Want a Bitcoin Tax Refund? You Might Need an Accountant

It’s tax season again, and unlike last year at this time—when many Bitcoin investors were sitting on exponential 2017 gains—there may be another reason for cryptocurrency holders to file their taxes: the possibility of a Bitcoin tax refund.

The price of Bitcoin fell nearly 74% in 2018, making it likely that many people sold their cryptocurrency last year at a loss. And just like the IRS requires paying taxes on capital gains, so too can losses be deducted on tax forms, lessening what tax filers owe or increasing their eligibility for a tax refund.

But figuring out the Bitcoin price when you bought it—also known as cost basis—and the price at which you sold it may be harder than it seems, says Jake Benson, founder and CEO of Libra, which built the first cryptocurrency tax calculator. That’s because the IRS does not require cryptocurrency brokers to provide clients with the traditional form, known as a 1099-B, that stock brokers must use to provide such information to customers, Benson explains on the latest episode of Balancing the Ledger.

“The burden is left upon the fund or the individual that’s trading to track cost basis, and this is extremely challenging,” says Benson, calling on the IRS to update its guidance on the issue. “Some customers track their cost basis, some rely on proceeds, and it’s a really challenging scenario.”

TurboTax and H&R Block—the mainstays of do-it-yourself tax filing—may not be sufficiently versed in the complexities that come with cryptocurrency trading, Benson adds, so many people might want to seek out an accountant specializing in crypto.

Libra works with institutional cryptocurrency investors and firms, including Circle and Mike Novogratz’s Galaxy Digital, helping them calculate their investment performance and net asset value (NAV), and produce financial statements for auditors—some of whom are also Libra clients.

Those services could also be a stepping stone towards the approval of a Bitcoin ETF, or exchange-traded fund. The U.S. Securities and Exchange Commission (SEC) has rejected multiple applications for a Bitcoin ETF, citing a lack of oversight and safeguards, as well as concern that it would be difficult to consistently calculate NAV, and that Bitcoin trading “seems impossible to audit effectively.”

Benson, however, thinks Libra may be able to help with at least some of those problems. “I think it is currently being solved,” Benson says. “We’re not solving every piece of the infrastructural issues, but on an auditability side, on an evaluation side, yes, that is what we focus on.”


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Author: JEN WIECZNER
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The Ledger: Crypto vs. Cannabis, Blockchain and Jamie Dimon in Davos, Facebook Coin

We’re back in your inbox after taking last Monday off to honor MLK.

If you follow me on Twitter, you may have noticed that lately I’ve written less about crypto and more about cannabis. I spent much of the last two months working on my new cover story for February issue, “The Marijuana Billionaire Who Doesn’t Smoke Weed.”

No, the words “Bitcoin” or “cryptocurrency” do not appear anywhere in the story. Still, throughout my reporting, I was constantly struck by how alike the crypto and cannabis communities seemed—both were caught up in market bubbles that recently popped; both know the pain of constant regulatory headaches—even as they operated on seemingly parallel planes. If one were to draw a Venn diagram, the circles would overlap only slightly.

That got me thinking: Perhaps cryptocurrency and cannabis could learn a little something from each other. After all, with cryptocurrency we spend a lot of time talking about cross-border transactions; for my cannabis story, I spent some time actually crossing borders. For instance, here’s what happened when I returned from Canada with Brendan Kennedy, the American CEO of British Columbia-based cannabis producer Tilray:

“I would not mention what we just did,” the CEO quietly advises as we sit on the tarmac in Seattle again, awaiting a customs officer to clear us to come home. While Kennedy has never been questioned, he has reason to be nervous: A few Canadian cannabis executives and investors have been detained at the border and even barred entry to the U.S. for life; a senior official at the U.S. Customs and Border Protection agency confirms that even American executives operating legally in Canada can face additional inspections upon their return. Adds Kennedy: “We generally don’t talk about what we do when we go back in the U.S.”

