This Just In: Crypto Transactions Aren’t Tax Free

Patrick White, CEO, Bitwave

“I don’t always believe people that say they are surprised about having to pay taxes on crypto. There’s a field on your tax form to say where you’ve made money doing illegal things. If you sell drugs, there’s a place to report how much money you’ve spent selling drugs. The IRS doesn’t care. Everything is taxed in this country.”

There is no such thing as too many crypto transactions when it comes to accounting purposes according to Patrick White, CEO of Bitwave. Bitwave operates the software that does the accounting for major blockchain companies and retailers who have taken crypto as payment.

White says that the high volume of crypto transactions aren’t coming from individuals sending digital assets back and forth, but rather from the companies that host the infrastructure of these transactions.

“It’s not just trading, trading is fun and we all love the rat race that is trading, but where it’s a lot more interesting is how some of our customers who are in the NFT space are seeing millions of revenue transactions a month.”

These sites like OpenSea, a client of Bitwave, are seeing sky high amounts of these types of transactions. When asked about the cost of accounting for an individual doing ten-thousand trades a month, White laughed.

“Ten-thousand trades a month is nothing,” he said.

White spoke of an instance which is seemingly a common occurrence in the crypto world. “We had a customer who when we were running their [transactions], I couldn’t figure out [an issue] with one of their months. I went to go look at the data, and they had turned on a Binance bot and without even realizing it, they didn’t know this, they accidentally had 200,000 trades in a month. The volume is incredible.”

When asked about how digital assets have impacted the accounting world, White stressed that the amount of transactions have resulted in companies appearing larger than they are from a transactional-perspective. According to him, some of his clients are doing as many transactions as some of the largest companies in the world.

“[One client] is a one-year old company that is doing the volume of a sixty year-old retail business, it’s unheard of.”

When asked further about the difference of cost in accounting digital assets versus dollars, White explained that it isn’t much different than how larger companies have maintained their books for some time.

“No matter what, if you are a high frequency trader and you’re making hundreds of millions of trades a year, you will need software to deal with that,” said White. “I wouldn’t say that [the amount of transactions] are increasing costs across the board, it is a cost that you would already be expected to [have].”

When asked about the apparent vacuum of crypto-native accountants, White seemed to cast blame on the approach of the information. When hiring, he says he finds more value in people with engineering experience over accounting experience, and blockchain experience over anything else.

“[Other accountants] are trying to apply finance 1.0 things to this crypto world,” said White. “We look for good engineers. A good engineer can figure anything out, a bad engineer with accounting experience can’t. We’re looking for blockchain experience, as blockchain [technology] is more difficult than accounting in many ways.”

While most businesses will file extensions this time around and finish their taxes in October, White believes that blockchain accounting will become more widespread as new firms leverage the infancy of the space and settle into their niches.

“Cottage industries will come up in order to enable the IRS,” said White. “I don’t expect the IRS to build this technology or this understanding in-house. There will be people and businesses that will do it for them.”

With the IRS’ decisions about taxing crypto having the potential to change at any notice, White stressed the necessity for malleability when developing this kind of accounting technology in such an unpredictable space.

“We’ve designed Bitwave from the very beginning to be able to rapidly adjust to the new laws that are coming out,” he said. “Even back then, it was very obvious that we couldn’t build this tech in such a way that it is inflexible.”

Tether is Now So Big, Its Collapse Could Disrupt the Short-Term Credit Markets

More than $62.5 billion worth of Tethers have been printed in the last few years to facilitate liquidity in the crypto markets. The system has worked because the company behind Tether had long claimed that each unit of the digital currency was backed somewhere by a real dollar in a bank account.

That was determined false. “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie,” wrote the New York State Attorney General in February after the regulator announced a settlement with the company. “These companies obscured the true risk investors faced and were operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system.”

Despite the characterization, Tether has continued to be the glue that makes the global crypto market hum. And their size is now so big, that it’s no longer just a crypto problem.

According to the Federal Reserve Bank of Boston, Tether now poses a risk to all short-term credit markets. The central bank listed it as an example of “new disruptors” that pose financial stability challenges.

Eric S. Rosengren, the CEO of the Boston Fed, said “There are many reasons to think that stable coins, at least many of the stable coins are not actually particularly stable and actually have some of the same features as money market funds. The difference is prime money market funds have been losing market share but these stable coins have been growing very rapidly in part because of their use along with the cryptocurrency market.”

On Tether in particular, he said, “While [Tether talks] about being stable, if you look at the set of assets that are there, it includes corporate bonds, secured loans, commercial paper, in effect this is a very risky prime fund. Prime funds would not be able to hold all these assets.”

Tether has drawn enhanced public scrutiny in recent months after releasing the following breakdown of its assets. The digital asset company that once claimed all Tethers were backed by dollars, revealed that less than 3% of them were actually backed by dollars.

Tether’s riskiness was also the subject of a recent segment on Jim Cramer’s Mad Money show on CNBC:

deBanked first shed light on the Tether mystery more than two years ago in a story that questioned what drove the cryptocurrency bull market of 2017.