100 Days of Learning Crypto and Taxes

Day #95

Cryptocurrency Investing, Speculating, and Day Trading

Tuesday 08/09/2022

 

I personally am an investor in cryptocurrencies—specifically Bitcoin, Ethereum and Bitcoin Cash. I attempt to buy low/sell high, and hold onto my cryptocurrency holdings for the long-term rise in value I anticipate. I typically only have a handful of trades each year, as I mostly buy and hold.

Some people speculate with cryptocurrencies looking to profit from the short-term large price volatility in the markets. Their time horizons are  measured in days, weeks and months—but normally not longer than that. They might have dozens or hundreds of trades in one year.

Day traders are full-time investors who typically get into/out of a cryptocurrency market within the same day. They look to profit on the minute-by-minute or hourly price volatility of the large intra-day price swings. These day traders typically have thousands of cryptocurrency trades within one year, sometimes across multiple cryptocurrency exchanges.

All investors must keep track of every trade they make in a tax year.

 

Investor definition from the Oxford Dictionary

“A person or organization that puts money into financial plans, property, etc. with the expectation of achieving a profit.”

 

Speculator definition from Investopedia

“Speculation refers to the act of conducting a financial transaction that has substantial risk of losing value but also holds the expectation of a significant gain. Without the prospect of substantial gains, there would be little motivation to engage in speculation.”

 

Day Trader definition from Investopedia

“Day traders are traders who execute intraday strategies to profit off relatively short-lived price changes for a given asset. Day traders employ a wide variety of techniques in order to capitalize on market inefficiencies, often making many trades a day and closing positions before the trading day ends.”

 

The IRS considers any purchase/sale of a cryptocurrency a sale of property, subject to the short-term and long-term capital gain rules for property sales. It is the responsibility of each investor to report the full-year transactions on their tax return.

If you only trade on one exchange like Coinbase or Kraken, they will provide the necessary year-end gain/loss report to adequately detail those cryptocurrency transactions on your tax return. They also seamlessly import that year-end gain/loss information into tax software like TurboTax®.

If you have hundreds or thousands of cryptocurrency trades each year, possibly across many different exchanges and wallets, then you might benefit by using one of the many online Cryptocurrency Tax Software/Portfolio Managers. Three of these leading products are:

I personally use CoinLedger and CoinTracker and they are great products for my needs. I have many tax professional friends who use Koinly and say it is very good. All three can organize all of your yearly cryptocurrency transactions into one consolidated year-end gain/loss report. They synchronize with your exchange(s) and also let you enter specific trades that might not have been completed through a traditional exchange. They then generate the IRS forms and data files you will need, to report the transactions on your yearly tax return, by importing information into tax software.

    • IRS Form 8949 that lists and details each trade
    • IRS Form Schedule D that summarizes/separates the trade categories and results between short-term and long-term gains/losses
    • IRS Schedule 1 that summarizes the ordinary income from cryptocurrency rewards, survey rewards, hobby mining income, etc.
    • The CSV file (comma separated value) that allows all the transactions to be imported into many different types of tax software.
    • The TXF file (tax exchange format) that is needed to import into some tax software like TurboTax Desktop®, Lacerte® and ProSeries®.

The exchanges and online cryptocurrency portfolio tax software have improved each year—to help report your year-end gain/loss transactions.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #94

Why Would I Write a Book about such a topic as Cryptocurrency and Taxes?

Monday 08/08/2022

 

I have been registered by the IRS as a professional tax preparer since I became a Registered Tax Return Preparer on 11/02/2012 and an Enrolled Agent on 10/14/2016. I have helped literally thousands of people with their taxes while working at H&R Block my first four years and with Intuit as a TurboTaxLive® Credentialed Tax Expert the last five years.

When I take a support phone call from a TurboTax® customer I have to be prepared to answer any question about Federal and State taxes, for the present and previous tax years. In the Summer of 2019 the IRS released the draft of this Schedule 1, and for the first time indicated that every taxpayer would have to answer this question about their cryptocurrency activity.

“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency? ”

When I saw this form I knew I only had a few short months from that Summer of 2019 to January of 2020 when the new tax season would begin. I knew absolutely nothing about cryptocurrency at that time and how the IRS planned to tax transactions involving cryptocurrency.

A week later I learned how to open my Coinbase account and immediately invested $100 in Bitcoin to learn that process. Then a few weeks later I purchased an item online with Bitcoin, and an item in person with Bitcoin. I also immersed myself in studying anything I could find about cryptocurrencies, Bitcoin, and how the IRS planned to tax this activity. By January 2020 I was prepared to help customers with their Crypto questions.

Three years later now in the Summer of 2022 many taxpayers are still confused, anxious and frustrated with their cryptocurrency investments and how to report those on a yearly tax return. I see and talk to the TurboTaxLive® customers every week about these issues. 

The most prominent cryptocurrency exchanges have gotten much better at generating year-end gain/loss reports and working with software companies like Intuit to seamlessly import that year-end gain/loss report into TurboTax®. Unfortunately many other cryptocurrency exchanges and online crypto wallets are woefully inadequate in how they report year-end crypto transactions, to help the taxpayer report these on their tax return.

I felt there was still a need to fulfill with a book about Cryptocurrency and Taxes—to help normal taxpayers understand cryptocurrency issues and how then you must report that activity each year on a tax return. The book will cover these topics and more to provide that understanding.

    • What is Bitcoin?
    • Is Bitcoin an Investment or Money or Both?
    • What are cryptocurrency exchanges that help you to acquire Bitcoin?
    • How does Bitcoin actually work?
    • What is Bitcoin Mining and is it really harming the environment?
    • How do Bitcoin transactions work?
    • What is the fractional accounting I had to learn, when I purchased my $100 of Bitcoin and then used that to buy two products?
    • What were my gains or losses on this Bitcoin activity I had in 2019, and how was that shown on the 2019 IRS tax forms?
    • What factors generate the price of Bitcoin and cause such price volatility?
    • What are the reliable news sites on the Internet to learn about Bitcoin?
    • The 14 books I used for research will be shown in a “visual” bibliography
    • The 32 cryptocurrency experts I learned from are shown with their photos, links to their YouTube videos, and explanations of their expertise.
    • Why is the Bitcoin protocol designed to increase Bitcoin’s value over time?
    • What is Sound Money and how has money evolved throughout history?
    • Why is Bitcoin referred to as the “Digital Gold” and how it compares to Gold?
    • What is all the IRS Guidance that has been published that defines how cryptocurrency is categorized as a property investment and therefore taxed?
    • How the IRS is auditing taxpayers for cryptocurrency reporting compliance.
    • What are Altcoins—all of the cryptocurrencies developed after Bitcoin.
    • What are the over twenty types of cryptocurrency transactions and how then are they taxed by the IRS and reported on your tax return?
    • Why are countries moving to make Bitcoin legal tender in their countries?
    • Why are companies holding Bitcoin on their balance sheets?
    • What legislation is Congress working on to regulate cryptocurrencies?
    • What is the role of Central Banks in the creation of money, how do they affect inflation, and how do they plan to have their own digital currencies to compete with Bitcoin?

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #93

Know Your Customer (KYC) Rules and Custodial and Non-Custodial Exchanges

Sunday 08/07/2022

 

Know Your Customer rules for a custodial (hosted) cryptocurrency exchange like Coinbase, involves you giving them an image of your driver’s license, your address, cell phone number, and linking to a credit card or bank account. You must then create a username, password, and double-factor authentication method on your cell phone—all to be used every time you log into your Coinbase account. They control access to your account.

See this Investopedia article Know Your Client (KYC) at:

https://www.investopedia.com/terms/k/knowyourclient.asp

 

For many purists in the cryptocurrency community, this sort of KYC requirement on custodial, hosted exchanges defeats the purpose of cryptocurrencies. Purists want cryptocurrencies to be a means of peer-to-peer money exchange, without the permission or requirement of a third-party being involved in the transactions. Non-custodial exchanges fill this need, as they do not require their customers to provide or adhere to KYC rules.

This is a list of the top 10 cryptocurrency exchanges in the world, ranked by 24-hour trading volume. Nine of them require KYC information. 

 https://coinmarketcap.com/rankings/exchanges/

 

Know Your Customer exchanges will also be required in 2023 to report cryptocurrency transactions to the IRS at the end of each tax year. Huobi Global is the only exchange in this top ten list, that does not require KYC.

There are also Anti-Money Laundering (AML) regulations that enhance the KYC rules. See this article:

The 2022 Guide to KYC/AML for Crypto Exchanges & Wallets at:

https://getid.com/aml-kyc-crypto-exchanges-wallets/

 

I am an IRS-licensed Enrolled Agent, that passed the FBI background and fingerprint checks to get my EFIN (Electronic Filing Identification Number) so I could e-file my Client’s tax returns each year. So I do not mind the KYC rules I had to adhere to when I setup my Coinbase account. 

The IRS already monitors every tax return I prepare for compensation, and the FBI can run my fingerprints anytime they wish. I personally don’t want to keep track of the Private Keys for the Bitcoin, Ethereum and Bitcoin Cash I own. Coinbase does that for me and guarantees they won’t lose them, backing up that guarantee with insurance.

The U.S. Government will also never demand that Coinbase lock my account, as I am careful enough to never upset the U.S. Government. If I did, they would take away my Enrolled Agent license, and much worse.

This is the argument for and against custodial, hosted exchanges like Coinbase, that must adhere to KYC rules in the U.S. That is why more sophisticated cryptocurrency investors only temporarily keep their crypto assets on an exchange like Coinbase, to only purchase and sell those crypto assets. They then move those crypto assets off/on Coinbase to/from “cold storage” solutions—like a USB stick drive they store in a safe deposit box.

Bitcoin.com offers a smart phone based wallet ( at https://wallet.bitcoin.com/ ) to buy, sell, trade and invest with one app. It provides more freedom for the user to manage the account and control the account access, as compared to Coinbase. Some crypto investors like this added flexibility.

Ledger and Trezor sell USB hardware wallets to transfer your cryptocurrency holdings from exchanges onto these storage devices. See at:

https://www.ledger.com/         and             https://trezor.io/

What cryptocurrency exchange you use and what physical crypto wallet you use, is all about personal preference. Do your homework and rest easy.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #92

Is Bitcoin Legal and Taxed in the top 15 World Economies?

Saturday 08/06/2022

 

These are the 15 top world economies ranked by GDP (Gross Domestic Product) and how Bitcoin is currently being taxed in those countries.

  1. United States:               $20.89 trillion        Bitcoin is taxed as Property as capital gains
  2. China:                               $14.72 trillion         Bitcoin is illegal to buy/sell/mine in China
  3. Japan:                               $5.06 trillion          Bitcoin is taxed as Property in Japan
  4. Germany:                       $3.85 trillion           Bitcoin taxed if held short-term, not long-term
  5. United Kingdom:        $2.67 trillion           Bitcoin taxed as capital gains upon disposal
  6. India:                               $2.66 trillion           Bitcoin is taxed at 30% on profits and income
  7. France:                            $2.63 trillion           Bitcoin is taxed as capital gains at 30%, 45%
  8. Italy:                                $1.89 trillion            Bitcoin is only taxed above certain Euro levels
  9. Canada:                          $1.64 trillion            Bitcoin is taxed as income or capital gain
  10. South Korea:                $1.63 trillion            Bitcoin is not taxed now, but will be in 2023
  11. Russia:                            $1.48 trillion           Bitcoin is taxed at 20%
  12. Brazil:                             $1.44 trillion           Bitcoin is taxed as capital gains above a level
  13. Australia:                       $1.32 trillion           Bitcoin is taxed as capital gains
  14. Spain:                              $1.28 trillion           Bitcoin is taxed as capital gains
  15. Indonesia:                     $1.05 trillion           Bitcoin is taxed with a VAT and capital gains

China is the only country on this list that has banned Bitcoin, with the others having current or planned tax policies regarding Bitcoin transactions. The nine countries listed below currently ban Bitcoin and cryptocurrencies, with many other putting various restrictions on digital currencies.

Algeria, Bangladesh, China, Egypt, Iraq, Morocco, Oman, Qatar, Tunisia

See this 67-page report Regulation of Cryptocurrency Around the World: November 2021 Update by the Law Library | Library of Congress:

https://tile.loc.gov/storage-services/service/ll/llglrd/2021687419/2021687419.pdf

 

Some industry experts expect the number of global cryptocurrency owners to reach 1 billion by the end of 2022, of the 7.9 billion people in the world. That’s 12.66% of the worldwide population that owns cryptocurrency.

The Market Capitalization of Bitcoin was $443 billion on August 6, 2022, with about $22 billion trading volume in the last 24-hours that day. See this CoinMarketCap web site for the updated statistics.

https://coinmarketcap.com/currencies/bitcoin/

 

In the 13 years since Bitcoin began in 2009 as an obscure digital money, it has gained a worldwide following and a market capitalization larger than some famous U.S. companies with household brands. It’s larger than:

    • Exxon Mobil, Walmart, Proctor & Gamble, MasterCard, JPMorgan Chase, Home Depot, Pfizer, Coca-Cola, Bank of America, Pepsico, Costo, Merck, & McDonalds

See this Largest Companies by Market Cap at:

https://companiesmarketcap.com/

 

Many very smart economists, financial professionals, corporate CEOs, and investment bankers believe Bitcoin will someday be the new world reserve currency—acting as the universal, Internet-based, global and political standard of value and settlement, across time and geography. Meaning all value will be priced according to its worth in Bitcoin. For example:

    • One ounce of Gold worth so much Bitcoin, to then be converted to the equivalent of a country’s fiat currency, like to the U.S. Dollar, Euro, Pound or Yen.
    • The relative value of a company’s market capitalization will be expressed in Bitcoin value. The relative value of a country’s GDP will be expressed in Bitcoin.

As feet/meters, pounds/kilos are universal measurements of distance and weight—Bitcoin will be a universal definition of value and settlement.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #91

Legislation in the U.S. Congress to Enhance the Use, Acceptance and Regulation of Cryptocurrency

Friday 08/05/2022

As explained in earlier Blog posts, the IRS has issued much guidance to define how cryptocurrency transactions are to be taxed and reported each year on the Form 1040 U.S. Individual Income Tax Return. 

The Congress, though, has not passed much useful legislation to advance the use, acceptance or regulation of cryptocurrency. Some proposed bills have been introduced recently that could help.

 

The Virtual Currency Tax Fairness Act of 2022 was introduced in the U.S. House of Representatives as H.R. 6582 and a similar bill in the U.S. Senate in 2022. See the text of the proposed bills below.

https://www.congress.gov/117/bills/hr6582/BILLS-117hr6582ih.pdf

https://www.banking.senate.gov/imo/media/doc/virtual_currency_tax_fairness_act.pdf

The House bill would exempt from gross income the gains from any disposition of virtual currency at or below $200. The Senate bill uses a lower threshold of $50. If passed, these new laws would encourage the use of cryptocurrency to pay for relatively inexpensive everyday goods and services. Currently most U.S. Taxpayers don’t pay for goods and services with their cryptocurrency holdings, as every single transaction, no matter how small or large, is subject to the short-term and long-term capital gain tax calculations. Every cryptocurrency transaction is currently a potentially taxable property sale to be reported on your yearly tax return.

 

The Infrastructure Investment and Jobs Act of 2021, created new reporting requirements for cryptocurrency exchanges to report yearly transactions to users and the IRS. Under Section 80603. Information reporting for brokers and digital assets it requires exchanges like Coinbase to report cryptocurrency transactions on a 1099-B form, for tax years beginning as of January 1, 2023. See the bottom of page 911 of 1039.

https://www.govinfo.gov/content/pkg/BILLS-117hr3684enr/pdf/BILLS-117hr3684enr.pdf

Exchanges like Coinbase, Robinhood Crypto, and Kraken—already do a very good job generating year-end cryptocurrency gain/loss reports—and they seamlessly import that information into tax software like TurboTax®.

Many lesser know cryptocurrency exchanges and smart phone wallets, do a horrible job of reporting year-end gains/losses. So this requirement in 2023 will be a very good, industry-wide requirement for year-end transaction reporting, to help Taxpayers comply with IRS Crypto reporting rules.

See this article 2023 IRS Cryptocurrency Reporting Requirements

https://www.strausstroy.com/articles/2023-irs-crypto-reporting/

 

The Responsible Financial Innovation Act, introduced in the U.S. Senate on 6/7/2022, creates a regulatory framework for digital assets that will be overseen and managed by the Commodity Futures Trading Commission (CFTC). Some key points of the proposed legislation are:

https://www.gillibrand.senate.gov/imo/media/doc/Lummis-Gillibrand%20Section-by-Section%20%5bFinal%5d.pdf

    • Creates a clear standard for determining which digital assets are commodities and what types are securities, providing clarity and structure for businesses and regulators.
    • Creates clear definitions.
    • Assigns regulatory authority over digital asset spot markets to the CFTC.
    • Defines and creates requirements for stablecoins that will protect consumers and markets and promote faster payments.
    • Creates an advisory committee to develop guiding principles, empower regulatory agencies and advise lawmakers on fast-developing technology.
    • Imposes disclosure requirements on digital asset service providers to ensure that consumers understand the product and can make informed decisions when engaging with digital assets.
    • Requires a study on digital asset energy consumption.
    • Directs the CFTC and the SEC to study and report on the development of a self-regulatory organization (SRO) and develop a proposal for its creation.
    • Directs the CFTC and SEC to consult with Treasury and the National Institute of Standards and Technology to develop comprehensive, principles-based guidance relating to cybersecurity for digital asset intermediaries.
    • Provides a regulatory sandbox for state and federal regulators to collaborate on innovative financial technologies.
    • Creates a workable structure for the taxation of digital assets.
    • Directs the Office of Management and Budget, along with the Cybersecurity and Infrastructure Security Agency, the Director of National Intelligence, and the Defense Department, to conduct an information security study around the digital yuan, China’s central bank digital currency.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #90

Moral Hazard and the implied Fed Put

Thursday 08/04/2022

 

Satoshi Nakamoto who created Bitcoin, embedded a phrase in the Genesis Block that launched Bitcoin. It represented the zeitgeist of the time during the 2008 financial crisis and bank bailouts—similar in sentiment to the Occupy Wall Street movement that had emerged at that same time.

“The Genesis block is shrouded in mystique. Encoded in the first coinbase transaction is a string: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” It is widely accepted that Satoshi included this string as a timestamp for the Genesis block, linking it to January 3, 2009.”

https://coingeek.com/the-mystery-of-the-genesis-block/

 

Moral Hazard 

“Moral hazard occurs whenever an institution like the Fed cushions the adverse impact of events. More to the point, lessening the consequences of risky financial behavior encourages greater carelessness about risk down the road as investors come to count on benign intervention.”

https://www.dallasfed.org/~/media/documents/research/eclett/2008/el0810.pdf

 

The Fed Put

“The “Fed Put” is a commonly used term in financial markets to describe the belief that many market practitioners hold that the U.S. Federal Reserve (the Fed) will step in with accommodative monetary policy to buoy markets, specifically the U.S. equity market, if prices fall too fast too quickly.”

https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/fed-put/

 

Some memorable Federal Reserve “Too Big to Fail” bank bailouts:

    • 1989 Savings and Loan crisis
    • 1998 Long-Term Capital Management hedge fund failure
    • 2008 Subprime Mortgage failures caused systemic risk to banks

Some Federal Reserve “Money Printing” U.S. Economy bailouts:

    • Economic Stimulus after the 9/11/2001 attacks
    • Economic Stimulus after the 2020 COVID-19 lockdowns

 

The commercial banks and investment banks then assume they can invest in risky activities, because if they fail to the point of creating systemic risk to the U.S. or World economy—the Federal Reserve will come to the rescue to bail them out—by flooding the economy with newly “printed” money. Their gains are privatized but their risks are socialized. The U.S. Taxpayer funds their risk-taking through the Federal Reserve bailouts. The bailouts cause inflation, as trillions of new U.S. Dollars are injected into the U.S. Economy, devaluing the U.S. Dollars already in circulation.

The banks that caused the 2008 financial crisis were for the most part bailed out or absorbed by the larger banks. But many U.S. Citizens were not bailed out, and lost millions of homes due to foreclosure. Thus the term “bailouts for Wall Street but not for Main Street.” The movements like Occupy Wall Street, the Tea Party, and Wikipedia arose from this anger.

https://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0393338827/ref

You can read about how the 2008 financial crisis happened in the book The Big Short by Michael Lewis. He actually worked in a Wall Street investment bank in the 1980s and observed first-hand the effects that the Moral Hazard and The Fed Put had on the senior management of these firms.

That management believed they were “Too Big to Fail” and therefore could create huge financial risks with extremely complicated and risky financial instruments. They believed and assumed the Fed would be there to rescue them and bail them out, if these investments failed by breaking the banking system—which they did in 2008.

Bitcoin was conceived and born at this time in 2008, as a sound money alternative to endless bailouts of the Wall Street investment banks, accompanied by endless money printing by the central banks, all over the world.

That “money printing” has caused significant year-over-year inflation since 2008, contributing greatly to an increase in income inequality between the top percentages of high-income individuals, and the vast majority of U.S. Citizens that live, work and reside in the Middle Class. Bitcoin is a growing “sound money” alternative as a store of value against inflation.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #89

How artificially low interest rates by the Federal Reserve causes asset inflation and income inequality

Wednesday 08/03/2022

How much did the house I grew up in at 802 Bode Drive in Lawrenceburg, Indiana increase in value over time. My parents built the home in 1959, paid cash with no mortgage, and was then sold in 2002 for $119,900. Zillow lists its current worth at $293,600 as of August 2022. That’s a 144.87% increase over that 20-year period from 2002. The percentage increase from 1959 would be over 1,000% in the 63-years from 1959-2022.

This demonstrates the benefit of real estate as a store of value asset, that protects against the yearly inflation the U.S. has experienced since the Federal Reserve was created in 1913. Improvements to the home also have added substantially to its value over the years. But very few homeowners in 2022 can pay cash for a new home to be built. They must take out a 15-year or 30-year mortgage, and pay thousands in mortgage interest all those years. They assume the home value increases enough over the years, to make up for the mortgage interest payments and the yearly property taxes.

There is one class of home purchasers who can still pay cash for homes even in 2022—those being the hedge funds like BlackRock. See this recent article how BlackRock has allocated $50 billion to buy single-family homes during the upcoming real estate downturn that they are anticipating.

Blackstone Prepares A Record $50 Billion To Snap Up Real Estate During The Coming Crash

https://www.zerohedge.com/markets/blackstone-prepares-record-50-billion-snap-real-estate-during-coming-crash

Blackstone is America’s largest residential and commercial landlord. They are first in line to benefit from very inexpensive credit, when the Federal Reserve lowers interest rates to zero—like after the 2008 financial crash and 2020 COVID-19 lockdown crash. See the Federal Funds chart below.

The Federal Reserve “prints” trillions of new U.S. Dollars that then flow to the major commercial banks, to be lent out into the economy, to stimulate growth after a severe recession, financial crisis, or a pandemic economic shutdown. The most credit worthy prime borrowers—like Fortune 100 companies, hedge funds and high net-worth individuals—get access to that “printed” money first, at the lowest possible interest rates. They then invest that money they borrowed at very low interest rates, into tangible assets like real estate, stock buybacks, bonds and collectibles.

Those new investments (by the prime borrowers) in these asset classes drives up the overall demand for those same assets for everyone else in the economy, after these first-in-line prime borrowers have already purchased their assets. So immediately their assets increase in value, but make those same assets more expensive for the less credit-worthy borrowers, who can’t qualify for preferential interest rates.

So for example, housing prices rise for everyone, at a faster pace than wages for example rise to compensate for the increased asset prices. That is what contributes to income inequality, as the less credit worthy citizens never have access to borrow money at such low rates, but they must pay the increased costs for an asset like a house, that has increased substantially. But they have not received increased wages.

Bitcoin is an asset class that everyone can invest in to preserve their wealth and protect themselves against inflation. It is designed to increase in value over time. 

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #88

Inflation versus Deflation

The Fed promotes Inflation but hates Deflation

Bitcoin is designed to increase in value over time

Tuesday 08/02/2022

 

We all understand everyday inflation as the cost of items going up over time—like groceries, gasoline, the price of buying or renting a home, college, etc. The U.S. Dollar losing value also causes inflation, as more of your devalued dollars are needed to buy the same products—as the producers of those products need to raise prices just to keep up with the devalued dollar—so they make the same percentage of profits after expenses.

Deflation is when the price of items are falling over time, which you would think is a good outcome. Your same U.S. Dollars would buy more, as you can purchase more items at a lower price, using your more valuable U.S. Dollars. Or you would hold off buying a more expensive item you don’t immediately need, as it might be cheaper in the future, if prices keep falling, and the U.S. Dollar is increasing its buying power.

The Federal Reserve believes falling prices—deflation—is not advisable, as they believe people will postpone non-essential purchases, hoping for cheaper prices in the future. The Federal Reserve fears this will cause an economic slowdown because of those delayed purchasing decisions, waiting for anticipated lower prices. They prefer ever increasing prices—inflation—as the economic engine they believe will encourage economic growth.

The Federal Reserve and the Banks also prefer perpetual inflation, as it makes the massive debt they help create, less valuable over time. The lender will get paid in full for the principle of the loan, but the money he/she gets paid with will be worth less, because of inflation, when the loan is finally paid off by the borrower. For example, a 15-year loan for $100,000 will deteriorate—assuming the Fed’s preferred 2% inflation/year target.

