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Bitcoin: IRS Takes On The Crooks—And The Good Guys

Image result for bitcoin and IRS

Are cryptocurrencies reportable for FBAR? For Fatca? No and maybe.

Turns out there’s no FBAR mandate on your offshore bitcoin account. Is the government making a tactical retreat in its war on money launderers and tax cheats?

In response to a request for guidance from an accountants’ group, the Treasury Financial Crimes Enforcement Network has recently decreed that cryptocurrency accounts held by exchanges located outside the country don’t have to be disclosed.

That means you don’t have to confess your Binance assets on the Foreign Bank and Financial Accounts Report, alias FBAR. The report, which is filed on a form called Fincen 114, is required when a taxpayer’s financial assets (cash and securities) held in foreign institutions top $10,000.

Why the leniency? Mostly because the antiquated laws aimed at financial mischief simply can’t cope with crypto.

A rational observer would say that bitcoin, which is both a store of value and a medium of exchange, is money. But the IRS, enforcing legislation written in a pre-internet age, has concluded that cryptocurrencies are “property”—more like Picassos than pesos.

At some point the tax police will get up to speed. They’ll rewrite rules or get legislation including digital assets in the offshore reporting scheme. But they’ll still have a hard time ferreting out hidden wealth. Cryptocurrencies, already somewhat anonymous, are getting more so. There are tumblers that erase bitcoin trails and there are newer currencies designed to offer enhanced privacy.

To investors, crypto is an asset class that might warrant an allocation in a portfolio. Although cryptocurrencies are volatile, they have the virtue of being not very correlated to stocks and bonds that fall, directly or indirectly, under the spell of central banks.

To enforcers, crypto is nothing but trouble. Bitcoin was the common currency of Silk Road, that bazaar of contraband whose manager got a life sentence. Russian hackers used bitcoin in their election meddling. A press release in May from Immigration & Customs Enforcement, crowing about the indictment of an alleged fentanyl vendor, gives bitcoin a prominent mention.

Donald Trump doesn’t like crypto. His Treasury secretary, Steven Mnuchin, complained recently that cryptocurrencies are being used illicitly. He vowed to produce regulations to keep them from turning into a new form of numbered Swiss bank account.

But aren’t bitcoins by their nature numbered accounts? The blockchain—a record of all transactions to date—is a string of integers, with no holders’ names attached. Still, holders can get nailed for doing something wrong.

Chain analysis software traces the history of a bitcoin as it moves from account to account. If at any point that coin passed through an exchange subject to U.S. know-your-customer rules (like Coinbase), the cops can get the name and taxpayer ID of someone who used the coin. That may give them a wedge, via subpoena or a threat of prosecution, to identify other participants in the chain of ownership.

And then there are users who make mistakes. Evidently the fellow accused of selling fentanyl wanted to convert bitcoins to dollars, and in the process of doing that transferred the coins to addresses that were controlled by federal agents. This is reminiscent of the bank robber who hops into what he thinks is a getaway car but turns out to be a police vehicle.

Cryptocurrency users who want their activities to be more cryptic have options. They can use one of the tumbler services that take in possibly dirty coins and replace them with randomly selected coins. They can use Monero or Zcash, currencies explicitly designed to be more private than bitcoin. And how is Secretary Mnuchin going to police Binance, the fast-growing coin repository that hops from jurisdiction to jurisdiction? It is now in Malta, where regulators are proud of their light touch.

Yet another way to keep coins hidden is to keep them in your own wallet instead of in the custody of an exchange. Just don’t lose the key.

Sean Golding, an Irvine, California attorney whose clientele includes global investors, says that you are under no obligation to report coins held in a wallet on your desktop, any more than you are obliged to report gold stored under your bed. You must, though, report and pay tax on profitable sales of either.

What about your account at an offshore exchange? Even with the recent dispensation from the IRS, Golding says, it might be a good idea to file the FBAR anyway. You might, after all, do some trading that temporarily turns bitcoins into dollars or euros. If your total of cash and securities held offshore exceeds $10,000, even for a day, the FBAR is mandatory.

