given that assets like BTC are treated as property by the Internal Revenue Service (IRS) and subject to capital gains and losses rules:

“Furthermore, the wash sale rule, which prohibits selling securities at a loss and reacquiring them within 30 days does not apply. Because crypto is not a security, there is no crypto-specific wash sale rule.”

MicroStrategy made use of this exception, reacquiring 810 BTC for approximately $13.6 million in cash just two days after realizing a loss on the sale of a portion of its holdings.

Ozelli highlighted the volatility of cryptocurrency market prices as an opportunity for retail and institutional investors to realize and harvest capital losses. The challenge lies in identifying assets that present the greatest opportunity for tax savings:

“The difficult part for investors is identifying which of the digital assets in their portfolio have the highest cost basis (original purchase price) when compared to the current market price.”

Nonfungible tokens (NFTs) also present another avenue to reduce tax liabilities. Renowned DJ Steve Aoki has been selling a variety of NFTs on OpenSea, with his activity publicly viewable on his verified profile.

Reports speculate that Aoki may have been looking to carry out tax-loss harvesting. Cointelegraph has reached out to the DJ’s publicist to ascertain the reason for the sale of hundreds of NFTs from his extensive collection.

IRS introduces broader ‘Digital Assets’ category ahead of 2022 tax year

An early draft of the 2022 IRS tax form sees cryptocurrencies, stablecoins and nonfungible tokens grouped under a new “Digital Asset” category.

American taxpayers will find a broader, more defined category encompassing cryptocurrencies and nonfungible tokens (NFTs) in their 2022 IRS tax forms. The draft bill released by the Internal Revenue Service features a well-defined Digital Assets section that outlines if and how taxpayers will account for the use of cryptocurrencies, stablecoins and NFTs.

Page 16 of the draft defines Digital Assets as any digital representations of the value recorded on a “cryptographically secured distributed ledger or any similar technology.” 2021’s tax form required taxpayers to indicate whether they had received, sold or exchanged in “virtual currency” — with this term changing in the yet-to-issued 1040 tax form for 2022.

Taxpayers are required to answer the Digital Assets section of their income tax return whether or not they have engaged in digital asset transactions during the tax year.

A number of situations will require American taxpayers to indicate yes to the question on Digital Assets of Form 1040 or 1040-SR. This includes receiving as a reward, award or payment for property or services or sold, exchanged, gifted or disposed of a digital asset in 2022.

Related: IRS to summon users who don’t report and pay tax on crypto transactions

This would include instances where an individual received digital assets as payment for property or services provided or as a result of a reward or award. Receiving new digital assets through mining or staking also falls under this category, as does transacting digital assets in exchange for goods or services as well as exchanging or trading digital assets.

Holding cryptocurrencies, stablecoins or NFTs as well as staking tokens is also clearly addressed in the draft tax form:

“You have a financial interest in a digital asset if you are the owner of record of a digital asset, or have an ownership stake in an account that holds one or more digital assets, including the rights and obligations to acquire a financial interest, or you own a wallet that holds digital assets.”

The Digital Assets explainer also outlined conditions that do not require taxpayers to check Yes on their tax forms. If an individual holds a digital asset in a wallet or account, transfers digital assets from a wallet or account to another wallet or account owned by themselves or acquires digital assets using United States dollars or other fiat currencies through electronic platforms like PayPal.

Digital asset transactions can be clearly classed in either capital gains or income sections of the 2022 tax return.

If an individual disposed of any digital asset during the year which was held as a capital asset, they are expected to calculate their capital gain or loss and report on Schedule D of the tax return.

If individuals received digital assets as payment for services or sold digital assets to customers in a trade or business, this would need to be reported as income in its specific category.

Portugal proposes 28% tax on annual crypto trading profits next year

The cryptocurrency tax haven could see taxes levied on profits realized from cryptocurrency trading or capital gains within a year of their acquisition.

Long considered a cryptocurrency tax haven, Portugal’s government has proposed a 28% tax on capital gains from cryptocurrencies held for less than a year.

The 2023 State Budget document published on Oct. 10 featured a short section addressing the taxation of cryptocurrencies, which to date have been untouched by the Portuguese tax authorities, given that digital assets were not recognized as legal tender.

