Cointelegraph By Jason Morton
The taxation of cryptocurrency is no longer just a young person’s problem. That changed the day the United States Internal Revenue Service made cryptocurrency a focal point of enforcement and added a crypto disclosure question on its Form 1040. Unsuspecting parents with dependent children should be on guard. The IRS is looking for noncompliance, and crypto questions create a possibly perjurious trap. Noncompliance may be sleeping in the basements of many unwary parents.
As of October 2019, nearly 40 million Americans own some form of cryptocurrency, and the average account value is over $5,000. And Google Analytics data shows that over 40% of all crypto owners over the age of 18 are millennials, and nearly 17% are recently out of high school. It is the latter group that should concern parents. Those numbers equate to millions of crypto owners being college-aged or younger. This creates a potential “crypto trap” for parents who claim crypto-savvy young persons as dependents on their tax returns.
Related: Crypto could save millennials from the economy that failed them
Most parents claim their children under 18 as dependents, and some claim their children in college. Parents should use extra caution this tax filing season, as they may be stepping into an inadvertent nondisclosure and nonreporting of crypto “kiddie” income.
The IRS is watching
Over the last two years, the IRS has launched a campaign to snuff out crypto tax noncompliance. It is estimated that crypto users account for a $25-billion tax gap. And because cryptocurrency is taxed as “property,” unearned income may arise when dependents are trading crypto or buying and selling goods with crypto.
Related: Tax justice for crypto users: The immediate and compelling need for an amnesty program
The unsuspecting parent could have dependent children swapping crypto, trading crypto, buying and selling with crypto, and earning crypto from staking activities. In those instances, the dependent has both reportable capital transactions and unearned income — income that would be taxed at their parents’ marginal tax rate.
Related: Better regulation needed to stop crypto tax evaders from running wild
Unsuspecting parents, altogether unfamiliar with Bitcoin (BTC) and other digital assets, may never think to ask their children about crypto activities. It is easy to imagine a young person — under the shelter of their parents — engaging in crypto activities without telling Mom and Dad the details. It takes nothing more than a cell phone to do so. And why would young people? They are the least experienced group and the least likely to understand the tax consequences of cryptocurrency for themselves, much less their parents. It is difficult to imagine a young person coming to their parents at tax time and saying, “Hey, Mom and Dad, your CPA might want to know about my cryptocurrency at Kraken.” That is about as likely as Mom and Dad understanding decentralized finance, sidechains or crypto mining.
The “kiddie” tax
But parents with dependents should quiz their children about crypto activities. Income is one big concern. The tax code imposes a “kiddie tax” on the unearned income of children who are under 19 (under 24, if a student). The current threshold is only $2,200. When a qualified child has unearned income in excess of $2,200, the kiddie tax may be applied to the excess at the parents’ marginal tax rate instead of the child’s tax rate. The kiddie tax is reportable on Form 8615, “Tax for Certain Children Who Have Unearned Income.” If a parent fails to report a dependent’s crypto capital gains in excess of $2,200, then the parent is omitting taxable income from their tax return.
And a dependent child earning income is not hard to imagine. At the time of writing, Bitcoin has gone up nearly 300% in the past 12 months, and the second-most traded cryptocurrency, Ether (ETH), is up 700% for the same time period. One may say that BTC and ETH are too rich for the young dependent, having spot prices of around $37,000 and $1,600, respectively, but consider others: Polkadot’s DOT, number three by market capitalization, is up over 300% since December, and its price is just $20. Cardano’s ADA, number six by market cap, rests at about $0.45, and it is also up 700% for the same time period. If Son or Daughter buys or sells goods with crypto, and the fair market value of those goods exceeds basis, then Mom and Dad may have a taxable transaction to be concerned with. By the end of it, parents may need to parentally control their child’s balance sheet.
The IRS has done little to advise parents with dependent children of this compliance trap. Unknowing parents will likely stay the course at tax time, giving little thought to Bitcoin or altcoin headlines. Yet if their dependent child holds it, trades it, buys and sells with it, or earns it through staking or otherwise, parents could well be filing a false tax return. Upon audit, things could get even stickier. There is no indication that the IRS is going to be forgiving about crypto noncompliance. Again, there is a $25-billion tax gap to fill — large enough to be intolerant.
The cryptocurrency disclosure question
Perhaps a bigger underlying problem lies in the cryptocurrency disclosure question on Form 1040. Here, too, unsuspecting parents may be in danger. The question asks:
“At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Ward Cleaver would certainly look to June Cleaver and say, “Of course we didn’t, honey,” without a thought to The Beaver.
