2023-11-13 14:05

The end of the trial provides some clarity for FTX customers as to how the company’s bankruptcy might affect their taxes. But how the IRS might act in the context of illegal activity is unclear. On November 2, 2023, Sam Bankman-Fried was found guilty on all counts in his federal criminal trial in the Southern District of New York. The most recent superseding indictment was filed on August 14, 2023, and included seven criminal counts such as wire fraud, securities fraud, commodities fraud, and conspiracy counts related to those activities. This post is part of CoinDesk's Tax Week, presented by TaxBit. After a multi-week trial, SBF was found guilty on all counts. An appeal of this conviction is likely; plus, the sentencing phase of the prosecution is not scheduled to occur until early 2024. So the saga is not over yet. But his conviction does provide, in its own way, some clarity for FTX customers waiting to figure out where they stand in the FTX bankruptcy proceeding and the tax treatment of any losses incurred. The joint FTX bankruptcy Since November 2022, the myriad of FTX affiliated companies, including Alameda Research, FTX,com (the offshore trading platform), and FTX.us (the U.S. trading platform), have been operating as debtors in bankruptcy. Customers of both FTC.com and FTX.us have been in a holding pattern with little certainty as to whether they will receive any of their account holdings back either in fiat or crypto. On July 31, 2023, the debtors filed a draft Plan of Reorganization under Chapter 11 of the bankruptcy code. The draft plan includes a number of upfront qualifiers alerting readers that it is likely to change over time as more information is uncovered, agreements are reached, and assets are discovered and moved back into the bankruptcy estate. With that said, the draft plan does provide a framework for creditors holding claims against the debtors, including FTX.com and FTX.us customers. Importantly, this clearly indicates that customers will likely not be made whole and that any payout is almost certainly to be received in cash. There is a possibility for an alternate payout with respect to FTX.com customers, but that is only referenced in a footnote. The draft plan segregates FTX.com and FTX.us customers into two distinct creditor pools, anticipating that funds to pay those pools will be based, at least initially, on fiat accounts or crypto wallets held in the names of each respective entity. It also carves out creditors with claims based on FTT token or NFT holdings on the debtor exchanges. These creditors are treated separately from the generic FTX.com and FTX.us customer-claimants. Of course, a creditor may hold multiple claims. Ultimately, creditors are still in a holding pattern as to when and how much of a payout they will receive in bankruptcy. Because creditors are likely not going to me made whole, customers subject to U.S. tax will have questions regarding what tax deductions may be available to mitigate the economic loss incurred. As explained below, SBF’s conviction likely solidifies one of the most difficult hurdles to overcome for those looking to deduct any losses on their U.S. tax returns — the existence of a theft. Claiming tax losses It is important to note that the bankruptcy proceeding begun by FTX in November 2022 did nothing for tax purposes. At that time, nothing had actually been lost by any customer. The bankruptcy filing simply put all activities on pause until the administrators of the bankrupt debtors — FTX’s new management — could figure out what assets FTX and its affiliates held so a plan could be proposed on how to dissolve the companies and pay out as much value as possible to creditors. Under the tax code, as it has existed since 2018, the amount of a loss can only be deducted in limited circumstances. As it relates to crypto, a taxpayer could deduct a loss resulting from the bankruptcy if: The taxpayer was in the trade or business of trading crypto; or The taxpayer was engaged in the trading of crypto for the production of income and the loss stemmed from a theft. Generally, the tax code has a pretty high standard for individual’s looking to characterize their trading activity as a trade or business. This avenue likely applies to only a few of FTX’s customers. Most customers, however, would easily be able to show that their activity on FTX was directed at making the production of income. It is unlikely that the IRS would challenge this characterization since investing activities have traditionally been characterized as activities done for the production of income. Until SBF’s conviction, the second part was uncertain. Since 2018, deductions for losses need to relate to both the production of income and be the result of a theft. Under the tax code, claiming that a loss is the result of a theft is much more difficult than just saying it was a theft. A taxpayer generally needs to show that a criminal theft occurred. For the majority of customers-turned-creditors in the wave of crypto-related bankruptcies over the past year, many are grappling with whether their ultimate losses can be characterized as thefts. SBF’s conviction now provides certainty on this front. In light of his conviction and the evidence introduced during the trial, taxpayers are in a good position to claim that losses incurred on either FTX.com or FTX.us were the result of a theft. Even with this step of the analysis resolved, taxpayers will still need to wait before deducting any losses because the losses are not deductible until there is reasonable certainty as to if or how much of a recovery will be made because that recovery reduces the amount of the loss that can be claimed. As a closing thought, U.S. taxpayers who are creditors of FTX.com, rather than FTX.us, should speak to their tax advisors about any loss deductions being sought. U.S. individuals were not supposed to be using FTX.com as it was an offshore entity not subject to U.S. jurisdiction, which means activity on that exchange was technically not legal. Although no criminal charges are likely to be brought against U.S. individuals who improperly used FTX.com, the IRS may use the impropriety of that activity to deny any losses claimed. Tax law in the U.S. has long recognized the government’s ability to deny a tax deduction on public policy grounds where the deduction arose in the context of illegal activity. The court opinions tackling these issues have some mixed outcomes generally based on the facts, but there are cases holding that theft losses incurred during the context of illegal activity are not deductible on public policy grounds. It is not clear if the IRS would try to take such a position with respect to losses claimed by U.S. users of FTX.com but it is a question that should be discussed with your tax advisor before claiming such a loss. https://www.coindesk.com/consensus-magazine/2023/11/13/the-tax-implications-of-sam-bankman-frieds-conviction/

