Crypto Goes for Broke on Broker Rules

Happy (belated)?International Accounting Day , the day when Luca Pacioli published the first ever description of double entry accounting! We hope you celebrated by crafting a killer spreadsheet. We're celebrating by publishing a newsletter at the forefront of the profession our man Luca got started 521 years ago.

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This is one of those rare weeks where the crypto internet is abuzz with news of a major digital asset tax update – in this case, the proposed broker reporting rules.

In this week’s Triple Entry, we’ll cover:

• A summary of the most notable public comments on the proposed regs
• What the IRS asked in the public hearing Monday (and what may still be open to interpretation)
• What BlackRock did, has yet to do, and definitely did not do (as it relates to crypto)

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Let’s get to it!?

Crypto Goes For Broke on the Broker Rules

Last Entry , we gave you a crash course on the IRS’s proposed broker reporting rules and 1099-DAs. We invited everyone and their dog to submit a comment to the IRS, and apparently, everyone listened (okay, our newsletter probably had very little to do with it).?

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These regulations saw more commentary than a pineapple pizza at an Italian chefs' convention. The IRS proposal received an eye-watering 124,000 responses before the comment period closed on Monday (our comment letter included).?

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In addition to the comment period closing, the IRS held a public hearing to discuss the nuances of the proposal with industry experts. And by “discuss,” we mean get yelled at about how stupid the proposed regs are.?

We'll give you the highlights to save you the mind-numbing boredom of reading through IRS comment letters and sitting through a public hearing on tax law.

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What Crypto Companies Said in the Comment Section

Social media was flooded with comment letters from various big players in the crypto space. Everyone appears to treat these letters like they treat college research papers: you submit them at the very last second before the deadline.

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We got a good feel for how the industry is thinking about the IRS’s proposal by reading through letters from organizations like?Blockchain Association ,?Consensys , and?DeFi Education Fund .

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Here are the top ten recurring themes we picked out:?

1. Overextended Definition of "Broker":?Many comments highlight that the new regulations stretch the term "broker" too far. This could rope in entities like software developers and DeFi participants, who traditionally haven't been considered brokers.

1. Vagueness and Lack of Clarity:?There's a recurring theme about the regulations being too vague. This vagueness makes it tough for businesses to know exactly what's expected of them, leading to potential compliance challenges.

1. Potential Stifling of Innovation:?Several comments express concern that these regulations could hinder the innovative spirit of the digital asset industry. The fear is that overly stringent rules might dampen creative technological advancements.

1. Privacy and Security Risks:?Concerns are raised about the risk to personal data privacy. Collecting and reporting extensive customer information could expose users to data breaches or privacy invasions.

1. Legal and Constitutional Concerns:?Some comments touch on potential constitutional conflicts, such as violations of the Fourth and Fifth Amendments, and question the legal grounds of the proposed changes.

1. Financial and Operational Burdens:?There's a common thread about the financial strain these regulations could place on businesses, especially smaller entities. The cost and effort to comply could be substantial.

1. Misunderstanding of DeFi and Digital Assets:?Comments suggest that the regulators might not fully grasp the unique nature of decentralized finance and digital assets, leading to impractical regulations.

1. Increased Taxpayer Confusion: Instead of simplifying tax reporting, these regulations might confuse taxpayers, leading to more questions than answers.

1. Call for Delayed Implementation:?Many advocate for pushing back the implementation timeline to allow businesses more time to understand and prepare for the changes.

1. Need for Clear, Practical Guidelines:?There's a strong call for the IRS to provide clear, practical, and implementable guidelines that align with the realities of the digital asset industry.

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It's clear from these themes that there's a shared voice among folks in the digital asset world. Everyone's pretty much on the same page about wanting rules that make sense and strike the right balance between fostering innovation and increasing tax compliance.

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IRS and Treasury Officials Probe Crypto Industry

In Monday’s panel discussion, IRS and Department of Treasury officials faced a barrage of critiques about their proposed crypto regulations, underscoring the potential upheaval in the industry.??

However, the probing questions from these officials provided the most insightful revelations, suggesting which areas of the proposal could possibly be open for revision.?

These are the main topics the IRS had questions on:?

Distinguishing NFTs From Other Assets

Officials are curious about distinguishing non-financial digital assets, like NFTs, from others. The frequent inquiries revolve around the feasibility of brokers identifying such assets. Marisa Coppel from the Blockchain Association believes this is achievable, especially with a more precise definition of "brokers" focusing on centralized exchanges.