    • $100,000 times 2% = $2,000. Loan is worth $98,000 after 1st year
    • $98,000 times 2% = $1,960. Loan is worth $96,040 after 2nd year
    • $96,040 times 2% = $1,921. Loan is worth $94,119 after 3rd year

So with constant 2% inflation the loan principal loses value each year.

The converse is true for the borrower, as inflation allows them to pay the 15-year loan back with money worth significantly less than when they originally borrowed it. $100,000 in 2037 is worth far less than in 2022.

Banks compensate for this loss of principal value over the life of the loan, by receiving the regular interest payments each month with that loan, over the entire life of the loan. Interest payments are also the highest in the first years of the loan, decreasing each year towards the eventual loan payoff date. The amortization schedule shows this inversion for any loan.

As Investopedia in their article Debt Deflation explains at:

https://www.investopedia.com/terms/d/debtdeflation.asp

“On its face, deflation benefits consumers because they can purchase more goods and services with the same nominal income over time. Deflation can particularly harm borrowers, who can be bound to pay their debts in money that is worth more than the money they borrowed.”

Consider the effects of prolonged deflation on the U.S. Government, which currently services over $30 trillion in public debt. Deflation does not reduce the value of that debt over time, like the inflation example showed. Deflation increases the real value of money, and the real value of the debt remaining to be repaid by borrowers, including the U.S. government. 

Bitcoin was designed from its beginning in January 2009, to be deflationary, to increase in value over time. This is because only 21 million Bitcoins will ever be minted into existence by the Miners, who create new Bitcoins about every 10-minutes. The amount of Bitcoins created every 10-minutes also decreases every four years—called the “halving event.”

In 2009 the reward was 50 bitcoins, which was halved to 25 bitcoins in 2012, then halved to 12.5 bitcoins in 2016, and to the present 6.25 bitcoins in 2020, to be halved again to 3.125 bitcoins in April 2024, and so forth.

So Bitcoin’s total final fixed supply of 21 million bitcoins, coupled with the every four year diminishing pace of new bitcoins being created, puts constant long-term upward pressure on the price and value of Bitcoin.

The demand for Bitcoin is increasing each year, as the world’s population discovers and learns about the sound money characteristics of Bitcoin. The supply of Bitcoin is diminishing over time, with the demand for Bitcoin increasing over time. That naturally will increase the value of Bitcoin over the long-term horizon of years and decades, reducing the price volatility.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #87

The Value Proposition of Bitcoin for the World

(Blog 3 of 3)

Monday 08/01/2022

This Blog post was based on the ideas presented by Wences Casares as he explained Bitcoin in a fabulous 1/29/2019 online audio-only podcast at Behind the Tech with Kevin Scott – Episode 06 interview at:

https://www.youtube.com/watch?v=xM-duzL3ZRY

 

Characteristics of Bitcoin that make it useful and valuable:

  • An easy way for people to receive payments, or safely store the value of their labor. That cannot be manipulated away by Governments.
  • A new digital currency where you can send anyone money anywhere, without asking for anyone’s permission to do that.
  • Bitcoin will do for money, what TCP/IP (the Internet Protocol) did for information across the world.
  • A decentralized peer-to-peer network run by the Bitcoin protocol
  • Uses a public transaction ledger called the Blockchain
  • Uses the proof-0f-work algorithm to confirm transactions and mine new Bitcoins into existence every 10 minutes, by reaching a consensus within a worldwide network of Bitcoin node computers. Everyone agrees on the current state of the blockchain, the ledger of all Bitcoin transactions that have occurred and have been permanently confirmed since January 2009.
  • The Bitcoin protocol defines the rules for the approval of new Bitcoin transactions, and the pace of the creation of new Bitcoins.

 

Wences describes the First Principles of the Internet and Bitcoin as:

First Principle of the Internet 

It moves information from anywhere in the network (Internet) to anywhere else in the network (Internet), in real time, for free after your access onto the Internet through an Internet Service or Cell Phone Provider. No Internet gatekeepers. Information moves freely within the Internet.

For the first time in history, people all over the world had access to information, sending information via email or the web, to anyone, anywhere.

 

First Principles of Bitcoin

  • The first sovereign world-wide computer system. Previously all computers belonged to a person, a company, or a government—that had to obey the rules of controlling those computers—defined by those entities.
  • Bitcoin is sovereign as it only obeys its own protocol rules.
  • The Bitcoin transactions are immutable, as they cannot be changed by anyone. No President can command that a previous Bitcoin transaction be cancelled, seized or changed.
  • No government, institution, or person can stop the “Bitcoin machine” that automatically processes and confirms new transactions every 10-minutes.
  • Nobody can stop Bitcoin, as transactions happen 24/7/365 and the are permanently confirmed every 10 minutes, every day, every month, all year long.
  • Bitcoin is truly a sovereign system, that cannot be manipulated by any person, government, business—nobody.
  • Bitcoin is the only sovereign money system that has ever existed, that cannot be changed by a government, world leader, commercial bank or central bank.

 

Benefits to the world with widespread adoption of Bitcoin 

  • Sovereign ownership of money through the ownership of Bitcoin will transform the world by democratizing money per person. It has already happened with Bitcoin and cannot be stopped. Persons controlling their own money.
  • Sovereignty and the blockchain used for personal Identity and Money issues.
  • There will never be more than 21 million Bitcoin and you don’t have to trust anyone to own/move/sell Bitcoin. A sovereign system that nobody can change. That sovereignty is programmed into the Bitcoin protocol. 
  • Bitcoin is un-censorable, as nobody can prevent you from using Bitcoin, if your transactions are done on a private, non-custodial exchange. Nobody can stop you from acquiring, sending, holding Bitcoin if using a private wallet. 
  • Bitcoin will be a global and political standard of value across time and geographies—independent of countries or their national currencies.
  • Bitcoin will be a global and political standard of settlement. Only banks currently belong to the modern global settlement network. Nobody in this banking system can move money on a weekend. This compares to the 24/7/365 Bitcoin network. Payments should not be political, limited by governments.
  • A global and political standard of weight currently exists as (kilos or pounds)
  • A global and political standard of length currently exists as (meters or feet)
  • Currently there is not a global and political standard of value and settlement, for money across the globe. Sovereign countries provide this, but only on a national scale, that is controlled by them and limited by their borders.
  • Bitcoin will eventually be used as the universal, Internet-based, global and political standard of value and settlement—across time and geography.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #86

The Value Proposition of Bitcoin for the World

(Blog 2 of 3)

Sunday 07/31/2022

Why does someone as intelligent as Wences Casares declare Bitcoin to be “The Best Form of Money Civilization Has Ever Seen or Invented?” He explained his thesis in this 14-minute presentation on 3/16/2015 at the Chicago Gold Ideas conference. See that YouTube video at: 

https://www.youtube.com/watch?v=IAFKJVLNVQA

 

He described the history of money during the last 100,000 years of human history as consisting of these five main time periods.

  1. 100,000 years ago to 25,000 years ago: the first 75,000 years
    • Tribes existed that kept mental lists of who owed whom value—only within that tribe. It was a subjective list of debts, not written down, kept amongst the tribe members. We could call the mental debt list a ledger.
    • For example: one tribe person could trade part of a slaughtered cow, for a certain quantity of grain, or firewood. The two exchanging parties would make a mental note of that transaction, and what remaining debits or credits they would be obligated to each other in the future.
    • This was a subjective ledger, as no money object was exchanged to record the value amount changed. They just remembered the values.
  1. 25,000 years ago to 5,000 years ago: the next 20,000 years
    • Tribes started using objects, or collectibles, to represent the debts between trading tribe members. They would represent this with objects like beads, salt, rocks, seashells—or anything “scarce” in their tribe.
    • This introduced an objective ledger of debts, instead of having to remember who owed what to whom. “I’ll pay you 2 beads for part of your slaughtered cow, in exchange for 2 beads worth of my grain.”
  1. 5,000 years ago to 1450 AD years ago: the next 6,500 years
    • Tribes started trading between tribes, and needed a universally accepted form of money. Gold filled that need as a universal store of value.
    • Gold was then used as the first universal ledger, traded between tribes.
  1. 1450 AD to the present day: the next 572 years
    • Countries began accepting one currency as the Reserve Currency of the world, that all trade between nations could be denominated in.
    • Those countries and their reserve currency periods were:
      • Portuguese Escudo beginning/ending in 1450-1530
      • Spanish Escudo beginning/ending in 1530-1640
      • French Livre beginning/ending in 1640-1720 
      • Dutch Guilder beginning/ending in 1720-1815
      • British Pound beginning/ending in 1815-1920
      • U.S. Dollar starting in 1920-Present Day
    • The Reserve Currencies acted also as a universal ledger. Trade flourished throughout the modern world, allowing countries to denominate trade between nations in this one commonly agreed-to reserve currency.
  1. 2009 to the present: the last 13 years
    • Bitcoin “went live” on 01/03/2009 and has matured into a universal ledger like Gold or a Reserve Currency, independent of any country, existing entirely on the Internet, within the world’s first global computer.

 

Why does Wences Casares believe Bitcoin is even better than Gold or the current Reserve Currency—the U.S. Dollar—to be the universal ledger that the world uses to define value? What traits does Bitcoin have that make it better than Gold or the U.S. Dollar. 

    • Scarce: there will only ever be 21 million Bitcoins. More Gold is discovered and mined each year, and the Federal Reserve just prints more U.S. Dollars as needed by the U.S. Government to fund its yearly deficit spending.
    • Divisible: Bitcoin is divisible into a bit, or a Satoshi, at 0.00000001 BTC.
    • Portable: Bitcoin can be sent to anyone, anywhere in the world, instantly, as easily as sending an email—for very low or no transaction fees.
    • Durable: Bitcoin is digital money, stored on an immutable blockchain ledger, updated every 10-minutes, by thousands of Bitcoin nodes all over the world. It is a digital representation of value, with no physical equivalent.
    • Recognizable: There are millions of Bitcoin users all over the world.
    • Fungible: Every Bitcoin is exactly equal to any other Bitcoin.

 

Wenses Casarses also describes the three functions of money when it works well. He believes Bitcoin will evolve to excel in all three functions. 

    1. As a Store of Value (A way of Saving to preserve your wealth)
    2. As a Payment Mechanism (A way of Paying for things)
    3. As a Unit of Account (A way of Pricing things)

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #85

The Value Proposition of Bitcoin for the World

(Blog 1 of 3)

Saturday 07/30/2022

 

The Corporate Finance Group defines a Value Proposition as:

“A value proposition is a promise of value stated by a company that summarizes how the benefit of the company’s product or service will be delivered, experienced, and acquired. Essentially, a value proposition specifies what makes the company’s product or service attractive, why a customer should purchase it, and how the value of the product or service is differentiated from similar offerings.”

https://corporatefinanceinstitute.com/resources/knowledge/strategy/value-proposition/

If your financial survival depended on it, which of the two investments do you believe will maintain more of their value ten years from now?

  • $10,000 of U.S. Dollar cash deposited into a savings account today
  • $10,000 of Bitcoin purchased today through a Coinbase account

See the charts below for the value of the U.S. Dollar since 1913 when the Federal Reserve was formed, and the monthly price of Bitcoin since it began in 2009. Will the inflation that devalues the U.S. Dollar continue, and will the deflation characteristics designed into Bitcoin continue?

https://www.in2013dollars.com/us/inflation/1913?amount=1#

That chart since 1913 should tell you all you need to know, about the inflation that affects the U.S. Dollar, contrasted with the inflation-protection built into Bitcoin. Is the daily/monthly/yearly price of Bitcoin still very volatile? Yes, absolutely, and as a short-term investment a person needs to be responsible for that price volatility, to guide their entry/exit points.

But there is absolutely no indication that the U.S. Dollar will ever increase in value, as one of the two mandates of the Federal Reserve is to create at least a 2% inflation rate every year. See this article from the Federal Reserve Bank of Chicago The Federal Reserve’s Dual Mandate.

https://www.chicagofed.org/research/dual-mandate/dual-mandate

“Our two goals of price stability and maximum sustainable employment are known collectively as the “dual mandate.”

“Price stability. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the Price Index for Personal Consumption Expenditures (PCE), is most consistent over the longer run with the Federal Reserve’s statutory mandate. The Committee has also explicitly noted that the inflation target is symmetric and stated that it “would be concerned if inflation were running persistently above or below this objective.”

The inflation rate is just over 9% as of June 2022, meaning $10,000 cash today will be worth only $9,100 in June 2023, down $900 in one year.

https://www.statista.com/statistics/273418/unadjusted-monthly-inflation-rate-in-the-us/

Just imagine how much that $10,000 will be worth ten years from now, even if the inflation rate was only the 2%/year the Fed is mandated to create. Imagine what a $10,000 Bitcoin investment will be worth in 2032.

 The next few blog post will illustrate how Bitcoin is expected to increase in value over the next ten years, based on its design as being scarce.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #84

Bitcoin “The Best Form of Money Civilization Has Ever Seen or Invented” as quoted by Wences Casares

Friday 07/29/2022

This Blog post was inspired by the ideas presented by Wences Casares as he explained Bitcoin in a brilliant 14-minute presentation on 3/16/2015 at the Chicago Gold Ideas conference. See that YouTube video at: 

https://www.youtube.com/watch?v=IAFKJVLNVQA

I have paraphrased his ideas in my own words and graphics. His is the most succinct explanation of Bitcoin’s value I have ever heard described.

If you had to predict which of the three money types shown above will hold their value 10 years from now, which would you pick? The $100 U.S. Dollar bill, the 1 oz Silver American Eagle or the 1 oz Gold American Eagle? 

This is their worth as of today 7/29/2022 at 8:15am EDT.

These three forms of money can be exchanged peer-to-peer—or person-to-person—without the permission of a bank, credit card company, or government. Two people just make the exchange between themselves in person. I give you a $100 bill or a coin. All have the traits of good money.

  • Scarce: Gold is the most scarce, followed by Silver, then by the U.S. Dollar
  • Divisible: The U.S. Dollar is the most divisible with its coinage and bills
  • Portable: All three are portable but the U.S. Dollar is the most convenient
  • Durable: Gold is the most durable, then Silver, then U.S. bills/coins
  • Recognizable: All three are recognized and accepted all over the world as money
  • Fungible: meaning a $100 bill is equal to another $100 bill, and the same 1 oz. Silver or Gold coins are equal to the same weight/grade/quality of those same coins.

What happens when these two people are not in the same room, the same city, or even the same country—and they want to exchange $100, or send someone some Silver or Gold? That is not so easy, as it involves some sort of financial intermediary—like a bank, credit card company, a PayPal or ApplePay wallet account, or a remittance service like Western Union.

You must use that financial intermediary to facilitate that exchange of money, over some distance, when you are not in the same room. They earn a fee for that, and you must have their permission to perform such a long-distance financial transaction. If you want to transfer large amounts of money between countries, using different currencies, that could take days. Most banks also are not open 24-hrs/day, 7-days/week, 356-days/year.

What if there was an Internet-based money that was as easy to exchange over long distances—like cash and coins are in a peer-to-peer, same room exchange? What if you could send that money over the Internet, without using a financial intermediary, as easily as sending someone an email, anywhere in the world? What if this Internet-based money exchange had very low or no transaction fees, and you do not need the permission of a financial intermediary, or a country, or a central bank, to make that instantaneous transaction? What then if that transaction was permanent, and could never be reversed? What if this money exchange system was open 24-hrs/day. This is Bitcoin—digital, universal, cash-like money.

These above questions/traits are all satisfied and provided by Bitcoin!

Bitcoin is the world’s first universally exchanged store of value (money) that is not controlled or issued by any government, bank, or other financial intermediary. It exists within the first truly worldwide digital computer, called the Bitcoin blockchain. The blockchain is the transaction ledger continuously being updated on thousands of Bitcoin nodes all over the world, reaching a consensus every 10-minutes, as to what new Bitcoin transactions are permanently approved. The blockchain immutably records every Bitcoin transaction ever made, since it began in January 2009.

Bitcoin is an independent money system valued and maintained by the people that use it, buy it, exchange it, sell it, earn it, and save it. The worldwide community of users maintains the Bitcoin network, with no central point of failure or control. It has no central authority to run it.

Wences Casares predicts “It (Bitcoin) will be the greatest leap forward in the democratization of money the world has ever seen.”

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #83

32 Industry Leaders/Influencers who Speak, Write, Report and Evangelize about Cryptocurrency

(Blog 6 of 6)

Thursday 07/28/2022

The previous blog post #78 introduced the 32 influential people in the Cryptocurrency world I have followed and learned from. Today’s post gives the description of the last five of these influential people.

 

Saifedean Ammous is the author of the seminal books The Bitcoin Standard and The Fiat Standard that thoroughly explain the economic promise of Bitcoin as sound money for the world. He contrasts this with Fiat Currencies which are designed to promote inflation and income inequality.

See his education site:

https://saifedean.com/

See his over four hour interview with Lex Fridman on 5/11/22 called Saifedean Ammous: Bitcoin, Anarchy, and Austrian Economics | Lex Fridman Podcast #284 at:

https://www.youtube.com/watch?v=gp4U5aH_T6A

 

Tyler and Cameron Winklevoss are considered the first Bitcoin Billionaires as described in the book with the same title. They started investing in Bitcoin in 2013, with some of the $65 million settlement they received from Facebook. Their net worth is now estimated to be over $6 billion in 2022.  They run Winklevoss Capital at https://winklevosscapital.com/ and a cryptocurrency exchange Gemini at https://www.gemini.com/. See this interview at Bitcoin 2021 with Anthony Pompliano:

https://www.youtube.com/watch?v=uS8gzycZPHg

 

Vitalik Buterin is the young genius that invented the Ethereum cryptocurrency and network when he was only 19 years old. He is the most famous person currently alive in the cryptocurrency world, ranked only second to Satoshi Nakamoto, who invented Bitcoin. 

Satoshi Nakamoto was never identified in public, as he only appeared through his writings and postings on obscure cryptographic chat rooms. He has since disappeared altogether from the Internet and public life. 

Vitalik Buterin has an enormous influence every time he speaks in public, writes on a blog, or publishes “white papers” on a crypto subject. He is actively involved in the evolution of the Ethereum 2.0 network, and the new capabilities planned to be incorporated into Ethereum 2.0.

See this Lex Fridman 6/3/2021 interview with Vitalik Buterin discussing the upcoming features of Ethereum 2.0.

https://www.youtube.com/watch?v=XW0QZmtbjvs

 

Wences Casares is the Founder and Chief Executive Officer of XAPO, a bitcoin wallet . Previously he founded Patagon, Wanako Games, Banco Lemon, and Lemon Wallet. 

He is chronicled in the book Bitcoin Gold as one of the key investment advisors to the early businesses involved in the Bitcoin ecosystem. 

He is an extremely intelligent speaker about the benefits of Bitcoin in the realms of finance and personal freedom.

See this short interview from 12/14/2014 on YouTube 

Wences Casares: Bitcoin is the New Gold | Big Think.

https://www.youtube.com/watch?v=z8hghEtKhg4

See this YouTube interview from 3/16/2015:

Wences Casares Explains Bitcoin

https://www.youtube.com/watch?v=IAFKJVLNVQA

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #82

32 Industry Leaders/Influencers who Speak, Write, Report and Evangelize about Cryptocurrency

(Blog 5 of 6)

Wednesday 07/27/2022

The previous blog post #78 introduced the 32 influential people in the Cryptocurrency world I have followed and learned from. Today’s post gives the description of the next six of these influential people.

 

Nathaniel Popper is the author of the seminal book Digital Gold. He was a journalist for The New York Times covering finance and technology from San Francisco. See his own page at:

http://www.nathanielpopper.com/ 

See him speak about his Digital Gold book at:

https://www.youtube.com/watch?v=LblhEaE3AtM

 

Nick Szabo was an early researcher into the subjects of digital contracts, digital currency and smart contracts. He created BitGold and was known to post on the cypherpunk message boards. See his presentation at the Bitcoin 2022 conference:

“Nick Szabo: Pioneers Of The Years Before Bitcoin – Bitcoin 2022 Conference.”

https://www.youtube.com/watch?v=Q5gj2YmQUhQ

 

Patrick Murck is an attorney who gave legal advice about cryptocurrency to many of the people and firms in the early years of Bitcoin, like Mt. Gox and BitInstant. He was a founding member of the Bitcoin Foundation. See him speak here:

“The Challenges and Nuances of Crypto Regulation”

https://cyber.harvard.edu/story/2019-04/challenges-and-nuance-crypto-regulation

 

Peter Thiel is a legend in Silicon Valley as an entrepreneur and angel investor. He co-founded PayPal and was an early investor in Facebook, Stripe, LinkedIn, Sofi and many FinTech firms.

He is an outspoken proponent of Bitcoin as an alternative to Fiat currencies and the traditional Wall Street investment bankers. See his keynote at the recent Bitcoin 2022 Conference:

https://www.youtube.com/watch?v=ko6K82pXcPA

 

Roger Ver otherwise known as “Bitcoin Jesus” is probably the most famous early and current evangelist for Bitcoin and the promise of Cryptocurrencies. He is covered extensively in many books about Bitcoin and recently has supported Bitcoin Cash (BCH) as a less expensive alternative to Bitcoin for everyday transactions. He is my personal favorite, as he is so eloquent, intelligent and entertaining when he speaks about cryptocurrencies. See this interview from 12/24/2021 at:

https://www.youtube.com/watch?v=JgNgYnVurYA

 

Ron Paul was a long serving U.S. Congressman from Texas and is a strong proponent of the Austrian School of Economics. He wrote the book End The Fed as an outgrowth of his two Presidential Campaigns discussing the faults of the U.S. Dollar as a Fiat currency and its management by the Federal Reserve. He is a proponent of Bitcoin as a sound money alternative to Fiat currencies. See this video “Ron Paul on Why Bitcoin Equals Freedom For Millions” at:

https://www.youtube.com/watch?v=CpVi1UrvAMY

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #81

32 Industry Leaders/Influencers who Speak, Write, Report and Evangelize about Cryptocurrency

(Blog 4 of 6)

Tuesday 07/26/2022

The previous blog post #78 introduced the 32 influential people in the Cryptocurrency world I have followed and learned from. Today’s post gives the description of the next six of these influential people.

 

Jed McCaleb is a former founder of Mt. Gox, an early cryptocurrency exchange, and helped develop the cryptocurrency networks Ripple (XRP) and Stellar (XLM). He has been involve since 2010 with cryptocurrency issues, so he is a wealth of knowledge of its history and development. This is a great interview with Anthony Pompliano at:

https://www.youtube.com/watch?v=qmy5q55Dw28

 

Jesse Powell is the creator of the cryptocurrency exchange Kraken. He also has been in the Bitcoin world since early on, as he was friends with Roger Ver, and they both helped Mt. Gox with issues when they had a security breach in 2011. That Mt. Gox experience is what prompted him to create Kraken in that same 2011.

See this interview Jesse Powell did on 2/8/21 with Michael Saylor of Microstrategy about their service to businesses.

https://www.youtube.com/watch?v=EHLuq4TTiRM

This is a “Introducing Crypto 101” video Jesse did for Kraken:

https://www.youtube.com/watch?v=iG-bpAnRvqM

He spoke with Real Vision CEO Raoul Pal about the intersection of macroeconomics and bitcoin at: 

https://www.youtube.com/watch?v=NwF9Zhu83tE

 

Lex Fridman is a professor at MIT in the field of artificial intelligence, and he hosts some epic podcasts with luminaries in the Crypto world. 

He has interviewed Vitalik Buternin, Saifedean Ammous, Jack Dorsey, Anthony Pompliano, Michael Saylor, and many others. They are all amazing interviews. See all 305 podcasts at: 

https://lexfridman.com/podcast/

 

Marc Andreessen was the co-author of Mosaic, the first widely used web browser, and co-founder of Netscape. He now runs the venture capital firm Andreessen Horowitz, which he co-founded in 2009. They invest in companies such as Coinbase, OpenSea, and recently formed a new $4.5 billion fund that will invest in cryptocurrency and Web 3 companies. See this Bloomberg video “Crypto Is a Technological Transformation, Andreessen Says” at:

https://www.bloomberg.com/news/videos/2021-08-03/crypto-is-a-technological-transformation-andreessen-says-video

 

Marti Malmi helped Satoshi Nakamoto with Bitcoin in 2009, by contributing to the Bitcoin Core software and evangelizing Bitcoin. See this article that Nathaniel Popper wrote about him.

“The shy college student who helped build Bitcoin into a global phenomenon” at:

https://www.theverge.com/2015/6/10/8751933/the-shy-college-student-who-helped-build-bitcoin-into-a-global

 

Michael Saylor is the CEO of Microstrategy. He is a leading corporate CEO buying Bitcoin to hold on his company’s balance sheet. They owned 129,699 bitcoins as of 6/28/22. See this interview by Michael Taylor with Jack Dorsey on 2/1/22 “Bitcoin for Corporations 2022 featuring Michael Saylor & Jack Dorsey, hosted by MicroStrategy.”

https://www.youtube.com/watch?v=XdgP25UcHB0

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #80

32 Industry Leaders/Influencers who Speak, Write, Report and Evangelize about Cryptocurrency

(Blog 3 of 6)

Monday 07/25/2022

The previous blog post #78 introduced the 32 influential people in the Cryptocurrency world I have followed and learned from. Today’s post gives the description of the next six of these influential people.

