For years, cryptocurrency holdings of U.S. taxpayers have existed in a sort of reporting gray zone. But now, those crypto wallets are getting a whole lot of attention from the Internal Revenue Service and President Biden, who appear determined to crack down on tax cheats.
The timing makes sense.
The president needs to raise money, relatively quickly, for his own ambitious economic agenda. And the “tax gap,” which is the difference between taxes paid and taxes owed, is a big pool of cash ripe for the picking. IRS chief Charles Rettig says the country is losing about a trillion dollars every year in unpaid taxes, and he credits this growing tax gap, at least in part, to the rise of the crypto market.
The federal government is so convinced of the potential for income from back-due taxes that the White House wants to give the IRS an extra $80 billion and new powers to crack down on tax dodgers, including those parking their cash in crypto.
“The IRS is in the business of collecting revenue,” said Shehan Chandrasekera, CPA, and head of tax strategy at CoinTracker.io, a crypto tax software company.
“Historically, if they spend $1 for any type of enforcement activity, they make $5…I think crypto enforcement activities are even higher than that,” he said.
Non-compliance made easy
In the U.S., it is easy to be an unintentional crypto tax cheat.
For one, the IRS hasn’t exactly made it easy to report this information.
Tax year 2019 was the first time the IRS explicitly asked taxpayers whether they had dealt in crypto. A question on form Schedule 1 read, “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
But experts said the question was vague, and crucially, not everyone files this specific document. A Schedule 1 is typically used to report income not listed on the Form 1040, such as capital gains, alimony, or gambling winnings.
So in 2020, the IRS upped its game by moving the virtual currency question to the 1040 itself, which is used by all individuals filing an annual income tax return.
“[They put it] right after your name and social security number, and before you put any income numbers or deduction numbers in,” explained Lewis Taub, CPA and director of tax services at Berkowitz Pollack Brant. This made the question virtually impossible to miss.
But perhaps the bigger issue, according to Shehan, is that many filers have no clue how to calculate their crypto capital gains and losses.
If you trade through a brokerage, you typically get a Form 1099-B spelling out your transaction proceeds, streamlining the reporting process.
That doesn’t happen in the crypto world, Shehan said. “Many crypto exchanges don’t report any information to the IRS.”
While some crypto exchanges have begun to issue a tax form known as the 1099-K – which is traditionally given to an individual who engages in at least 200 transactions worth an aggregate $20,000 or more – in the context of crypto, this form only reports the total value of transactions. The total value does not factor in how much the person paid for the cryptocurrency in the first place, something referred to as the “cost basis,” which makes it hard to calculate the taxable gain.
“A lot of people have actually over-reported their income, because they got confused,” explained Shehan.
But the biggest issue driving non-compliance is the fact that the tax rules surrounding digital currencies are still being worked out, and in a state of constant flux.
The IRS treats virtual currencies like bitcoin as property, meaning that it is taxed in a manner similar to stocks or real property. If you buy one bitcoin for $10,000 and sell it for $50,000, you face $40,000 of taxable capital gains. While this concept is relatively simple, it isn’t always clear what constitutes a “taxable event.”
Is buying dogecoin with your bitcoin a taxable event? Purchasing a TV with your dogecoin? Buyingan NFT with ether?
All of the above are technically taxable events.
“The government says if I buy something with crypto, it is as if I liquidated my crypto no differently than if I sold any other property,” said Taub.
Mining dogecoin for fun qualifies as self-employment income in the eyes of the government. According to cryptocurrency tax software TaxBit – which recently contracted with the IRS to aid the agency in digital currency-related audits – tax rates vary between 10-37% on mining proceeds.
“Crypto miners have to pay taxes on the fair market value of the mined coins at the time of receipt,” wrote crypto tax attorney Justin Woodward. While there are ways to get creative to minimize this tax burden, such as classifying mining as a business and deducting equipment and electricity expenses, it takes a bit of filing acrobatics to make it work.
Earning interest on the bitcoin sitting idle in your crypto wallet also counts as income and is taxed as such. Exchanges like Coinbase have also begun to send Form 1099-MISC to taxpayers who earned $600 or more on crypto rewards or staking.
