Tom Lee Predicts Cyrptocurrency Market Outflow to Fiat Currency Before Tax Day | Hacker News Reader

Tom Lee Predicts Cyrptocurrency Market Outflow to Fiat Currency Before Tax Day

altcoinreport.co

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Someone used a throwaway account to share their recent personal experience on this matter at /personalfinance, titled "I just discovered that I owe the IRS $50k that I don't have, because I traded in cryptos."

Original: https://www.reddit.com/r/personalfinance/comments/84huks/i_j...

Update: https://www.reddit.com/r/personalfinance/comments/89ipyu/upd...

They removed the story inside their update, but Google cached it: https://i.imgur.com/0DspXDr.png

That makes NO sense at all and I continue to be surprised at the fundamental misunderstanding of the US tax system by techies (it's really not that complicated for individuals).

You pay tax on the GAINS, not on the value of the trade. If he owes the IRS $50k, it means he has a realized gain of ~$333,000. Where did that money go?

The only possibility here is that he took $330,000 and reinvested ALL of it into 'altcoins' just before the end of the year and is still holding them.

Sorry, but that has bullshit written all over it (throwaway account, too)

Anecdotally, it's my understanding that rolling all gains forward isn't an uncommon practice for non-professional traders -- especially during bull markets.

It doesn't necessarily have BS written all over it - in fact, I think there are MANY people who got left holding the bag with alts.

Depends. If he's in a high tax state and it was all short term capital gains, then those gains are taxable as income. If he didn't keep the tax money separate and the market tanks 80% (which it did) he'd end up with losses that can't be offset because you can't carry losses backwards, only forward.

You can end up in this situation if you traded profitably in 2017 (which is totally reasonable to expect due all the price hikes) and then lost a lot in trades in 2018.

As far as how he got $330k - each time you convert one crypto to another you realize gain/loss. And it is quite possible to expect him to do just that.

Super common situation is you make a couple trades in 2017'Q4 and 2018'Q1 during the bubble and just decide the whole thing is stupid and forget about it all because you never realized anything in USD and it's all fake. And then the IRS comes and says actually you owe USD. And the price dropped back down so you might not even have enough to cover it!

It does make sense.

I buy Bitcoin at $1000 in March. I trade my Bitcoin for Ripple in December when Bitcoin is worth $20000 and Ripple is worth $3. I have $19000 in gains because that is a taxable event. Fast forward to April and my $20000 of Ripple is now $3500 and I owe about $9000 in capital gains taxes.

Even if I sold everything I can't cover what I owe because the losses on Ripple are in the next tax year and not offsetting. This is obviously a worst case scenario but you can see how this could get you in trouble

The post didn't specify it was all short term gains. But even if they are, you still get to deduct your losses from any future capital gains once you sell at a loss. You and a lot of other replies seem to think I was saying it's impossible and arguing against that.

It's not. It's just highly improbably and extremely imprudent.

Alternatively, his altcoins bounce back up, he sells them and this time pays the tax properly.

The future capital gains may be at a much lower tax rate if spread over several years, so it doesn’t just cancel out.

> it means he has a realized gain of ~$333,000. Where did that money go?

Generally, the way this works is this:

1. You realize your gain in 2017 by exchanging for, say, ETH, at BTC $19k.

2. BTC falls to $7k, and ETH falls in accordance due to arbitrage desks.

3. You owe taxes on the 2017 gain. You could liquidate your much smaller ETH position in 2018, but you could only deduct $10k per year for 10 years on the large(r than 100k) loss you took.

My guess for how the OP has no assets left to pay the $50k liability is that they rode BTC down to $7k on margin. Buffett has a few things to say on the topic of leverage vs volatile assets.

Your point 3 is actually a little worse - the carry forward loss deduction from regular income is capped at $3k per year (but unlimited against both future short term and long term capital gains).

Can't he claim likewise exchange?

Short-term CGT in the US is around the 40-50% mark, something like that. Our hero bought 8 BTC for $7,200, or so goes their story, then sold it for $120,000-worth of altcoins, making a taxable gain of $113,800. 45% of that taxable gain = ~$50,000.

It is taxed as regular income so 10-40%

Short-term CGT is basically your ordinary income tax rate. So if you are taxed around 50%, then you aren't in the USA since the top rate is 39.6%. Also, your ordinary income tax rate depends on your income, the rate for $120k is 28% (but that only applies to income after 90k, before that it is taxed at 25% or less). You would only be taxed at 39.6% for gains after $418k.