 

Dan Morehead is the CEO of Pentera Capital. From his CoinTelegraph Bio:

“Dan Morehead founded Pantera Capital in 2003 as a global macro hedge fund. 10 years later, in 2013, the firm underwent a total rebranding as it began investing in blockchain and cryptocurrency. Today, Pantera Capital is one of the most prominent blockchain investment firms in the United States and one of the largest institutional owners of digital assets. In addition to offering several crypto-focused funds, Pantera’s Venture Investments division has invested in over 50 blockchain companies, including Bakkt, Bitstamp, Ripple, and ShapeShift.”

See this “London Real” YouTube interview “Crypto is just the beginning – Dan Morehead of Pantera Capital” from 3/30/2022 at:

https://www.youtube.com/watch?v=rUG8_iQYUtQ

 

Dan Schulman is the CEO of PayPal and said this at Axis Tel Aviv 2022.

“I’m very excited about what crypto and digital ledger technology can do to the financial system going forward. To me, the real exciting thing about digital currencies is what kind of utility can they provide in payments. The intersection between CBDC, stable coins, digital wallets, and enhanced utility of payments through cryptocurrencies is not just fascinating but I think will redefine a lot of the financial world going forward.” 

See at: 

https://www.calcalistech.com/ctechnews/article/rjeadynz9

 

Eric Voorhees was one of the early pioneers in the adoption of Bitcoin. He was the owner of SatoshiDice which he sold for $12.4 Million in 2013, and was the director of marketing for BitInstant. In July 2014 he started ShapeShift, a cryptocurrency to cryptocurrency only exchange.  

He is one of the most eloquent speakers about Bitcoin and cryptocurrencies. See this YouTube interview on Cryptonites TV at:

https://www.youtube.com/watch?v=CthGExHqsZ4

 

Gavin Andresen was an early evangelist for Bitcoin, working and corresponding with Satoshi Nakamoto to help promote and maintain the Bitcoin core software in the very early days of 2009. This is a 2015 YouTube interview about the use and benefits of Bitcoin as “cash” on the Internet.

https://www.youtube.com/watch?v=onUzEV0C7-o&t=13s

 

Jack Dorsey of Twitter fame is a huge proponent of Bitcoin. His financial payments company Square, now named Block, Inc. is investing heavily to accelerate Bitcoin as a payments network, using the Lightning Network as a secondary payments layer on top of the Bitcoin blockchain. 

This is his interview from the Bitcoin 2021 Conference in Miami, called “Bitcoin 2021: Banking The Unbanked | Jack Dorsey & Alex Gladstein” at: 

https://www.youtube.com/watch?v=rSSnyJpFNZU

 

Jason Williams wrote the book “Bitcoin: Hard Money You Can’t F*ck With.” He owns a tire recycling company from which he uses the renewable electricity from that process, to power a Bitcoin Mining operation. See the YouTube interview:

“Jason Williams, Co-Founder of Morgan Creek Digital on Taking the Bitcoin Red Pill” at:

https://www.youtube.com/watch?v=2f2DK0EUBPM

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #79

32 Industry Leaders/Influencers who Speak, Write, Report and Evangelize about Cryptocurrency

(Blog 2 of 6)

Sunday 07/24/2022

The previous blog post #78 introduced the 32 influential people in the Cryptocurrency world I have followed and learned from. Today’s post gives the description of the next five of these influential people.

 

Bobby and Charlie Lee are brothers. Bobby Lee is an author, entrepreneur, and bitcoin proponent. He is the founder and CEO of Ballet, a company that makes easy-to-use physical cryptocurrency wallets. Bobby Lee also founded BTCC, China’s first cryptocurrency exchange, and sold the company in 2018. Prior to founding BTCC, Lee was vice president at Walmart, and one of the early software engineers at Yahoo.

See at https://www.bobbylee.com/

See his interview from Bloomberg on 5/25/2021.

https://www.bloomberg.com/news/videos/2021-05-25/btc-china-co-founder-bobby-lee-on-bitcoin-video

 

Charlie Lee, the younger of the two brothers, invented Litecoin in 2011 while he was still a Google employee. He is the Managing Director of the Litecoin Foundation at: 

https://www.litecoin.net/

From their site:

“What is Litecoin? Litecoin is a peer-to-peer decentralized digital currency (cryptocurrency) which can be used to make quick transactions worldwide, with almost no fees. Litecoin is one of the most established and stable cryptocurrencies in terms of transaction volumes and liquidity, and is commonly used as a means of exchange. Yes, it’s real currency!”

See this YouTube interview from 4/1/2022:

https://www.youtube.com/watch?v=ahScdDSqW0U

 

Brian Armstrong is the current CEO of Coinbase. He created Coinbase to allow non-technical, everyday people to have access into the Bitcoin and Cryptocurrency world. Coinbase is currently the third largest cryptocurrency exchange.

See this YouTube video series “The Diary of a CEO” called “Coinbase Founder: The Crazy Journey Of Building A $100 Billion Company: Brian Armstrong | E161” by Steven Barlett of the UK.

https://www.youtube.com/watch?v=TB0yceuXmrI

 

Christine Lee, the Lead Anchor at CoinDesk, from her LinkedIn bio:

“Christine anchors and produces FIRST MOVER at 9am/NYC every weekday live, CoinDesk TV’s flagship show and first look at the day’s global crypto news headlines, and ALL ABOUT BITCOIN at 3pm for markets analysis and all things BTC. CoinDesk is the leading news, events and data provider for the blockchain and digital assets industry.”

See this video from 7/19/2022 at Consensus 2022, where Christine interviews FTX CEO Sam Bankman-Fried. She is a great interviewer.

https://sports.yahoo.com/main-stage-june-10th-journey-202559057.html

 

The Cypherpunk Movement encompasses many people whose early research work created the technologies that eventually became Bitcoin. They were referred to as Cypherpunks. 

This was a Wired magazine cover for a story written by Steven Levy on 2/1/1993 called “Crypto Rebels” at: https://www.wired.com/1993/02/crypto-rebels/

Satoshi Nakamoto, the inventor of Bitcoin, was a cypherpunk, as well as Julian Assange, the founder of WikiLeaks. 

See this 5/21/2021 article by Jie Yea One called “Who Are the Cypherpunks And What Are They Advocating For?” at 

https://www.makeuseof.com/who-are-cypherpunks-and-what-are-they-advocating-for/

Bitcoin would never have been created without the Cypherpunks.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #78

32 Industry Leaders/Influencers who Speak, Write, Report and Evangelize about Cryptocurrency

(Blog 1 of 6)

Saturday 07/23/2022

Appendix 1 of my upcoming book is the “Visual Bibliography” of the twelve books I used for research. The front/back covers of the books are shown, with the Amazon.com link to purchase the book. There is a several paragraph description of each book, with the value it was to me, in researching all aspects of Bitcoin and the Cryptocurrency market. These were shown in the blog on days #64 through #69.

Appendix 2 of my book will be a reference about 32 people in the Bitcoin and Cryptocurrency world, who are true influencers, and from whom I learned a tremendous amount. They are all very effective speakers with many of them also being terrific writers, who have published books about Bitcoin and Cryptocurrency topics. I show a photo of each person, write a short bio, and give a link to a video of them speaking, or a web link about them. They are listed below, sorted alphabetically by first name.

    1. Andreas Antonopoulos
    2. Anthony Pompliano
    3. Antony Lewis
    4. Barry Silbert
    5. Bobby and Charlie Lee
    6. Brian Armstrong
    7. Christine Lee
    8. Cypherpunk Movement
    9. Dan Morehead
    10. Dan Schulman
    11. Eric Voorhees
    12. Gavin Andresen
    13. Jack Dorsey
    14. Jason Williams
    15. Jed McCaleb
    1. Jesse Powell
    2. Lex Fridman
    3. Marc Andreessen
    4. Marti Malmi
    5. Michael Saylor
    6. Nathaniel Popper
    7. Nick Szabo
    8. Patrick Murck
    9. Peter Thiel
    10. Roger Ver
    11. Ron Paul
    12. Saifedean Ammous
    13. Tyler and Cameron Winklevoss
    14. Vitalik Buterin
    15. Wences Casares

 

Andreas Antonopoulos, is the author of the “Mastering Bitcoin” book. His own educational website can be found at https://aantonop.com/. He is an expert in Bitcoin and Open Blockchain technology. See his YouTube video “Bitcoin Explained in the Bitcoin Basics Workshop” at: 

https://www.youtube.com/watch?v=FYo5E7zT-vM

 

Anthony Pompliano is a founder and partner at Morgan Creek Digital, a hedge fund specializing in blockchain technology and digital assets and backed by investment management firm Morgan Creek Capital. See this RealVision web page for an interview with Anthony for “The Pomp Story.”

https://www.realvision.com/contributor/anthony-pompliano

 

Antony Lewis is the author of “The Basics of Bitcoins and Blockchains.” He runs a blog called “Bits on Blocks” at https://bitsonblocks.net/. See this link for a YouTube video presentation he did in 2019, speaking about “Decentralized 2019 | Security Tokens and Permissioned Blockchains.”

https://www.youtube.com/watch?v=iRRHr90Q_vs

 

 Barry Silbert is the Founder and CEO of Digital Currency Group at https://dcg.co/.

 “We are a team who passionately believe bitcoin and blockchain technology will drive global economic and social change. Our unique model enables us to deploy our resources to build the bitcoin and blockchain ecosystem over the long term. 

See this Coindesk TV interview on 4/14/21 at 

https://www.youtube.com/watch?v=EH3PoKNPHqM

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #77

What are Collectibles and How are they Taxed?

Friday 07/22/2022

 

We have seen in previous Blog posts, how the IRS considers a cryptocurrency like Bitcoin as a “property” and not a “currency.” Therefore every buy/sell transaction involving Bitcoin, for example, is subject to the IRS rules governing the taxation of short-term/long-term capital gain property transactions. Did you incur a short-term/long-term capital gain or loss?

There is one exception to this rule—the taxation of Collectibles—like NFTs otherwise known as Non-Fungible Tokens. NFTs have grown in popularity recently, so we need to understand how the IRS taxes profits and losses from the sale of NFTs, when they are classified as a Collectible. See this Investopedia article “How Collectibles Are Taxed” by Dan Moskowitz:

https://www.investopedia.com/articles/personal-finance/061715/how-are-collectibles-taxed.asp

“Collectibles are considered alternative investments by the IRS and include things like art, stamps & coins, cards & comics, rare items, antiques, and so on. If collectibles are sold at a gain, you will be subject to a long-term capital gains tax rate of up to 28%, if disposed of after more than one year of ownership.”

CoinLedger, one of the leading online Crypto Portfolio Tax Organizers, has a great article on this topic as “The Ultimate Guide to NFT Taxes in 2022” written by Miles Brooks at:

https://coinledger.io/blog/how-are-nfts-taxed

“The IRS treats collectibles as a special class of capital asset subject to its own specific rules. If your NFT is considered a “Collectible,” you will need to pay a maximum tax of 28%, which is slightly higher than the typical long-term capital gains tax rate. This is in effect if you held the NFT for more than one year.

 The IRS defines a collectible as:

    • Any work of art,
    • Any rug or antique,
    • Any metal or gem,
    • Any stamp or coin,
    • Any alcoholic beverage, or Any other tangible personal property that the IRS determines is a “collectible” under IRC Section 408(m).

For specific NFTs such as digital art, it’s reasonable to assume they fall under the “work of art” collectible category.

Similarly, it’s reasonable to assume that “trading card-like” NFTs, such as those on the NBA Top Shot platform, will also be treated as collectibles. Physical trading cards have historically been treated the same way. “

 

For a Single person, the 2021 long-term capital gain tax rates are.

Taxable Income $0 to $40,000                         0% Long-Term Capital Gain Rate

Taxable Income $40,401 to $445,850           15% Long-Term Capital Gain Rate

Taxable Income above $445,851                      20% Long-Term Capital Gain Rate

Once your ordinary taxable income falls into the 32% bracket, your long-term capital gains on a “collectible” NFT sale is capped at a 28% long-term capital gain rate. This will be shown and calculated on line 43 of the “Schedule D Tax Worksheet” in your tax software, like TurboTax®.

In essence, long-term gains by selling a collectible NFT are taxed at ordinary income tax rates, until taxable income is above the 24% income tax rate. Then the maximum tax on long-term NFT collectible gains is 28%.

See this article from CPA firm Ardito, Toscano & McCollum, PC CPA

“As Collectibles Boom, Selling Can Be Taxing”

http://www.atm-cpa.com/article_10-14_b.htm

“When you sell collectibles, the special 0%, 15%, and 20% tax rates on long-term capital gains don’t apply. Instead, you’ll owe tax at your ordinary tax rate, with a cap of 28%.”

“As is the case with all assets, short-term capital gains on the sale of collectibles are taxed at ordinary rates.”

The U.S. Congress in writing Collectible Art tax law, did not give preferential treatment to long-term gains from Collectibles, as they did not consider it a productive use of capital. Capital gains from stocks, cryptocurrencies, property, etc., are considered a productive use of capital, as many companies use the investment capital provided to expand their business.

Selling the Andy Warhol’s 1964 “Shot Sage Blue Marilyn” painting for $195 million on 5/8/2022, for example, is not considered by Congress to be a productive use of capital, so any long-term gains on that sale would be taxed at this maximum 28% rate. I’m sure the Art World would disagree with Congress.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #76

Fractional Reserve Banking—The Multiplier Effect

Thursday 07/21/2022

 

This article from Investopedia gives a good explanation of this effect.

https://www.investopedia.com/terms/d/deposit_multiplier.asp

What Is the Deposit Multiplier? Written by Liz Manning

“The deposit multiplier is the maximum amount of money that a bank can create for each unit of money it holds in reserves. The deposit multiplier involves the percentage of the amount on deposit at the bank that can be loaned. That percentage normally is determined by the reserve requirement set by the Federal Reserve.

The deposit multiplier is key to maintaining an economy’s basic money supply. It’s a component of the fractional reserve banking system, which is now common to banks in most nations around the world.”

 

What would be an example of this multiplier effect, now that as of 3/26/2020, the Federal Reserve removed the 10% reserve requirement. See this article that describes this most recent move by the Fed:

“Federal Reserve Eliminates Reserve Requirements”

https://www.eidebailly.com/insights/articles/2020/4/federal-reserve-eliminates-reserve-requirements

Banks in the U.S. can now legally loan out 100% of the cash they receive from their depositors, as new mortgage, business, and personal loans. They are no longer required to hold in “reserve” any liquid cash, to satisfy the withdrawal requirements of their customers who have checking, savings, or certificate of deposit accounts, in that bank. If they would experience a “bank run,” the Federal Reserve will provide them with the cash to satisfy the withdrawal requirements that caused the “bank run.” Some more prudent banks still hold funds in “reserve” for their customers, and the Federal Reserve pays them 1.65% interest on those “reserve” funds. See the Federal Reserve web page for the interest rate paid on reserve balances:

          https://www.federalreserve.gov/monetarypolicy/reserve-balances.htm

This is a classic example of “moral hazard” encouraged by the Fed. Banks can loan out 100% of their deposit funds, with the Fed as backstop.

 

How far can a bank multiply $1 million by loaning that entire amount into the economy? Remember, banks no longer have reserve requirements.

    1. Let’s say JPMorgan Chase takes that $1 million in demand deposit cash, and creates four $250,000 mortgage loans. That means a buyer pays a house seller $250,000 for each of those four new house purchases. Each house seller now has $250,000 in their bank and each buyer now has a mortgage debt of $250,000, typically over a 15 or 30 year mortgage. JP Morgan now collects over 5% interest on that $1 million of loans, to a total of $50,000 in yearly interest payments. That is $750,000 of interest received if they were 15-yr mortgages.
  • $250,000 went to four new banks, who now can lend that money out again
  • JP Morgan collects $50,000 in yearly interest, that it can loan out again

 

    1. Four banks now receive this $250,000 deposit from those four happy house sellers, to let’s say TD Bank, Citibank, Wells Fargo, and Bank of America. They do the exact same thing, writing four new mortgages for $250,000 each, to earn yearly interest on the mortgages.

 

    1. Those four new mortgages then get recycled again by four more banks, and so on, and so on, etc.

 

Fractional Reserve Banking causes inflation, as it constantly “multiplies” the U.S. Money supply in circulation, devaluing the purchasing power of the U.S. Dollar. It makes asset prices go up exponentially, contributing to the income inequality seen in America over the last several decades.

This is why many very smart people in the financial world, have such a reverence for Bitcoin as a “sound money” store of value, over the time span of the next several years or decades. Bitcoin is programmed to only ever have 21 million Bitcoins mined into circulation, and over 19 million have already been mined into circulation since Bitcoin began in January 2009. 

There is no fractional reserve banking in the Bitcoin economy, as it is impossible to “print new Bitcoins” without doing the computational work, every 10-minutes, that a Miner must do, by winning the “Nonce” puzzle. Only one miner or mining pool throughout the entire globe, wins that contest every 10-minutes to produce the 6.25 new Bitcoins, every 10-minutes.

That 6.25 Bitcoin mining reward is scheduled to “halve” to 3.125 Bitcoin around May of 2024, and again to 1.5625 Bitcoin in 2028, and so forth, every four years, on an immutable programmed schedule. There is no money supply restraint on the Federal Reserve or U.S. Banking system.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #75

What is Fractional Reserve Banking?

How the Federal Reserve supports this system

Wednesday 07/20/2022

 

If you deposit $100,000 in cash into your bank’s Certificate of Deposit account, the bank pays you interest on that—perhaps at a 1.90% rate. I found a link from Marcus by Goldman Sachs, for that CD rate calculation.

https://www.marcus.com/us/en/savings/high-yield-cds?#cdcalc

If you want a 30-year mortgage on a new $250,000 home, the current competitive rates are 5.73%, on 7/20/22 according to Bankrate at this link:

https://www.bankrate.com/mortgages/30-year-mortgage-rates/

The bank assumes the risk on a 30-yr mortgage by being paid 5.73% interest/year for 30-years, and can then pay a saver 1.90% on a CD. That is how a bank makes money—on the “spread” between these two products—which is 5.73% minus 1.90% = 3.83% earnings on those bank activities.

For example, 3.83% on $1 billion is over $38 million per year in interest earned on that 30-year mortgage portfolio. The total value of the U.S. housing real estate is over $43 trillion. It is estimated that over 60% of homeowners still carry a mortgage—to pay those monthly interest payments—in addition to reducing their remaining loan principal balance.

What would happen if all the savers in a particular bank, wanted to withdrawal all their liquid cash, even if they had to pay an “early withdrawal” penalty to “cash out” a CD that had not yet matured. The bank’s other customers that have money in checking/savings accounts also want to take out all their money at the same time. The bank no longer has all their money, as it has been lent out as mortgages, etc. This would create a bank run.

The rules for Fractional Reserve Banking, set by the Federal Reserve, normally had stipulated banks must hold 10% of their “liquid” cash holdings in reserve. The other 90% they can lend out as mortgages and loans.

Since 3/26/2020, the Federal Reserve lowered the reserve requirement to zero percent to stimulate economic growth due to Covid-19. That means the banks can loan out 100% of their “liquid” cash demand deposits. The Fed has stated they do not intent to reimpose a reserve % requirement.

See this article from Investopedia called “Fractional Reserve Banking.”

https://www.investopedia.com/terms/f/fractionalreservebanking.asp#

What Is Fractional Reserve Banking? Written by Julia Kagan

“Fractional reserve banking is a system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal. This is done to theoretically expand the economy by freeing capital for lending.”

What happens if a bank’s customers want all of their money now, and the bank does not have the liquid cash to give back to their depositors? The FDIC (Federal Deposit Insurance Corporation) insures each customer up to  $250,000 per account owner, so they can withdrawal their money. The banks have to pay premiums into the FDIC system to fund its insurance.

If the FDIC insurance is not enough, then the U.S. Federal Reserve “steps in” as the “Lender of Last Resort” to bail that bank out of its predicament. It gives it the required cash to satisfy the withdrawal demands of its customers, if the FDIC insurance is not enough.

Does that bank go out of business? Most often no, as the Federal Reserve gives them money to avoid a catastrophe. The last U.S. Bank to declare bankruptcy backed by the Federal Deposit Insurance Corp. (FDIC) was on Oct. 23, 2020, when Almena State Bank, in Kansas, closed. See this link from the FDIC website:

https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/almenastate.html

Most years this Fractional Reserve Banking System, with FDIC insurance, with the Federal Reserve as the lender of last resort, works very well. It doesn’t work well during a financial crisis, as the entire banking system needs this help to avoid bankruptcy—like what happened during the 2008 Financial Crisis or the 2020 COVID-19 nationwide economy shutdown.

The Federal Reserve then has to flood the banking system with new money to prevent the crisis from crashing the entire U.S. Economy. They do that by literally “printing” money and injecting that into the banking system. They printed trillions during 2008 and more trillions in 2020. That then often causes inflation, as that vast amount of money “injected” into the U.S. Economy causes asset prices to increase. The Fed’s balance sheet increased from under $2 trillion in 2008, to almost $9 trillion in 2022.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #74

Bitcoin Bookkeeping 101—Fractional Bitcoin Accounting (My 2019 transactions)

(Blog 3 of 3)

Tuesday 07/19/2022

 

My fifth Bitcoin transaction in 2019 was to buy a second “lot” of Bitcoin for $100 on 12/5/2019—as the price of Bitcoin had dropped significantly  (to $7,430.25/BTC)—since I bought my 1st “lot” of Bitcoin for $100 on 10/29/2019 (at $9,390.78/BTC). See that second “Bought Bitcoin” below.

I received a larger fractional quantity of Bitcoin for that same $100. 

I received 0.01305608 BTC for $100 the 2nd time on 12/5/2019, as compared to 0.01033035 BTC for $100 the 1st time on 10/29/2019.  

The same calculation applies: 

$97.01 ÷ $7,430.25/BTC = 0.01305608 BTC

My Cost Basis is the total of $100 cash invested to purchase the Bitcoin.

I held onto this 2nd $100 of Bitcoin purchased on 12/5/2019, and sold it for a profit in the Summer of 2020. I did not buy anymore products with Bitcoin.

Refer to the spreadsheet below, for a summary of my five Bitcoin transactions in 2019, with the calculations for each Cost Basis, the Proceeds, and the remaining fractional Quantities of Bitcoin I had at the end of 2019, from those original two lots of $100 of Bitcoin.

My conclusion at the end of my initial 2019 Bitcoin investment activity, is it is not practical, at least for me, to use Bitcoin to purchase everyday goods and services. The fractional accounting necessary to keep track of dozens, or even hundreds of these everyday purchases with Bitcoin, for me, is not worth the trouble, even if Coinbase can produce a year-end report.

It is important, though, to understand the complexity of this Fractional Bitcoin Accounting, to be cautious of how you spend your Bitcoin. The IRS considers every purchase/sale of Bitcoin, to be a short-term or long-term capital gain or loss transaction. See the CSV file below from Coinbase, that has the three taxable transactions to buy the kitchen bowls and Pyrite rock. The IRS form 8949 below that, shows how these are reported to the IRS. The CSV file can be imported into tax software like TurboTax®.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #73

Bitcoin Bookkeeping 101—Fractional Bitcoin Accounting (My 2019 transactions)

(Blog 2 of 3)

Monday 07/18/2022

 

I had a $74.93 Cost Basis remaining from my original $100 worth of Bitcoin I purchased. ($100) minus ($25.07) equals $74.93.

I had a 0.00774015 fractional quantity of Bitcoin remaining from the original 0.01033035 of Bitcoin I purchased for $100 on 10/29/2019.

My third Bitcoin transaction in 2019 was an extra shipping fee of $1.37 sent to Overstock.com as there was an error in the original order.

The price of Bitcoin had dropped even further to $9,241.15/BTC, so I had to send them a 0.00014825 fractional quantity of Bitcoin, about 45 minutes later, as they had sent me an email, explaining I owed them a bit more for the shipping fees.

So $1.37 divided by $9,241.15/BTC equals a 0.00014825 quantity of BTC sent them to cover shipping costs. That $1.37 was the transaction Proceeds.

The Cost Basis was then that 0.00014825 quantity of BTC sent them divided by the original 0.01033035 quantity I purchased equals 1.44%. So 1.44% of that original $100 is $1.44. My Cost Basis was $1.44.

The formula for gain/loss is (Proceeds) minus (Cost Basis) = gain/loss.

($1.37 Proceeds) minus ($1.44 Cost Basis) = -$0.07 short-term loss.

You should begin to see using Bitcoin for small everyday purchases is too much trouble, in my opinion, to keep track of the tax accounting.

 

My fourth Bitcoin transaction in 2019 was spending $21.92 at Astro West for a small Pyrite rock crystal. See that and the kitchen bowls below.

Astro West is a great store near the Museum of Natural History in NY City, that had been accepting Bitcoin for years.

I used the Coinbase app on my iPhone to send $21.92 of Bitcoin to them to pay for the Pyrite rock, on 12/5/2019. The price of Bitcoin had fallen further all the way down to $7,279.49, from my original price of $9,390.78 per BTC. I had to send them a 0.0030112 quantity of BTC.

$21.92 divided by $7,279.49 equals that 0.00301120 quantity of Bitcoin. So $21.92 were my Proceeds on this purchase. I exchanged Bitcoin (property) for a piece of Pyrite rock (property).

