Headline is misleading: the founder has threatened to doxx and report them to the IRS if they don't return funds which according to the Compound protocol, they rightfully own anyway.
Notch it up to another first for crypto.
Notch it up to another first for crypto.
And that is one of the biggest misconceptions of crypto stuff.
Law and contracts (1) determine who owns what, not who happens to currently hold it.
That's why the founder can threaten them with the IRS, because they (likely(1)) do not rightfully (as defined per law) own it.
This is also why NFTs are kinds stupid, because you totally can sell someone a NFT which "claims ownership rights" without selling them any ownership rights legally seen. Sure it's most likely fraud as you deceived people, but only if. So telling people you sell them the NFT but not the think behind the NFT would make that pretty legal. Like you can sell a certificate about the correctness/quality of a picture without selling (or even having) that picture.
(1): Smart contracts are not contracts, they are computer programs. They might also contain contracts, but that doesn't mean that just because something is done in a certain way in a smart contract it is legally binding, legal, or anything (Well, that's also true for contracts themself).
This statement is nonsensical - the IRS has no enforcement mandate for theft/fraud, nor does it have any authority to return stolen property. All the IRS would do is say "Hey, I heard you got an extra $NN last year - please pay your taxes on it".
It could even be argued that by reporting people the the IRS, the founder is implicitly admitting that the current possessors actually do own said crypto, otherwise they wouldn't owe any tax on it.
https://www.irs.gov/publications/p17
Illegal activities. Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Schedule 1 (Form 1040), line 8, or on Schedule C (Form 1040) if from your self-employment activity.
:)
It seems that the only thing you own when you purchase an NFT is the NFT itself. Not a little jpeg that it points to; just the bit of code on the blockchain.
It's kind of tautologically stupid. You buy a receipt that states you own that very receipt.
But if people buy deeds instead of the house itself (i.e. most NFTs) then the link becomes broken and the signifier of “ownership” is less useful.
The deed is only a signifier of ownership, nothing more. If you can prove in court that the possession of the deed itself was improperly transferred, the state will return the deed to the rightful owner. Or annul the old deed and create a new one. (At least in the US.)
As you say, a deed is not a bearer instrument but the concept of home ownership which it symbolizes has legal protection.
And as it is used for digital goods, the signifier of “ownership” is already broken, as multiple people can have a copy of the item without their being any ownership conflict, unlike a house.
This seems wrong. Here's the quote from the founder:
> Otherwise, it's being reported as income to the IRS, and most of you are doxxed.
It seems to be "return it or else it will count as your income," which seems... weird. Do most crypto people just not pay taxes on crypto? How is this a threat?
In fact, that threat almost makes returning it the riskier move. Are they going to report all of these transfers to the IRS? Will the IRS consider it income, and then a gift back to compound if I return it?
[edit] there's even a cottage industry supporting folks who refuse to pay taxes in getting second passports and abandoning their US citizenship. [1]
[1] https://www.cnbc.com/2021/07/11/plan-b-passport-tax-break-bi...
The thought experiment that made this concrete was a sort of reductio ad absurdem:
Let's say for a moment that NFTs win worldwide support and begin to be used as proof of ownership for everything. As part of this movement, the Louvre registers an NFT signature for each item in their collection.
Now, let's say a nefarious actor manages to use social engineering and convince a naive Louvre curator to transfer the NFT ownership of the Mona Lisa.
This bad actor promptly goes to Sotheby's and asks them to list "his" Mona Lisa for sale.
---
Of course, the Mona Lisa would not go anywhere. The French government would never allow it. This is an extreme example but can be walked back to less and less valuable items: would this work for an NFT of a house, a car, a computer, etc?
Unless the state decided to universally and with no exceptions enforce ownership of NFTs, they are ultimately worthless.
Most developed contries have digitized their deed system, so I am not sure how you can con someone out of their deed.
Also, back when we did use physical deeds, there generally was owner’s copy and land office’s copy, and on the back of the deed would be the transfer history.
So to con someone out of their deed, you would not only need to get the owner’s deed, but you would also have to get your name added to the land office’s copy.
Not the US*. I mean I guess they are digitized in the sense that records are typically published online electronically, but it is all still based off these bits of paper going back and forth, there is not like a database of ownership.