As far as I know, blockchain has not yet made it easier for people to traverse borders, but the experience does underscore just how powerful it is to have a currency that circumvents central authorities who could otherwise stop money from leaving or entering. In fact, many cannabis businesses that operate in the U.S. struggle to get financial services; plenty of banks, citing the enduring federal ban on marijuana, refuse to work with companies that grow or sell the drug even in states that have legalized weed. That means unbanked cannabis businesses are forced to pay their taxes in cash—dropping it off in suitcases or garbage bags—and also invest in security to guard the heaps of it sitting at dispensaries.

It also makes cryptocurrency a natural fit for the legal cannabis industry, providing it with banking services that need not navigate discrepancies between state and federal law (the way Bitcoin has also facilitated the illegal drug trade). And yet the cryptocurrency industry has not quite reached a standard of security and stability that would make it a suitable business currency even for cannabis businesses walking that gray line of legality.

A couple of months ago, I spoke with Jon Brandon, the CEO of Foria Wellness, a company that sells cannabis-infused massage oils and “aphrodisiacs” in states where it’s legally allowed. He described the difficulty of finding banks that would do business with the company, and said he’d considered cryptocurrency as an alternative option, but ultimately decided against it. His thought process: “Then I gotta take the crypto risk on top of a sex and drug business?”

One thing that seems to be working in the cannabis industry’s favor: As it has grown up, it has also become more centralized, moving from street dealers and backyard growers to multibillion dollar international corporations with industrial farming operations. That mainstreaming has opened the market to investors, with Tilray last summer becoming the first cannabis producer to go public on the Nasdaq, and also helped sway public opinion, with laws steadily changing to reflect greater acceptance.

Even as Bitcoin diehards and cryptocurrency traditionalists insist that decentralization is core to the technology’s success, they may eventually have to confront a trade-off: mainstream acceptance may depend on the emergence of more polished—and yes, centralized—institutions who play by the rules. Indeed, that seems to be exactly what the SEC wants from a Bitcoin ETF it would be willing to approve—a “centralized, regulatory data source” and “a surveillance-sharing agreement with a regulated, bitcoin-related market of significant size. Wall Street and other investors likely feel the same way.

For now, cryptocurrency seems to be struggling to corner even the obvious marijuana market: PotCoin, which bills itself as a “digital currency for the cannabis industry,” fluctuates between one and two cents.


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Author: ROBERT HACKETT, JEFF JOHN ROBERTS, and JEN WIECZNER
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A Faster, More Efficient Cryptocurrency

Design reduces by 99 percent the data users need to join the network and verify transactions.

 

MIT researchers have developed a new cryptocurrency that drastically reduces the data users need to join the network and verify transactions — by up to 99 percent compared to today’s popular cryptocurrencies. This means a much more scalable network.

Cryptocurrencies, such as the popular Bitcoin, are networks built on the blockchain, a financial ledger formatted in a sequence of individual blocks, each containing transaction data. These networks are decentralized, meaning there are no banks or organizations to manage funds and balances, so users join forces to store and verify the transactions.

But decentralization leads to a scalability problem. To join a cryptocurrency, new users must download and store all transaction data from hundreds of thousands of individual blocks. They must also store these data to use the service and help verify transactions. This makes the process slow or computationally impractical for some.

In a paper being presented at the Network and Distributed System Security Symposium next month, the MIT researchers introduce Vault, a cryptocurrency that lets users join the network by downloading only a fraction of the total transaction data. It also incorporates techniques that delete empty accounts that take up space, and enables verifications using only the most recent transaction data that are divided and shared across the network, minimizing an individual user’s data storage and processing requirements.

In experiments, Vault reduced the bandwidth for joining its network by 99 percent compared to Bitcoin and 90 percent compared to Ethereum, which is considered one of today’s most efficient cryptocurrencies. Importantly, Vault still ensures that all nodes validate all transactions, providing tight security equal to its existing counterparts.

“Currently there are a lot of cryptocurrencies, but they’re hitting bottlenecks related to joining the system as a new user and to storage. The broad goal here is to enable cryptocurrencies to scale well for more and more users,” says co-author Derek Leung, a graduate student in the Computer Science and Artificial Intelligence Laboratory (CSAIL).