The 0.00301120 quantity of BTC sent to Astro West, divided by my original 0.01033035 quantity I purchased equals 29.15% of that $100 of Bitcoin I originally purchased, for a Cost Basis of $29.15.

The formula for gain/loss is (Proceeds) minus (Cost Basis) = gain/loss.

($21.92 Proceeds) minus ($29.15 Cost Basis) = -$7.23 short-term loss.

Once again I paid a penalty for Bitcoin’s drop in price, from the higher price I bought my $100 of Bitcoin with. Another lesson in price volatility. 

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #72

Bitcoin Bookkeeping 101—Fractional Bitcoin Accounting (My 2019 transactions)

(Blog 1 of 3)

Sunday 07/17/2022

The Blog posts on Days #5 through #8 showed the fractional accounting for my small purchases at Overstock.com for kitchen bowls, and at Astro West for a piece of Pyrite rock. These next three posts review the Bookkeeping and Fractional Accounting for my five 2019 Bitcoin transactions.

These are my five Bitcoin transactions in 2019 using my Coinbase account:

    1. Invested in first $100 of Bitcoin on 10/29/2019
    2. Bought plastic kitchen bowls on Overstock.com for $23.81 on 11/07/2019
    3. Paid an extra shipping fee to Overstock.com for $1.37 on 11/07/2019
    4. Bought a piece of Pyrite Rock at AstroWest for $21.92 on 12/05/2019
    5. Invested in second $100 of Bitcoin on 12/05/2019.

Coinbase records each transaction with a timestamp. The “Bought Bitcoin” window below shows my first $100 purchase of Bitcoin on 10/29/2019. The price of Bitcoin at that moment was $9,390.78 per BTC.

Coinbase charged a $2.99 transaction fee to make that purchase, so I actually had $97.01 left to purchase some Bitcoin. If you then divide $97.01 by the $9,390.78 cost of Bitcoin at that time—that results in a 0.01033035 quantity of Bitcoin purchased—for that $97.01 I had after $2.99 spent on fees.

My Cost Basis was still $100 for that fractional quantity of Bitcoin purchased—as that is the total “out of pocket” cash I invested, including fees, to purchase my Bitcoin that day.

 

My second Bitcoin transaction in 2019 was a purchase of plastic kitchen bowls on Overstock.com for $23.81 on 11/07/2019, using some of that original $100 of Bitcoin I had just purchased on 10/29/2019. 

I wanted to learn how to purchase something online with my new $100 of Bitcoin holdings. The price of Bitcoin at the moment I bought the kitchen bowls had dropped to $9,192.34/BTC—down from the $9,390.78 per BTC when I invested in my first $100 of Bitcoin on 10/29/2019.

$23.81 divided by $9,192.34/BTC equals a 0.00259020 fractional quantity of Bitcoin I sent to Overstock.com. 

The IRS considers $23.81 as the Proceeds of this transaction, as I received $23.81 of kitchen bowls (property) in exchange for my Bitcoin (property). I paid them in a 0.00259020 quantity of Bitcoin instead of paying them U.S. Dollars with a credit card.

I need to calculate the Cost Basis of that 0.00259020 fractional quantity of Bitcoin I sent to Overstock.com, to determine if I had a capital gain/loss on my trade of Bitcoin for kitchen bowls. The IRS considers each buy/sell Bitcoin transaction a taxable event.

I divide the quantity of Bitcoin I sent to OverStock.com of (0.00259020) by the quantity of my original $100 worth of Bitcoin purchased of (0.01033035)—to get a percentage value of 25.07%. So I had to spend 25.07% of my original $100 of Bitcoin—or a $25.07 Cost Basis—to send that required (0.00259020) quantity of Bitcoin to Overstock.com. 

The formula for gain/loss is (Proceeds) minus (Cost Basis) = gain/loss

($23.81 Proceeds) minus ($25.07 Cost Basis) = -$1.26 short-term loss 

Since the price of Bitcoin had dropped to $9,192.34 from $9,390.78, I had to send a larger fractional quantity of Bitcoin to Overstock.com for that purchase. This was the penalty I paid for the daily price volatility in Bitcoin. I now had a 0.00774015 fractional quantity of my Bitcoin remaining.

The next Blog shows how I had to send an additional $1.37 of my Bitcoin to Overstock.com for extra shipping fees, due to an error in the order.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #71

What is a Central Bank Digital Currency (CBDC)

Saturday 07/16/2022

This is a good introduction to this topic written by Brandon Smith of Alt.Market.us, and as republished on Zerohedge.com.

“Central Bank Digital Currencies Are Coming – What Will The Consequences Be?”

https://alt-market.us/central-bank-digital-currencies-are-coming-what-will-the-consequences-be/

I always stay clear of the politics of an issue, as I believe people can have their own opinions on a topic, and should be free to debate their views. So I will attempt to just present the idea of Central Bank Digital Currencies (CBDCs) and what the possible motives are to create them, and what the cost/benefits will be—both for the Governments proposing creating CBDCs and their citizens that must eventually use and abide by them.

Exchanging cash between two individuals (in a peer-to-peer exchange) is not traceable by any Government. Sending Bitcoin electronically between two individuals, anywhere in the world, is potentially not traceable if those individuals use a non-custodial exchange, that does not have KYC (Know Your Customer) ID verification rules. These two peer-to-peer exchanges of physical cash money and non-traceable digital money, is a severe problem for Governments that believe most of this peer-to-peer, non-traceable money exchange activity is criminal in nature—whether or not that is true.

Many countries have already outlawed large denomination cash bills, in an attempt to stop this illicit cash-based activity. The introduction of a Central Bank Digital Currency (CBCD) will solve this problem by:

    1. Outlawing and removing cash as legal tender in that country
    2. Mandating that only the CBDC is legal tender, and must be used for all transactions in society. Cash will no longer be in existence.
    3. Governments will then have the ability, through your digital CBDC activity, to monitor all of your spending habits, and what sources of income you have, and from whom you received that income.
    4. The Governments can then “turn off” your CBDC account, if they believe you are doing something illegal, or against their rules of society.
    5. They then will only “turn on” your CBDC account, once you comply.

You might say to yourself “this could never happen” but it is already happening in China, as their CBCD has been integrated with and works in coordination with their “Social Credit” monitoring system.

In the years of 2020/2021, the collaboration of the U.S. Congress/Federal Reserve/U.S. Treasury Dept./IRS have already demonstrated a CBDC-like system in the U.S.—when they created and distributed millions of dollars through the three stimulus payments during the COVID-19 pandemic. 

If you listed a bank account on your most recently filed tax return, to receive a refund or pay tax due, this U.S. CBDC-like entity direct-deposited the three stimulus payments into that bank account—with no participation on your part. It just happened overnight, and magically a stimulus value of $1,200, $600 and $1,400 per person appeared in your bank account. So the U.S. Government already has access into your bank account, without any action on your part, to give them permission to do that. It would be naive to believe someday, with that same access, they could remove money from those same accounts, or freeze, or suspend those accounts.

The Canadian government went even further in 2022, during the so-called Canadian Trucker Protests, by seizing/freezing bank accounts of people who donated to that cause. They used a so-called “Emergencies Act” to justify doing this to their citizens, who acted improperly, according to the Canadian government. They also froze bank accounts of Canadian citizens protesting agains the Canadian Covid-19 vaccine mandate.

Here is a link from the U.S. Federal Reserve, on their ongoing research and publications about a U.S. Central Bank Digital Currency (CBDC).

https://www.federalreserve.gov/central-bank-digital-currency.htm

My own personal opinion is it will take years for America to adopt a CBDC, because of the privacy concerns. I believe the U.S. Government will stress the benefits of eliminating cash transactions—to prevent illicit criminal cash transactions—and the tax evasion that a cash economy allows. It is a known fact that much of the cash-only economy is never reported on an individual tax return. This equates to billions of lost tax revenue each year.

Bitcoin can never be shut down by any Government, as it is already thoroughly intermingled into the world economy, and literally held on the balance sheets of public companies and sovereign governments. So the government CBDCs will “compete” with Bitcoin, to be the preeminent digital currency used in their countries. It will be fascinating to watch.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #70

Are We Experiencing Another “Crypto Winter” in the Current Bitcoin Price Downturn? 

Friday 07/15/2022

Bitcoin has traded through four major boom/bust cycles since 2017 as seen in the monthly chart below—marked by the #1 and #2 circles and the blue up and red down trend arrows.

Bitcoin is currently in a downtrend since making an all-time high of $68,906/BTC on 11/10/2021. The most recent low was $17,614/BTC on 6/20/2022—seen in the Daily chart below.

Many journalist refer to this major downtrend as a “Crypto Winter.” There is even an article on Investopedia called “Crypto Winter” at: 

https://www.investopedia.com/crypto-winter-5496605

“Crypto Winter is a common expression that refers to a poorly performing cryptocurrency market. The term is comparable to a bear market in the stock market. A crypto winter signifies negative sentiment and lower average asset values among a large swath of digital currencies.”

Price volatility has been a common theme with Bitcoin since that first boom at the beginning of 2017. This latest downturn has been the most severe—as its low price has surpassed the previous cycle low from 2021.

So is this a time to panic, or a time to buy at low prices? Will that most recent low of $17,614/BTC on 6/20/2022 “hold” or will it be penetrated, with Bitcoin continuing to drop to an even lower price? No investor knows that answer, so they have to invest based on their risk tolerance.

MicroStrategy, one of the first publicly traded companies to add Bitcoin to its balance sheet, has continued to buy at these lower prices. MicroStrategy held approximately 129,699 BTC as of June 28, 2022.

Paul Krugman of The New York Times, wrote an article on 7/11/2022 called “Crypto Is Crashing. Where Were the Regulators?” He has been a long-term critic of the entire idea of cryptocurrencies. 

CoinDesk, an industry-leading Crypto news web site, published an article on 6/15/2022 called “Crypto Winter Is Here. The Weak Will Die, and the Strong Will Eat Their Bones.” Their opinion is the downturn is useful to get rid of inefficient cryptocurrency companies, and lets the smart money add to their investments at low prices.

The fundamental usefulness of Bitcoin and cryptocurrencies in general has not changed. Many extremely smart people believe Bitcoin in particular is here to stay, and will only become more valuable over time. It is the speculators that cause these boom/bust price swings. The strong investors keep buying at the low levels, while the weak ones sell at a loss, as they do not have the “staying power” of the institutional cryptocurrency investors.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #69

The 12 Cryptocurrency Books I used for Research

(Blog 6 of 6)

Thursday 07/14/2022

Bitcoin and Cryptocurrency—Trading for Beginners 2021 (3 books in 1)

by Nicholas Scott: Paperback published 2021, 310-pages

https://www.amazon.com/Bitcoin-Cryptocurrency-Trading-Beginners-2021/dp/B0924G66K4

    1. Trading Cryptocurrency (124 pages)
    2. Investing in Bitcoin and Cryptocurrency (95 pages)
    3. NFT For Beginners (89 pages)

Caution should be used with any “Investment” book to understand the author’s investment strategies—to gauge if they make sense for your investment risk profile. With that caution, these three books give a very good introduction to cryptocurrencies, and how a person can begin investing in them. The book on NFTs, or Non-Fungible Tokens, is very thorough to explain this new crypto investing category.

I have been investing in cryptocurrencies since October 2019, so I found the author’s explanations of his trading strategies very interesting to supplement my knowledge. Some of my strategies were substantiated, and I learned new ones.

 

The NFT Handbook by Matt Fortnow and Quharrison Terry

Paperback published 2022, 265-pages

https://www.amazon.com/NFT-Handbook-Create-Non-Fungible-Tokens/dp/111983838X

The first NFT was minted on 5/3/2014 by digital artist Kevin McCoy. Many NFTs then were created with and on the Ethereum blockchain from 2017 to 2020. Then NFTs in general became mainstream in 2021, with even Christie’s and Sotheby’s auctioning and selling NFT artwork.

Per his LinkedIn description: “Matt is an entertainment lawyer turned entrepreneur, now heavily involved in crypto and NFTs. In 1996, Matt co-founded Commissioner.com, the internet’s first fantasy sports service.” 

Per Amazon: “Quharrison Terry is a growth marketer and entrepreneur. Co-Founder of 23VIVI, the world’s first digital art marketplace powered by the Bitcoin blockchain, he is a 4x recipient of LinkedIn’s Top Voices in Technology Award. He currently leads Growth Marketing at Mark Cuban Companies.”

So it goes without saying that these two authors are incredibly qualified to explain this brand new art form of NFTs, and the cryptocurrency network that makes it all possible. They discuss these topics in the ten chapters.

1) Introduction to NFTs                         2) What are NFTs

3) Why NFTs Have Value                       4) History of NFTs

5) NFT Marketplaces                              6) Creating and Minting NFTs

7) Selling NFTs                                          8) Buying NFTs

9) Legal Aspects of NFTs.                    10) The Future of NFTs

You will get a thorough introduction how to participate in the world of NFTs.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #68

The 12 Cryptocurrency Books I used for Research

(Blog 5 of 6)

Wednesday 07/13/2022

The Gold Standard by Peter C. Earle and William J. Luther: Paperback published 2021, 328-pages

https://www.amazon.com/Gold-Standard-Retrospect-Prospect/dp/1630692190

The Gold Standard plays an important role in any discussion about Bitcoin, as they both are considered forms of “Sound Money” as compared to Fiat currencies. 

These two authors from the American Institute For Economic Research have assembled and edited a thorough book of articles written by themselves and many other contributors. Together they chronicle the history of the Gold Standard in the United States and in Europe, and why all these governments eventually abandoned that sound money system, for Fiat currency issued and controlled by Central Banks.

They end the book with a chapter and discussion of cryptocurrency called “Digital Gold: The Case for Cryptocurrencies,” as a thesis for how Bitcoin can improve upon the past gold-backed currencies, or the present fiat-backed currencies. 

A Gold Standard and a Bitcoin-based monetary system have scarcity that controls inflation, compared to Fiat currencies that are not scarce and create inflation.

 

End The Fed by Ron Paul: Paperback published 2009, 212-pages

https://www.amazon.com/End-Fed-Ron-Paul/dp/0446549177

Ron Paul is probably the most famous critic of the Federal Reserve (The Fed) in America. He wrote this book as a result of his Presidential campaigns, where a grass-roots effort to “End the Fed” arose out of the 2008 financial crisis. His supporters at his rallies would actually chant “End the Fed,” so he wrote this book.

Ron Paul, like Saifedean Ammous, is a student of and proponent of the Austrian school tradition of economics. He actually met and studied under the icons of that movement, namely Ludwig von Mises, Murray N. Rothbard, F.A. Hayek, Henry Hazlitt, and Hans F. Sennholz. He was a member of the U.S. Congress from 1976 to 1977, from 1979 to 1985, and from 1997 to 2013—representing the Texas 14th and 22nd congressional districts in the House of Representatives. That platform gave him the opportunity to meet and work with these economists, to interview the Chairmen of the Federal Reserve in congressional hearings, and see first hand how the Fiat currency used in the United States, gave the U.S. Government unlimited money to fund massive deficit spending, monetized by the Fed “printing money.”

He describes the history of money in the United States, from the 19th century Gold Standard, to the 1913 creation of the Federal Reserve, to the 1971 ending of the Gold Standard, to the current “money printing” of the Federal Reserve. He explains in detail the history of the Federal Reserve, why it was created and by whom, and who it is setup to serve, which in his opinion is often not the American people.

He makes no mention of Bitcoin in the book, but has become a public proponent of Bitcoin to become legal tender in the U.S., to compete with the U.S. Dollar.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #67

The 12 Cryptocurrency Books I used for Research

(Blog 4 of 6)

Tuesday 07/12/2022

Mastering Bitcoin by Andreas M. Antonopoulos: Paperback published 2017, 375-pages

https://www.amazon.com/Mastering-Bitcoin-Programming-Open-Blockchain/dp/1491954388

This book is highly technical and is geared towards programmers, who want to understand the Bitcoin Core software that runs a node, how to setup Bitcoin wallets, and the scripting languages used to customize Bitcoin with smart contracts.

The author ingeniously uses 7 scenarios to explain the basic features of Bitcoin.

    1. Alice, who buys a cup of coffee at a Bob’s Cafe with Bitcoin
    2. Carol, an art gallery owner, who accepts Bitcoin for art sales
    3. Bob, the Cafe owner, who pays a web contractor in India with Bitcoin
    4. Gabriel, a young t-shirt vendor in Rio Di Janeiro, who accepts Bitcoin
    5. Eugenia, director of a charity in the Philippines, who accepts Bitcoin
    6. Mohammed, an importer in Dubai, uses Bitcoin for international payments
    7. Jing, a computer engineering student in Shanghai, who is mining Bitcoin

These scenarios help to explain how Bitcoin works and functions in the world.

 

Out of the Ether by Matthew Leising: Hardcover published 2021, 313-pages

https://www.amazon.com/Out-Ether-Amazing-Ethereum-Destroyed/dp/1119602939

Ethereum is the second largest cryptocurrency after Bitcoin. It has created a large FinTech (Financial Technology) market for DeFi (Decentralized Finance) applications—by using the robust programming language built into Ethereum. These DeFi applications create smart contracts that can automate many traditional tasks in financial firms—like borrowing, saving, investing, and trading. It is programmable money with smart contracts, created with Ethereum, and runs on its own blockchain, using the Ether token as a payment method on its network.

Ethererum was conceived in 2013 by Vitalik Buterin, who was a 19 year old computer programming student. He wrote the Ethereum white paper in 2014.

This book chronicles the invention of Ethereum by Vitalik, and the people he associated with to build the team that turned Ethereum into a reality on 7/30/2015. His family was from Russia and moved to Canada when he was only five years old. It is a fascinating story how Vitalik developed his intellect and skills, to the point he is now considered a genius for computer programming and cryptocurrency issues.

One of the first and most important DeFi applications using Ethereum was known as the DAO (Decentralized Autonomous Organization), which was a crowdfunding DeFi setup in April 2016 to raise money to fund the final development of Ethereum before its first launch. It raised over $150 million, but then was hacked in the Summer of 2016, and the hackers stole $60 million of the Ether token value in the DAO. This book chronicles those hacking events, and how the Ethereum community fought off the hacker, to save the Ethereum organization from failing.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #66

The 12 Cryptocurrency Books I used for Research

(Blog 3 of 6)

Monday 07/11/2022

Bitcoin: Hard Money You Can’t F*ck With by Jason A. Williams: Softcover published 2020, 216-pages

https://www.amazon.com/Bitcoin-bitcoin-global-reserve-currency/dp/1838318402

Jason A. Williams is a successful entrepreneur, educated as a medical doctor who pioneered Urgent Care facilities with FastMed, and owns PRTI Inc.—which recycles waste tires—using the renewable energy from that plant to run a Bitcoin Mining Farm. He also is a founder of the investment firm Morgan Creek Digital Assets.

He uses his vast finance and Bitcoin experience to expertly explain money, cryptocurrencies, and why he believes Bitcoin will be the next global reserve currency. The book is divided into three parts, with 10/11/10 chapters in the 3 parts.

Why Bitcoin Matters Now

A Brief History of Money (And Money Printing)

HyperBitcoinIzation: How Bitcoin Becomes the Next Global Reserve Currency

Like The Bitcoin Standard and The Fiat Standard, this book explains money, how Fiat Currency and the Federal Reserve work, and how Bitcoin is sound money.

 

 

Bitcoin Billionaires by Ben Mezrich: Published 2019, Paperback, 276 pages

https://www.amazon.com/Bitcoin-Billionaires-Genius-Betrayal-Redemption/dp/1408711915

Ben Mezrich is a very accomplished author, who wrote the book The Accidental Billionaires which was turned into the film The Social Network. The characters in that book and film centered around Mark Zuckerberg of Facebook fame, and Tyler and Cameron Winklevoss—the two famous twins who attended Harvard with Mark Zuckerberg, and accused him of stealing the idea for Facebook from them.

The Winklevoss twins sued Zuckerberg, then invested and grew the $65 million they received in the settlement into over $2 billion investing in Bitcoin itself, and businesses involved in the early development of Bitcoin. This book tells the fascinating story of how this happened and the redemption the twins earned by turning the Facebook defeat/shame they experienced into a literal fortune.

The book reads like a mystery novel, introducing the real-world Bitcoin personalities of the Winklevoss twins, Roger Ver, Eric Voorhees, and Charlie Shrem—and how these people were involved in a start-up company called BitInstant. The timeline of the story is from early 2008 through to early 2018.

BitInstant was a Bitcoin Exchange started in 2011 by Charlie Schrem and Gareth Nelson—designed to make it much easier to purchase Bitcoins—than from Mt. Gox. The Wilklevoss twins invested over $1 million into BitInstant, and went on to acquire about 1% of all the Bitcoins in the world, during this 10-year period.

Intertwined within this story is a very good explanation of Bitcoin, how it works, and the circumstances under which it was created. It solves specific problems with money in how the worldwide banking system works, and moves money.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #65

The 12 Cryptocurrency Books I used for Research

(Blog 2 of 6)

Sunday 07/10/2022

The Fiat Standard by Saifedean Ammous: Hardcover published 2021, 358-pages

https://www.amazon.com/Fiat-Standard-Slavery-Alternative-Civilization/dp/1544526474

Saifedean Ammous elaborates on the work he did in The Bitcoin Standard, to examine The Fiat Standard, from the perspective that it is a monetary system similarly based on engineered systems and technology. He details the economic and social costs/benefits the U.S. Dollar system has given the world the last 109 years.

Fiat in the economic sense means “by decree.” The U.S. Dollar has been declared, by decree, to be legal tender, as payment for transactions, debts and taxes.

Fractional Reserve Banking is discussed, and how a Fiat currency supports lending out more money than the bank actually has in liquid deposit assets. The U.S. Federal Reserve is also discussed, as the “lender of last resort” not only for U.S. banks, but for all Western banks in the world and their Country’s central banks.

“Printing money” by Central Banks is explained, and how that allows unlimited Government spending, creates inflation, and causes income inequality. Bitcoin is then presented as the “Sound Money” solution for a Global Settlement Network.

 

The Basics of Bitcoins and Blockchains by Antony Lewis: Published 2021, Paperback, 408 pages

https://www.amazon.com/Basics-Bitcoins-Blockchains-Introduction-Cryptocurrencies/dp/1642506737

Antony Lewis lives in Singapore and has led a career in finance, after studying at Cambridge University. He works at Temasek’s blockchain venture building and investment team. Tamasek is a global investment company based in Singapore.

Antony explains Bitcoin, cryptocurrencies, blockchains, and the technology that created this new digital money. He gives a history of money, the Gold Standard, and the emergence of Fiat Currencies. He explains the benefits and bottlenecks of the current digital “money movement” system controlled by banks and governments. He then contrasts that with the advantages of Bitcoin and cryptocurrencies, and how they can solve those same bottlenecks in global money transfers.

He explains in detail the technology behind cryptocurrencies, such as cryptography, encryption/decryption, hashes, digital signatures and blockchains. He describes how cryptocurrency wallets and exchanges allow users to buy/sell/exchange/spend/send cryptocurrencies peer-to-peer between two people, instantly, anywhere in the world, 24-hrs/day, 365-days/year.

He ends the book with these two statements about cryptocurrency technology:

    1. They provide new censorship resistant financial assets, methods of value transfer, and transparent automation of business transactions. 
    2. They are new technologies that allow business-to-business data and asset transfer, without the traditional financial intermediaries, or money clearance delays.

For me it was a very technical book—but well worth my effort to understand it.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #64

The 12 Cryptocurrency Books I used for Research

(Blog 1 of 6)

Saturday 07/09/2022

Digital Gold by Nathaniel Popper: Hardcover published 2015, 398-pages

https://www.amazon.com/Digital-Gold-Bitcoin-Millionaires-Reinvent/dp/006236250X

Nathaniel Popper covers finance and technology from San Francisco for The New York Times. This book is the undisputed “bible” to learn about all the early participants who created the breakthroughs in cryptography and digital cash that led to the creation of Bitcoin. Their inventions and philosophical pursuits were the precursors to Bitcoin. The story begins on 1/10/2009, when Hal Finney mined his first 50 Bitcoins, becoming the second person after Satoshi Nakamoto to do that. 

Who were the cypherpunks? Who were the geniuses in the study of public-key cryptography? Why has Satoshi Nakamoto remained anonymous? What were Mt. Gox and Silk Road, and why did they fail? How did Bitcoin become mainstream?

Read about the seminal events that influenced the early Bitcoin world, from January 2009 to the end of 2014. It is a page-turning read of intrigue, that not only illuminates the personalities involved, but explains the revolutionary technology.

 

The Bitcoin Standard by Saifedean Ammous: Hardcover published 2018, 286-pages

https://www.amazon.com/Bitcoin-Standard-Decentralized-Alternative-Central-dp-1119473861/dp/1119473861

Saifedean Ammous is an economist who evangelizes about and teaches from the Austrian school tradition of economics. He is an associate professor of economics at the Lebanese American University and a member of the Center on Capitalism and Society at Columbia University.

This book explains how humans have defined, created, used, and valued money throughout history. From the primitive times, to the 19th century Gold Standard, up to the present day when Governments all over the world issue and use Fiat currencies—no longer backed by redeemable Gold.

