Isn't it ironic? The crypto world is full of human dramas as complex as the technologies that inspire it. Take the bizarre, mysterious story of Australian computer scientist Craig Wright, for example. For years, Wright has claimed to be Satoshi Nakamoto, Bitcoin's unknown creator. Many cryptocurrency experts and enthusiasts reject his claim, contending, among other things, that he has yet to provide definitive proof. Now the latest twist in Wright's bizarre story has highlighted a contradiction at the heart of the fledgling blockchain industry.
This week, several major exchanges announced plans to remove support for, or "delist," a currency called Bitcoin SV (for "Satoshi's vision"), which Wright helped create last November via a hard fork of Bitcoin Cash. They were responding to calls from crypto enthusiasts who took to social media to call for the delisting after Wright began threatening to sue prominent Twitter users for claiming that he is not really Nakamoto. (Yes, it's got a bit petty.)
Changpeng Zhao, the CEO of Binance, one of the exchanges that delisted Bitcoin SV, followed his company's announcement with a tweet in which he called Wright a "fraud." Binance, Kraken, and several other exchanges were celebrated for removing Bitcoin SV, moves that likely contributed to a substantial drop in its value.
There's an irony here. A fundamental promise of blockchain technology is that it will eliminate the need for the trusted, centralized (read: human) authorities that traditionally facilitate financial transactions. At the same time, a major reason for the interest in the technology and the growth of the nascent industry around it are centralized trading platforms like Binance and Kraken. The moves these exchanges make have massive implications for the cryptocurrency industry and cryptocurrency users. So much for decentralized finance.
Cryptocurrency exchanges are private companies and can delist (or, if you'd prefer, de-platform) whatever coins they want. There are no rules against it. But should cryptocurrency fans really be celebrating these social-media-fueled delistings? That sure seems like putting a lot of trust in central intermediaries not to abuse their power. We've seen that movie before.
America's cryptocurrency policy is (still) confusing everyone. It's high time for the US Internal Revenue Service to sort it out and explain. That's the gist of a strongly worded letter sent by a bipartisan group of 21 members of the House of Representatives to the IRS late last week.
The legislators, led by Tom Emmer from Minnesota, join a growing chorus of policy advocates calling on the IRS to update the guidance it published in 2014. There remains "substantial ambiguity on a number of important questions about the federal taxation of virtual currencies," they write. Emmer and his colleagues say there's an "urgent need" for additional guidance.
At the top of the priority list are open questions around the concept of capital gains, which are profits an investor realizes when selling an investment. The guidance the IRS published five years ago stated that "virtual currency" would be treated as property for federal tax purposes. Buying and holding it is not a taxable event. But if you use your crypto to buy anything—even something like a cup of coffee—you have to make sure you keep track of the difference between the value of the cryptocurrency when you first bought it and when you spent it. If it increased in value, that counts as a capital gain, and you have to pay taxes on it.
But the IRS hasn't specified exactly how people should determine their cryptocurrency's value while calculating capital gains. That's problematic, since many digital currencies are listed on multiple exchanges, and prices are not uniform. Emmer and colleagues have asked the IRS to be much more specific.
The lawmakers also raise the issue of hard forks, which occur when a blockchain network decides to split into two, each with its own coin. This may happen if the community around the network becomes irreconcilably divided—for instance, over proposed technical changes. This is why Bitcoin Cash formed, as a fork of Bitcoin, in 2017.
Last year, Bitcoin Cash itself split in two. When a chain splits, holders of the original coin are entitled to the same value of the new coin. Is that income? How exactly is it taxed? The IRS has yet to issue any guidance here.
Though there are "many other open questions," Emmer and his coauthors say the confusion about crypto capital gains and hard forks is a particularly urgent problem. The letter requests a written response describing the IRS's plans to provide additional guidance on these issues by May 15. That won't have helped people scrambling to meet Monday's filing deadline, but maybe next year tax season won't be so much of a headache for crypto users.
The Chain Letter, but IRL. On May 2, at our Business of Blockchain event, we'll zero in on the cutting edge of the discussion around this still-emerging technology, and try to discern a sense of where it's headed—sort of like I try to do in this email, but on stage. Get your ticket before they sell out. Here's a sample of the programming:
- Robleh Ali, research scientist at MIT's Digital Currency Initiative, will discuss stablecoins with Haseeb Qureshi, an advisor at MetaStable Capital.
- I'll chat with Adam Caplan of Salesforce about blockchain's role in enterprise.
- FCC Commissioner Jessica Rosenworcel will talk about how blockchains could be used for wireless spectrum auctions.
- Aya Miyaguchi, executive director of the Ethereum Foundation, will speak about the values and goals of the blockchain ecosystem.