Most Americans are also paying state / local / city taxes so it is possible to pay a ~50% marginal rate.

Some are, sure, but that would be high bracket. Glad to live in Washington state, at least.

1/ Short term, so 50k tax is 150k gains

2/ Your possibility is correct - the IRS computes tax on USD-equivalent as of trades completed Dec 31; but the USD price crashed in 2018'Q1, and he can't pay his tax bill in crypto. He can deduct the USD-equivalent losses next year but only against capital gains, not his W2 income, and the tax is due now in USD.

Continued: As a though experiment: lets say 100% of crypto traders owe 1/3 of their gains (obviously not real). There is nowhere close to enough USD liquidity to handle a sell like that and it would liquidate everyone and still leave them unable to pay their USD tax bill.

The apparent USD liquidity is mostly actually Tether liquidity. There is not actual USD liquidity – nobody is buying huge amounts of BTC who doesn't already have it – so we don't even have pricing data on what the USD price is, all that data has been corrupted by systemic exposure to Tether.

Obviously the thought experiment is totally absurd but it raises questions like, what exactly is the tipping point and how much liquidity is there actually?

Gains are only realized when they sell, so liquidity doesn’t matter if they don’t sell.

It matters if you traded alts, which all of reddit was doing for the last six months and what this whole issue is about

The IRS will only tax you on realized gains. Assuming individuals bought BTC (or alt coins or any other asset for that matter), and are still holding it, no taxes will be due until it is sold. If the individual sold their BTC in 2017, then they needed to have set aside a percentage of any profits for tax purposes.

So I'm inclined to agree with antisthenes, this person is either being untruthful or they lack a coherent investment plan and have a spectacularly bad tax planner.

How do you get a $50k tax bill implies realized gain of 330k? OP states $120k gain on top of 47k salary. To be generous, i'll first assume that he has had his salary withheld at the correct rates. Federally he will owe 32253 in additional tax (short term so treated as income, and marginally falls into a mix of 25 and 28% brackets). Must be that he also is in a high tax state. I understand California the best (which also might be the highest tax state). There, the gain would also be treated as regular income, and taxpayer would owe an additional 10458. So, 42700 in taxes. Running the numbers backward to find out income from tax liability is a little trickier, but it comes out to nowhere near 33000.

So perhaps the tax bill was not quite 50k, but it's certainly the right ballpark from what I can see. Very possible that he also under-withheld during the year, or had a higher gain, or his tax bill was a little lower, or had other issues that we don't know about. In any case, not what I'd call "makes NO sense at all" or indicative of a current fundamental misunderstanding of the tax system (saying nothing about his misunderstanding prior to the events).

Now, the bigger question I have is did this happen on a foreign exchange? Binance, bitfinex, etc? And if it did, has OP let the treasury know about his foreign accounts? FBAR is a real thing with huge penalties for non reporting and lying.

https://www.irs.gov/businesses/small-businesses-self-employe...

If it was all short term capital gains, then yes, but he would still have realized gains way over what the tax bill is. That wasn't specified in the post though. Usually capital gains refer to something that's taxed at a lower rate for assets held for more than 1 year, 15% (or 20% if you're in a higher bracket)

How tax/financial-illiterate do you have to be to pour ALL of your realized gains back into altcoins going into the next year?

The original post states that he bought in early 2017, and sold in late 2017. That makes it clearly all short term capital gains.

Trading between crypto, I would guess. You spend bitcoins to buy ether and you owe money.

I'm not familiar with this person so I followed the link to his previous prediction of BTC reaching "$25,000 by the end of 2018" from January: https://altcoinreport.co/tom-lee-predicts-bitcoin-price/

> “We expect bitcoin’s major low to be $9,000, and we would be aggressive buyers around that level … We view this $9,000 as the biggest buying opportunity in 2018.”

BTC is currently trading at about $6,500. At this point I'd sooner believe cartomancers when it comes to cryptocurrency market predictions, the market is too irrational and easily manipulated to make these types of predictions IMO. Might as well try to guess the outcome of tonight's lottery.