He explains why Gold convertibility to the U.S. Dollar was abandoned in 1971, and then how Fiat currencies since then have intentionally caused inflation, devalued their currencies, and have allowed unlimited government spending with central bank printed money, no longer backed by Gold.

Bitcoin is then explained as a solution to the problems of Fiat money, by bringing back “sound money” to the worldwide banking system, which is currently controlled by Governments and their Central Banks.

Bitcoin is “decentralized” money not controlled by Governments or Central Banks. It is “scarce” with built-in inflation protection, as its issuance “halves” every four years, towards a final supply of only 21 million Bitcoins ever to be produced. The advantages of Bitcoin are explained in this book, as an alternative to Fiat currencies, and to the potential of Bitcoin becoming the new world reserve currency.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #63

Ethereum and the Altcoins

Friday 07/08/2022

Bitcoin was the original cryptocurrency launched on January 3, 2009. It is still by far the largest measured by market capitalization. Every cryptocurrency created after Bitcoin is called an “Altcoin” with Ethereum being the second largest by market capitalization after Bitcoin. 

These were the ten top cryptocurrencies on 7/6/2022 at 8:30pm EDT, as seen in the price chart on Coinbase, ranked by market cap.

PayPal lets its users buy/hold/sell/send/receive four cryptocurrencies:

    • Bitcoin (ranked #1 by market cap.)
    • Ethereum (ranked #2 by market cap.)
    • Litecoin (ranked #21 by market cap.)
    • Bitcoin Cash (ranked #31 by market cap.)

Litecoin and Bitcoin Cash evangelize their improvements to Bitcoin.

 

Coinbase lists over 10,000 cryptocurrency prices at this web page:

https://www.coinbase.com/explore

Each cryptocurrency has its own “About” page that explains the Altcoin, why it was created, and what unique issue or problem it solves.

An entire book could be written about many of the popular Altcoins. Below is a brief introduction to the other three cryptocurrencies besides Bitcoin that Paypal supports—being Ethereum, Litecoin and Bitcoin Cash.

 

About Ethereum at https://ethereum.org/en/what-is-ethereum/

Ethereum was a brand new cryptocurrency created by Vitalik Buterin in 2014.

“Ethereum is a technology that lets you send cryptocurrency to anyone for a small fee. It also powers applications that everyone can use and no one can take down. It’s the world’s programmable blockchain. Ethereum builds on Bitcoin’s innovation, with some big differences. Both let you use digital money without payment providers or banks. But Ethereum is programmable, so you can also use it for lots of different digital assets–even Bitcoin! This also means Ethereum is for more than payments. It’s a marketplace of financial services, games and apps that can’t steal your data or censor you.”

 

About Litecoin at https://litecoin.org/

Litecoin, authored by Charlie Lee in 2011, was created from a copy of Bitcoin’s source code—as compared to a hard fork from the Bitcoin blockchain.

“Litecoin is a peer-to-peer Internet currency that enables instant, near-zero cost payments to anyone in the world. Litecoin is an open source, global payment network that is fully decentralized without any central authorities. Mathematics secures the network and empowers individuals to control their own finances. Litecoin features faster transaction confirmation times and improved storage efficiency than the leading math-based currency, Bitcoin. With substantial industry support, trade volume and liquidity, Litecoin is a proven medium of commerce complementary to Bitcoin.”

 

About Bitcoin Cash at https://bitcoincash.org/

Bitcoin Cash was a hard fork from Bitcoin in 2017, by a group of programmers.

“Bitcoin Cash brings sound money to the world, fulfilling the original promise of Bitcoin as “Peer-to-Peer Electronic Cash”. Merchants and users are empowered with low fees and reliable confirmations. The network transaction fee for a typical Bitcoin Cash transaction is less than one penny.”

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #62

Sovereign Nations using Bitcoin as Legal Tender and are holding Bitcoin in their National Reserves

Thursday 07/07/2022

El Salvador and the Central African Republic have adopted Bitcoin as legal tender in their respective countries, in addition to their national currencies. El Salvador uses the U.S. Dollar as their national currency. 

The Central African Republic uses the Central African Franc (CFA) as their national currency—which is tied to the Euro with a fixed exchange rate—at 1 Central African Franc (CFA) always equal to 0.0015 Euro.

Individuals all over the world hold Bitcoin in their personal digital wallets. Many publicly traded companies in the U.S. now hold Bitcoin on their balance sheets. Sovereign countries are beginning to use Bitcoin as legal tender, and buying Bitcoin to hold as an asset in their national reserves. 

Many smart financial professionals believe Bitcoin will be the world’s next reserve currency, supplanting the U.S. Dollar as the world’s reserve currency. A status it has held since 1944—when the victors of World War II—at the Bretton Woods conference, created the U.S. Dollar backed system.

See this Bitcoin Magazine article by Drew McMartin from 2/8/2022:

“BITCOIN: THE INEVITABLE PATH TOWARD GLOBAL ADOPTION OF THE NEXT WORLD RESERVE CURRENCY

A changing of the guard is standard for fiat currencies — but bitcoin is set to supplant them all.”

https://bitcoinmagazine.com/business/bitcoins-path-toward-global-adoption

Some pertinent quotes from that article:

“Stanley Druckenmiller, who is considered a legendary investor in part due to his study of history and macroeconomics, thinks the USD will lose reserve currency status within 15 years.”

“For example, El Salvador became the first government to make bitcoin legal tender in September 2021. Today, there are more residents with Bitcoin wallets than traditional bank accounts.”

“Paul Tudor Jones says it best, “Bitcoin has this enormous contingent of really, really, smart sophisticated people who believe in it…. You’ve got this group—which by the way is crowdsourced all over the world—that are dedicated to seeing Bitcoin succeed in becoming a commonplace store of value and transactional to boot.”

Will this experiment that El Salvador and the Central African Republic embarked on prove to be a financially wise move for their country and its citizens? Why would they make such a move? Here are four examples of how adopting Bitcoin as legal tender might improve their citizens lives.

    1. As a facilitator of inexpensive remittance payments to their citizens—from their family members and friends—working in the United States and other wealthier countries. Relatives can send Bitcoin to their family members, as easily as sending them an email, for very low transaction fees, as compared to remittance services like Western Union.
    1. As a way to provide “banking services” to their citizens—many of which are underserved, or “unbanked,” by the traditional banking services offered in their towns. Less than 30% of the population in El Salvador have a traditional bank account. They now instead can be a “Bank of One” with their Bitcoin wallet on an inexpensive smart phone.
    1. As a way to attract investment into their countries. El Salvador is attempting to create a “Bitcoin City” via a $1 billion bond offering, near the Conchagua volcano’s geothermal energy to power Bitcoin mining.
    1. As a way to encourage innovation with Blockchains—like the Sango project in the Central African Republic—for Citizenship, e-Residency, and Land Property rights. See their web site at:

https://sango.org/

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #61

Bitcoin used to Pay for Goods and Services, or a Store of Value to counter U.S. Cash inflation

Wednesday 07/06/2022

Bitcoin transaction fees are normally too high to pay for everyday goods and services, and in the U.S. those everyday transactions still have a capital gain/loss calculation for every item you would buy using Bitcoin. When the Bitcoin network is very busy, transaction fees would likely be more than the inexpensive everyday item you would pay for with Bitcoin. 

PayPal lets you transfer in your Bitcoin, Ethereum, Litecoin and Bitcoin Cash—to then be converted or sold for U.S. Dollars. That U.S. cash can then be used to purchase everyday goods and services from their millions of merchants that use PayPal to process payments. But you still must calculate the capital gain/loss on each transaction you use PayPal to buy something—with U.S. Dollars obtained by selling your cryptocurrency assets.

For smaller everyday purchases, it is much cheaper and more efficient to use a traditional credit or debit card, or a digital wallet like ApplePay. The merchants you buy from pay the transaction fees, not you. They pay 3% transaction fees to give you the convenience to pay them with digital U.S. Cash.

Some U.S. companies are converting their strategic cash to Bitcoin—to hold on their balance sheets—to counter inflation that is depreciating their cash holdings. The top 11 companies doing this as of 4/12/2022 are:

    • MicroStrategy (owns 125,051 BTC)
    • Tesla (owns 42,902 BTC)
    • Galaxy Digital Holdings (owns 16,400 BTC)
    • Voyager Digital LTD (owns 12,260 BTC)
    • Marathon Digital Holdings Inc (owns 8,956 BTC)
    • Square Inc (owns 8,027 BTC)
    • Hut 8 Mining Corp (owns 6,115 BTC)
    • Riot Blockchain, Inc. (owns 5,783 BTC)
    • Core Scientific (owns 5,296 BTC)
    • Bitfarms Limited (owns 4,883 BTC)
    • Coinbase Global, Inc (owns 4,482 BTC)

https://www.business2community.com/crypto-news/bitcoin-treasury-heres-the-firms-holding-btc-on-their-balance-sheet-02467785

MicroStrategy in 2020 bought $1.125 billion of Bitcoin—as they could not earn interest on their cash holdings—that was dwindling due to inflation. Twenty-two years ago they could have earned 5% a year on that cash in a safe 6-month Certificate of Deposit, for $56 million a year in interest.

MicroStrategy now owns 129,699 BTC as of 6/29/2022, as their CEO Michael Saylor believes Bitcoin will appreciate greatly over the long-term.

 The last four boom/bust cycles in Bitcoin had these price swings:

    • Jan. 2017 at 762 BTC to a high of 19,862 BTC in Dec. 2017, to then drop down to 3,359 BTC in Jan. 2019
    • Jan 2019 at 3,359 BTC to a high of 13,844 BTC in June 2019, back down to 3,925 BTC in March 2020
    • March 2020 at 3,925 BTC to a high of 64,789 BTC in April 2021, back down to 28,958 BTC in June 2021
    • 28,958 BTC in June 2021 to a high of 68,906 BTC in Nov. 2021, to the most recent low of 17,614 BTC in June 2022

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #60

Bitcoin Mining—A Waste of Electricity, or an Industry in search of “Off-the-Grid” Energy Sources

Tuesday 07/05/2022

A Bitcoin Miner has two types of expenditures required to setup and operate a profitable mining rig—the equipment/building costs of the computer mining equipment and the building they are contained in, and a source of cheap electricity to be used on a 24/7/365 continual basis.

Many mainstream environmentalists and activists bemoan Bitcoin as a terrible waste of energy that is contributing to global warming. See this article from the Columbia Climate School—Climate, Earth, and Society.

“Bitcoin’s Impacts on Climate and the Environment” by Renee Cho:

https://news.climate.columbia.edu/2021/09/20/bitcoins-impacts-on-climate-and-the-environment/

 

Conversely this is an article from Seeking Alpha that explains the opposite view that the electricity Bitcoin miners use is not a problem.

“Bitcoin’s Energy Usage Isn’t A Problem. Here’s Why” by Lyn Alden Schwartzer at:

https://seekingalpha.com/article/4452010-bitcoin-energy-usage-isnt-a-problem-heres-why

 

I intentionally stay clear of political and environmental discussions, as I am more interested in the logic/profit motive of a Bitcoin miner. Most people agree the equipment/building costs are fairly equal to all potential Bitcoin miners—with variations only in how efficiently they can procure the mining equipment and build/rent the space to setup their mining farm.

The competitive distinction between miners is who can find and secure the least expensive source of reliable electricity—that can run 24-hrs/day, 365-days/year—to operate their mining farm to successfully mine Bitcoin. Increasingly these electricity sources are “reusing” an otherwise “discarded” source of electricity. For example “gas flaring” at oil rigs; hydroelectric power in remote locations too far away to economically transmit the electricity over the grid; geothermal electricity at remote volcanic locations; and solar panels in very remote areas too far away from population centers.

A Bitcoin Mining operation can be literally located anywhere in the world, where they can obtain cheap electricity and a reliable Internet connection. It could be in New York City, or at the Arctic, or in the Amazon jungle, or in any location that can build the mining farm/structure and create/utilize a very cheap or “free” source of reliable, continuous electricity. 

If you were a very large Bitcoin Mining operation, you would be greatly incentivized to find or create a very cheap source of underutilized electricity. That is exactly what is happening with the Bitcoin Mining market in 2022. These articles below substantiate this hypothesis as miners pay zero or very low rates for their renewable electricity to operate their Mining Farms.

 

“PRTI makes cryptocurrency from old car tires in Northern Carolina”

https://www.datacenterdynamics.com/en/news/prti-makes-cryptocurrency-from-old-car-tires-in-northern-carolina/

“Product Recovery Technology International (PRTI), is processing discarded tires at a site in Franklinton, north of Raleigh, to create oil, syngas, carbon char, and steel. It is then using the gas to generate electricity which it uses in bitcoin miners in its on-site office.”

 

“Bitcoin Miners Tap Hydropower as Environmental Criticism Grows”

https://www.youtube.com/watch?v=D6YtzoIy0DM

“A bitcoin mining facility in upstate New York is using electricity from a local hydroelectric plant powered by the Niagara River. The company is part of a group of miners attempting to make the industry more sustainable, both environmentally and financially.”

 

“El Salvador explores bitcoin mining powered by volcanoes”

https://apnews.com/article/cryptocurrency-technology-business-bitcoin-central-america-e0074a2343a3e3a9beb08723ff65ecf5#:~:

“At a geothermal power plant near El Salvador’s Tecapa volcano, 300 computers whir inside a trailer as they make complex mathematical calculations day and night verifying transactions for the cryptocurrency bitcoin.”

 

If you ran a hedge fund and had $10 million to invest to build a Bitcoin Mining Farm in 2023 anywhere in the world—would you use electricity you had to pay for, or would you search the world for the most innovative way to produce free, off-the-grid, continuous, reliable, renewable electricity? 

Bitcoin Mining is fueling creation of clean, innovative renewable energy sources all over the world—biofuel, solar, wind, hydro and geothermal.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #59

IRS Letters to 10,000 Cryptocurrency Investors—The Letters 6174 and 6174-A

Monday 07/04/2022

The previous Blog described the three types of letters the IRS began sending to cryptocurrency investors in July 2019—if the IRS suspected the taxpayers did not correctly report taxable cryptocurrency transactions on their yearly tax returns for the tax years 2013 through 2017. 

The previous blog explained the first Letter 6173 and the instructions to respond. That Letter 6173 informs the taxpayer that the IRS “suspects” that they have not reported their taxable cryptocurrency transactions on the 2013 to 2017 tax returns, or they did not file those tax returns.

The Letter 6174 informs the taxpayer the IRS “is aware” of their cryptocurrency holdings, and very strongly suggests they file the tax returns for 2013 to 2017, or amend those same tax returns to report their taxable cryptocurrency transactions in those years. The IRS is now getting very serious.

The Letter 6174-A is when the IRS “accuses you of failing to disclose cryptocurrency income” and threatens you with future civil or criminal enforcement activity. Criminal Investigation agents can be used.

 

Letter 6174:

“Why we’re writing to you:

We have information that you have or had one or more accounts containing virtual currency but may not know the requirements for reporting transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies. 

What you need to do: 

After reviewing the information below, if you believe you didn’t accurately report your virtual currency transactions on a federal income tax return, you should file amended returns or delinquent returns if you didn’t file a return for one or more taxable years. If you do not accurately report your virtual currency transactions, you may be subject to future civil and criminal enforcement activity.

When filing amended or delinquent returns, write “Letter 6174” at the top of the first page of the return. Mail the original amended or delinquent return to: 

Internal Revenue Service, 2970 Market Street, Philadelphia, PA 19104 

You do not need to respond to this letter. 

 

 Letter 6174-A:

“Why we’re writing to you:

We have information that you have or had one or more accounts containing virtual currency but may not have properly reported your transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies. What you need to do: 

After reviewing the information below, if you believe you didn’t accurately report your virtual currency transactions on a federal income tax return, you should file amended returns or delinquent returns if you didn’t file a return for one or more taxable years. If you do not accurately report your virtual currency transactions, you may be subject to future civil and criminal enforcement activity. For more information, visit www.irs.gov/filing. 

When filing amended or delinquent returns, write “Letter 6174-A” at the top of the first page of the return. Mail the original amended or delinquent return to: 

Internal Revenue Service, 2970 Market Street, Philadelphia, PA 19104 

You do not need to respond to this letter. 

Note, however, we may send other correspondence about potential enforcement activity in the future. 

 

Both Letters 6174 and 6174-A also give these suggestions:

“Reporting virtual currency transactions: 

Virtual currency is considered property for federal income tax purposes. Generally, U.S. taxpayers must report all sales, exchanges, and other dispositions of virtual currency. An exchange of a virtual currency (such as Bitcoin, Ether, etc.) includes the use of the virtual currency to pay for goods, services, or other property, including another virtual currency such as exchanging Bitcoin for Ether. This obligation applies regardless of whether the account is held in the U.S. or abroad. More information can be found on www.irs.gov and in Notice 2014-21, found at www.irs.gov/pub/irs-drop/n-14-21.pdf, which describes how general tax principles for property transactions apply to transactions involving virtual currency. 

You must report virtual currency transactions on your tax return, regardless of whether you received a payee statement for the transaction (such as a Form W-2, Form 1099, etc.). Common IRS schedules for reporting virtual currency transactions include the following: 

    • Schedule C as an Independent Contractor; 
    • Schedule D for short-term and long-term Capital Gain/Loss transactions; 
    • Schedule E for supplemental income from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in REMICs.”

The IRS Letters 6173, 6174, and 6174-A are very serious communications from the IRS that warrant immediate attention by the taxpayer.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #58

IRS Letters to 10,000 Cryptocurrency Investors

Sunday 07/03/2022

The IRS announced action on 7/26/2019 as stated on this web page:

https://www.irs.gov/newsroom/irs-has-begun-sending-letters-to-virtual-currency-owners-advising-them-to-pay-back-taxes-file-amended-returns-part-of-agencys-larger-efforts

 

“IRS has begun sending letters to virtual currency owners advising them to pay back taxes, file amended returns; part of agency’s larger efforts”

“IR-2019-132, July 26, 2019

WASHINGTON — The Internal Revenue Service has begun sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly.

“Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” said IRS Commissioner Chuck Rettig. “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”

The IRS started sending the educational letters to taxpayers last week. By the end of August, more than 10,000 taxpayers will receive these letters. The names of these taxpayers were obtained through various ongoing IRS compliance efforts.

For taxpayers receiving an educational letter, there are three variations: Letter 6173, Letter 6174 or Letter 6174-A, all three versions strive to help taxpayers understand their tax and filing obligations and how to correct past errors.

Taxpayers are pointed to appropriate information on IRS.gov, including which forms and schedules to use and where to send them.”

The links to those three letters are below:

 

Letter 6173 is the first and least threatening letter the IRS will send to cryptocurrency investors that they suspect have not reported their crypto activity on one or more tax returns. The taxpayer has 30-days to respond.

“Why we’re writing to you. We have information that you have or had one or more accounts containing virtual currency and may not have met your U.S. tax filing and reporting requirements for transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies.”

“For one or more of tax years 2013 through 2017, we haven’t received either a federal income tax return or an applicable form or schedule reporting your virtual currency transactions.”

“What you need to do by the “respond by” date above. 

Take one of the following actions: 

    • If you failed to file one or more income tax returns, file the delinquent returns and report your virtual currency transactions as soon as possible. For more information see www.irs.gov/filing 
    • If you made a mistake on your income tax return, such as not reporting your virtual currency transactions or incorrectly calculating your income, gain, or loss; you can file an amended return. For more information, visit www.irs.gov/forms-pubs/about-form-1040x 
    • If you believe you followed all tax and information reporting requirements relating to your virtual currency accounts, mail or eFax the following to the address or eFax number shown at the top of this letter. 
    1. A statement of facts explaining your position. Include a complete history of previously reported income from your virtual currency transactions. Explain the actions you took to become compliant with U.S. reporting requirements and provide copies of previously filed documents that confirm your  compliance.
    2. Your contact information, including your telephone number, complete address, and the address where you receive mail (if different).”

“If we don’t hear from you by the “respond by” date: 

We may refer your tax account for examination. Please be aware that underpayments of tax are subject to interest and penalties.”

The taxpayer’s response gets mailed to the IRS in Philadelphia at 2970 Market Street—where the IRS Criminal Investigation (CI) Division is located. CI Special Agents are authorized to carry guns and badges, when they show up at your door or business. CI is involved with these letters, as they suspect some cryptocurrency transactions might involve illegal activity.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #57

Taxable Cryptocurrency Transactions—IRS Guidance from its Cryptocurrency FAQ (Cont.)

(Blog 7 of 7)

Saturday 07/02/2022

This concludes the questions from the IRS FAQ on Cryptocurrency.

 

Q44.  Where do I report my ordinary income from virtual currency?

A44. You must report ordinary income from virtual currency on Form 1040, U.S. Individual Tax Return, Form 1040-SS, Form 1040-NR, or Form 1040, Schedule 1, Additional Income and Adjustments to Income, as applicable.

 

Q45.  Where can I find more information about the tax treatment of virtual currency?

A45.  Information on virtual currency is available at IRS.gov/virtualcurrency. Many questions about the tax treatment of virtual currency can be answered by referring to Notice 2014-21 and Rev. Rul. 2019-24.

 

Q46. What records do I need to maintain regarding my transactions in virtual currency?

A46. The Internal Revenue Code and regulations require taxpayers to maintain records that are sufficient to establish the positions taken on tax returns. You should therefore maintain, for example, records documenting receipts, sales, exchanges, or other dispositions of virtual currency and the fair market value of the virtual currency.

See this IRS web page for their Virtual currency source of information.

https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies

There are many more hyperlinks to related References/Related Topics as seen in this image below.

One interesting topic is the IRS has been sending letters to Taxpayers they believe have not reported their cryptocurrency transactions on their tax returns.

 

The IRS Costing Methods you can use when you sell your cryptocurrency

The IRS mentioned the FIFO (First In, First Out) in question #41 in the FAQ, and the Specific ID Identification method (Spec ID) in question #40. Most cryptocurrency exchanges use the Highest In, First Out (HIFO) costing method when they calculate the capital gain or losses for your taxable cryptocurrency transactions each tax year. 

There are seven possible Costing Methods you can choose from, for example to designate the Bitcoins you purchased, to the Bitcoins you will sell. You can use these methods to calculate your Gain or Loss. See this article from the Koinly | Blog entitled “What is Cost Basis in Crypto?” at:

https://koinly.io/blog/calculate-cost-basis-crypto-bitcoin/

 

  1. First In, First Out (FIFO)

FIFO means the first asset you buy is the first asset you sell.

  1. Last In, First Out (LIFO)

LIFO means the most recent asset you purchased is the first you sell

  1. Average Cost Basis (ACB)

To calculate the cost basis using ACB, you need to figure out an average cost for all assets. You calculate this by adding up the total amount you paid to buy your asset(s) and divide it by the total amount of coins/tokens held.

  1. Highest Cost, First Out (HIFO)

HIFO means the highest cost asset you purchased is the first you sell

  1. Lowest Cost, First Out (LCFO)

LCFO means the lowest cost asset you purchased is the first you sell

  1. Specific Lot Identification (Spec ID)

Spec ID lets you select the specific lot of crypto asset to sell, instead of using the date of sale—like the first asset (FIFO) or most recent asset (LIFO).

  1. Loss Gain Utilization (LGUT)

LGUT method means you use the cost basis that would result in the largest loss first. You can’t use the same cost basis over and over again, so you’ll work through your available cost basis options from the largest loss to the smallest. Short-term losses are prioritized over long-term losses.

 

Once you pick a cost basis method, you must use that method consistently when calculating your gains and losses. The default again for most cryptocurrency exchanges is to use the HIFO costing method.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #56

Taxable Cryptocurrency Transactions—IRS Guidance from its Cryptocurrency FAQ (Cont.)

(Blog 6 of 7)

Friday 07/01/2022

This continues the questions from the IRS FAQ on Cryptocurrency.

 

Q37. When my charitable organization accepts virtual currency donations, what are my IRS reporting requirements? (added December 26, 2019)

A37. A charitable organization that receives virtual currency should treat the donation as a noncash contribution. See Publication 526, Charitable Contributions, for more information. Tax-exempt charity responsibilities include the following:

  • Charities report noncash contributions on a Form 990-series annual return and its associated Schedule M, if applicable. Refer to the Form 990 and Schedule M instructions for more information.
  • Charities must file Form 8282, Donee Information Return, if they sell, exchange or otherwise dispose of charitable deduction property (or any portion thereof) – such as the sale of virtual currency for real currency as described in FAQ #4 – within three years after the date they originally received the property and give the original donor a copy of the form. See the instructions on Form 8282 for more information.

 

Q38.  Will I have to recognize income, gain, or loss if I own multiple digital wallets, accounts, or addresses capable of holding virtual currency and transfer my virtual currency from one to another?

A38. No. If you transfer virtual currency from a wallet, address, or account belonging to you, to another wallet, address, or account that also belongs to you, then the transfer is a non-taxable event, even if you receive an information return from an exchange or platform as a result of the transfer.

 

Q39.  I own multiple units of one kind of virtual currency, some of which were acquired at different times and have different basis amounts.  If I sell, exchange, or otherwise dispose of some units of that virtual currency, can I choose which units are deemed sold, exchanged, or otherwise disposed of?

A39.  Yes. You may choose which units of virtual currency are deemed to be sold, exchanged, or otherwise disposed of if you can specifically identify which unit or units of virtual currency are involved in the transaction and substantiate your basis in those units.