The IRS crypto crackdown
Crypto trading volume may have fallen off a cliff in the last few weeks, but the overall market value of digital currencies is still up about 75% this year. The IRS has made it clear that it wants a piece of the action.
The agency recently ramped up efforts to subpoena centralized crypto exchanges for information about noncompliant U.S. taxpayers.
This spring, courts authorized the IRS to issue John Doe summonses to crypto exchange operators Kraken and Circle as a way to find individuals who conducted at least $20,000 of transactions in cryptocurrency from 2016 to 2020.
The IRS also put this same type of summons to use in 2016, when it went after Coinbase crypto transactions from 2013 to 2015.
Issuing these summons one exchange at a time is a clumsy way to capture noncompliant U.S. taxpayers, but it can be effective, according to Jon Feldhammer, a partner at law firm Baker Botts and a former IRS senior litigator.
In 2019, the IRS announced it was sending letters to more than 10,000 people who potentially failed to report crypto income.
Rettig said in a statement that taxpayers should take the letter “very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties.”
According to Shehan, the infamous “Letter 6173” gave individuals 30 days to respond to the IRS, otherwise they risked having their tax profile examined. Letters went out again in 2020, and a fresh round of these stern warnings are expected to be sent this autumn.
Even the threat of a letter has a lot of people seeking the counsel of accountants as to whether they should get ahead of a potential audit and be proactive about amending past returns.
“A lot of people ask me on Twitter: ‘Oh my god, in 2018, I had $200 worth of capital gains I didn’t report. What should I do?'” recounted Shehan. “In that case, it just is not worth amending the return to pick up $200 worth of income…The high-level thing is that if you didn’t do anything intentionally, you are fine.”
The IRS is also getting smarter about uncovering crypto tax evaders with the help of new data analytic tools it can employ in-house.
The agency’s partnership with TaxBit is a part of this effort. Taub describes the software as being able to go through cryptocurrency wallets and analyze them to figure out what was bought and sold in crypto. In addition to enlisting the services of the vendor itself, Taub says that IRS agents are being trained up on the software as a way to identify tax dodgers.
Biden’s new crypto rules
The president’s 2022 budget proposal could lead to a raft of new crypto reporting requirements for those dealing in digital coins.
The U.S. Treasury Department’s new “Greenbook,” released in May, calls for more comprehensive reporting requirements for crypto, so it’s as hard to spend digital currencies without getting reported as it is to spend cash today.
One proposal would require businesses to report to the IRS all cryptocurrency transactions valued at more than $10,000. Another calls for crypto asset exchanges and custodians to report data on user accounts which conduct at least $600 worth of gross inflows or outflows in a given year.
Another potential major blow to crypto holders: Biden’s proposal to raise the top tax rate on long-term capital gains to 43.4%, up from 23.8%.
“Crypto gains are being taxed as any other type of gain in assets, either at long-term capital gains or ordinary rates. President Biden has proposed to eliminate the difference between the two,” said David Lesperance, a Toronto-based attorney who specializes in relocating the rich.
Lesperance told CNBC the proposal would also function retroactively and apply to any transactions which took place after April 28, 2020.
“This translates into $19,800 in increased capital gains tax for each $100,000 in capital appreciation of crypto,” he said.
Amid the rising crypto crackdown here in the U.S., Lesperance has helped clients to expatriate in order to ditch their tax burden altogether.
“By exercising a properly executed expatriation strategy, the first $750,000 in capital appreciation is tax-free and the individual can organize themselves to pay no U.S. tax at all in the future,” he said.
But Lesperance warned that taxpayers need to move fast. “The runway to execute this strategy is very short,” he said.
Robinhood CEO defends payment for order flow, says practice is ‘here to stay’
Vlad Tenev, co-founder and CEO of Robinhood, rings the opening bell at the Nasdaq on July 29, 2021.
Source: The Nasdaq
Robinhood CEO Vlad Tenev says he doesn’t believe that the payment for order flow (PFOF) model of market-maker routing that the company incorporates in the U.S. is under threat.