Joining Leung on the paper are CSAIL researchers Yossi Gilad and Nickolai Zeldovich, who is also a professor in the Department of Electrical Engineering and Computer Science (EECS); and recent alumnus Adam Suhl ’18.

Vaulting over blocks

Each block in a cryptocurrency network contains a timestamp, its location in the blockchain, and fixed-length string of numbers and letters, called a “hash,” that’s basically the block’s identification. Each new block contains the hash of the previous block in the blockchain. Blocks in Vault also contain up to 10,000 transactions — or 10 megabytes of data — that must all be verified by users. The structure of the blockchain and, in particular, the chain of hashes, ensures that an adversary cannot hack the blocks without detection.

New users join cryptocurrency networks, or “bootstrap,” by downloading all past transaction data to ensure they’re secure and up to date. To join Bitcoin last year, for instance, a user would download 500,000 blocks totaling about 150 gigabytes. Users must also store all account balances to help verify new users and ensure users have enough funds to complete transactions. Storage requirements are becoming substantial, as Bitcoin expands beyond 22 million accounts.

The researchers built their system on top of a new cryptocurrency network called Algorand — invented by Silvio Micali, the Ford Professor of Engineering at MIT — that’s secure, decentralized, and more scalable than other cryptocurrencies.

With traditional cryptocurrencies, users compete to solve equations that validate blocks, with the first to solve the equations receiving funds. As the network scales, this slows down transaction processing times. Algorand uses a “proof-of-stake” concept to more efficiently verify blocks and better enable new users join. For every block, a representative verification “committee” is selected. Users with more money — or stake — in the network have higher probability of being selected. To join the network, users verify each certificate, not every transaction.

But each block holds some key information to validate the certificate immediately ahead of it, meaning new users must start with the first block in the chain, along with its certificate, and sequentially validate each one in order, which can be time-consuming. To speed things up, the researchers give each new certificate verification information based on a block a few hundred or 1,000 blocks behind it — called a “breadcrumb.” When a new user joins, they match the breadcrumb of an early block to a breadcrumb 1,000 blocks ahead. That breadcrumb can be matched to another breadcrumb 1,000 blocks ahead, and so on.

“The paper title is a pun,” Leung says. “A vault is a place where you can store money, but the blockchain also lets you ‘vault’ over blocks when joining a network. When I’m bootstrapping, I only need a block from way in the past to verify a block way in the future. I can skip over all blocks in between, which saves us a lot of bandwidth.”

Divide and discard

To reduce data storage requirements, the researchers designed Vault with a novel “sharding” scheme. The technique divides transaction data into smaller portions — or shards — that it shares across the network, so individual users only have to process small amounts of data to verify transactions.

To implement sharing in a secure way, Vault uses a well-known data structure called a binary Merkle tree. In binary trees, a single top node branches off into two “children” nodes, and those two nodes each break into two children nodes, and so on.

In Merkle trees, the top node contains a single hash, called a root hash. But the tree is constructed from the bottom, up. The tree combines each pair of children hashes along the bottom to form their parent hash. It repeats that process up the tree, assigning a parent node from each pair of children nodes, until it combines everything into the root hash. In cryptocurrencies, the top node contains a hash of a single block. Each bottom node contains a hash that signifies the balance information about one account involved in one transaction in the block. The balance hash and block hash are tied together.

To verify any one transaction, the network combines the two children nodes to get the parent node hash. It repeats that process working up the tree. If the final combined hash matches the root hash of the block, the transaction can be verified. But with traditional cryptocurrencies, users must store the entire tree structure.

With Vault, the researchers divide the Merkle tree into separate shards assigned to separate groups of users. Each user account only ever stores the balances of the accounts in its assigned shard, as well as root hashes. The trick is having all users store one layer of nodes that cuts across the entire Merkle tree. When a user needs to verify a transaction from outside of their shard, they trace a path to that common layer. From that common layer, they can determine the balance of the account outside their shard, and continue validation normally.

“Each shard of the network is responsible for storing a smaller slice of a big data structure, but this small slice allows users to verify transactions from all other parts of network,” Leung says.