 

Q40.  How do I identify a specific unit of virtual currency?

A40.  You may identify a specific unit of virtual currency either by documenting the specific unit’s unique digital identifier such as a private key, public key, and address, or by records showing the transaction information for all units of a specific virtual currency, such as Bitcoin, held in a single account, wallet, or address.  This information must show (1) the date and time each unit was acquired, (2) your basis and the fair market value of each unit at the time it was acquired, (3) the date and time each unit was sold, exchanged, or otherwise disposed of, and (4) the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.

 

Q41.  How do I account for a sale, exchange, or other disposition of units of virtual currency if I do not specifically identify the units?

A41.  If you do not identify specific units of virtual currency, the units are deemed to have been sold, exchanged, or otherwise disposed of in chronological order beginning with the earliest unit of the virtual currency you purchased or acquired; that is, on a first in, first out (FIFO) basis.

 

Q42.  If I engage in a transaction involving virtual currency but do not receive a payee statement or information return such as a Form W-2 or Form 1099, when must I report my income, gain, or loss on my Federal income tax return?

A42.  You must report income, gain, or loss from all taxable transactions involving virtual currency on your Federal income tax return for the taxable year of the transaction, regardless of the amount or whether you receive a payee statement or information return.

 

Q43.  Where do I report my capital gain or loss from virtual currency?

A43.  You must report most sales and other capital transactions and calculate capital gain or loss in accordance with IRS forms and instructions, including on Form 8949, Sales and Other Dispositions of Capital Assets, and then summarize capital gains and deductible capital losses on Form 1040, Schedule D, Capital Gains and Losses.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #55

Taxable Cryptocurrency Transactions—IRS Guidance from its Cryptocurrency FAQ (Cont.)

(Blog 5 of 7)

Thursday 06/30/2022

This continues the questions from the IRS FAQ on Cryptocurrency.

 

Q30.  Do I have income when a soft fork of cryptocurrency I own occurs?

A30.  No. A soft fork occurs when a distributed ledger undergoes a protocol change that does not result in a diversion of the ledger and thus does not result in the creation of a new cryptocurrency. Because soft forks do not result in you receiving new cryptocurrency, you will be in the same position you were in prior to the soft fork, meaning that the soft fork will not result in any income to you.

 

Q31.  I received virtual currency as a bona fide gift. Do I have income?

A31.  No. If you receive virtual currency as a bona fide gift, you will not recognize income until you sell, exchange, or otherwise dispose of that virtual currency.  For more information about gifts, see Publication 559, Survivors, Executors, and Administrators.

 

Q32.  How do I determine my basis in virtual currency that I received as a bona fide gift?

A32.  Your basis in virtual currency received as a bona fide gift differs depending on whether you will have a gain or a loss when you sell or dispose of it. For purposes of determining whether you have a gain, your basis is equal to the donor’s basis, plus any gift tax the donor paid on the gift. For purposes of determining whether you have a loss, your basis is equal to the lesser of the donor’s basis or the fair market value of the virtual currency at the time you received the gift. If you do not have any documentation to substantiate the donor’s basis, then your basis is zero. For more information on basis of property received as a gift, see Publication 551, Basis of Assets.

 

Q33.  What is my holding period for virtual currency that I received as a gift?

A33. Your holding period in virtual currency received as a gift includes the time that the virtual currency was held by the person from whom you received the gift. However, if you do not have documentation substantiating that person’s holding period, then your holding period begins the day after you receive the gift. For more information on holding periods, see Publication 544, Sales and Other Dispositions of Assets.

 

Q34.  If I donate virtual currency to a charity, will I have to recognize income, gain, or loss?

A34. If you donate virtual currency to a charitable organization described in Internal Revenue Code Section 170(c), you will not recognize income, gain, or loss from the donation. For more information on charitable contributions, see Publication 526, Charitable Contributions.

 

Q35. How do I calculate my charitable contribution deduction when I donate virtual currency?

A35. Your charitable contribution deduction is generally equal to the fair market value of the virtual currency at the time of the donation if you have held the virtual currency for more than one year. If you have held the virtual currency for one year or less at the time of the donation, your deduction is the lesser of your basis in the virtual currency or the virtual currency’s  fair market value at the time of the contribution. For more information on charitable contribution deductions, see Publication 526, Charitable Contributions.

 

Q36. When my charitable organization accepts virtual currency donations, what are my donor acknowledgment responsibilities? (added December 26, 2019)

A36.  A charitable organization can assist a donor by providing the contemporaneous written acknowledgment that the donor must obtain if claiming a deduction of $250 or more for the virtual currency donation. See Publication 1771, Charitable Contributions Substantiation and Disclosure Requirements, for more information. A charitable organization is generally required to sign the donor’s Form 8283, Noncash Charitable Contributions, acknowledging receipt of charitable deduction property if the donor is claiming a deduction of  more than $5,000 and if the donor presents the Form 8283 to the organization for signature to substantiate the tax deduction. The signature of the donee on Form 8283 does not represent concurrence in the appraised value of the contributed property. The signature represents acknowledgement of receipt of the property described in Form 8283 on the date specified and that the donee understands the information reporting requirements imposed by section 6050L on dispositions of the donated property (see discussion of Form 8282 in FAQ 36). See the Form 8283 instructions.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #54

Taxable Cryptocurrency Transactions—IRS Guidance from its Cryptocurrency FAQ (Cont.)

(Blog 4 of 7)

Wednesday 06/29/2022

This continues the questions from the IRS FAQ on Cryptocurrency.

 

Q23. One of my cryptocurrencies went through a hard fork followed by an airdrop and I received new cryptocurrency.  Do I have income?

A23.  If a hard fork is followed by an airdrop and you receive new cryptocurrency, you will have taxable income in the taxable year you receive that cryptocurrency.

 

Q24.  How do I calculate my income from cryptocurrency I received following a hard fork?

A24.  When you receive cryptocurrency from an airdrop following a hard fork, you will have ordinary income equal to the fair market value of the new cryptocurrency when it is received, which is when the transaction is recorded on the distributed ledger, provided you have dominion and control over the cryptocurrency so that you can transfer, sell, exchange, or otherwise dispose of the cryptocurrency.

 

Q25.  How do I determine my basis in cryptocurrency I received following a hard fork?

A25.  If you receive cryptocurrency from an airdrop following a hard fork, your basis in that cryptocurrency is equal to the amount you included in income on your Federal income tax return. The amount included in income is the fair market value of the cryptocurrency when you received it. You have received the cryptocurrency when you can transfer, sell, exchange, or otherwise dispose of it, which is generally the date and time the airdrop is recorded on the distributed ledger. See Rev. Rul. 2019-24. For more information on basis, see Publication 551, Basis of Assets.

 

Q26. I received cryptocurrency through a platform for trading cryptocurrency; that is, through a cryptocurrency exchange.  How do I determine the cryptocurrency’s fair market value at the time of receipt?

A26.  If you receive cryptocurrency in a transaction facilitated by a cryptocurrency exchange, the value of the cryptocurrency is the amount that is recorded by the cryptocurrency exchange for that transaction in U.S. dollars. If the transaction is facilitated by a centralized or decentralized cryptocurrency exchange but is not recorded on a distributed ledger or is otherwise an off-chain transaction, then the fair market value is the amount the cryptocurrency was trading for on the exchange at the date and time the transaction would have been recorded on the ledger if it had been an on-chain transaction.

 

Q27. I received cryptocurrency in a peer-to-peer transaction or some other type of transaction that did not involve a cryptocurrency exchange. How do I determine the cryptocurrency’s fair market value at the time of receipt?

A27.  If you receive cryptocurrency in a peer-to-peer transaction or some other transaction not facilitated by a cryptocurrency exchange, the fair market value of the cryptocurrency is determined as of the date and time the transaction is recorded on the distributed ledger, or would have been recorded on the ledger if it had been an on-chain transaction. The IRS will accept as evidence of fair market value the value as determined by a cryptocurrency or blockchain explorer that analyzes worldwide indices of a cryptocurrency and calculates the value of the cryptocurrency at an exact date and time. If you do not use an explorer value, you must establish that the value you used is an accurate representation of the cryptocurrency’s fair market value.

 

Q28.  I received cryptocurrency that does not have a published value in exchange for property or services. How do I determine the cryptocurrency’s fair market value?

A28.  When you receive cryptocurrency in exchange for property or services, and that cryptocurrency is not traded on any cryptocurrency exchange and does not have a published value, then the fair market value of the cryptocurrency received is equal to the fair market value of the property or services exchanged for the cryptocurrency when the transaction occurs.

 

Q29. When does my holding period start for cryptocurrency I receive?

A29.  Your holding period begins the day after it is received. For more information on holding periods, see Publication 544, Sales and Other Dispositions of Assets.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #53

Taxable Cryptocurrency Transactions—IRS Guidance from its Cryptocurrency FAQ (Cont.)

(Blog 3 of 7)

Tuesday 06/28/2022

This continues the questions from the IRS FAQ on Cryptocurrency.

 

Q14.  Will I recognize a gain or loss if I pay someone with virtual currency for providing me with a service?

A14.   Yes. If you pay for a service using virtual currency that you hold as a capital asset, then you have exchanged a capital asset for that service and will have a capital gain or loss. For more information on capital gains and capital losses, see Publication 544, Sales and Other Dispositions of Assets.

 

Q15.  How do I calculate my gain or loss when I pay for services using virtual currency?

A15.  Your gain or loss is the difference between the fair market value of the services you received and your adjusted basis in the virtual currency exchanged.  For more information on gain or loss from sales or exchanges, see Publication 544, Sales and Other Dispositions of Assets.

 

Q16.  Will I recognize a gain or loss if I exchange my virtual currency for other property?

A16.  Yes. If you exchange virtual currency held as a capital asset for other property, including for goods or for another virtual currency, you will recognize a capital gain or loss. For more information on capital gains and capital losses, see Publication 544, Sales and Other Dispositions of Assets.

 

Q17.  How do I calculate my gain or loss when I exchange my virtual currency for other property?

A17.  Your gain or loss is the difference between the fair market value of the property you received and your adjusted basis in the virtual currency exchanged.  For more information on gain or loss from sales or exchanges, see Publication 544, Sales and Other Dispositions of Assets.

 

Q18.  How do I determine my basis in property I’ve received in exchange for virtual currency?

A18.  If, as part of an arm’s length transaction, you transferred virtual currency to someone and received other property in exchange, your basis in that property is its fair market value at the time of the exchange.  For more information on basis, see Publication 551, Basis of Assets.

 

Q19. Will I recognize a gain or loss if I sell or exchange property (other than U.S. dollars) for virtual currency?

A19.  Yes. If you transfer property held as a capital asset in exchange for virtual currency, you will recognize a capital gain or loss.  If you transfer property that is not a capital asset in exchange for virtual currency, you will recognize an ordinary gain or loss. For more information on gains and losses, see Publication 544, Sales and Other Dispositions of Assets.

 

Q20.  How do I calculate my gain or loss when I exchange property for virtual currency?

A20.  Your gain or loss is the difference between the fair market value of the virtual currency when received (in general, when the transaction is recorded on the distributed ledger) and your adjusted basis in the property exchanged. For more information on gain or loss from sales or exchanges, see Publication 544, Sales and Other Dispositions of Assets.

 

Q21.  How do I determine my basis in virtual currency that I have received in exchange for property?

A21.  If, as part of an arm’s length transaction, you transferred property to someone and received virtual currency in exchange, your basis in that virtual currency is the fair market value of the virtual currency, in U.S. dollars, when the virtual currency is received.  For more information on basis, see Publication 551, Basis of Assets.

 

Q22.  One of my cryptocurrencies went through a hard fork but I did not receive any new cryptocurrency.  Do I have income?

A22.  A hard fork occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger. This may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. 

If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whether through an airdrop (a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses) or some other kind of transfer, you don’t have taxable income.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #52

Taxable Cryptocurrency Transactions—IRS Guidance from its Cryptocurrency FAQ (Cont.)

(Blog 2 of 7)

Monday 06/27/2022

This continues the questions from the IRS FAQ on Cryptocurrency.

 

Q6. How do I determine if my gain or loss is a short-term or long-term capital gain or loss?

A6. If you held the virtual currency for one year or less before selling or exchanging the virtual currency, then you will have a short-term capital gain or loss.  If you held the virtual currency for more than one year before selling or exchanging it, then you will have a long-term capital gain or loss. The period during which you held the virtual currency (known as the “holding period”) begins on the day after you acquired the virtual currency and ends on the day you sell or exchange the virtual currency. For more information on short-term and long-term capital gains and losses, see Publication 544, Sales and Other Dispositions of Assets.

 

Q7. How do I calculate my gain or loss when I sell virtual currency for real currency?

A7.  Your gain or loss will be the difference between your adjusted basis in the virtual currency and the amount you received in exchange for the virtual currency, which you should report on your Federal income tax return in U.S. dollars. For more information on gain or loss from sales or exchanges, see Publication 544, Sales and Other Dispositions of Assets.

 

Q8. How do I determine my basis in virtual currency I purchased with real currency?

A8.  Your basis (also known as your “cost basis”) is the amount you spent to acquire the virtual currency, including fees, commissions and other acquisition costs in U.S. dollars. Your adjusted basis is your basis increased by certain expenditures and decreased by certain deductions or credits in U.S. dollars. For more information on basis, see Publication 551, Basis of Assets.

 

Q9.  Do I have income if I provide someone with a service and that person pays me with virtual currency?

A9.  Yes. When you receive property, including virtual currency, in exchange for performing services, whether or not you perform the services as an employee, you recognize ordinary income. For more information on compensation for services, see Publication 525, Taxable and Nontaxable Income.

 

Q10. Does virtual currency received by an independent contractor for performing services constitute self-employment income?

A10. Yes. Generally, self-employment income includes all gross income derived by an individual from any trade or business carried on by the individual as other than an employee. Consequently, the fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and is subject to the self-employment tax.

 

Q11. Does virtual currency paid by an employer as remuneration for services constitute wages for employment tax purposes?

A11.  Yes. Generally, the medium in which remuneration for services is paid is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes. Consequently, the fair market value of virtual currency paid as wages, measured in U.S. dollars at the date of receipt, is subject to Federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement. See Publication 15 (Circular E), Employer’s Tax Guide, for information on the withholding, depositing, reporting, and paying of employment taxes.

 

Q12. How do I calculate my income if I provide a service and receive payment in virtual currency?

A12. The amount of income you must recognize is the fair market value of the virtual currency, in U.S. dollars, when received. In an on-chain transaction you receive the virtual currency on the date and at the time the transaction is recorded on the distributed ledger.

 

Q13.  How do I determine my basis in virtual currency I receive for services I’ve provided?

A13.  If, as part of an arm’s length transaction, you provided someone with services and received virtual currency in exchange, your basis in that virtual currency is the fair market value of the virtual currency, in U.S. dollars, when the virtual currency is received. For more information on basis, see Publication 551, Basis of Assets.

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #51

Taxable Cryptocurrency Transactions—IRS Guidance from its Cryptocurrency FAQ

(Blog 1 of 7)

Sunday 06/26/2022

The IRS has published a 46-question FAQ to timely address issues related to the taxation of cryptocurrency transactions. The next seven Blog posts show that FAQ in its entirety, for the scope of IRS information given. 

https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions

 

Frequently Asked Questions on Virtual Currency Transactions

On 04/14/2014, the IRS issued Notice 2014-21, 2014-16 I.R.B. 938, explaining that virtual currency is treated as property for Federal income tax purposes and providing examples of how longstanding tax principles applicable to transactions involving property apply to virtual currency. The frequently asked questions (“FAQs”) below expand upon the examples provided in Notice 2014-21 and apply those same longstanding tax principles to additional situations. 

Note: Except as otherwise noted, these FAQs apply only to taxpayers who hold virtual currency as a capital asset. For more information on the definition of a capital asset, examples of what is and is not a capital asset, and the tax treatment of property transactions generally, see Publication 544, Sales and Other Dispositions of Assets.

 

Q1. What is virtual currency?

A1.  Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange.  Some virtual currencies are convertible, which means that they have an equivalent value in real currency or act as a substitute for real currency. The IRS uses the term “virtual currency” in these FAQs to describe the various types of convertible virtual currency that are used as a medium of exchange, such as digital currency and cryptocurrency. Regardless of the label applied, if a particular asset has the characteristics of virtual currency, it will be treated as virtual currency for Federal income tax purposes.

 

Q2. Will I recognize a gain or loss when I sell my virtual currency for real currency?

A2.  Virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency.  For more information on the tax treatment of virtual currency, see Notice 2014-21. For more information on the tax treatment of property transactions, see Publication 544, Sales and Other Dispositions of Assets.

 

Q3. What is cryptocurrency?

A3.  Cryptocurrency is a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. A transaction involving cryptocurrency that is recorded on a distributed ledger is referred to as an “on-chain” transaction; a transaction that is not recorded on the distributed ledger is referred to as an “off-chain” transaction.

 

Q4. Will I recognize a gain or loss when I sell my virtual currency for real currency?

A4.  Yes. When you sell virtual currency, you must recognize any capital gain or loss on the sale, subject to any limitations on the deductibility of capital losses.  For more information on capital assets, capital gains, and capital losses, see Publication 544, Sales and Other Dispositions of Assets.

 

Q5. The 2020 Form 1040 asks whether at any time during 2020, I received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency. During 2020, I purchased virtual currency with real currency and had no other virtual currency transactions during the year. Must I answer yes to the Form 1040 question? (updated March 2, 2021)

A5. No. If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question.

 

Q5(a). The 2021 Form 1040 asks whether at any time during 2021, I received, sold, exchanged, or otherwise disposed of any financial interest in any virtual currency. During 2021, I purchased virtual currency with real currency and had no other virtual currency transactions during the year. How do I answer the question on the Form 1040? (added March 10, 2022)

A5(a). If your only transactions involving virtual currency during 2021 were purchases of virtual currency with real currency, you are not required to answer “yes” to the Form 1040 question, and should, instead, check the “no” box.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #50

Taxable Cryptocurrency Transactions—Earn interest by Yield Farming/Liquidity Farming crypto to a DeFi (Decentralized Finance) application

Saturday 06/25/2022

Decentralized Finance (DeFi) applications, primarily written on to the Ethereum blockchain, are an innovation with cryptocurrencies that allow peer-to-peer financial services, without a third-party intermediary. This DeFi capability is what accounts for Ethereum being the second largest and most popular cryptocurrency after Bitcoin—its ability to have “smart contracts” written to and run on this Blockchain, like DeFi applications.

Coinbase has a good introduction to Defi as “What is Defi?” at:

https://www.coinbase.com/learn/crypto-basics/what-is-defi

“DeFi (or “decentralized finance”) is an umbrella term for financial services on public blockchains, primarily Ethereum. With DeFi, you can do most of the things that banks support — earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more — but it’s faster and doesn’t require paperwork or a third party. As with crypto generally, DeFi is global, peer-to-peer (meaning directly between two people, not routed through a centralized system), pseudonymous, and open to all.”

“DeFi takes the basic premise of Bitcoin — digital money — and expands on it, creating an entire digital alternative to Wall Street, but without all the associated costs (think office towers, trading floors, banker salaries). This has the potential to create more open, free, and fair financial markets that are accessible to anyone with an internet connection.”

Yield Farming and Liquidity Farming are two categories of these DeFi applications that allow cryptocurrency investors to earn interest by loaning their cryptocurrency assets to the DeFi platforms. Those DeFi lending companies then loan the pledged cryptocurrency assets to customers, who pay them interest for that privilege. They forward interest to the investor.

Yield Farming typically pays interest to the investor, while Liquidity Farming can also pay the investor units of the underlying cryptocurrency.

See article/image below by by Avinandan Banerjee of the Blockchain Council that explains Staking, Yield Farming, and Liquidity Mining.

“Staking vs Yield Farming vs Liquidity Mining- What’s The Difference?”

https://www.blockchain-council.org/defi/staking-vs-yield-farming-vs-liquidity-mining/

Dai is a popular cryptocurrency that offers interest yields when you pledge your Dai tokens to a DeFi application. Dai is a stablecoin that is pegged to the U.S. Dollar—so one Dai is typically always worth $1. This is a YouTube video that explains the process for a Coinbase account.

https://www.youtube.com/watch?v=eIvjJ_CUca0

 

What are the tax ramifications of Yield Farming/Liquidity Farming?

  1. If you only earn Interest paid in U.S. Dollars, you report that total interest earned on each year’s tax return, like any other interest earned.
  2. If you earn fractional cryptocurrency units, paid as “Interest,” you have Ordinary Income based on the Fair Market Value of that cryptocurrency interest, paid to you at the time/date of periodic payments.
  3. When you then eventually sell those fractional cryptocurrency units received as “Interest,” you must calculate your Capital Gain/Loss, on each “lot” of fractional cryptocurrency interest units you received.

Coinbase or the online cryptocurrency tax aggregators can help you keep track of all these transactions, to create a year-end gain/loss report

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #49

Taxable Cryptocurrency Transactions—The tax ramifications of staking rewards

Friday 06/24/2022

Ethereum being the second largest cryptocurrency after Bitcoin, is moving to a Proof of State consensus mechanism, from its current Proof of Work mechanism. This could happen in August 2022. They explain at:

https://ethereum.org/en/developers/docs/consensus-mechanisms/pos/

 

“Proof-of-stake is a type of consensus mechanism used by blockchains to achieve distributed consensus. 

In proof-of-work, miners prove they have capital at risk by expending energy. In proof-of-stake, validators explicitly stake capital in the form of ether into a smart contract on Ethereum. This staked ether then acts as collateral that can be destroyed if the validator behaves dishonestly or lazily. The validator is then responsible for checking that new blocks propagated over the network are valid and occasionally creating and propagating new blocks themselves. Proof-of-stake comes with a number of improvements to the proof-of-work system:

  • better energy efficiency – there is no need to use lots of energy on proof-of-work computations
  • lower barriers to entry, reduced hardware requirements – there is no need for elite hardware to stand a chance of creating new blocks
  • reduced centralization risk – proof-of-stake should lead to more nodes securing the network
  • because of the low energy requirement less ETH issuance is required to incentivize participation
  • economic penalties for misbehavior make 51% style attacks exponentially more costly for an attacker compared to proof-of-work
  • the community can resort to social recovery of an honest chain if a 51% attack were to overcome the crypto-economic defenses.”

Individual cryptocurrency investors can use Coinbase or another Staking Pool, to earn interest rewards by loaning their cryptocurrency to the larger Staking Pool. Those interest rewards are usually paid with fractional quantities of the cryptocurrency being staked—like ETH 2.0 stake rewards.

The IRS has not issued clear guidance on the taxation of Staking Rewards, and a recent IRS Court Case still did not clarify the issue. Read at:

“What the IRS Court Case Over Crypto Staking Taxes Really Means”

https://decrypt.co/91984/what-irs-court-case-crypto-staking-taxes-really-means 

While we are all waiting for the IRS to provide clarity with guidance on Staking rewards, the consensus within the tax professional community is to treat Staking reward income like Mining income.

  • Report the fair market value of the staking rewards, on the date and time received, as ordinary or self-employment income on that year’s tax return.
  • Report capital gain/loss when you sell staking rewards represented by the quantities of that cryptocurrency, on the tax year return in which those sales occur.

 

An Example:

  1. You used your quantity of 1000 Cosmos (ATOM) you own, to earn staking rewards in your Coinbase account. The first rewards are typically credited to your account after 7-14 days, then every 7 days after that.
  1. The price of Cosmos was about $6.88 on 6/21/2022. So your 1000 Cosmos units would be worth $6,880 at that price.
  1. Many staking exchanges claim to pay you upwards of 10% for an APY (Annual Percentage Yield) for your staking rewards, but we’ll assume a 5% return on a more conservative Coinbase account. So 5% of 1000 Cosmos (ATOM) would be a total of 50 additional Cosmos (ATOM) added to your portfolio in one year.
  1. If you staked for a year, you could receive 51 staking rewards, with the first one after two weeks, and then weekly thereafter. So 50 Cosmos (ATOM) divided by 51 payments equals about 0.98039 ATOM per those 51 staking events.
  1. You then have to keep track of the Fair Market Value of each of those quantities of Cosmos (ATOM), every time you received the staking reward. That would be reported in total as Ordinary or Self-Employment Income taxable in the year of receipt, at the value at the time the staking rewards were given to you. 
  1. If you sold any of those ATOM quantities, you would have to calculate any Capital Gain/Loss on the sales, based typically on the HIFO (Highest In, First Out) costing method most exchanges use. Coinbase or online tax portfolio software would help you calculate this, as each staking reward was received and/or sold.

Staking is still very new, so do your own due diligence and invest wisely.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #48

Taxable Cryptocurrency Transactions—What is Staking your cryptocurrency holdings?

Thursday 06/23/2022

Staking is an investment method, whereby you can “loan” your cryptocurrency to its blockchain to help maintain the network and verify transactions. You get paid a periodic fee for staking your cryptocurrency asset.