There is no guidance on what a “financial interest” means or how far it extends. If a parent is required to report the crypto income of their dependent, is that parent also required to answer “yes” to the cryptocurrency disclosure question? That question remains unanswered. But looking at it through the lens of current crypto tax enforcement policy, the answer gets murkier. The IRS may answer this question consistent with its overall crypto tax policy goals. It seeks to know about crypto positions, and it may not be satisfied only knowing obscure “kiddie” crypto income reported through an IRS Form 8615. The IRS may want to know more.
If a parent takes “ownership” of a dependent child’s unearned income (for tax purposes), perhaps that same parent takes similar “ownership” of the crypto positions of his or her child (for disclosure purposes). After all, it is not the parent’s income they must report on IRS Form 8615, it is the child’s. It may not matter that the parent does not own the crypto account outright so long as the account is owned by their dependent child and the parent has knowledge of it. Knowledge is also a tricky complication. Presently, most crypto exchanges do not issue informational tax forms to users; rather, parents must rely on their children for answers.
The kiddie tax and crypto
The policy reasons behind the kiddie tax may provide answers. The kiddie tax was implemented, in part, to close tax loopholes — that is, eliminate the retitling of investment property into the names of dependent children in an effort to avoid paying higher tax rates. Likewise, a similar policy argument could be made in relation to cryptocurrency disclosures. For example, if a parent were a large holder of cryptocurrency and an avid trader, they — without a disclosure obligation — could simply claim the accounts under the name of their child and avoid the crypto disclosure question entirely. That is, obscurely reporting the capital gains from crypto activities on Form 8615 but shielding the accounts from disclosure. It is unlikely the IRS would find such a tactic amenable.
Unfortunately, a rhetorical question does not answer whether a parent must disclose their dependent child’s crypto accounts on Form 1040. Taxpayers are left guessing until more guidance is published or tax enforcement answers it. The idea that a parent would need to disclose the financial positions of a child is not a foreign one. Under the Bank Secrecy Act, minor children have a foreign bank account reporting, or FBAR, obligation if their foreign accounts meet certain thresholds. In that instance, if the child is unable to file the FBAR themself, the legal guardian or parent must file it for the child. If the Treasury Department expects disclosure assistance in one context, it is not difficult to see how they might expect it in another.
Income and voluntary disclosures are at the forefront of the IRS’s crypto tax initiative, and both are potentially implicated by the kiddie tax and the 1040 crypto disclosure question. Parents need to remember that they sign tax returns under penalties of perjury. These days, Johnny is doing more than mowing lawns for extra “coin” in his pocket.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Jason Morton practices law in North Carolina and Virginia and is a partner at Webb & Morton, PLLC. He is also a judge advocate in the Army National Guard. He focuses on tax defense and tax litigation (foreign and domestic), estate planning, business law, asset protection and the taxation of cryptocurrency. He studied blockchain at the University of California, Berkeley and studied law at the University of Dayton and George Washington University.
Traders speculate that Bitcoin’s price may continue to trade sideways for now
Cointelegraph By Benjamin Pirus
Bitcoin’s price has declined in recent days. While it has rebounded from its weekly lows, the asset’s trajectory remains uncertain says CryptoWendyO, a crypto trader on Twitter.
“The daily timeframe is not looking great as we are having trouble sustaining $50K,” she told Cointelegraph on Friday. “I am feeling like we will get a run to $51.6[K].”
“From there I would be cautious as rejection could lead back to the $50K -$45K range. A break down there could be a swift wick to $42-38K with a glorious recovery. Invalidation would be a sustained consolidation at $52K.”
After hitting record highs of approximately $58,360 in February, Bitcoin (BTC) dropped down to roughly $43,015 in subsequent days, based on TradingView data. The asset then rebounded up to about $52,660, before continuing its downward price action below $50,000. Bitcoin is trading at roughly $49,020 at time of publication.
Cheds, a trader on Twitter holding his CMT level I certification, expects “more consolidation from BTC above that key 42k level,” he told Cointelegraph on Friday. He also tweeted a chart of his range expectations.
“The big question is if the recent 27% correction is enough to bring us to a new high,” Cheds said. “In the meantime we will watch a tightening range on the daily of lower highs and higher lows.”
A number of technology stocks have also suffered price decline recently.