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Redefining 'Broker' in the Crypto Context

A critical issue raised involves the broad definition of 'brokers' in the proposal, encompassing some DeFi projects and wallet software. The central query: what challenges do decentralized platforms face in data reporting? Marisa Coppel highlights the immense data collection required, noting the challenge in decentralized environments where no specific entity owns or controls the software.

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Stablecoin Reporting: A Controversial Topic

The inclusion of stablecoins in the reporting requirements sparked debate. Stablecoins, typically pegged to stable assets like the dollar, play a pivotal role in the digital assets industry. Lawrence Zlatkin, Vice President of Tax at Coinbase, questioned the logic of reporting stablecoin transactions when they generally don't result in gain or loss. He suggests re-evaluating the reporting criteria for transactions involving stablecoins.

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Protecting User Privacy

The conversation also delved into crypto user privacy. IRS officials discussed with experts on digital identification systems that could uphold anonymity. The focus was on privacy tokens and their growing adoption. Additionally, they explored how transaction aggregators calculate the cost basis for assets and ensure data consistency, given the discrepancies in tax liability reports. Shehan Chandrasekera from CoinTracker recommended that the IRS could set standards for the aggregation industry to follow.

The Triple Entry Take

It’s tough to say what the final regulations will look like here.??

On the one hand, the questions posed by the IRS make us?very?cautiously optimistic that the IRS will carefully read each of the 124,000 submitted comments and rethink its overreaching definition of a “broker.”?

On the other hand, there are whispers that the IRS wants to get this done before the end of the year, and there won’t be much change. It doesn’t help that Elizabeth Warren, the Wicked Witch of Web3, is?pressuring the IRS ?to get this done ASAP.?

We’re all for facilitating tax compliance, but the way these regulations are written now will only make digital asset taxes more of a nightmare than they already are.?

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If approved as written, the IRS estimates 8 billion new 1099s costing $9.40 per 1099 from 5,050 brokers.

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Using those estimates, the annual burden (disregarding startup costs) would be:?

• $75.2B aggregate, $14.9M/broker.
• 1.2B aggregate hrs, 237,623 hrs/broker.

And most "brokers" are startups.

It’s easy for us to see the absurdity, but does the IRS?

And do they care??

BlackRock Did Some Stuff, and Also Did Not

A couple of entries ago, we briefly covered the (ultimately fake news)?story ?concerning a Bitcoin spot ETF approval. This time around, we might be able to take things a little more seriously. Emphasis on “a little.”?

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The headline first: BlackRock, the world’s largest asset manager, is?making moves to file for a spot ether ETF. ?And as you might expect, Ethereum rallied considerably (over 8% in 24 hours) in response to this news.?

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Now let’s talk about…?

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What BlackRock Did, Has Yet to Do, and Definitely Did Not Do?

The last year in crypto has felt like a long walk through the desert looking for water, so it can be easy to freak out when we think we see the oasis in the distance. But just to make sure we don’t all rip our shirts off and dive into what’s ultimately a mirage, let’s quickly re-establish the?actual facts?of what’s?actually confirmed?as of?right now.?

Last Thursday, November 9th, BlackRock registered the iShares Ethereum Trust with the state of Delaware (see screenshot below). Reminder: registering the trust is just a precursor to actually filing the ETF application with the SEC, which, so far it seems BlackRock has not done. However, we can expect that it will closely follow since back in June, they registered the iShares Bitcoin Trust before filing the ETF application a week later.

Another thing BlackRock has done is decline to comment, which is the same thing I do when the cops ask me if I know how fast I was going through that construction zone back there.?

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>>>BREAKING: something BlackRock has?definitely not?done:?filed an ETF for XRP. The chickens are restless out here, y’all, ready to snap up anything that looks like a tasty grub falling to the ground, and the news of BlackRock’s imminent Ethereum ETF filing has apparently sparked at least one?fake news story ?to try to capitalize on the excitement. Friendly reminder: it’s more important than ever to Do Your Own Research (DYOR), and also remember that Twitter is not financial advice (nor, for that matter, is this very newsletter).?

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So what does this mean??