The government takes the Fincen 114 form seriously. It’s trying to collect a $4.7 million fine from someone who forgot to fill it out.

Your account at a U.S. exchange needs no FBAR. The IRS can already see the account. Thus, Coinbase customers who neglect to declare gains from crypto sales can expect to hear from the feds.

What about Fatca? The Foreign Account Tax Compliance Act is another disclosure regime, overlapping Fincen but with its own set of rules and different thresholds ($50,000 for a single taxpayer, $100,000 for a joint return filer). Play it safe, advises Golding. The recent guidance on FBAR doesn’t apply here. If you’re at or above the cutoff, file the Fatca report.

The FBAR must be filed electronically with Fincen, a Treasury unit separate from the IRS. Start here.

For Fatca, file Form 8938 with the 1040 you send to the IRS. It can be on paper. The form is here and the instructions are here.

A useful comparison between the FBAR and Fatca requirements is here.

This Journal of Accountancy report describes the recent guidance from Fincen.

The FBAR regs are here.

I aim to help you save on taxes and money management costs. I graduated from Harvard in 1973, have been a journalist for 44 years, and was editor of Forbes magazine from 1999 to 2010. Tax law is a frequent subject in my articles. I have been an Enrolled Agent since 1979. Email me at williambaldwinfinance — at — gmail — dot — com.

 

 

Source: Bitcoin: IRS Takes On The Crooks—And The Good Guys

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This Awful Bitcoin Stat Guarantees It’s Not Crypto’s Future: Mathematician

With all the hype about blockchains and their many uses, we shouldn’t forget the original purpose for the Bitcoin blockchain and Nakamoto’s great leap forward.

Blockchains and cryptocurrencies were created to be decentralized currencies, replacing or complementing fiat currencies. For the most avid crypto fans, crypto is the future of currency and will eventually handle full-scale economies. We dream of the day that we laugh and tell our kids and grandkids that we had physical wallets, paper currencies, and things called “credit cards” (“Grandpa, seriously, you are so old!”).

Preparing the Crypto Economy for Mass Adoption

So what has to happen in order for us to run economies on the blockchain?

There are several hurdles we still need to clear, like getting the value of these currencies to be stable, handling privacy in a sensible way, and getting confirmation speeds fast enough for point-of-sale transactions.

By far the most glaring hurdle, however, is throughput. We need to be able to handle many, many more transactions per second than any current blockchain is capable of. At 13 transactions per second (a high estimate), Bitcoin can handle just over a million transactions per day. For niche, small economies, this might do the trick. But it certainly won’t do it for, say, the US economy.

Let’s put this into perspective. In 2017, the US gross domestic product (GDP) was almost $20 trillion. GDP isn’t a great measure of how much money changes hands during the year, but for our purposes, it’s close enough. If about $20 trillion changed hands in the US in 2017, then about $54 billion changed hands every day (20 trillion divided by 365). Ignoring how slowly Bitcoin processes transactions, if it were to handle $54 billion in transactions in one day, transactions would have to be on average about $54,000 (54 billion divided by 1 million).

What? Your everyday transactions aren’t $54,000 on average? Of course not. Between 2012 and 2017, US consumers spent roughly $80 per transaction online.

bitcoin is bad for payments

Bitcoin doesn’t look like a candidate to replace credit cards in the online payments realm. | Source: Statista

In 2016, transactions on Amex credit cards averaged about $141, and those on Visa averaged about $80. While it is true that corporations tend to transact in higher dollar amounts, it’s still likely that the crypto community is still a few orders of magnitude away from being able to handle all the transactions in an economy on a single blockchain.

If, based on the statistics I just gave, we assume that transactions are about $100 on average, then $54 billion would change hands every day in roughly 540 million transactions (54 billion divided by 100). That boils down to about 6,000 transactions per second on average. If we take into account the fact that most people transact during the day, a quick recalculation yields about 10,000 transactions in an average daytime second (instead of dividing by 24 hours of the day, divide by 16 to account for about 8 hours of sleep).