Additionally, the researchers designed a novel scheme that recognizes and discards from a user’s assigned shard accounts that have had zero balances for a certain length of time. Other cryptocurrencies keep all empty accounts, which increase data storage requirements while serving no real purpose, as they don’t need verification. When users store account data in Vault, they ignore those old, empty accounts.


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Author: Rob Matheson
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10 Crypto Events You Can Expect to See in 2019

If 2018 was the year we all realized unregulated cryptocurrency offerings (ICOs) would have to be replaced by regulated “security token” offerings (STOs), 2019 is shaping up to be the year we see that regulation implemented.

As a result of that change, here are 10 events I predict we’ll see in the crypto space within the next 12 months:

1. A large bank will enter into the crypto custody business

The institutions are coming! It’s hard to get through a day on crypto Twitter without someone associating the current price of Bitcoin with the imminent entrance of so-called “institutional money.” It’s hard to imagine the “suits” won’t soon enter the community. The promises of Bitcoin and Ethereum (and their profit-producing volatility and liquidity) attracted professional traders in droves in late 2017 and 2018, and many of them stayed through the latest downturn. With the SEC declaring BTC and ETH as currencies, the path towards institutional custody and trading isn’t far behind. Expect JP Morgan or Goldman to enter the market, with perhaps BoNY joining them. Confidence level: 100%.

2. Several traditional broker-dealers will open ATSs for STO trading

If you have followed the crypto sector for any amount of time, you are probably familiar with OFN, aka The Open Finance Network, a recently licensed regulated alternative trading system. In the U.S. and Canada, an ATS is a non-exchange trading venue that matches buyers and sellers to find counterparties for transactions. They are usually regulated as broker-dealers instead of as exchanges (note: my company’s General Counsel and cofounder, Gautam Gujral, was an author on the SEC’s first Concept Release on ATS and Exchange regulations). OFN is just the first of these businesses that will be popping up. Recently, Coinbase purchased a broker-dealer, as did token issuance platform Tokensoft. In 2019, we can expect more broker-dealers (perhaps firms such as Entoro Capital, US Capital Global, or SeriesOne) to obtain licenses to trade in alternative investments like security tokens. Confidence level: 100%.

3. 2017 ICOs issued in the U.S. will be the first security tokens traded on exchanges

With year-long restrictions, small-ish raises, and tiny floats, don’t expect many of the 2018 STOs you’ve heard about to trade on exchanges (some have fewer than five holders and asset values in the low single digits). Instead, expect “remediated” ICOs that have registered their shares with the SEC to be the first issuers to trade in volume on compliant exchanges. There really is a Santa Claus for the security token exchanges, and his name is SEC Chairman Jay Clayton. In 2018 he put some presents under the tree in the form of Airfox and Paragon Coin, both ICOs that received “orders” from the SEC forcing them to register. In other words, the first widely traded STOs will have started life as ICOs. Hear me now, believe me later. Confidence level: 99%.

4. Asian investors and funds will pivot to the US to invest in digital assets

Asian investors are still dominant in traditional Bitcoin (mining) and ICO-driven crypto activity, but over the course of the last six months, as prices have dropped and new technologies (like digital asset tokenization) have come to the market, investor groups such as Huobi and Binance, and newer VCs like 8 Decimal, Alpha Omega Capital, Aurablock Capital, and Alpha Square Group are inverting the market and coming to the U.S. for its regulatory clarity. With the Chinese government saying that STOs will be kicked out, Chinese investment teams have been especially active in the U.S.-based STO community, seeking to learn how to structure these offerings. This is exciting; the U.S. may in fact be a bastion of innovation in at least one realm of crypto — the kind that Wall Street and big investors prefer. Confidence level: 95%.

5. The SEC will approve several Reg A+ deals related to tokens

The JOBS Act Reg A+ exemption, for those who don’t remember, allows unaccredited investors to fund startups. Ignored in the heyday of the ICO, Reg A+ is now considered a holy grail by those in crypto who oppose the idea of accredited investor requirements but still believe in playing by the SEC’s rulebook. Reg A+ lets a company raise up to $50 million annually via non-restrictive crowd fundraising, enabling a form of ICO that’s legal in the U.S.