It is only used for cryptocurrencies that use the Proof of Stake consensus mechanism—as compared to Bitcoin’s Proof of Work consensus mechanism. The nine most popular cryptocurrencies offering staking rewards are listed below, with their market prices as seen on 6/20/22:

• Ethereum (ETH)  $1,119/ETH

• Solana (SOL)  $34.91/SOL

• Avalanche (AVAX)  $17.04/AVAX

• Polkadot (DOT)  $7.80/DOT

• Cosmos (ATOM)  $6.77/ATOM

• Tezos (XTZ)  $1.43/XTZ

• Luna (LUNA)  $1.20/LUNA

• Cardano (ADA)  $0.49/ADA

• Algorand (ALGO)  $0.31/ALGO

Coinbase explains staking at: https://www.coinbase.com/staking

“Staking lets you earn income with your crypto by contributing to the Proof of Stake (PoS) network of a particular asset. When you stake your crypto, you make the underlying blockchain of that asset more secure and more efficient. And in exchange, you get rewarded with more assets from the network. To generate staking rewards on a Proof of Stake blockchain, a node has to designate a certain amount of tokens on the network as a stake (similar to a security deposit). The chance of that node being chosen to validate the next block is directly proportional to the number of tokens being staked. If the node successfully validates a block, it is awarded the staking reward, similar to a miner being rewarded in Proof of Work chains. Validators lose part of their stake if they approve a fraudulent transaction—this incentivizes them to only approve valid transactions.”

“Today, staking your own crypto is a challenge for most investors. To stake on your own requires running a node on your own hardware, syncing it to the blockchain, and funding the node with enough cryptocurrency to meet minimum thresholds, including providing a sizable deposit and bond. On Coinbase, we do all this for you. While Coinbase stakes, generates and signs blocks on your behalf, you retain full ownership of your tokens and earn rewards.”

Coinbase essentially creates a “Staking Pool” to combine their customer’s “stakes” into one node Coinbase runs on that blockchain. They then proportionately pay their customers who stake their cryptocurrency assets, after Coinbase takes their commissions. They explain their process as:

“Some blockchain protocols allow participants to earn additional cryptocurrency (rewards) by contributing to the network. These rewards can be earned in many different ways including staking and inflation. Coinbase participates in these networks and distributes the rewards to eligible customers who have opted in to staking or inflation.”

“Staking is the process of actively participating in transaction validation (similar to mining) on a proof-of-stake (PoS) blockchain. On these blockchains, anyone with a minimum-required balance of a specific cryptocurrency can validate transactions and earn staking rewards.”

For example, if you want to run your own Staking Node on the Ethereum network, you must “put up” 32 Ether tokens, which is the “gas” used on the Ethereum blockchain network. At $1,119/ETH that would be $35,808. See this site from Ethereum to setup your own staking node with their explanation below:

https://ethereum.org/en/staking/

“Staking is the act of depositing 32 ETH to activate validator software. As a validator you’ll be responsible for storing data, processing transactions, and adding new blocks to the blockchain. This will keep Ethereum secure for everyone and earn you new ETH in the process. This process is known as proof-of-stake.”

CoinDesk has a great article “Crypto Staking 101: What Is Staking?”

https://www.coindesk.com/learn/crypto-staking-101-what-is-staking/

Staking your cryptocurrency is a sophisticated investment strategy, so you should invest time for due diligence to understand the benefit/risks.

The next Blog post will discuss the tax ramifications of staking rewards.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #47

Taxable Cryptocurrency Transactions—Earn interest by lending out your Bitcoin

Wednesday 06/22/2022

Would you like to get more than 1% on a bank account paying you interest? You can “loan out” your Bitcoin as collateral to receive a higher rate of interest on your cryptocurrency investments—up to a 9.42% APY. If that sounds too good to be true, it very well may be too good to be true. 

This is a very new investment category for cryptocurrency, and the market participants do not seem very well established. Given that, there are still tax reporting implications if you participate in Bitcoin lending to earn those much higher rates of interest.

This is a great article by Robert Farrington, from “The College Investor” web site that has many links to these companies. There also is a short video that explains the theory of Cryptocurrency Saving Accounts, and “lending out” your Crypto to earn interest, at potentially much higher rates than a traditional savings account. 

“The Top Crypto Savings Accounts Of June 2022”

https://thecollegeinvestor.com/34109/top-crypto-savings-accounts/

 

Some facts to consider:

  1. Much higher rates of Interest are paid on your Bitcoin lent to the company, with many compounded daily, paid in U.S. Dollars or Bitcoin.
  2. Not FDIC insured, so you could lose your entire quantity of Bitcoin you have lent to the company, if their borrower defaults on your Bitcoin.
  3. Bitcoin is lent out typically to institutional or corporate borrowers, who use your Bitcoin lent to them as collateral, to raise even more capital.
  4. You no longer have access to your Bitcoin, for the period it is lent out to these investors. They use that Bitcoin and pay interest on the loan.
  5. Some of these Bitcoin Interest companies have withdrawal restrictions, in that you can only withdrawal a certain amount, within a certain time frame. So most often you cannot get all your Bitcoin back immediately.
  6. Some of these lending companies are not subject to U.S. regulations.

CoinLoan is one of the few approved for U.S. Citizens, and they are based in Tallinn, Estonia. You can Chat with them 24-hrs/day, which I did to get answers to my questions. See this link for their FAQ for their Interest Account, with 10 articles answering common questions.

https://help.coinloan.io/en/collections/2082357-interest-account

 

Coinbase had its own Coinbase Lend program, but are no longer allowed to offer that to their U.S. Customers, until the SEC approves it. See these articles explaining the regulatory issues to be resolved with the SEC, and the announcement they were no longer launching Coinbase Lend.

https://blog.coinbase.com/the-sec-has-told-us-it-wants-to-sue-us-over-lend-we-have-no-idea-why-a3a1b6507009

https://blog.coinbase.com/sign-up-to-earn-4-apy-on-usd-coin-with-coinbase-cdad79e5f5eb

 

Here is an analysis from Roll Call, on why the SEC did what they did.

“SEC seen having clear case against Coinbase’s lending program”

https://rollcall.com/2021/09/28/sec-seen-having-clear-case-against-coinbases-lending-program/

 

If you loan out your Bitcoin holdings, these lending companies will pay you interest, either in U.S. Dollars or quantities of Bitcoin.

  • Interest paid in U.S. Dollars is reported as Ordinary Income on your tax return, just like other interest sources. The company might send you the 1099-INT form to report your interest, paid in U.S. Dollars, earned each tax year.
  • Interest paid in quantities of Bitcoin is more involved, as it has two income reporting requirements. Ordinary Income and Capital Gain/Loss income.
  • Ordinary Income as the Fair Market Value of the Bitcoin quantity paid to you as interest, on the date/time you received it.
  • Capital Gain/Loss income when you sell those Bitcoin quantities.

 

This could cause reporting nightmares, if you receive a quantity of Bitcoin every month as an interest payment. You must keep track of:

  • Each fractional quantity of Bitcoin you received as an interest payment
  • The fair market value, or cost basis, of that Bitcoin when sent to you
  • When you sell some or all of your Bitcoin received as interest, which “lot” of Bitcoin did you sell—using the HIFO (Highest In, First Out) costing method.

Lending your Bitcoin to earn interest should be researched thoroughly.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #46

Taxable Cryptocurrency Transactions—Receive cryptocurrency in an Airdrop from a Hard Fork

Tuesday 06/21/2022

What have been the significant Hard Forks from the original Bitcoin, that are still operating with a significant Market Capitalization? These are the three in the top 100 cryptocurrencies as measured by Market Cap.

Hard Forks happen when many of the programmers of a particular cryptocurrency want to add features to the original cryptocurrency, but cannot get the entire open source software programming community to agree to that change. So the cryptocurrency splits into two “Forks,” keeping the original cryptocurrency Blockchain “as is” and starting a new cryptocurrency with its own new Blockchain—from that date the Fork happens. 

You are given the new cryptocurrency from a Hard Fork in a cryptocurrency you own, by receiving it in an Airdrop. For example, when Bitcoin had its first Hard Fork into Bitcoin Cash on Aug. 1, 2017. Airdrop is the term for crediting new cryptocurrency into your cryptocurrency wallet.

  • Bitcoin Cash increased its block size from Bitcoin’s 1MB to a maximum of 32MB—to enable processing of more Bitcoin Cash transactions per second—greatly reducing transaction costs as compared to Bitcoin.
  • Bitcoin Cash kept the limit of only 21 million BCH ever to be minted.

Bitcoin “Hard Forked” into a 2nd cryptocurrency as Bitcoin Cash, on August 1, 2017. On that day, each current owner of Bitcoin then received an equivalent amount of the new Bitcoin Cash. The Bitcoin Cash Blockchain still had the record of all the Bitcoin transactions since 2009 in  its transaction ledger. But from 8/1/2017 onward, its Blockchain only recorded Bitcoin Cash transactions—thus the Fork of the two Blockchains. 

Roger Ver, aka “Bitcoin Jesus,” was a leading proponent of Bitcoin Cash, and still promotes and evangelizes it to this day. See this video on CoinDesk.tv called “Roger Ver on Bitcoin vs. Bitcoin Cash” where he discusses the rational for his support of Bitcoin Cash versus Bitcoin.

Anyone who owned any quantity of Bitcoins prior to 8/1/2017, received an equivalent quantity of the new Bitcoin Cash. Bitcoin cash then started being traded on the cryptocurrency exchanges, so people could sell their new Bitcoin Cash, or hold for more price appreciation. It got up to $9,500/BCH in November 2017, but most recently is down to around $120/BCH, after hitting $1,430/BCH on 5/8/2021. So its price has been very volatile.

The Fair Market Value of that quantity of new Bitcoin Cash received, on that “Fork Date,” would have been reported as Ordinary Income on that year’s 2017 tax return. You then owned that “property” of Bitcoin Cash.

If you held the Bitcoin Cash from 2017, as an investment, and did not sell them, then you have no Capital Gain/Loss to report, as you have an unrealized gain/loss. When you do sell it, you will use the Cost Basis of your original quantity you received in the Airdrop from the Hard Fork, which was the Fair Market Value at the time of the Airdrop.

Hard Forks with Airdrops are still happening in 2022. See this link from CoinDesk that tracks the most recent ones. 

https://www.coindesk.com/tag/hard-forks/

 

As a review, Hard Forks with an Airdrop create two income sources:

  1. Ordinary Income for the Fair Market Value of the Airdrop on that date
  2. Capital Gain/Loss when you sell that Forked cryptocurrency quantity

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #45

Revenue Ruling 2019-24 to address the tax consequences of receiving new cryptocurrency as a result of a Hard Fork (Continued)

(Blog 2 of 2)

Monday 06/20/2022

FACTS 

Situation 1: 

A holds 50 units of Crypto M, a cryptocurrency. On Date 1, the distributed ledger for Crypto M experiences a hard fork, resulting in the creation of Crypto N. Crypto N is not airdropped or otherwise transferred to an account owned or controlled by A. 

Situation 2: 

B holds 50 units of Crypto R, a cryptocurrency. On Date 2, the distributed ledger for Crypto R experiences a hard fork, resulting in the creation of Crypto S. On that date, 25 units of Crypto S are airdropped to B’s distributed ledger address and B has the ability to dispose of Crypto S immediately following the airdrop. B now holds 50 units of Crypto R and 25 units of Crypto S. The airdrop of Crypto S is recorded on the distributed ledger on Date 2 at Time 1 and, at that date and time, the fair market value of B’s 25 units of Crypto S is $50. B receives the Crypto S solely because B owns Crypto R at the time of the hard fork. After the airdrop, transactions involving Crypto S are recorded on the new distributed ledger and transactions involving Crypto R continue to be recorded on the legacy distributed ledger.


 LAW AND ANALYSIS 

Section 61(a)(3) provides that, except as otherwise provided by law, gross income means all income from whatever source derived, including gains from dealings in property. Under § 61, all gains or undeniable accessions to wealth, clearly realized, over which a taxpayer has complete dominion, are included in gross income. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955). In general, income is ordinary unless it is gain from the sale or exchange of a capital asset or a special rule applies. See, e.g., §§ 1222, 1231, 1234A. 

Section 1011 of the Code provides that a taxpayer’s adjusted basis for determining the gain or loss from the sale or exchange of property is the cost or other basis determined under § 1012 of the Code, adjusted to the extent provided under § 1016 of the Code. When a taxpayer receives property that is not purchased, unless otherwise provided in the Code, the taxpayer’s basis in the property received is determined by reference to the amount included in gross income, which is the fair market value of the property when the property is received. See generally §§ 61 and 1011; see also § 1.61-2(d)(2)(i). 

Section 451 of the Code provides that a taxpayer using the cash method of accounting includes an amount in gross income in the taxable year it is actually or constructively received. See §§ 1.451-1 and 1.451-2. A taxpayer using an accrual method of accounting generally includes an amount in gross income no later than the taxable year in which all the events have occurred which fix the right to receive such amount. See § 451. 

  

Situation 1: 

A did not receive units of the new cryptocurrency, Crypto N, from the hard fork; therefore, A does not have an accession to wealth and does not have gross income under § 61 as a result of the hard fork. 

Situation 2: 

B received a new asset, Crypto S, in the airdrop following the hard fork; therefore, B has an accession to wealth and has ordinary income in the taxable year in which the Crypto S is received. See §§ 61 and 451. B has dominion and control of Crypto S at the time of the airdrop, when it is recorded on the distributed ledger, because B immediately has the ability to dispose of Crypto S. The amount included in gross income is $50, the fair market value of B’s 25 units of Crypto S when the airdrop is recorded on the distributed ledger. B’s basis in Crypto S is $50, the amount of income recognized. See §§ 61, 1011, and 1.61-2(d)(2)(i).

 HOLDINGS 

  1. A taxpayer does not have gross income under § 61 as a result of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new cryptocurrency. 
  1. A taxpayer has gross income, ordinary in character, under § 61 as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of new cryptocurrency. 

 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #44

Revenue Ruling 2019-24 to address the tax consequences of receiving new cryptocurrency as a result of a Hard Fork

(Blog 1 of 2)

Sunday 06/19/2022

The IRS released Revenue Ruling 2019-24 on 10/09/2019 to address the tax consequences of receiving new cryptocurrency as a result of a Hard Fork. The next two Blog posts cover this Revenue Ruling 2019-14, by reproducing the entire text from that Revenue Ruling.

https://www.irs.gov/pub/irs-drop/rr-19-24.pdf

 

ISSUES

  1. Does a taxpayer have gross income under § 61 of the Internal Revenue Code (Code) as a result of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new cryptocurrency? 
  1. Does a taxpayer have gross income under § 61 as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of new cryptocurrency?

 

BACKGROUND 

Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and a store of value other than a representation of the United States dollar or a foreign currency. Foreign currency is the coin and paper money of a country other than the United States that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance. See 31 C.F.R. § 1010.100(m).

https://www.law.cornell.edu/cfr/text/31/1010.100

Cryptocurrency is a type of virtual currency that utilizes cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. Units of cryptocurrency are generally referred to as coins or tokens. Distributed ledger technology uses independent digital systems to record, share, and synchronize transactions, the details of which are recorded in multiple places at the same time with no central data store or administration functionality. 

A hard fork is unique to distributed ledger technology and occurs when a cryptocurrency on a distributed ledger undergoes a protocol change resulting in a permanent diversion from the legacy or existing distributed ledger. A hard fork may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. Following a hard fork, transactions involving the new cryptocurrency are recorded on the new distributed ledger and transactions involving the legacy cryptocurrency continue to be recorded on the legacy distributed ledger. 

An airdrop is a means of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers. A hard fork followed by an airdrop results in the distribution of units of the new cryptocurrency to addresses containing the legacy cryptocurrency. However, a hard fork is not always followed by an airdrop. 

Cryptocurrency from an airdrop generally is received on the date and at the time it is recorded on the distributed ledger. However, a taxpayer may constructively receive cryptocurrency prior to the airdrop being recorded on the distributed ledger. A taxpayer does not have receipt of cryptocurrency when the airdrop is recorded on the distributed ledger if the taxpayer is not able to exercise dominion and control over the cryptocurrency. 

For example, a taxpayer does not have dominion and control if the address to which the cryptocurrency is airdropped is contained in a wallet managed through a cryptocurrency exchange and the cryptocurrency exchange does not support the newly-created cryptocurrency such that the airdropped cryptocurrency is not immediately credited to the taxpayer’s account at the cryptocurrency exchange. If the taxpayer later acquires the ability to transfer, sell, exchange, or otherwise dispose of the cryptocurrency, the taxpayer is treated as receiving the cryptocurrency at that time.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #43

Taxable Cryptocurrency Transactions—Receive Bitcoin as a reward, such as a Coinbase sign-up promotion

Saturday 06/18/2022

An exchange like Coinbase offers $200 of free Bitcoin for opening a new account, or a small quantity of cryptocurrency for learning about a new cryptocurrency being promoted. They offer existing Coinbase users $10 for signing up a friend, and even cash-back rewards paid in Bitcoin, for their VISA debit card. These “free” income sources are taxable as Ordinary Income on your tax return, in the year you “earn” the rewards. If you then sell those “rewards” Bitcoins, you have a Capital Gain/Loss on the sale.

See this article “(16 Ways) How To Get Free Bitcoins: Earn Free Bitcoin In 2022” for 16 suggestions how to earn Bitcoins.

https://www.softwaretestinghelp.com/earn-free-bitcoins/#13_Watching_Videos_Ads_And_On_Social_Media

People can get paid in Bitcoin to complete surveys on Timebucks: 

 https://timebucks.com/

If you provided no personal services in exchange for the “free” Bitcoins, that is reported as Ordinary Income not subject to self-employment taxes.

If you provided substantial personal services, like taking many surveys with the intention of performing this activity as a job, that income is considered self-employment, as you had a profit motive in completing the surveys. You did not complete surveys as an infrequent “Hobby.” The income is reported as Self-Employment Income subject to regular Income Tax, Social Security and Medicare  taxes. This is reported on the Schedule C.

If the activity was only considered an occasional “Hobby,” then that income would be reported as Ordinary Income on the Schedule 1 (Form 1040), line z, as shown below. I used these values as an example.

    • $200 Coinbase Signup Reward
    • $54 Coinbase Earn Rewards
    • $257 Timebucks Survey Rewards

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #42

Taxable Cryptocurrency Transactions—Transfer Bitcoin from one exchange wallet to another wallet, on or off exchange

Friday 06/17/2022

Many sophisticated Bitcoin investors will buy their Bitcoin on an established exchange like Coinbase, then they will move those Bitcoins to another wallet, for safe keeping. Some examples are a paper and a USB wallet.

You have to be a technically savvy computer user and a very experienced Bitcoin user, to properly move some of your Bitcoin holdings permanently to these “cold storage” options. If you lose them, your Bitcoin holdings could be lost forever. These are options for sophisticated users.

In the case of the paper wallet, both of the QR barcodes for the Bitcoin Address and your Private Key—are printed on the front of the paper wallet. So if someone steals your paper wallet sheet, they can spend the Bitcoin value encoded in the paper wallet—as they would have your Private Key—which is used to authorize, sign and release Bitcoins in all transactions. Similarly with the USB wallet, if someone stole that and your computer, they might gain access into your Bitcoins and steal them.

For me personally, that is why I use Coinbase and PayPal—as they handle all the Private Key security issues and trading details for me, for reasonable transaction fees. It all depends on your own sophistication level with computers, and the familiarity you have with Bitcoin backups. Many experienced Bitcoin investors keep most of their holdings in “cold storage” as they feel more comfortable with that, as compared to keeping them on a “Hosted” Cryptocurrency Exchange like Coinbase or PayPal.

PayPal just recently announced in June 2022, that they would now allow their users to transfer their cryptocurrency from their PayPal account to another wallet. See this article from CoinDesk entitled “PayPal’s Move to Allow Crypto Transfers to External Wallets the First Step Away From Fiat World, CEO Says.” See these pull-quotes from that article.

https://www.coindesk.com/business/2022/06/10/paypal-allowing-crypto-off-its-platform-heralds-a-first-step-away-from-fiat-world-ceo-schulman-says/

“The payment services giant will allow users to turn crypto into fiat for use at any one of 35 million merchant accounts.”

“We will instantaneously take your crypto and translate it in to fiat, and you will be able to use that in any one of our 35 million merchant accounts, so we are trying to add functionality.” 

Are there tax reporting requirements if you transfer, for example, some of your Bitcoin holdings from Coinbase to PayPal?

The answer is no, as you did not “sell” any cryptocurrency in that transfer. You just moved that same Bitcoin quantity from one wallet (Coinbase) to another wallet (PayPal), just like transferring money between two bank accounts.  You now just need to keep track of the Cost Basis (what you initially paid for that just transferred Bitcoin), so you can calculate the Capital Gain/Loss when you sell it, by converting it back into U.S. Dollars.

If you use online Tax Portfolio/Tax Reporting software like CoinTracker or CoinLedger, you can keep track of these transfers of Bitcoin or any other cryptocurrency—between your many crypto wallet locations. Then when you sell that transferred Bitcoin, CoinTracker/CoinLedger will calculate the proper Capital Gain/Loss for the tax year the sales occurred.

Transferring cryptocurrencies between wallets assumes you are a sophisticated investor, and thoroughly understand the procedures required.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #41

Taxable Cryptocurrency Transactions—Exchange Bitcoin for Ethereum, or another Altcoin

Thursday 06/16/2022

Cryptocurrencies that were created after Bitcoin are referred to as Altcoins. Ethereum has the second largest market capitalization of any cryptocurrency after Bitcoin. Literally thousands of Altcoins have been created to solve all sorts of problems with money and finance. The top ten measured by Market Capitalization are listed below. What are the tax reporting requirements when you exchange Bitcoin for Ethereum, for example?

Previous to the 2018 tax year, this could have possibly qualified as a Like-Kind Exchange of similar cryptocurrency property—which would have “postponed” the Long-Term Capital Gain realized and the tax imposed on the exchange profits. This is no longer allowed due to a tax law change.

The Tax Cuts and Jobs Act passed in late 2017, ended the Like-Kind Exchanges for Personal Property like equipment, stocks and cryptocurrency—and only allows for Real Property (Real Estate) Like-Kind Exchanges. That means for the tax year 2018 and beyond, Like-Kind Exchanges of two “similar” cryptocurrency property holdings, are no longer allowed. You must pay the tax on any Capital Gain from the exchange, in the tax year the exchange of the two cryptocurrencies happened.

As An Example—exchange some Ethereum for some Bitcoin:

  • On May 19, 2017 you invested in 10 Ethereum (ETH) cryptocurrency Ether units, and paid $100 each, for a total investment of $1,000.
  • On July 1, 2019, one Ethereum (ETH) unit was worth $300, which now means that original $1,000 investment is worth $3,000. 
    • (Ten Ethereum) times ($300) = $3,000.
  • So you have a potential long-term Capital Gain of $2,000 on your 10 Ethereum Ether units. $3,000 Proceeds minus $1,000 original Cost Basis = $2,000 Profit
  • Now suppose there is a unique Crypto pricing opportunity, as Ethereum is making multi-year highs while Bitcoin is experiencing a recent and severe low-price move. You can now acquire more Bitcoin quantity, at this lower price.
  • Instead of selling the 10 Ethereum Ether units for U.S. Dollar cash, you use that $3,000 value to “exchange” for $3,000 worth of Bitcoin on that day.
  • You instruct Coinbase to setup this exchange, so they “sell” $3,000 worth of your holdings of Ethereum to a buyer willing to “sell” you $3,000 worth of Bitcoin. So you have exchanged your $3,000 worth of Ethereum for their $3,000 worth of Bitcoin. That gets you a new quantity of Bitcoin, for that $3,000.
  • You would report the $2,000 of Long-Term Capital Gain on the 2019 tax return, as you “exchanged or sold” your original $1,000 of Ethereum for $3,000. You took possession of $3,000 of Bitcoin, instead of receiving $3,000 U.S. cash for the sale. You exchanged property (Ethereum) for other property (Bitcoin).
  • The Cost Basis of that new quantity of Bitcoin you “exchanged for” is $3,000, which is the value of the Ethereum to Bitcoin exchange on that day.

If you use Coinbase, you can do this “exchange-crypto-for-crypto”  in Coinbase. See this YouTube video, by TruFinancials, called “Coinbase – How to Convert Crypto From One to Another” for a quick demonstration:

https://www.youtube.com/watch?v=bzLd7V2ZLp8 

Coinbase will also keep track of the fractional accounting, and include the “Exchange” transactions in your year-end Gain/Loss report.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #40

Taxable Cryptocurrency Transactions—Send Bitcoin to another person in a peer-to-peer exchange

Wednesday 06/15/2022

Bitcoin allows for peer-to-peer money exchanges, free of third-party intermediaries like banks, credit card companies or remittance services. This creates near-instantaneous Bitcoin payments to anyone, anywhere in the world. People can control their own Bitcoin money, without a bank or credit card company, dictating when they can access their funds, or who they can transact with. Bitcoin is a 24-hrs/day, 7-days/week, 365-days/year market, that never closes. New transactions are securely verified and approved about every 10-minutes, from all over the world. A person always has access to their Bitcoin balances, as there is no ATM network to go down, or in-person banking hours they must adjust their schedule to.

You can send Bitcoin to another person anywhere in the world—like a remittance service—without high fees.

Coinbase allows you to send a value of Bitcoin, to any person, anywhere in the world, so long as you have their public Bitcoin address or their Bitcoin QR square barcode.

People use a peer-to-peer video connection between their computers, like Zoom, as the recipient can then hold their smart phone up to their computer screen camera, so you can then “scan” their public address Bitcoin QR square barcode. This is my Coinbase Bitcoin wallet public BTC address and corresponding QR code.