The section notes that the Portuguese government intends to create a ‘broad and adequate’ tax framework aimed at cryptocurrencies in terms of their taxation and classification. A proposed income tax from operations involving cryptocurrencies through activities such as mining or trading, as well as capital gains, was put forward in the 444-page document:

“Capital gains relating to crypto-assets held for a period of less than one year are subject to the rate of 28% (without prejudice to the aggregation option), with the capital gains referring to crypto assets held for more than 365 days exempt from taxation.”

The State Budget also proposes a 4% taxation fee of free transfers of cryptocurrencies in instances of inheritance, as well as stamp duties on commissions charged by intermediaries involved in the cryptocurrency sector.

Related: Portugal slowly becoming a ‘haven’ for European Bitcoiners

The section concludes by noting that security and legal certainty are provided in the proposed creation of the tax regime in an effort to foster the crypto economy.

Portugal’s parliament will have the final say as to whether the proposed cryptocurrency tax changes are enforced, while the notion is not entirely new. In March 2022, Secretary of State for Tax Affairs António Mendonça Mendes laid out the rationale in a parliamentary working session for taxing cryptocurrencies given that capital gains were being realized by users.

Germany recently took a similar stance toward the taxation of cryptocurrencies. It released new guidelines in May 2022 outlining clear income tax rules for cryptocurrency and virtual assets. Individuals who sell Bitcoin (BTC) or Ether (ETH) more than a year after acquisition will not be liable for taxes on the sale if they realize a profit.

Tax on income you never earned? It’s possible after Ethereum’s Merge

IRS rules weren’t ready for the Ethereum upgrade. It’s unlikely to become the fiasco that taxpayers experienced when Bitcoin forked in 2017, but there are measures they can take to prepare for whatever the IRS decides.

After much buildup and preparation, the Ethereum Merge went smoothly this month. The next test will come during tax season. Cryptocurrency forks, such as Bitcoin Cash, have created headaches for investors and accountants alike in the past.

While there has been progress, the United States Internal Revenue Service rules still weren’t ready for something like the Ethereum network upgrade. Nonetheless, there seems to be an interpretation of IRS rules that tax professionals and taxpayers can adopt to achieve simplicity and avoid unexpected tax bills.

How Bitcoin Cash broke 2017 tax returns

Because of a disagreement over block size, Bitcoin forked in 2017. Everyone who held Bitcoin received an equal amount of the new forked currency, Bitcoin Cash (BCH). But when they received it caused some issues.

Bitcoin Cash was first issued in the fall but didn’t hit Coinbase or other major exchanges until December. By that time, it had gone up significantly in value. For tax purposes, receiving free coins is income. Suddenly, many investors had a lot of income to claim that they hadn’t anticipated.

Related: Get ready for a swarm of incompetent IRS agents in 2023

Many crypto-savvy accountants advised clients to claim the value of Bitcoin Cash when it was issued, not when it finally arrived in their exchange accounts. No IRS guideline explicitly said this was OK — in fact, it runs contrary to the accounting principle of dominion and control — but it seemed like the only reasonable way to handle the issue.

Airdropped proof-of-work ETH is another gray area

As a result of the problems with reporting income from Bitcoin Cash, the IRS issued Revenue Ruling 2019-24 to address the treatment of blockchain forks. According to the ruling, forks that result in the airdrop of a new currency to an existing holder are taxable accessions to wealth. While not the usage of “airdrop” most investors are used to, the IRS uses the term to describe when the holder of an existing cryptocurrency receives a new currency from a fork.

The potential confusion with the Ethereum upgrade is that assigning the forked and original currency based on the ruling alone is unclear. One can easily see how the IRS could take the position that, following the upgrade, the Ether (ETH) tokens held in wallets and exchanges across the world is a new coin, and that Ethereum proof-of-work (PoW) — which continues on the legacy network — is the original.

Cryptocurrencies, IRS, Taxes, Tax reduction, United States, Law, Ethereum 2.0

While the argument makes logical sense, this position would also result in chaos. Every U.S. taxpayer who held ETH — or assets such as nonfungible tokens (NFTs) based on Ethereum smart contracts — on Sept. 15 would have to claim its value as ordinary income. Though it’s using the old technology, Ethereum PoW is clearly the “new” coin.