When Circle acquired SeedInvest in Q4 2019, it laid the groundwork for some successful 2019 Reg A’s. Expect the SEC to approve several Reg A+ issuances this year with an underlying token, from firms like Issuance.com and SeedInvest. Confidence level: 90%.

6. ‘Legacy’ financial institutions will become digital asset infrastructure buyers

Once crypto tokens cross the chasm and the so-called early-majority starts to form (in mid-to-late 2019), expect to see some significant M&A activity within the ecosystem. Coinbase’s hiring of former LinkedIn M&A boss Emilie Choi, is a good indicator. While it’s tempting to expect large and early crypto infrastructure ventures like Coinbase (and Circle, Huobi, Binance, Cumberland-DRW, etc.) to be the primary drivers of this activity, some believe we will see the Nasdaq, NYSE, EuroNext, JPX, or even more likely DTCC or Cede and Co., come in as acquirers. What could prevent this from happening? Not enough data/signal to create institutional FOMO, where fear of insurgent innovation drives M&A. Confidence level: 90%.

7. Ethereum will lose ground as the predominant platform for the next generation of coin offerings

Ethereum’s ERC-20 smart contract standard is the undisputed coin of the ICO realm, with more than 1,000 unique ERC-20 crypto tokens issued since Ethereum debuted in 2015. Despite its overwhelming popularity with ICOs, widespread exchange compatibility, and developers’ familiarity with Solidity (the programming language for Ethereum-based smart contracts), Ethereum’s time as the predominant platform may be coming to an end. Faster and cheaper smart contract platforms like NEO, Stellar, IBM’s Hyperledger Fabric, and Hedera Hashgraph are coming along to steal the limelight just as the world starts paying attention to SEC-compliant token offerings. Also not helping Ethereum is the Constantinople hard fork coming up later this month, which could damage the community supporting the chain. While there are many reasons to move from Ethereum, the concentration of developer expertise and the standardization efforts of security token issuance projects like Polymath, Harbor, and Securrency will keep Ethereum in the lead for 2019. Confidence level: 70%.

8. Regional authorities will increasingly match U.S. crypto policies and may surpass the U.S. in STO activity

As more ICO projects launched outside of the U.S. fail (shut down, etc.) and more issuers wrap their offerings in safe-seeming nomenclature (i.e. calling any offering an STO, regardless of how it is structured), expect foreign regulators to adopt frameworks similar to what the SEC has established in the U.S. Exhibit A: Malta. While Malta has been attracting projects seeking to raise capital, it suffers from a poor reputation among banking regulators. In order for Malta to attain its goal of becoming “Blockchain Island,” it will need to pass and maintain stricter KYC & AML rules so depositors in its banks (i.e. crypto projects) can be confident they can use the funds to pay developers and vendors who are not on the island. Malta is not alone in its attempts to normalize and provide investor protections. Singapore recently stepped up efforts and may be the real pioneer in trading tokens on regulated exchanges. Confidence level: 60%.

9. Tokens will be traded on ‘major’ exchanges in addition to new broker-dealer operated Automated Trading Systems

This might be the easiest prediction, because an insider made news of it at December’s Consensus: Invest. According to Gabor Gurbacs of Nasdaq partner Van Eck, the Nasdaq plans on launching Bitcoin futures trading in Q1 2019. But before you say this is a safe prediction, remember what Bakkt said about ICE-Bakkt in August. There is no such thing as a “gimme putt” in crypto, and yes, tokens will also trade on tZero and Open Finance. Confidence level: 50%.

10. Rules related to accredited investor requirements will be relaxed

Accredited investor rules are what separate ICOs from STOs. They dampen excitement and enthusiasm among fans of so-called “open finance.” With these rules in place, only the wealthy are able to participate in current STOs. Spice VC, which recently began trading on OpenFinance, is an example of an offering that might be interesting to more investors, but is only available to those with a $200k annual income or more than $1 million in assets. The market will struggle to foment revolution in capital formation and liquidity as long as most of the potential investor pool is excluded from investing. However, in the harsh light of the ICO hangover, changes to accreditation rules have little chance of a quick modification. Confidence level: 1%.


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Author: Dave Hendricks
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