Bitcoin Support at $47K “Very Strong,” Glassnode CTO Asserts After Price Falls
Bitcoin has an extreme potential to hold $47,000 as its support level, according to Rafael Schultze-Kraft, the co-founder/CTO of blockchain analytics platform Glassnode.
The data scientist studied the number of existing bitcoins that moved within the said price bucket and placed it against other price levels. He noted that the “UTXO Realized Price Distribution” near the $47,000-level was comparatively higher than the rest in recent times, stressing that the range prompted the Bitcoin network participants to become more active than usual.
In retrospect, a higher number of coins moving near a specific level signifies more trades. It is possible that traders and investors sold or bought more bitcoins near $47,000 than any other level around it. Given the cryptocurrency’s recent uptrend, it is safe to assume that most trades near $47,000 had a bullish outlook, which made the level ideal support for Bitcoin.
“[We have a] very strong on-chain support at $47k – around 500,000 BTC have been moved at that level,” noted Mr. Schultze-Kraft. “It is important that we hold it; otherwise, we could see low forties quickly before the next upwards movements.”
Offsetting Yield Fears?
The statements appeared as Bitcoin bled through an unaccustomed macroeconomic environment. The benchmark cryptocurrency was among the biggest losers this Thursday as Federal Reserve Chairman Jerome Powell ignored offering any future guidance on rising bond yields in the US.
Bitcoin closed the previous session 3.95 percent lower and opened Friday declining further as it logged an intraday low near $46,219. The cryptocurrency pushed against bearish attempts and attempted a recovery above $47,000. At press time, it was still wobbling around the so-called on-chain support level.
Traders anticipated that Mr. Powell would boost the Fed’s bond-buying program to longer-dated Treasurys to contain interest rate returns on the benchmark 10-year note. Lower yields have benefited Bitcoin throughout 2020, so it was safe to assume that the Fed’s extended assistance would aid the cryptocurrency’s bull run.
But with Mr. Powell choosing to remain mum, the Bitcoin market entered an uncertainty phase.
“Speculation is harder when there is no clear upwards trend,” said Alex Krüger, an independent market analyst. “There are multiple major market drivers pulling in opposite directions, and/or trades are crowded. As is the case right now.”
“I’ve got bids down to 45k,” said another analyst. “I still definitely lean towards the low being in — this drop doesn’t surprise me at all.”
Institutional Support for Bitcoin
Ki-Young Ju, the CEO of CryptoQuant—a South Korea-based blockchain analytics platform, said that institutional capital into the bitcoin market remains higher near the $46,000-47,000 range. As of Friday morning in London, about 12,000 BTC flowed out of Coinbase Pro wallets to enter its custodian addresses, reflecting accumulation via over-the-counter desks.
“Also,” Mr. Ju added, “it seems most US institutions haven’t sold any Bitcoin since their OTC deals. For example, custody wallets from Coinbase outflows on Dec 23, 2020 [show that] no BTC moved since then.”
Bitcoin was trading at $46,500 at press time.
Former Bitcoin opponent says crypto is an effective hedge against currency debasement
Cointelegraph By Sam Bourgi
Financial industry veteran George Ball believes investors would be prudent to allocate a “small part” of their portfolio to cryptocurrencies — marking a major departure from his previous stance towards digital assets.
In an interview with Yahoo Finance, Ball described cryptocurrencies like Bitcoin (BTC) as an “attractive” option for investors looking to hedge against currency debasement. His comments came as Congressional lawmakers mulled a $1.9 trillion relief bill that would put provide up to $1,400 in direct stimulus payments to Americans impacted by Covid-19.
“I’ve never said this before, and I’ve always been a blockchain, cryptocurrency and Bitcoin opponent. But if you look now, the government cannot stimulate markets forever, the liquidity flood will end,” Ball said.
“With the cryptocurrencies, I think there is a fundamental hydra-headed shift that makes them attractive as a part, a small part, of almost any portfolio.”
If higher inflation leads to currency debasement over the long term, Ball said, “then the cryptocurrencies have a great deal of allure.”
Ball, who served as Chairman of Prudential Financial between 1982 and 1992, began to change his tune on Bitcoin in August 2020 when he told investors that now was the time to seek exposure to the digital asset. At the time, one Bitcoin was worth roughly $12,000. It’s presently valued at just over $48,000.
Wall Street veterans like Ball are warming to cryptocurrencies as they’ve watched Bitcoin pull a 5x move in less than six months. Institutions like JPMorgan and Morgan Stanley are eyeing the Bitcoin market, whereas firms like BNY Mellon have already started to custody the digital asset.
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