The assets of the investor haven’t changed — rather, the underlying consensus mechanism was upgraded. Plus, unlike Bitcoin Cash, which stemmed from a disagreement with two legitimate sides, the Ethereum upgrade had widespread support and was only opposed by self-interested miners.

Related: Biden is hiring 87,000 new IRS agents — And they’re coming for you

Another example would be when EOS froze the Ethereum-based EOS token and moved the holders to the EOS mainnet. The continuation of the coin on the EOS network was not viewed as taxable, as rights were simply teleported to another chain with the same ticker symbol. (Crypto exchange traders probably didn’t even notice.)

Is the “new coin” always the lesser adopted coin? Is a coin its technology or its community? The IRS likely won’t rule on this before Tax Day in April, so taxpayers and advisors will just have to make the call. But it seems like the choice is clear.

Additional considerations for investors and developers

Tax-savvy Ethereum holders may want to wait and see if Ethereum PoW is adopted before they attempt to access the coins. Accepting them will guarantee taxable income without leaving room for an argument that the fork is a half-hearted fork/farce/scam, like many of the derivative Bitcoin forks in 2017–2018, which had thinly traded values on remote exchanges.

If the value of Ethereum PoW drops before an investor sells, it can mean a tax bill that exceeds the value of the asset. (Bitcoin Cash dropped from over $2,500 in value to under $100 in 2018, save for a short-lived spike in 2021). On the other hand, Grayscale Ethereum Trust’s Sept. 16 press release indicates it will claim, sell or distribute proceeds related to the ETH POW coin, so there may be some value to report at the end of the day.

Related: Post-Merge ETH has become obsolete

It takes some doing to claim Ethereum POW that is worth less than 1% of the corresponding quantity of Ethereum. Early adopters often have an advantage in crypto, but a fork is one case where patience could be prudent.

Any crypto developers considering a fork should bear in mind that forks always create tax headaches, the severity of which varies based on the rationale for and execution of the fork. Assuming the IRS follows the lead of the crypto tax community again, the Ethereum upgrade provides an example of how to do it right.

Justin Wilcox is a partner at the Connecticut accounting and advisory firm Fiondella, Milone & LaSaracina. He founded the firm’s cryptocurrency practice in 2018, providing tax and advisory services to Web3 organizations and crypto investors. He mines cryptocurrencies like DOGE (though he still supported the Ethereum Merge). He holds various cryptocurrencies and NFTs, including coins mentioned in this article.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

P2E gamers, minors not any safer from the tax man — Koinly

Earning an income from play-to-earns is “complicated” without tax guidance, advises Australian crypto tax specialists.

Modern parents are going to need to keep an even closer eye on their kids’ gaming habits, as some of them may be accumulating a hefty tax bill, according to a crypto tax specialist.

Speaking to Cointelegraph during last week’s Australian Crypto Convention, Adam Saville-Brown, regional head of tax software firm Koinly said that many don’t realize that earnings from play-to-earn (P2E) games can be subject to tax consequences in the same way as crypto trading and investing. 

This is particularly true for play-to-earn blockchain games that offer in-game tokens that can be traded on exchanges and thus have real-world financial value:

“Parents were once worried about their kids’ playing games like GTA, with violence […] but parents now need to be aware of a whole new level […] tax complexities.”

Saville-Brown said he was approached during the convention by a father of a nine-year-old son, concerned that his boy was “making bank” from P2E games.

“The nine-year-old kid is mining, staking, creating Youtube and TikTok videos to the point that his dad had to bring him here today because he’s generating so much income,” Saville-Brown recounted to Cointelegraph.

However, the treatment of P2E game earnings — at least in Australia — can be complex.

Koinly’s head of tax Danny Talwar explained that in Australia if one is playing a game to earn income — they are considered as “running a business” and could face a “complicated” tax situation, noting: 

“If you’re a professional gamer, it’s possible that you’re running a business, so you’d be treated under such rules.”

This is further complicated as the gamers could either be “playing these games as an investor” or “playing these games as a trader.”

According to the Australian Taxation Office, investors are subject to capital gains when they sell their assets, while traders doing the same thing would be seen as “trading stock in a business,” and thus any profits would be treated as ordinary income.