Quick definition of terms here, probably more for our own benefit than yours because you probably already know this stuff: a spot ETF isn’t just a crypto thing. It exists for numerous other assets like securities, commodities, or currencies. A spot ETF tracks the current price in the marketplace “at which a given asset [...] can be bought or sold for immediate delivery.” [Sauce:?Investopedia ] An ETF for crypto means that institutional investors can gain exposure to crypto investing via their traditional investment platforms and exchanges without having to worry about some of the more degen aspects like self-custody or having to piddle around with setting up a crypto exchange account.?

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This is a big part of why asset managers would want something like this. After all, if there’s an opportunity to reap financial reward without taking on risk, taking advantage of it just makes sense.?

And obviously, this ties in with things we’ve been talking about for a while concerning institutional adoption of (or even just friendliness toward) digital assets. It’s a legitimizing move for our industry. Analysts at crypto investment firm Galaxy have?predicted ?that - if approved - a spot BTC ETF would usher a whopping $14.4B demand into crypto and juice the price of BTC past 74.1% (and that, theoretically, within only the first year of the ETF approval).

Does this hold true for ETH as well? Maybe.?

But then again. Maybe not.?

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The Triple Entry Take

We don’t want to burst any bubbles, but we also want to make sure we’re being a measured voice in the midst of all this. A spot ETF for BTC or ETH?could?be good news, but it also may not be the one-and-only golden ticket.?

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We know—wet blanket. We’re sorry. But also, please note that Canada - a market subject to the same pressures and narratives as the US - has had a BTC spot ETF for two years, and…let’s just say it’s been far from a gold rush.

We like the way Bankless put it in?this article :

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“Canadian investors are exposed to exactly the same investment narratives as Americans. Their lack of demand for spot BTC products is telling of potential US demand and indicative that Bitcoin’s narrative as a hedge against inflation and debasement is not potent enough to create inflows to the asset among non-crypto natives in the current market regime.”

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To put it in words with fewer syllables, there may still be work ahead to communicate crypto's value proposition to people who are not already all-in on this industry. Spot crypto ETF approval in Canada could reasonably predict its success in the states. In two years, there was no major influx into crypto from the average joes in Canada, which means that people either don’t care, don’t understand, or aren’t experiencing enough FOMO yet.?

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But there’s another angle we want to point out here, which has more to do with the industry’s overall direction than it does with whether or not BlackRock will help us head into another bull run.?

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The true benefit of owning crypto is OWNING crypto.?

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The tricky thing with ETFs is that you don’t own the underlying asset. Yes, you get “exposure” to the asset, but only as a profit-generating mechanism. In some ways, a spot crypto ETF just means people want to feel like they own crypto without?actually?holding it. There’s no skin in the game. The only cause it really furthers is the one treating crypto as a vehicle for price speculation,?not a new financial paradigm .?

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And when you’re bullish on the TRUE ethos of crypto, it’s worthwhile to be a little wary of movements that may just make it another asset class for the same old players that have been driving this bus for decades.?

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It’s a chicken-and-egg kind of scenario. We need their involvement to gain traction, but not so much that we lose our souls in the process.?

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So, we still want to be cautiously optimistic. The energy is definitely in the air. Big things may be coming, and maybe sooner rather than later. We’d like to think that one way or another, the bulls are at the gate, and the hinges are starting to rattle. The gates are just not open yet.

Spotlight????-? Simplifying Token Compensation & Compliance

As the digital asset landscape continues to evolve, businesses are reimagining their financial strategies to keep pace. Today, more companies than ever before are turning towards a more streamlined, cost-efficient model of token-based compensation to provide upside to employees and contractors.

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Last week, @Bitwave hosted a webinar with @Toku to unravel the complexities of token-based compensation and discover the best practices for compliant, audit-ready reporting. It was a stellar conversation, and you can see the whole thing for free on BitwaveU now!?

The Water Cooler ??

Things worth talking about at the office water cooler…if you 1) talk to people, 2) still work in an office, and 3) have a water cooler.

???????Featured Funding Find:?a16z Doubles Up on Blockchain Infrastructure

We’ll spare you the more detailed write-up we usually provide in this section and just point out the main idea - venture megafund a16z is making a?slight return ?to more infrastructure funding, leading or participating in two recent funding rounds focused on blockchain infrastructure that came to a combined $9.7M. Peep the article?here ?to find out more.?

Extraordinary Items ??

We made this dramatic interpretation of what some people might think is happening in the markets right now.?

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(And now we want to rewatch the entire extended edition trilogy of Lord of the Rings just so we can see?this scene again .)