Or they are just bad at predicting it

A couple related observations:

1) With the dramatic rise and then fall of the Nasdaq back in 2001, with similar timing (peak right around New Years Day [0]), and a similar amount of new and uninformed market participants (online day trading just beginning to become a thing), could some of the early 2001 market performance be due to a similar dynamic? Noob traders make bank in 2000, log in to H&R block, start doing their taxes, and then have an oh shit moment when they come to the question about "have you bought or sold any stocks this year?"

2) Stock trading happened through United States institutions. Much of crypto trading does not. Many people may have started with $1k in Binance or Bitfinex, and seen that go up by more than a multiple of 10. Many of those people, I feel, are likely to accidentally commit a felony this year by failing to report their foreign account holdings because they are similarly unaware of the consequences of having money outside their down the street bank. FBAR is a real thing, people face serious fines (at least up to 10k for any infringement, 10k plus half your offshore assets and potential jail time if willfully [1]).

[0]http://futures.tradingcharts.com/historical/ND/2001/0/contin... [1]https://www.irs.gov/businesses/small-businesses-self-employe...

"The IRS will not impose a penalty for the failure to file the delinquent FBARs if income from the foreign financial accounts reported on the delinquent FBARs is properly reported and taxes are paid on your U.S. tax return, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted."

I've made this same prediction before. In 2001 it was driven by people owing AMT from option exercises in addition to day trading. We got tax paperwork from our brokers though - I'm not sure how many crypto traders will even realize they owe taxes.

The crypto market is less dependent on the US but it may also be priced at the margins and unable to absorb a big selloff.

Minor typo but can someone fix the title? Cryptocurrency is misspelled as Cyrptocurrency.

This happened in 2000. 1999 was a heck of a year for amateur daytraders.

I’m sure altcoinreport.co is as reputable as, say, the Wall Street Journal

Maybe in a few decades if it's still around. I'm sure they're hopeful of that at least :).

Why would people wait till Tax day to sell in order to pay taxes?

Many people probably don't know how much taxes they have to pay until right before tax day (because they haven't done their taxes yet). Especially with something like cryptocurrency, where actually calculating your true tax can be really complicated (if you have a lot of trades, are trading alt coins for alt coins, etc).

Presumably if you think BC is going to go continually up you want to wait until the last minute to sell.

Get rich or die trying?

I am really curious where he's getting the $25 billion in capital gains figure from the report, and what percentage of gains it assumes people realized.

Due to the massive amount of capital gains taxes owed on crypto, Tom Lee believes there will be a sell off in order to pay these taxes. Following tax day, he believes Bitcoin will find footing again.

A decrease of $20 for every $1 pulled from the market seems a little steep...

Not if the entire market cap is based on wash trading, HODL, and speculation.

Or maybe it's not steep enough. A forced-sell situation doesn't leave much pricing power. The classical Roman fire-sale is the archetypical case. Also I'm sure many taxpayers will elect not to pay the capital gains before tax day, deciding instead to ride out interest and penalties in favor for being able to sell at a higher price. This could get interesting.

I would love to see an after the fact analysis that deduces the relative market power of buyers and sellers from the transaction history.

For those who don't get the reference to "the classical Roman fire-sale": https://en.wikipedia.org/wiki/History_of_firefighting#Rome

> The first ever Roman fire brigade of which we have any substantial history was created by Marcus Licinius Crassus... One of his most lucrative schemes took advantage of the fact that Rome had no fire department. Crassus filled this void by creating his own brigade—500 men strong—which rushed to burning buildings at the first cry of alarm. Upon arriving at the scene, however, the fire fighters did nothing while their employer bargained over the price of their services with the distressed property owner. If Crassus could not negotiate a satisfactory price, his men simply let the structure burn to the ground, after which he offered to purchase it for a fraction of its value.

Through this and other schemes, Crassus became one of the richest men in Rome. He used this fortune to amass substantial political power, eventually rising to the peak of power in the Roman system by joining the First Triumvirate (https://en.wikipedia.org/wiki/First_Triumvirate) with Pompey the Great and and ambitious young go-getter named Julius Caesar.

That would drop the whole crypto market cap to $50bn from the current $250bn.

I agree. It's suspect because the numbers don't add up. From the article:

" [...]Tom Lee notes that U.S. households owe an estimated twenty five billion dollars in capital gains taxes due to crypto gains."

Total market capitalization of all cryptocurrencies, as of 12:18PM EST on April 6, 2018 is $248,821,531,204.

According to Mr. Lee, each $1 taken from the market will result in a $22.50 decrease in aggregated market value (avg. of his estimated range, "$20 - $25").