Talwar added that if users have “intentions to actually run as a business […] and have a business strategy,” then it will be treated as a business for tax purposes.

He brought up the popular P2E game Axie Infinity as an example of a game that might receive business treatment for tax purposes “as people use that game to earn an income.”

The tax expert advised that how one “should be treated from a tax perspective, all gets very complicated without guidance.”

He added that once you “throw in the other issue of minors under 18” playing games to earn an income and “creating in-game value, that has a marketplace with taxable consequences in doing so that people aren’t necessarily realizing.”

Related: Which countries are the worst for crypto taxation? New study lists top five

A similar situation could play out in the United States. Artav at Law, a U.S. Law Firm, states that complications arise because not “all P2E earnings” are the same.

There is a gray area as “what (and how) the game pays the player determines the type of taxes that particular player will owe […] is the income in the form of NFT? Tokens? Staking income? An airdrop?”

The U.S. law firm stated that whether it is called a token, cryptocurrency or virtual currency, a native token is taxed like intangible property and is subject to capital gains tax, which the Internal Revenue Service (IRS) has had “a consistent position on this since at least 2014.”

However, if you earn crypto tokens “as part of a play-to-earn game, the value of such crypto is taxable as ordinary income,” it said. 

P2E gamers, minors not any safer from the tax man, says Koinly

Earning an income from play-to-earns is “complicated” without tax guidance, advises Australian crypto tax specialists.

Modern parents are going to need to keep an even closer eye on their kids’ gaming habits, as some of them may be accumulating a hefty tax bill, according to a crypto tax specialist.

Speaking to Cointelegraph during last week’s Australian Crypto Convention, Adam Saville-Brown, regional head of tax software firm Koinly said that many don’t realize that earnings from play-to-earn (P2E) games can be subject to tax consequences in the same way as crypto trading and investing. 

This is particularly true for play-to-earn blockchain games that offer in-game tokens that can be traded on exchanges and thus have real-world financial value.

“Parents were once worried about their kids’ playing games like GTA, with violence […] but parents now need to be aware of a whole new level […] tax complexities.”

Saville-Brown said he was approached during the convention by a father of a nine-year-old son, concerned that his boy was “making bank” from P2E games.

“The nine-year-old kid…is mining, staking, creating Youtube and TikTok videos to the point that his dad had to bring him here today because he’s generating so much income,” Saville-Brown recounted to Cointelegraph.

However, the treatment of P2E game earnings — at least in Australia — can be complex.

Koinly’s Head of Tax Danny Talwar explained that in Australia if one is playing a game to earn income — they are considered as “running a business” and could face a “complicated” tax situation, noting: 

“If you’re a professional gamer, it’s possible that you’re running a business, so you’d be treated under such rules.”

This is further complicated as the gamers could either be “playing these games as an investor” or “playing these games as a trader.”

According to the Australian Taxation Office, investors are subject to capital gains when they sell their assets, while traders doing the same thing would be seen as “trading stock in a business,” and thus any profits would be treated as ordinary income.

Talwar added that if users have “intentions to actually run as a business […] and have a business strategy,” then it will be treated as a business for tax purposes.

He brought up the popular P2E game Axie Infinity as an example of a game that might receive business treatment for tax purposes “as people use that game to earn an income.”

The tax expert advised that how one “should be treated from a tax perspective, all gets very complicated without guidance.”

He added that once you “throw in the other issue of minors under 18” playing games to earn an income and “creating in-game value, that has a marketplace with taxable consequences in doing so that people aren’t necessarily realizing.”

Related: Which countries are the worst for crypto taxation? New study lists top five

A similar situation could play out in the United States. Artav at Law, a U.S. Law Firm, states that complications arise because not “all P2E earnings” are the same.

There is a gray area as “what (and how) the game pays the player determines the type of taxes that particular player will owe […] is the income in the form of NFT? Tokens? Staking income? An airdrop?”

The U.S. law firm stated that whether it is called a token, cryptocurrency, or virtual currency, a native token is taxed like intangible property and is subject to capital gains tax, which the Internal Revenue Service (IRS) has had “a consistent position on this since at least 2014.”

However, if you earn crypto tokens “as part of a play-to-earn game, the value of such crypto is taxable as ordinary income,” it said.