*Except for Iowa https://archive.curbed.com/2018/2/26/17017142/title-insuranc...
"Digitizing" something doesn't make it invincible to con artists - there's really no difference between me conning you into signing over a deed if it's paper or digital.
Therefore I have to conclude that NFT usage is an extremely radical act against state power, because what it says is that the state doesn't matter, this blockchain(the one you are using at that moment) does. And you are accepting that your rights end where it does, too, so you had better trust the community.
https://mobile.twitter.com/moo9000/status/144389383001774899...
“Send the money back or we’ll follow the laws we were supposed to be following anyway!”
Patio11 had a thread on Twitter better than this article.
Except that recent events regarding Citigroups incorrect $900M payout on the Revlon bond shows that in fact grown up finance will sometimes say, actually, the law is the law and the contract doesn't cover this, so thanks for the money.
This was a case where the bond holders did have some claim to the money, but it was clearly an error.
You refer to recent events, and I don't know how recent, so maybe I missed something; but my understanding was that the finding was that it was reasonable for Revlon to believe when they received the fund that it was a legitimate payment, not just an error. Of course in retrospect (e.g., when Citigroup calls and says so!) it is clear that it was an error, but the legal argument, whether or not you buy its truth, was that it was not clear at the time. I think that this sort of finding in which both grown-up financiers decide not to be chummy about misplaced funds, and the law sides with them in not requiring them to do so, is comparatively rare.
At most, it works like that for anyone rich or working on behalf of a big firm, which isn't exactly a ringing endorsement. And don't you worry, cryptocurrencies are just as capable of reversing transactions of those with the real power! [2]
[1] Thanks to blfr for finding the link: https://twitter.com/patio11/status/1443738002065268736
[2] https://www.gemini.com/cryptopedia/the-dao-hack-makerdao
There are also a lot more ways for regular people to reverse transactions, but I take your point about how hard it is to reverse wires to scammers.
I'm still pretty bullish on DeFi.
Wash. Rev. Code §§ 9A.56.110, 9A.56.130, 9A.04.110
For example
Indeed, this is the key to make it "not blackmail".
That would seem to present all sorts of risks for his users, and himself, legal and otherwise.
(Also, I assume you mean tax evasion? Avoidance is the legal one.)
It does nothing of the sort. It's a enormous leap based on an assumption of bad faith to go from expecting protocol users to sort out their own personal tax situation to "willfully assisting in tax avoidance."
There are obviously lots of subtleties here, including places where no-one knows how the legal implications will shake out, but "expecting … users to sort out their own personal tax situation" isn't always an option; for example, my bank isn't allowed to assume I'll sort out my own personal tax situation and must report my interest earned, whereas, say, Amazon is allowed to make that assumption, and so need not report the items that they have sold to me. It could be that this is a more Amazon-y situation, but it could also be that it's a more traditional-bank-y situation. Probably even the IRS and Leshner, but definitely those of us who aren't involved in the situation, don't know which it is.
Precisely, which is why the jump to "strongly implies willfully assisting in tax avoidance" comes off so poorly. In my opinion, it not only mischaracterizes what is happening, it imputes ill intent to boot. Guidance for DeFi apps is poor currently and policy in this area is actively being legislated. In the meantime, shifting the onus for tax reporting back onto individual users !== willful assistance in tax avoidance any more than companies not witholding income taxes from payroll pre-WW2 was willful assistance in tax avoidance.
Further, since these transactions are all captured on a public ledger, anyone using this for tax avoidance is really just electing to pay their taxes later with massive penalties and possible jail time once the IRS gets around to tying addresses with unreported transactions to fiat on/off ramp transactions that are KYC'd.
Playing devil's advocate: it's not exactly "free money", it's free "tokens" of some kind, which might not be convertible to money at the same rate which was used to estimate the tax. If the tax amount was assessed at the value the tokens were supposed to have today (based on what they recently traded for at some exchange somewhere), but you were too slow and only traded the next day and the price paid for these tokens has fallen heavily, you might have to pay more in tax than the money you can get from these "free tokens". So yes, it's not hard to imagine a situation in which paying tax on that "free money" can be "the end of the world" for some.