2023-11-13 13:30

The proposal to establish a U.S. tax regime for digital assets has drawn a stunning 120,000 comments and will be the focus of an IRS hearing today. The Internal Revenue Service's audio-only hearing today will draw views from the crypto industry on what threats the digital assets advocates see embedded in the proposed new tax approach being contemplated for cryptocurrencies. The concerns include user privacy, the scope of crypto entities that would have to report transaction information, the inclusion of stablecoins and whether the proposal implies anything about whether digital assets should be counted as securities. The U.S. Internal Revenue Service (IRS) is gathering the final words now from a crypto sector that is arguing the agency's proposal for a digital-assets taxation regime is an existential threat to investor privacy and to decentralized crypto projects. After a comment deadline and a public hearing on Monday, the U.S. Department of the Treasury's tax arm will have a mountain of more than 120,000 comments to sift through – aided in some instances by the wordsmithing of artificial intelligence tied to such campaigns as the LeCpunK Army's "Treasury Raid." Monday's hearing – confined to audio – will gather prominent crypto advocates to lay out their arguments on this proposal that maps out how crypto brokers and investors would report transactions to the IRS. The new taxation system – which won't become final until IRS officials weigh the input, rewrite a final version and approve it – has drawn industry ire that's partially focused on how the proposal would define a "broker" that needs to comply. "The digital asset middleman category stretches the statutory language beyond its breaking point in direct contravention of the relevant legislative history," the DeFi Education Fund argued in a comment letter. The current language of the proposal "inexorably leads to the conclusion that the proposed regulations could treat every participant in the blockchain technology stack as a broker." DeFi By intentionally roping in some decentralized finance (DeFi) platforms, decentralized autonomous organizations (DAOs), wallet providers and certain payment processors, the IRS may be trying to require tax information from organizations that would have difficulty providing it. A comment from Americans for Tax Reform says the government's scope for brokers is pursuing "a broad definition that includes entities incapable of reporting the applicable transactional information." The group argued that "the IRS wants to rope DeFi into the reporting regime to ensure that other entities do not convert to DeFi entities and circumvent reporting requirements." Another frequent industry concern was for investor privacy when it comes to government reporting of transactions, which crypto brokerage Coinbase (COIN) argued "would impose an unprecedented, unchecked and unlimited tracking on the daily lives of Americans," according to a comment letter from Lawrence Zlatkin, the company's vice president for tax. He contended that the regulations as written would allow "government surveillance of the choices Americans make about their most private health care decisions, or even when they purchase a cup of coffee." Bright side Despite the objections, there is a general bright side for a crypto taxation approach in the U.S. Establishing rules and forms for how investors report their gains would eliminate one of the central impediments toward wider interest in cryptocurrencies: uncertainty over how to figure out what one owes in taxes. The proposal would establish a bespoke tax form, akin to the 1099s stock market investors are used to dealing with. Were an IRS rule to pass before any of the crypto proposals from the U.S. Securities and Exchange Commission (SEC), it would clear the first major hurdle in U.S. crypto regulation: establishing an official status for digital assets in U.S. finance, even as Congress continues to stumble in its debate over future crypto markets laws. Federal agencies are compelled to review all comments in the process of giving birth to a new rule, and the incredible volume for this proposal could demand more time than usual to complete that task. Tens of thousands of individuals provided objections. Other complaints with the proposal focused on its inclusion of stablecoins as reportable assets and its relationship with defining securities. To avoid this rule reinforcing the argument that digital assets are securities, Nicolas Morgan, president of the Investor Choice Advocates Network, asked the Treasury Department to make it clear that this rule wouldn't apply to securities law. Read More: How the Crypto Industry Responded to the IRS Proposed Broker Rule https://www.coindesk.com/policy/2023/11/13/irs-raided-by-crypto-investors-as-industry-puts-up-fight-against-us-tax-proposal/