     25B * $22.50 = $562.5B

He's suggesting that the price impact on cryptocurrencies required to pay for capital gains is going to be double the current market capitalization? Am I misinterpreting the statement he made?

The alternative explanation I can come up with is if the statement was poorly formed and what he was really talking about was $25B in investment income will need to be reported and the appropriate short-term or long-term tax rates would need to be applied.

Rough, back of napkin estimation, assuming an even distribution between short-term and long-term capital gains tax rates--which isn't going to be accurate, but I don't have a better way to estimate for this analysis--would be:

    Short-term: $12.5B * 28%[1] = $3.5B
    Long-term:  $12.5B * 15%[2] = $1.875B
    Total Estimated Taxes Due: $5.375B

    Estimated impact on total market capitalization:
    5.375B * $22.50 = $121B

That would leave $127B in the market, or if evenly distributed over all tokens, all prices would be half of their current values after April 15 (e.g. today's $6.6k BTC would be $3.3k BTC).

That doesn't sound right, either. Am I totally off-base for both interpretations?

---

[1] Making an educated guess about the "typical" cryptocurrency investors' income bracket, but without actual numbers I'm open to this estimate being higher than reality.

[2] https://www.fool.com/retirement/2016/12/11/long-term-capital...

I think Lee is predicting a 50% market adjustment because each fiat dollar added into the cryptocurrency market increases market cap by $22.50 because of speculation and other factors. It doesn't seem too crazy if you consider the volatile swings cryptos have had. Along with that, we dont know what to expect with this much money in potential sell offs because you can't expect investors to use other cash to pay taxes. They will just sell more crypto.

He probably meant "decrease of $20 for every $1B pulled from the market"

Won't the capital gains only be owned when people try to convert to fiat currency in the first place? If you're leaving your stuff in cryptocoin form I don't think you would pay capital gains.

So this is only a problem for the people cashing out, and if they've cashed out then they should have the cash to cover their tax bill.

And this assumes they didn't cash out to the Cayman Islands account. Probably not a lot of capital gains will be reported to the IRS this year for cryptocoin related profits.

Crypto gains are taxed on each exchange whether that be btc-eth or btc-fiat or [altcoin]-[altcoin]. That’s what’s so bad because some didn’t withdraw fiat to pay for gains.

"If you're leaving your stuff in cryptocoin form I don't think you would pay capital gains."

Note this is only true if you hold onto particular coins. If you exchange some bitcoin for etherium, for example, you will realize capital gains or losses. This has nothing specifically to do with cryptocoins, the same thing would happen to you if you bough silver, say, and then exchanged it for gold.

Your latter point is straightforward tax evasion and will be caught or not in much the same ways as other forms.

I'm just saying that cryptocoins attract the kind of people who would try to evade taxes.

https://www.bizfilings.com/toolkit/research-topics/managing-...

What I'm saying is that trading btc for ltc is barter- and it is taxible.

Lol this misunderstanding is exactly why everyone will suddenly realize they need liquidity before tax day.

the general rule "If you can afford an accountant, you should probably hire one" applies generally, and keeps you out of a lot of trouble.

I think he is wrong, this is more likely to happen next year.

So, how high do you think things will go then?

How come the wording? Cryptocurrencies are inherently no less fiat currencies than government mandated ones.

That's a good question, and I too would like to know why people consider Cryptocurrencies to be "not fiat" ?

Currencies either have value from

1) Being made of a commodity (e.g. gold coin) or exchangeable for the commodity.

2) Because someone says so. This is "Fiat". Usually this is a government, not not necessarily so. See "company scrip" for another example.

Lack of an issuing government does not magically create a backing commodity.

Because I can't actually buy anything with them, outside of a few niche markets.

I'm not following?

Being unable to use a banknote (e.g. a 2008 Zimbabwe 1 Trillion Dollars Banknote) doesn't make it any less Fiat - no commodity has appeared; it makes it low-quality fiat money.

Haha. Aside from the things I can buy with it, I can't buy anything with it!

Just because I can exchange Chuck-E-Cheese coins or WoW gold for certain specific goods and/or services doesn't make them fiat.

> Just because I can exchange Chuck-E-Cheese coins ... for certain specific goods and/or services doesn't make them fiat.

So what does it make them then? As far as I know, the categories are "fiat" or "commodity-backed". If it's not Fiat, which commodity backs Chuck-E-Cheese coins?