This estimate is probably about right. There are roughly 324 million people in the United States, and about 5 million businesses. If we assume that people and businesses, on average, transact 1.5 times per day, then we have about 500 million transactions per day (329 million entities multiplied by 1.5). This is close to our estimate of 540 million daily transactions from before, which gives about 10,000 transactions per daytime second in the United States.

Bitcoin Would Need to Increase Transaction Capacity By Four Orders of Magnitude to Replace Visa

Mastercard, Visa, Bitcoin

With Bitcoin’s staggeringly-limited transaction capacity, it’s unrealistic to believe it can rival Visa or Mastercard – much less both. | Source: Shutterstock

Getting back to the original question, how many transactions per second does a blockchain have to be able to handle in order to support the United States economy? Our rough calculation of 10,000 transactions per second is almost certainly not enough, but it does give a base from which we can work. To give perspective, Visa processes about 1,700 transactions per second on average but at peak times it can handle up to about 24,000 transactions per second. Their max limit is just over an order of magnitude higher than the average, in order to handle high-volume days like Black Friday or the post-Christmas wave of returns.

Taking Visa’s data as an example, since 10,000 transactions per second is our rough estimate for the average, we’d probably need to be able to handle around 100,000 transactions per second to really kill it (one order of magnitude higher than the average, similar to Visa). That’s a lot. More precisely, that’s about 10,000 times faster than Bitcoin—a whopping difference of four orders of magnitude.

To me, this says that our methods of finding consensus on a blockchain are simply not fast or powerful enough to actually use crypto as a viable currency. We need innovations in infrastructure, hardware, and consensus algorithms in order to even hope to reach this threshold.

Bitcoin Is Not the Future of Crypto

bitcoin

Derek Sorensen believes Bitcoin is definitely not the future of crypto. | Source: Shutterstock

That is to say that, barring some major changes and improvements, Bitcoin is almost certainly not the future of crypto.

Technologies like the Lightning Network attempt to solve the scalability problem, but do so awkwardly and ineffectively. Opening channels to transact off-chain ties up money in extremely inconvenient ways. In practice it incentivizes users to open a single channel with a centralized liquidity provider on the blockchain, rather than opening many channels. This effectively creates unregulated, centralized banks, and in my view goes against the core principles of blockchain technology. Even worse, because transactions are done off-chain and channel data can’t be deterministically rebuilt, if a Lightning node crashes, both parties can easily lose funds. It may genuinely be one of the worst ideas in cryptocurrency.

Notwithstanding, the blockchains of the future may not be so far off. New research in math shows promising results in the mathematical foundations of consensus that could produce blockchains with 50,000 transactions per second or more without compromising safety or decentralization. Every day, a new paper comes out or a crypto startup launches a new product.

There are plenty of bright minds working on securing the crypto dream. I guess in twenty years if you’re paying for your groceries with crypto you’ll know that we succeeded.

About the Author: Derek Sorensen, Pyrofex Research Mathematician, has an MSc in Mathematics and Computer Science from the University of Oxford and is set to start his PhD this fall at the University of Cambridge, where he will study logic and topology. His work at Pyrofex is in formal verification, which includes research on the theory of consensus and setting up mathematical frameworks to prove theorems about code.

Source: This Awful Bitcoin Stat Guarantees It’s Not Crypto’s Future: Mathematician

If Bitcoin (BTC) Breaks 3700 USD, It Could Boost the Crypto Markets, CryptoSync Analyst Says – Ethereum World News

It seems that the prediction season has begun, with bullish and bearish opinions much more conservative than the ones from the last year. While it is difficult to provide a certain level of strength in the predictions of a market as volatile and young as the cryptomarket, this does not seem to stop analysts and fans from exposing their views to the world…….

Source: If Bitcoin (BTC) Breaks 3700 USD, It Could Boost the Crypto Markets, CryptoSync Analyst Says – Ethereum World News

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