Let's assume the income case, a qyestion: What would happen if someone took these coins then transfered them to a new wallet while claiming that their private key was compromised. So "theft" essentially. Would they still be on the hook for taxes?
The real downside to crypto to me is that there is no ownership, only proof of authentication credentials ownership.
Just like stocks (you don’t pay for any changes in value to the stock until you sell it for fiat currency).
How do you calculate the tax on that?
They can’t have it both ways. Either crypto is an equivalent to money or it isn’t. If it is, accept it. If it’s not, tax it when the money “appears” out the other end.
Basically the current trade value for the non-dollar item is your income on it.
The current law is bad imo.
The difference between stock and stock options might not seem like enough to matter, but it’s simply the same generic rule applying.
ISOs existed to correct for this failure in options, but the income at which AMT removes that protection hasn't been updated substantially since it was created so this protection no longer really covers exercise. I also don't really understand how it could be abused.
My change would be to have option exercise pay no tax on the spread, with all taxes payed on gains on sale.
As it is, people with massive wealth can exercise when there is no spread (because they have lots of cash already when the shares are granted to them) or they get special early exercise via the 83b election with the IRS and special access from their startup.
The people that get hit hardest by this are regular employees starting out that don't have lots of cash to exercise when the spread is zero.
If I receive $XX, would happily pay %Y of that to stay above board. If the IRS wanted to audit me, my personal war chest is now $XX-%Y greater than it was before and more than adequate to cover whatever past (accidental) tax errors I may have had in the past.
But paying taxes on it doesn't make it legal if it was illegal for non-tax reasons, it just makes it not-tax-evasion.
EDIT: Also profitable, taxes should be less then 90%. Just out of curiosity, isn't DeFi motivating users to defraud the IRS by promising 10% without reporting it as income?
EDIT: Come to think of it, if they are offering 10% without reporting to the IRS, which is obviously less than after taxes, would it be reasonable to assume all revenue / profits have not yet been reported to IRS as revenue?
Michael Morell, a former acting director of the CIA, has some things to say about the use of BTC in crime:
> Based on our research and discussions with industry experts, I have confidence in two conclusions: • The broad generalizations about the use of Bitcoin in illicit finance are significantly overstated. • The blockchain ledger on which Bitcoin transactions are recorded is an underutilized forensic tool that can be used more widely by law enforcement and the intelligence community to identify and disrupt illicit activities. Put simply, blockchain analysis is a highly effective crime fighting and intelligence gathering tool.
Source: https://casebitcoin.com/story/former-cia-director-finds-bitc...
Just because every one thinks they know how it works doesn't mean they know how it works, thats why I am questioning it. The truth is its pretty well known how tax evasion works but it doesn't use crypto.
Why even bother trying to make a mountain out of a molehill? You are building on a red herring.
Anyway thats a lot of idioms
And taxes on gifts are presumptively payable by the donor, not the recipient.
Disclaimer: not tax advice, YMMV etc.
Technically the profits are a result of the computer code of the system, though. If they want to stick to their arguments that smart contracts are the law, then it’s just a regular payout from the system according to the rules of the system. Business as usual.
However, I suspect when the losses are in the tens of millions they’ll drop the pretense of “code is the contract” and start pursuing other legal avenues. The loss was about 1% of the total money locked in Compound.
But a mistaken payment is also not income and threatening willfully to mis-file a 1099 is completely inappropriate.
If they want to get the mistaken payments back, they can ask nicely, they can send threatening letters, they can sue in court; but they can't use the IRS as their cat's paw because the only tax situation that fits the facts here is gift.
If one wants to claim it's a mistaken payment, then the recipient needs to return the tokens - their legal ownership was never conveyed.
Additionally, you can tell the intent is not that of a gift because the transferrer immediately wants it back.
If you keep it, and it's over the taxable limit, you have to report it and pay tax.
https://www.irs.gov/businesses/small-businesses-self-employe...
"Who pays the gift tax? The donor is generally responsible for paying the gift tax."
>For example, if you go on price is right, and you win a nice trip to tahiti
Those are prizes or winnings, not gifts. Totally different tax treatment.