Or is it merely backed by the say-so of the Chuck-E-Cheese company? You understand that "say-so" in Latin is "fiat"?

Isn't this just a form of "Company Scrip", a (low quality) Fiat instrument?

https://en.wikipedia.org/wiki/Company_scrip

https://thebluecollareconomist.com/2016/10/30/fiat-currency-...

Fiat in the case of currency involves more than "someone says so". It generally means that a government makes a law or a regulation that says the money is legal tender, and also that the value of the currency is derived solely from that law and is not "backed" by any physical goods.

No government or other monetary authority has said that cryptocurrencies are legal tender in their country, or has required that anything to be paid in cryptocurrencies. In fact, many governments say it is a commodity.

I have already read the wikipedia page, and it says "often by government regulation." So not necessarily so then. See here for an example of non-governmental fiat monies: https://en.wikipedia.org/wiki/Company_scrip

of course "because someone says so" is an oversimplification of fiat; they need to do so believably which is why the United States of America has the resources to do it but I would not be able to.

Company Script is generally illegal these days, which is instructive - you need to distinguish between "it's impossible to have fiat money without government regulation" (false) and "it's illegal to have your own fiat money because of government regulation" (generally true). Nation-states even sometimes fail at fiat money, so regulation is understandable.

Bitcoin looks like something that has value only because people agree that it does. Saying that "bitcoin is a commodity" means what exactly? This trivially copied pattern of bits is a scarce resource? Proof of work is valuable in itself?

> Proof of work is valuable in itself?

This is actually an interesting way to analyze it. The trust created by PoW apparently does create value to many people.

I don't think that it does in itself, actually; but there seems to be the perception that it does.

How much would you pay for an hour of video of me digging a hole with a spade and then filling it in. That's proof of work, and also worthless.

How much would you pay for someone to provably burn ton of coal? It's only valuable if it does something useful for the energy expended.

The blockchain's proof of work has been characterised as "Computers yelling Numberwang at each other" and what use does it have outside of itself? It burns huge amounts of of energy to produce waste heat and a trivial hash.

You're focusing on the work rather than the result. Just because you don't personally believe it doesn't mean that nobody else does. If in doubt, visit https://coinmarketcap.com

I'm asking "what is the result" ?

As for current market cap, IMHO it means less than you think. See also: bubble, pyramid scheme, ponzi scheme.

The result is a publicly-available ledger with a transaction history backed by the cumulative amount of work performed to verify consensus in each block.

> Saying that "bitcoin is a commodity" means what exactly?

It means that the government does not legally consider it any kind of currency, fiat or otherwise. It's taxed like a commodity when you buy and sell it. It's not legal tender.

Ok, so if we're saying "commodity" as in "not legally any kind of currency or legal tender" then that's a valid reason.

If we're using "commodity" to refer to an useful substance like wheat or silver "a product of agriculture or mining" ( https://www.merriam-webster.com/dictionary/commodity ) Then I would disagree, bitcoin does not fit this definition, the value of bitcoin is an agreement, nothing more. "Agreement" and "because we say so" seems a lot like fiat to me.

Exactly! Fiat money has value solely because the participants in the market agree that it does so. That's practically the definition. And it's exactly where most cryptocurrencies are at, except for those that are explicitly backed (like Royal Mint Gold is backed by, well, gold). Hence my original comment. But some people seem to think that down voting that comment will somehow change these facts. Oh well.

Most of us define “fiat” similar to this: 1 : a command or act of will that creates something without or as if without further effort According to the Bible, the world was created by fiat. 2 : an authoritative determination : dictate a fiat of conscience 3 : an authoritative or arbitrary order : decree government by fiat

https://www.merriam-webster.com/dictionary/fiat

Most cryptocurrencies have value because of a mutual belief that they have value, but the overwhelming majority have not been mandated for use by some authority yet.

> Most cryptocurrencies have value because of a mutual belief that they have value

So, "they have value because we agree that they have value. Because we say so".

That's exactly "Fiat".

Agreement is not equivalent to authority. Fiat means dictated by authority, which is backed by the power to enforce the rule.

I don't think that those two things, "agreement" and "authority" are actually very different at all. And "Fiat" as opposed to Commodity-backed is not something that is subject to fine slicing like that, lest you beg the question, "what commodity magically came into being to back it here?"

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