Tax AMA - 2018 Tax Season - Ask Me Anything

in bitcoin •  18 days ago

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Do you have a U.S. cryptocurrency tax question? Ask me anything! Even if not crypto related, feel free to ask.

It's been a while since I posted. I had a lot of fun with this AMA the last time I did this, and received a few solid questions.

Terms

Feel free to ask a basic question and I will reply with a basic answer, and a link to any prior articles I may have written on the matter (if related to crypto).

Note: The information obtained through the AMA is not a substitute for consulting a tax advisor. This AMA does not create a client relationship between the author and any reader. This is not specific tax advice, just general guidance with to help the general public understand the basic U.S. tax consequences of crypto investing. By posting a question, you acknowledge these terms and you agree to hold me harmless for any adverse consequence of relying on any response (including responses of other posters). Again, consult your own tax advisor before taking any action.

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There are tons of people who are curious about the tax consequences of opening/using a Maker CDP. It's one of the most common questions asked on /r/makerdao and the Maker Rocket Chat. Although I don't have any CDPs, I've been curious myself.

The technical steps are as follows:

  1. Wrap your ETH into WETH, which I argue should probably not be a taxable event. (They have the same economic properties, just different technical ones)
  2. Wrap your WETH into PETH (Pooled ETH) which is a token representing a share in all the collateral that the MakerDAO system has. Since the pool can grow or shrink, and thus has different economic properties, I'm thinking this is a taxable event. I've heard arguments against that, though.
  3. Lock your PETH into a CDP. This is probably not a taxable event.
  4. Take out a DAI loan from the CDP. Here's where my layman's knowledge ends. I would hope that it's legally considered a loan, but it's not in USD, or even technically a currency.
  5. Repay the loan, which requires briefly purchasing MKR to pay the interest on it. Also, the effective principle will have fluctuated--you might have taken out the loan when DAI was trading at $1.02, and now it's $0.97.

This is not counting the possibility of one's collateral falling in value, whereupon some or all of it will be repossessed by the system. I'm sure there's something in the tax code somewhere about this sort of thing, but I haven't a clue where.

EDIT: Also, can you deduct the interest on the CDP--say, if it was owned by your business?

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Based on the description, this is what I would think (but I would need to review the terms 100% to be certain on this). Below is from the perspective of the borrower itself.

  • I would say ETH-WETH is a non-taxable event if WETH is an alternative digital representation of ETH and they trade in/out 1 for 1. No property has actually been sold.
  • I would say WETH-PETH-CDP is a security deposit. If the borrower would end up with more/less ETH when withdrawing - deemed loss of ETH or realized gain for free ETH . The loss would be nondeductible if the purpose of the loan is non-investment, non-business ( is personal loan collateral).
  • The existence of a loan for U.S. tax purposes would depend on whether there is set maturity dates, interest payments, recourse against borrower. Let's assume this applies. For more reading check out Roth Steel Tube Company V. Comm. Sounds like a loan on the surface.
  • Repaying the loan at a USD premium could be treated as deductible original issue discount on the loan for the issue price versus redemption payment difference (if the loan is personal this is not deductible). However, re-payment of the DAI loan at a discount could trigger cancellation of debt income. All other stated interest is potentially deductible (unless personal).

See disclaimer above in original post (but you already knew that!).

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Thanks for the in-depth answer.

  • ETH-WETH is definitely traded in/out 1 for 1.
  • Interesting about PETH. Considering that some people are facing potentially massive capital gains by opening a CDP with early-bought ETH, it'd be worth it for them to consult a professional to be sure.
  • Even more interesting, CDPs sorta fit two out of those three. There is definitely interest, which can be paid at any time, and if the collateral falls in value, it will be seized. But there's no set maturity date. Which makes me wonder if it's not a loan, and instead just a fancy margined long position.

If you're curious, the Maker team goes into more detail in its whitepaper: https://makerdao.com/en/whitepaper The Maker team itself has not released any tax guidance of its own, for understandable reasons.

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I will have to look into this, it is fascinating. I would argue that a margin call is a maturity date and liquidation of positions would give rise to taxable events. Margin interest in typical investing is deductible.

Great to see you in time for the season! Did we ever get clarity on the EOS ICO in terms of the token exchange when the mainnet went live? I remember you mentioned that it was still uncertain if it would be or not be a taxable event.

Posted using Partiko iOS

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Hi, hope all is well!

I plan to treat as a nontaxable event. The ER 20 token was a tradeable digital representation of the genesis mainnet right to EOS tokens. And folks holding EOS on exchanges at the time have the same digital right that they did the day before/after the freeze.

And I hypothesize, if SEC ever treated EOS as a security, I presume they would link the pre-freeze ER 20 token and the post-freeze EOS mainnet token as the same asset, which would support the position.

Linking relevant article that you likely have seen in the past (and I note there is uncertainty at the time of the article): https://steemit.com/eos/@cryptotax/eos-token-swap-u-s-tax-considerations

The good news is, more brainpower is allocated to cryptocurrency and hopefully arguments emerge that support my common sense approach to this all. One research firm provided an interesting argument that chain splits are analogous to free samples and income is not realized until a taxpayer exhibits dominion & control over freely received assets. In RE: the EOS mainnet, if the EOS mainnet token was treated as income upon subsequent sale/disposition post-freeze, this doesn't address the issue of the cost basis locked up in the ER 20 token at the time of the freeze.

On a separate topic, did you see this? Pretty interesting: https://www.coindesk.com/ey-aims-to-make-it-easier-to-calculate-crypto-taxes-with-new-tool

To listen to the audio version of this article click on the play image.

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