* it was paid under the terms of a valid contract and need not be returned, and therefore is income (as this rests on the existence of a contract embodied by the protocol, it is not a gift, but an exchange for value.)
* it was an error and must be returned.
This seems to be an offer to settle for the former treatment if the recipients refuse the offerers claim that the latter is correct.
[1] A recent high-profile example where the facts and circumstances meant the wrongly wired funds were legally kept by the recipient: https://www.theregister.com/2021/02/19/citibank_money_mistak...
You can't just get rid of 100% of bad things about regulation and keep 100% of the good things about regulations. It reminds me of people who start open relationships. The upside sounds great, but there is a huge potential for downside and you may not fully appreciate that until it happens.
Other analogy that may be relevant are cases where casinos had slot machines with bugs awarding more prizes than the casino intended. In some cases/jurisdictions the courts ruled in favor of casinos, that the money was awarded incorrectly and should be returned; but in other cases/jurisdictions favored the winner, saying that the winner did everything right according to the rules of the game and should keep the winnings.
Also the Pepsi 349 Scandal in the Philippines in 1992 comes to mind [1]. In that case courts side with Pepsi, but I suspect that money has some inertia in Judges minds, so it was easy to side with Pepsi when it haven't paid yet. I suspect that if all that money had actually been automatically transfered to the many winners, then Pepsi would have a much harder task to convince the judges to make everyone transfer the money back.
Right?
If people signed a paper contract and a software system was designed to implement the contract, but the software system erroneously (through a bug) did something that went against the contract, that would be an erroneous payment. But if the code is the contract in a smart contract, bugs aren't contract errors.
The thing about crypto and ownership is that the blockchain is not the final arbiter of legal ownership, and that qualifier matters in a lot of cases.
[1] https://www.cnn.com/2021/02/16/business/citibank-revlon-laws...
[2] https://www.ktvu.com/news/woman-jailed-after-refusing-to-ret...
https://www.cnn.com/2021/02/16/business/citibank-revlon-laws...
if you think about money as a commodity, to be consumed, transformed, redeployed, similar to let's say... corn. what would you do, as a grain processor, if your supplier decided to show up with 500k bushels six months too early?
Your example mainly deals with futures (a type of financial instrument), mainly because you have agreed to pay within a tight schedule, which does not allow you to service them too early nor too late. Also, you forgot that money was invented to be widely fungible (okay, you can argue if this is true in this age but I argue it's still largely is) meaning that it can be (relatively speaking) easier to convert to corn, stocks, or generators (for example), which is different from corn which is only usable to a subset of people, meaning that you can only deal with those people which needs or wants corn (for example, you cannot easily get generators with corn).
additionally, the lenders to revlon took on both an expectation on money in the future and a non-zero default probability. maybe you can say it is fine for money in the future to be money in the present, making the layman assumption that the carry mechanism exists every single day from the date of accidental payment to the date of actual payment, but the lenders cannot also give up the non-zero default probability. that's their obligation in return for full future payment. but since payment and the obligation are inseparable, i personally see no difference between early payment with no obligation and shylock's taking of a pound of flesh and all the blood along with it.
Money is not a commodity; it's a quantity of fungible tokens (plus the other stuff that makes it money). Money doesn't expire; the closest thing is tax. Yes, it's worth a different amount as time goes on, but debts are generally money debts rather than value debts.
Those users will be doxxed anyway, they should just keep the money since they are on the hook for it anyway now.
Also, I wouldn't mind paying taxes on some free money since I still get to keep 66% of it.
It seems likely the IRS will subpoena them for the data regardless, and potentially seek conviction of tax fraud.
While I ironically enjoy that he thought the best way to intimidate cryptocoin people was to threaten them with taxation, it does highlight cryptocoin's primacy as a way to acquire nation currency without paying taxes on it.
Like the sketchy folks who run Tether and Binance at the same time.
Or Elon Musk tweets raising and lowering the value of Bitcoin by a significant amount.
Even Bitcoin itself is largely held by just a few people. It's just another tool for billionaires to get even richer.
That has strong implications the company is not reporting properly to begin with.
Wouldnt be a first for the capitalist class, but using your legally required tax as blackmail is... well.. Interesting.