That’s despite calls from notable consumer trading advocates and regulators for a ban on the practice.
Speaking with CNBC, Tenev defended the practice of PFOF, saying that it’s “inherently here to stay.” He was referring to PFOF as it exists in the United States, where the practice is legal and regulated.
PFOF is the practice of routing trades through market-makers like Citadel Securities in return for a slice of the profits. The phenomenon has helped trading firms like Robinhood drive commissions down to zero, making it cheaper generally for consumers to invest in stocks.
“If I’m a business that’s selling things, and I’m generating transaction revenue, the more you use it, the more money you get. Inherently, there’s a conflict there because I make more money by getting you to transact more,” Tenev told CNBC in an interview.
“I think it’s important not to take the baby out with the bathwater. What does that mean, you shouldn’t make revenue on a transaction-based business? That’s unreasonable. And I think the point has been politicised to some degree.”
PFOF is viewed as controversial because of the perceived conflict of interest it creates between the broker and clients.
Critics say that brokers have an incentive to direct order flow to market makers offering PFOF arrangements over the interests of their clients.
PFOF is banned in the U.K., where Robinhood announced plans to launch Thursday.
The U.S. Securities and Exchange Commission had looked at banning PFOF in light of concerns surrounding the practice, but opted not to, while the European Union has imposed a blanket ban on PFOF.
PFOF accounts for a small chunk of Robinhood’s revenues today, Tenev said, while much of its income today comes from net interest income which is generated from cash in user balances.
Transaction-based revenues, which includes PFOF, decreased 7% in Robinhood’s second fiscal quarter to $193 million.
“If you look at equities, PFOF in particular, it’s about 5%. of our revenue, so a much smaller component of the overall pie. And we’ve diversified the business quite a bit,” including other areas like securities lending, margin, and subscriptions.
Robinhood’s race to the bottom on commission fees has forced many major players in the wealth management world to slash their own fees to zero, in turn causing some companies to wind up or sell up to competitors.
“In the U.S., Robinhood came along and really changed the industry,” Tenev said. “The discount brokers that are charging commissions essentially ceased to exist.”
“They had to drop commissions to zero. A lot of them couldn’t survive that transition as standalone companies and ended up consolidating. And we’re still living through the the end result of that.”
Federal judge blocks Montana’s TikTok ban, which would have been the first of its kind
TikTok Music has launched on Wednesday in Australia, Singapore and Mexico to a small group of users.
Jaap Arriens | Nurphoto | Getty Images
A federal judge in Montana has blocked a law that would have resulted in a state-wide ban of TikTok starting on Jan. 1, 2024.
Judge Donald Molloy explained his rationale for issuing the preliminary ruling via a legal filing released Thursday, saying the state of Montana failed to show how the original SB 419 bill would be “constitutionally permissible,” among other reasons.
The ruling represents a setback for Montana, whose Governor Greg Gianforte signed into law the SB 419 bill in May, pitching it as helping “our shared priority to protect Montanans from Chinese Communist Party surveillance.”
“Despite the State’s attempt to defend SB 419 as a consumer protection bill, the current record leaves little doubt that Montana’s legislature and Attorney General were more interested in targeting China’s ostensible role in TikTok than with protecting Montana consumers,” judge Molloy wrote in the filing. “This is especially apparent in that the same legislature enacted an entirely separate law that purports to broadly protect consumers’ digital data and privacy.”
A TikTok spokesperson said in a statement the company is “pleased the judge rejected this unconstitutional law and hundreds of thousands of Montanans can continue to express themselves, earn a living, and find community on TikTok.”
However, the office of the Montana Attorney General said in a statement that the judge’s decision is merely “a preliminary matter at this point.”
“The judge indicated several times that the analysis could change as the case proceeds and the State has the opportunity to present a full factual record,” the Montana Attorney General office said. “We look forward to presenting the complete legal argument to defend the law that protects Montanans from the Chinese Communist Party obtaining and using their data.”
Before the judge’s preliminary ruling, Montana was set to become the first U.S. state to ban the popular video and social media app, which is owned by the China-based tech giant ByteDance.