2023-11-13 13:20

The funds were then bridged to bitcoin on the THORChain bridge. A hacker stole $27 million worth of tether (USDT) from a wallet linked to the Binance deployer over the weekend, according to blockchain analyst ZachXBT. The $27 million loot was converted to ether (ETH) before being sent to exchanges FixedFloat and ChangeNow. All funds were then bridged to bitcoin (BTC) via the THORChain bridge. According to on-chain data, the victim's wallet had received ether via two separate wallets from the Binance deployer in 2019. "The user made a withdrawal from Binance, which was valid and authorized on our platform. Unfortunately, the DeFi wallet that received the withdrawal was compromised. While this is outside of our scope of control, Binance's security team is looking into the matter and we will provide assistance where we can," a Binance spokesperson told CoinDesk. A deployer wallet is a wallet used to create smart contracts. Binance's deployer wallet has been inactive since December, 2020. THORChain has become an epicenter for hack-related activity over the course of the year – in June hackers that stole $35 million from Atomic Wallet used THORChain to conceal the ill-gotten gains, and last month THORSwap put its platform into maintenance mode after a series of FTX hack-related trades. Exchanges are often the target of hackers. Last week Poloniex lost $114 million after a hack breached that exchange's hot wallets. https://www.coindesk.com/business/2023/11/13/hacker-steals-27m-in-tether-from-wallet-linked-to-binance-deployer/

2023-11-13 11:11

ARK offloaded 201,047 GBTC shares, worth around $6 million, from its Next Generation Internet ETF. Cathie Wood's ARK Invest sold over 200,000 shares in Grayscale Bitcoin Trust (GBTC) on Nov. 10 as the BTC investment vehicle rallied around 10% last week. ARK offloaded 201,047 GBTC shares from its Next Generation Internet ETF (ARKW), according to an emailed update. The shares were valued $6.03 million based on Friday's closing price. GBTC remains the largest holding of ARKW, with a weighting of 9.97% worth about $132 million. The sale followed smaller transactions totaling about $5.7 million over several days earlier in the week. GBTC shares rose nearly 10% last week from around $27.35 to just under $30. The trust has rallied nearly 250% in 2023, around double the increase of bitcoin (BTC), which is up around 123% this year. Grayscale Investments, which is owned by CoinDesk parent DCG, won a legal victory against the U.S. Securities and Exchange Commission in August over the regulator's rejection of its application to convert GBTC into a spot bitcoin exchange-traded fund (ETF). Last week, the SEC opened talks with Grayscale on the details of its application, in a further boon for chances of a spot ETF being listed in the U.S., one of the major factors in the recent crypto rally. Read More: Cathie Wood Likes Bitcoin as Both Deflationary and Inflationary Hedge https://www.coindesk.com/markets/2023/11/13/cathie-woods-ark-sold-6m-of-grayscale-bitcoin-trust-shares-amid-rally/

2023-11-13 10:10

Bithumb is aiming to close the market-share gap with fellow exchange Upbit, which has over 80% of the South Korean market. Cryptocurrency exchange Bithumb plans to go public in its native South Korea, according to reports by local news outlets on Monday. The exchange aims to list on Kosdaq, the South Korean counterpart to Nasdaq, though it is also open to an initial public offering (IPO) on the country's main stock market, the Kospi, The Korea Herald reported, citing a Bithumb official. "We selected Samsung Securities as our manager for initial public offering. We aim to go public during the second half of 2025," the official said. The IPO would mark the first such listing by a Korean crypto exchange. There were reports in 2020 that Bithumb was considering a share sale, though it denied them at the time. Bithumb is aiming to boost its market share and close the gap on fellow exchange Upbit, which has more than 80% of the South Korean market. South Korea's government set upon a crackdown of the crypto industry in 2021 in an attempt to tackle fraud and other illegal activities. Bithumb's offices were raided at the start of this year as part of a probe into price manipulation of an unspecified digital asset. Crypto trading in South Korea remains healthy, however, with Upbit surpassing Coinbase and OKX in August to become the world's second-largest crypto exchange after Binance. Neither Bithumb nor Samsung Securities responded to CoinDesk's request for comment . Read More: South Korea’s Crypto Ecosystem Shakes Off Terra Debacle, With Gaming Dominating Web3 Activity https://www.coindesk.com/business/2023/11/13/crypto-exchange-bithumb-plans-south-korea-ipo-in-second-half-2025-report/

2023-11-13 09:24

Prices on the majors stabilized after a rally at the end of the U.S. trading week, while the crypto winter continues to thaw in every part of the market from bitcoin to ether and DEXs. Bitcoin and ether started the trading week steady in Asia, buoyed by narrowing discounts on Grayscale Bitcoin Trust and heightened anticipation for the approval of spot bitcoin and ether ETFs. Market optimism is at an all-time high, with investor inflows surpassing $1 billion this year. Bitcoin (BTC) began the trading week in Asia above $37,000 and ether (ETH) above $2,000, with prices little changed from an exchange-traded fund rally that closed last week, helping narrow the discount on the Grayscale Bitcoin Trust (GBTC) to levels not seen since July 2021. Data from YCharts shows the trust's discount to its net asset value is 10.35%. The discount has been shrinking from a record of almost 50% during the depths of the FTX-induced crypto winter in December last year. Last week, CoinDesk reported that the U.S. Securities and Exchange Commission (SEC) initiated discussions with Grayscale Investments about converting the trust to a spot bitcoin ETF, which, if successful, would provide significant market momentum and liquidity. Grayscale Investments and CoinDesk are both owned by Digital Currency Group. Bitcoin fund holdings have reached an all-time high, driven by investor enthusiasm over the anticipated approval of a spot bitcoin ETF in the U.S., with total inflows exceeding $1 billion this year, CoinDesk recently reported. Market sentiment has also been lifted by last week's announcement that fund-management giant BlackRock is planning to issue an ether-based ETF. News of the announcement pushed ETH to a seven-month high, outperforming bitcoin. In a recent interview with CoinDesk TV, Diffuse Funds CEO Kenny Estes said BlackRock's decision to apply for an ether ETF shows the financial giant is highly confident the bitcoin ETF will be approved. "I think it will get approved, and the biggest reason for that is because BlackRock put in the application," he said. "The fact that they're putting in an Ethereum application, to me, sounds like it's a predetermined outcome that it will be approved." Meanwhile, trading activity on decentralized exchanges (DEXs) is also at a six-month high as traders cycle out of altcoins and into ether in anticipation of any ETF approval, according to research from WOO Network shared with CoinDesk. “Recent extreme market volatility showed Arbitrum is still the lead performer in the L2 race, capturing six times the 24-hour trading volume of Optimism, and 25 times that of Base," Ben Yorke, WOO Ecosystem VP said in a note shared with CoinDesk, referring to layer-2 blockchains. "That said, what’s clear is that Ethereum is still ultimately the end boss, overseeing more than twice the volume of all Layer 2 scaling solutions combined – driven in part by the volatility surrounding Blackrock’s apparent filing for an ETH ETF.” Crypto traders will likely have their eye on Core Consumer Price Index data and U.S. retail sales data, scheduled to be released later this week, along with speeches by New York Fed President John Williams, which should give clues into where interest rates are going. https://www.coindesk.com/markets/2023/11/13/grayscale-discount-continues-to-narrow-as-spot-bitcoin-ether-etf-euphoria-works-through-markets/