ByteDance sued Montana in May to “prevent the state of Montana from unlawfully banning TikTok,” the company said at the time. Lawyers for the company said in court filings that Montana failed to support allegations that the Chinese government “could access data about TikTok users, and that TikTok exposes minors to harmful online content.”
In March, U.S. lawmakers raised questions about the relationship between the Chinese government and the app’s parent company ByteDance when they grilled TikTok CEO Shou Zi Chew during a hearing. The lawmakers were concerned that the Chinese Communist Party may be able to access the data of U.S. citizens, and have considered implementing a nation-wide ban on TikTok.
TikTok has tried to assuage national security concerns by emphasizing its “Project Texas” initiative, intended to ensure that the data of U.S. citizens remains in the country via the help of enterprise tech giant Oracle.
Amazon broke federal labor law by calling Staten Island union organizers ‘thugs,’ interrogating workers
Amazon and consultants for the company violated federal labor law by interrogating and threatening employees regarding their union activities, and racially disparaging organizers who were seeking to unionize a Staten Island warehouse, a National Labor Relations Board judge ruled.
The NLRB said Friday that Administrative Law Judge Lauren Esposito found Amazon “committed multiple violations” of federal labor law at its largest warehouse in New York, called JFK8, between May and October 2021, a period that saw an increase in organizing activity.
In April 2022, employees voted to join the Amazon Labor Union, a grassroots group of current and former workers, becoming the first unionized Amazon facility in the U.S. Since that victory, the group has been fighting to reach a contract with Amazon.
The judge in New York heard testimony from Amazon employees, managers and labor consultants in virtual hearings that went on for almost a year. Esposito determined Amazon illegally confiscated organizing pamphlets from employees that were being distributed in on-site breakrooms and conducted surveillance of employees’ organizing activities.
Amazon also violated labor laws when it sent an employee at a neighboring facility to JFK8 home early from his shift and changed his work assignments in retaliation for supporting the union, the judge found. The employee, Daequan Smith, sorted packages at a delivery station called DYY6, down the street from JFK8.
Additionally, the judge found that Amazon broke the law when a “union avoidance” consultant, Bradley Moss, who was hired by the company, threatened employees, telling them it would be “futile” to vote to join the ALU. Amazon and other companies often hire labor consultants like Moss, referred to as “persuaders,” to dissuade workers from unionizing. The company spent $14 million on anti-union consultants in 2022, the Huffington Post reported in March, citing disclosure forms filed with the Department of Labor.
As a result of the ruling, Amazon will be required to post notices reminding workers of their rights at its JFK8 and DYY6 facilities. The company also has to make Smith “whole for any loss of earnings and other benefits,” the NLRB said.
In one exchange with a JFK8 employee, Natalie Monarrez, Moss discussed the union campaign at another Amazon facility, BHM1, in Bessemer, Alabama. Monarrez said Moss told her the Bessemer campaign was “not a serious union drive,” but a “Black Lives Matter protest about social injustice.”
“Moss then pointed to the front of the JFK8 warehouse and said, ‘Just like these guys out here, they’re just a bunch of thugs,'” Esposito wrote in her judgment, citing testimony from Monarrez.
Moss and representatives from Amazon didn’t immediately respond to a request for comment.
Employees at BHM1 voted against joining the Retail, Wholesale and Department Store Union in April 2021, but the results of the election were tossed after the NLRB found Amazon improperly interfered in the vote. A do-over election was held last year, but the results remain too close to call.
Amazon’s labor record has been scrutinized heavily, especially as union organizing ramped up in its warehouse and delivery workforce during the Covid pandemic. The company faces 240 open or settled unfair labor practice charges across 26 states, according to the NLRB, concerning a range of allegations, including its conduct around union elections.
The company has also clashed with Chris Smalls, a former Amazon employee and one of the leaders of ALU. A leaked memo obtained by Vice revealed David Zapolsky, Amazon’s general counsel, had referred to Smalls, a Black man, as “not smart or articulate,” and recommended making him “the face” of efforts to organize workers.
Amazon continues to challenge the JFK8 election results, as well as the NLRB and the union’s conduct during the drive. The agency upheld the results of the election in January.
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