The person you are sending Bitcoins to, clicks Receive on their phone. That displays their Bitcoin QR Address square barcode, which they hold up to the Zoom camera. You click Send on your phone app, and then “scan” that person’s QR barcode, off their computer screen. The person’s QR barcode is registered into your phone, and you click to Send the payment. See this Coinbase Learn video: “How to send crypto”

If you did not sell the Bitcoins to this person, then you can Gift them up to $16,000 worth of Bitcoins, in 2022, without having the obligation to file a U.S. Gift Tax return. This is called the yearly Gift Tax Exclusion Amount, which was $15,000 in 2021, and increased to $16,000 in 2022.

People often complete this procedure when they want to send a remittance of Bitcoin value, to a relative in another Country. It is easier, with far lower transaction fees, as compared to using a remittance or wire service, like Western Union, to send money to a family member, anywhere in the world. It is as easy as sending an email to that person.

The IRS and the U.S. Government consider Bitcoin as property, not currency, so you must keep track of your Bitcoin sent or received as a gift.

What are the U.S. IRS tax reporting requirements when you send Bitcoin to a friend or family member, as a remittance gift?

    • Sent as a gift, under the $16,000/year per person limit—no Gift Tax return required.
    • Sent as gift over $16,000/year per person limit—Gift Tax return required.
    • Sold to a family member or friend—report Capital Gain/Loss calculation.

What are the U.S. IRS tax reporting requirements when you receive Bitcoin from a friend or family member?

    • Received as a gift or remittance from a friend or family member?
      • Cost Basis of Bitcoin on the date/time received = Fair Market Value
      • The Bitcoin value received as a gift not included in taxable income
      • The IRS typically does not tax Gifts received
      • You have a Capital Gain/Loss when you sell that Bitcoin for U.S. Dollars
  • You purchased the Bitcoin from that family member or friend
    • The purchase price is the Cost Basis of that Bitcoin quantity purchased
    • Purchase and Hold: Report Capital Gain/Loss when you eventually sell
    • Purchase and Sell: Report Capital Gain/Loss on that year’s tax return

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #39

Taxable Cryptocurrency Transactions—Donate your appreciated Bitcoin to a charity

Tuesday 06/14/2022

If you donate your Bitcoin holdings to a qualified charitable organization, you may pay no tax on the accrued Capital Gain. See this IRS Publication 561 “Determining the Value of Donated Property.”

https://www.irs.gov/pub/irs-pdf/p561.pdf

The IRS allows you to donate property to a qualified charitable organization without you then owing the tax obligation on the long-term Capital Gain, or the appreciation in value, of that property. This works, for example, for donated shares of appreciated stock or the increased value of your Bitcoin holdings, that you have held for more than one year.

For example, you can donate “appreciated” stock shares or “appreciated” Bitcoin holdings to a qualified charitable organization. The value of the stock shares or Bitcoin holdings, donated to the qualified charitable organization, is the Fair Market Value (FMV) of that stock or quantity of Bitcoins—averaged that day on the stock exchange or the Bitcoin price at transfer.

Since you donated property, by giving the stock shares or Bitcoin holdings to a qualified charitable organization, you will not owe any long-term Capital Gain taxes if the value of the stock shares or Bitcoin holdings have increased significantly since you originally purchased them.

As an example to consider: 

You were one of the early “casual” investors in Bitcoin in 2012, when the price of Bitcoin traded between $4.19 and $13.70. Suppose in 2012 you purchased 10 Bitcoins at $10 each, for a total investment of $100. You were just curious about this new phenomenon called Bitcoin, so you purchased a very small $100 amount to learn about it.

The price range of Bitcoin in 2021 was between $30,023.21 and $66,930.39. You decided to transfer the ownership of your 10 Bitcoins (bought in 2012) to your favorite charity. On the day of the transfer (in 2021) to the charity, Bitcoins were priced on average for $35,000 each—meaning your 10 Bitcoin holdings were worth $350,000—on the day of the transfer to the charity. That would be considered the Fair Market Value of the donated Bitcoin holdings, on that day, as (10 Bitcoins) times ($35,000 per Bitcoin) = $350,000. The charity then assumes ownership of these 10 Bitcoins, with the value to them, at the FMV of $350,000 on the day of ownership transfer. It is considered a “transfer in kind” to the charity. They would be transferred into their Bitcoin wallet.

The normal long-term Capital Gain on that sale would have been $349,900, arrived at by subtracting your original $100 purchase price of the ten Bitcoins (in 2012) from the eventual transfer to the charity (in 2021) at the Fair Market Value of $350,000. Since you donated these “appreciated” Bitcoin holdings to the charity, you owe no long-term Capital Gain tax on the $349,900 of Capital Gain that had accrued since 2012.

You are then permitted to deduct the FMV of $350,000 as a charitable contribution, as an itemized deduction, on your 2021 tax return, normally up to 30% of your Adjusted Gross Income (AGI). The unused charitable deduction, if any, and generally above the 30% of your 2021 AGI, can then be carried forward and used in the subsequent five tax years as a charitable contribution. So you will benefit by being able to deduct up to $350,000 in charitable contributions on six of your consecutive tax returns, instead of paying the long-term Capital Gain tax on the profits. Many higher income individuals would rather donate these “Gains” to a charity for the deduction, then pay the Capital Gain taxes to the IRS on the profits.

If you held Stock Shares or Bitcoins for less than one year, then the “value” of the donated property is the lower of your Cost Basis—i.e. what you paid for the Stock or Bitcoins—or the Fair Market Value (FMV) on the date of donation. This could qualify for a 50% charitable deduction.

See this article “Deductions for Charitable Gifts of Real Property” by Ducks Unlimited, for a good discussion of donating Property, like Bitcoin. 

https://www.ducks.org/conservation/land-protection/deductions-for-charitable-gifts-of-real-property#

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #38

Taxable Cryptocurrency Transactions

Receive Bitcoin as an Inheritance, after the original owner has died

Monday 06/13/2022

You received Bitcoins as an Inheritance from a family member or friend. What are the tax ramifications if you sell that Bitcoin. Let’s consider you inherited Bitcoin from your now deceased Brother, with this scenario.

    • Your unmarried older Brother died unexpectedly on August 1, 2021, and he left you his entire Bitcoin investment, which included a total of 15 Bitcoins, purchased in many small Bitcoin increments from 2014 through 2017. 
    • He was a HODL. Crypto HODLers, focus on “holding on” by not selling their cryptocurrency. The Brother never sold any of his Bitcoin, as he strongly believed the price of Bitcoin would appreciate greatly in the future years.
    • He kept impeccable records, so the value of the Bitcoins on the date of his death, was easy to determine by the Executor of his Estate, who handled his Will. They were worth $152,768 on August 1, 2021, the day he died, but he had only paid $25,000 over the years to acquire the total of 15 Bitcoins.
    • His Cost Basis was $25,000—the total he paid to acquire the 15 Bitcoins.
    • Your Cost Basis for these 15 Bitcoins you inherited, is “stepped up” to the value of the 15 Bitcoins, on the date of his death, at $152,768, as determined by the Executor of his Estate. Your cost basis is not the $25,000 he paid.
    • This “Stepped-Up Basis” rule is one advantage of inheriting property from a deceased person, as compared to receiving the property as a gift, while the donor is still living. The Fair Market Value of the inherited property, on the date of death, as defined by the Estate Executor, is your Cost Basis in that inherited property. It is “stepped up” from his original $25,000 cost basis.
    • These 15 Bitcoins are not reported or taxed as Ordinary Income in the year you inherit the 15 Bitcoins, but you will have a Capital Gain or Loss on the eventual sale, in the year you sell them. They are considered property by the IRS, so the same Capital Gain or Loss property rules apply, when you eventually sell the inherited property, the Bitcoins.
    • The default holding period for inherited property is long-term, so you will be taxed at long-term capital gain rates when you sell these inherited Bitcoins.

Congress has debated for many decades, the wisdom of this “stepped-up basis” rule for inherited property, versus the previous “carry-over basis” rule that was in effect in earlier periods of U.S. tax law history. The current Biden Administration is proposing eliminating the “stepped-up basis” rule for inherited property, for inherited gains in excess of $1 million. 

See this article for the quote shown below from President Biden, written by Ellen Chang, of Bankrate.com on 05/25/2021.:

https://www.bankrate.com/taxes/biden-estate-tax-step-up-basis/

“In an April 28, 2021 speech, President Biden said the plan would close the loophole, “ending the practice of ‘stepping-up’ the basis for gains in excess of $1 million ($2.5 million per couple) and making sure the gains are taxed if the property is not donated to charity.”

Here is another quote from the Cornell Law School’s Legal Information Institute, about the definition of Stepped-Up Basis.

https://www.law.cornell.edu/wex/stepped-up_basis 

“Stepped-up basis refers to a tax policy that looks at the market value of assets at the time a person inherits them instead of the value when the prior owner purchased the assets. For tax purposes, assets that are sold will be taxed for capital gains, and the more the asset value increases, the greater the capital gain taxes will be. Stepped-up basis can greatly reduce the capital gain taxes owed by someone inheriting property or other assets.”

This disagreement over stepped-up basis for inherited property, is an example of how Congress passes or changes tax law, to influence the behavior of taxpayers, or to “punish” or “reward” certain groups of taxpayers. 

This has been happening with Congress ever since 1913, when the Sixteenth Amendment to the United States Constitution was ratified by 42 of the States, to allow Congress to levy an income tax, without apportioning it among the States on the basis of population.

For me, this has always been one of my fascinations with U.S. Tax Law that is passed by Congress, and implemented each year by the IRS. How will Congress “this year” change the tax laws, to influence behavior they favor or oppose, and reward or punish certain sectors of the U.S. population? They do it every year, then decry that the tax code is “so complicated.” 

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #37

Taxable Cryptocurrency Transactions—Receive Bitcoin as a Gift, when the donor is still living

Sunday 06/12/2022

You received Bitcoins as a gift from a donor. You did not provide personal services or money for the gift, or give property in exchange for the gift. The IRS does not consider gifts to be taxable income to the gift recipient. It is a taxable event when you sell that gifted Bitcoin at a later date.

When you sell the gifted Bitcoins, you will calculate the Capital Gain or Loss, based on the Fair Market Value (FMV) on the date of gift receipt, or the Cost Basis belonging to the donor who gave them to you. There are three possible scenarios under which the sale of this gifted Bitcoin property is taxed, depending on the Fair Market Value and Cost Basis.

 

  1. Bitcoins received from the donor on the gift date, that have a Fair Market Value (FMV) above what the donor originally paid for them.
  • Your Uncle bought 1 Bitcoin in 2014 for $1,000 per BTC
  • He gave you that 1 Bitcoin in 2022, when it was valued at $30,000 per BTC
  • Your Cost Basis in the 1 Bitcoin is $1,000—from the purchase date in 2014.
      • The cost basis of what your Uncle originally paid for the 1 Bitcoin in 2014.
  • When you eventually sell it, you calculate the Gain from that original $1,000

 

  1. Bitcoins on the gift date, have a FMV below what the donor paid for them, and you sell them for a value below that FMV on the gift date 
  • Your Brother bought 1 Bitcoin at the 2021 market top, at $65,000 per BTC. 
  • He no longer wants this 1 Bitcoin, so he gave it to you in 2022, when the Fair Market Value (FMV) of Bitcoin on that day was down to only $35,000.
  • If you sell the Bitcoin for below $35,000, your loss is calculated from the lower $35,000 FMV, not the higher $65,000 value he originally paid in 2021.
  • If you hold onto the 1 Bitcoin for several years, and eventually sell it for a price well above his original $65,000 cost, then you use that $65,000 as your original purchase price (his original Cost Basis) to calculate your Gain.
  • This means these two possible scenarios will dictate your Gain or Loss.

If you received property by gift and your cost basis is determined by your donor’s basis, your holding period begins when the donor acquired the property. If you must use the FMV at the time of the gift as your basis, your holding period begins when you received the gift.

 

  1. The Bitcoins on the gift date, have a FMV below what the donor paid for them, and you sell them for a value between the FMV on the gift date and what the Cost Basis was for the donor who paid for them.
  • Your Friend bought 1 Bitcoin in 2021, at $45,000 per BTC. 
    • He no longer wants this 1 Bitcoin, so he gave it to you in 2022, when the Fair Market Value of Bitcoin on that day had dropped to $27,000.
    • You sell them in late 2022 for $35,000 per Bitcoin
    • This is a selling price “between” the higher original $45,000 Cost Basis he paid for the 1 Bitcoin in 2021, and the lower Fair Market Value of $27,000 on the day in 2022 he gave you the 1 Bitcoin.
    • You have no Capital Gain or Loss on this sale, as the selling price of $35,000 per Bitcoin is between his higher original $45,000 Cost Basis and the lower FMV of $27,000.
    • This is an unusual circumstance under which you sell gifted property, in that you recognize no Gain or Loss. Your sales price is between the two values you consider—the original donor Cost Basis or Fair Market Value on the gift date.

Tax software like TurboTax® will help you calculate this gain/loss scenario on gifted property you sold—for these three scenarios—taking into consideration the Cost Basis and Fair Market Value of the gift you received.

What if you want to give Bitcoin to a person? Are there any tax reporting requirements for the donor each year, when they gift cash or property  value to a person? The answer is yes, and it is called the Annual Gift Tax Exclusion amount, which was $15,000 per person you gifted to in 2021, and increased to $16,000 per person you gifted to in 2022.

In the 2022 tax year, if you give $16,000 or less to any person, in cash or property (priced by its Fair Market Value at the time of the gift), you are not required to file a Gift Tax return, to report the gift to that person.

If your gift exceeds that $16,000 per person gift recipient value, you must file a Gift Tax return using the IRS Form 709 “United States Gift (and Generation-Skipping Transfer) Tax Return.” For most taxpayers this is just a gift reporting requirement, and they will owe no gift tax, because the lifetime gift tax exclusion is currently $12.06 million—that you can give away tax free over the course of your lifetime, above the annual gift tax exclusion.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #36

Taxable Cryptocurrency Transactions—Bitcoin mining as a business?

Saturday 06/11/2022

Most people who mine Bitcoin do it with a profit motive, and invest substantial amounts of money to acquire the specialized hardware that is powerful enough to “win” the 6.25 BTC miner reward. They also incur expenses for the 24-hr/day electricity source needed to run their mining machines, and the cost of the room or facility to setup their mining farm. Very large mining farms take up entire buildings, as shown in the image below.

The expenses incurred for Bitcoin mining run as a business, whether out of your basement/garage, or in an entire building, could include:

  • Electricity metered only for the mining business
  • Mining equipment: using a section 179 or depreciation deduction
  • Repairs to the mining equipment, electrical connections, the room/farm
  • Rented or purchased space for the mining room/farm (rent or depreciation)

The total of your expenses are then subtracted from your gross mining income, to result in the net profit/loss from your mining business. You then pay regular tax, social security, and medicare tax on that net profit.

This was Bitcoin Block 700000 mined on 9/11/2021 at 12:14am EDT.

    • 6.25 BTC Reward priced at that time as $178,696.50. One Bitcoin was priced at $28,591.44 at that moment in time the reward was won.
    • 0.15388640 BTC reward for the transaction fees priced at $4,399.83, so one Bitcoin was priced at $28,591.42 at that moment.
    • Total Bitcoin quantity received was 6.40388640 BTC
    • Total ordinary income received was $183,096.33

You must pay self-employment taxes (Social Security and Medicare) on this Bitcoin mining business income, as well as regular income tax. 

That miner now owned 6.40388640 BTC worth $183,096.33. The miner would have a capital gain/loss when they eventually sell this Bitcoin. For example, assume they sold it in November 2021 at the market high.

  • If sold on 11/8/2021 it would be a short-term capital gain, as that Bitcoin had been held for less than one year. Bitcoin made its all-time high of $68,789.63 the week of 11/8/2021, so the miner took advantage.
  • Assume this Miner sold the 6.40388640 lot of Bitcoin on 11/8/2021 when Bitcoin was priced at $65,000, for $416,252.62 of proceeds.
  • $416,252.62 – $183,096.33 = $233,156.29 short-term capital gain.

The miner would then report that $233,156.29 short-term capital gain on their 2021 tax return, subject to regular income tax rates. 

If they held the Bitcoin past one year, and sold it on 9/12/2022, it would be considered a long-term capital gain, taxed at the lower capital gain tax rates. Lower taxes is a great incentive to hold more than one year.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #35

Taxable Cryptocurrency Transactions—Is Bitcoin mining a hobby or a business?

Friday 06/10/2022

Is the money you earned from being a Bitcoin Miner considered a hobby or a business? This IRS link gives some insight, with these pull-quotes shown below:

https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses

Question

How do you distinguish between a business and a hobby?

Answer

In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. A hobby activity is an activity not done for profit. This includes activities done mainly for sport, recreation, or pleasure. No one factor alone is decisive. 

You must generally consider these nine factors in determining whether an activity is a business engaged in making a profit:

  1. Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
  2. Whether you have personal motives in carrying on the activity.
  3. Whether the time and effort you put into the activity indicate you intend to make it profitable.
  4. Whether you depend on income from the activity for your livelihood.
  5. Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
  6. Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
  7. Whether you were successful in making a profit in similar activities in the past.
  8. Whether the activity makes a profit in some years and how much profit it makes.
  9. Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

You may find more information on this topic in section 1.183-2(b) of the Federal Tax Regulations at this link:

https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFRcc67ec453a5e514/section-1.183-2

If the IRS considers your mining activity a hobby, you cannot deduct any hobby-related expenses. The deduction of hobby-related expenses has been suspended for the 2018 through 2025 tax years, due to the Tax Cuts and Jobs Act passed at the end of 2017.

That hobby mining activity is reported as “Other Income” 0n line 8z of Schedule 1 (Form 1040) “Additional Income and Adjustments to Income.” This is added to your overall income totals, and taxed at ordinary income tax rates, base on your taxable income level, from 10% t0 up t0 37%.

As was discussed in the Day #19 post, it is very difficult to mine Bitcoin as a hobby in 2022, as a personal computer is no longer powerful enough to win the proof of work “Nonce puzzle.” This is required to win the 6.25 Bitcoin reward given to the Miner who verifies and adds the next block of transactions to the Bitcoin Blockchain, about every ten minutes.

See this IRS Fact Sheet “Is Your Hobby a For-Profit Endeavor?” for more insight about what the IRS considers a hobby, and the the requirement to show a profit in at least three of the last five tax years, including the current tax year—or the IRS could deem your business a hobby—and will disallow any business expense deductions for that now hobby activity.

https://www.irs.gov/pub/irs-news/fs-08-23.pdf

The IRS does not want taxpayers reporting businesses that show a loss, for consecutive years, to reduce their otherwise taxable income. If the IRS Audits these tax returns, you will have to prove the validity of the money losing business, and if it is truly a viable “for profit” business, or a hobby.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #34

Taxable Cryptocurrency Transactions—Receive Bitcoin as wages providing services as an employee

Thursday 06/09/2022

Some U.S. employees are requesting their employers pay their wages to them in Bitcoins. How would an employer do that, and how would the employee receive their paycheck in Bitcoins every two weeks? 

Bitwage offers such a payroll service to employers. See their link at: 

 https://www.bitwage.com/

NYDIG also provides Bitcoin payroll services. See their link at:

https://nydig.com/news/getpayroll-announces-crypto-payroll-via-nydig

Let’s take an example of a female Enrolled Agent, working at Taxes Are Easy, who makes a $100,000/year salary. Best Employee wants to be paid in Bitcoin, instead of U.S. Dollars. Her boss at Taxes Are Easy is a cryptocurrency enthusiast, so the boss agrees to set this up to pay Best Employee in Bitcoins. Refer to her W-2 form above, for that $100,000 salary.

The payroll department at Taxes Are Easy uses a payroll service that can pay Best Employee in Bitcoin, and send the Federal, Social Security and Medicare taxes to the IRS, in U.S. Dollars. They then issue the standard W-2 form in January to the employee, priced in U.S. Dollars. Best Employee lives in a State without state income tax, like Florida or Texas.

$100,000 ÷ 26 = $3,846.15 gross per paycheck paid every two weeks

    • Her Federal tax is withheld at a 15% rate, or $576.92/paycheck
    • Social Security tax is withheld at a 6.2% rate, or $238.46/paycheck
    • Medicare tax is withheld at a 1.45% rate, or $55.77/paycheck

That tax withholding per paycheck then totals $871.15.

    • $3,846.15 – $871.15 = $2,975 she clears per paycheck after taxes

So then every two weeks her employer would pay her $2,975 worth of Bitcoin, at the market price of Bitcoin at that moment of payment.

That is 26 quantities of Bitcoin received during the year for the net $2,975 paycheck, at the time of payment, with the value of Bitcoin at that moment the payroll department credited her account with Bitcoin.

She therefore would receive 26 different quantities of Bitcoin for each of those 26 paychecks earned throughout the year. Bitcoin’s market price constantly fluctuates, so the exact quantity of Bitcoin she would receive will vary for each paycheck—she earned and receives every two weeks.

Tax Reporting #1—Wages:  She would list on her tax return that she received $100,000 in wages, expressed in U.S. Dollars.

Tax Reporting #2—All Bitcoin Held as an Investment: If she did not need to spend or sell any of the 26 quantities of Bitcoin she received as a paycheck, she would have no capital gain/loss to report that year. 

Tax Reporting #3—Some Bitcoin Sold for living expenses: If she needed to sell some of the Bitcoin to cover her monthly living expenses, then she would calculate the short-term or long-term capital/gain loss on each of those transactions, every time she sold some Bitcoin to cover her expenses. She would use the HIFO (Highest In/First Out) costing method to determine which Bitcoin lot was sold that month. She could use online cryptocurrency software like CoinTracker for the transaction calculations.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #33

Taxable Cryptocurrency Transactions

Pay a person in Bitcoin for personal services  they provided to you

Wednesday 06/08/2022

I have been an IRS Enrolled Agent since October 14, 2016, which gives me the license to prepare any U.S. tax return for any person or business, and represent them with collection/audit matters they have with the IRS.

I work as a TurboTaxLive credentialed tax expert for Intuit Monday through Friday year round, and for myself during tax season on the weekends preparing tax returns from my own tax practice clients. Currently I bill them through QuickBooks, so they can pay me online with their credit cards. My remote clients do that, and some of my local clients pay me via a personal check. What if they paid me with Bitcoin, for my personal services provided to them as their tax professional who prepared their tax return?

I charge anywhere from a $100 for a simple tax return, to up to $500 for complicated returns. What would happen if they paid me with Bitcoin? Let’s look at an example:

  1. Let’s assume I completed a tax return for $250 on March 20, 2022. Bitcoin closed that day at $41,247.82 BTC.
  2. $250 ÷ $41,247.82 = 0.00606092 BTC
  3. So they would have sent me that 0.00606092 BTC quantity of Bitcoin, which equaled $250, when Bitcoin was priced at that $41,247.82.
  4. So my cost basis in that 0.00606092 BTC quantity is $250. I received that fractional quantity of Bitcoin that was worth $250 at the time they paid me for my $250 worth of tax preparation services.
  5. I could choose to hold onto that $250 worth of 0.00606092 BTC, as I believe over the long-term Bitcoin will drastically increase in value.
  6. I would report on my tax return, I earned $250 to prepare that tax return, as self-employment income.
  7. If I hold onto that $250 worth of Bitcoin, there is no tax reporting requirement for that quantity of Bitcoin I received for my services.
  8. If I sold that Bitcoin for U.S. Dollars, I would have a taxable gain/loss.

The Clients who paid me with Bitcoin would have a tax reporting requirement on their 2022 tax return, as they sold that 0.00606092 BTC to me, for $250. I provided them the value of my personal services as a tax preparer, for a $250 U.S. Dollar value. They would have to determine these values:

  1. From which lot of the Bitcoin they previously owned, did that 0.00606092 BTC come from, that they sent to me?
  2. How much was that 0.00606092 BTC quantity worth, when they originally acquired that lot of Bitcoin, they used to pay me? This represents their cost basis in the transaction with me.
  3. Their proceeds were the $250 value they paid me in Bitcoin.
  4. They would use the formula “Proceeds – Cost Basis = Gain/Loss” to determine if they realized a gain or loss on this transaction. 
  5. If they held that 0.00606092 BTC for one year or less, then it would be a short-term capital gain/loss.
  6. If they held that 0.00606092 BTC for more than one year, then it would be a long-term capital gain/loss.

If they used Coinbase, it would automatically calculate the capital gain/loss on this transaction, using the HIFO (Highest In, First Out) costing method, to select the specific lot of Bitcoin they used to send me that 0.00606092 BTC quantity. Coinbase creates a year-end capital gain/loss report as a very well organized PDF file, and can also import that entire gain/loss report into tax software like TurboTax® as a CSV file.

I will be setup for the 2022 tax year to accept Bitcoin payments from my tax practice clients in Bitcoin, as they will just send these payments denominated in Bitcoin, to my public Bitcoin address I have with Coinbase. I report the tax preparation income received in Bitcoin, at the fair market value of the Bitcoin quantity, at the time I received it. Coinbase will automatically calculate those values, when I receive the Bitcoin quantity.

Some vendors that accept many transactions in Bitcoin, use payment processors like Bitpay. Bitpay gives you the option of keeping the Bitcoin quantity, or they can instantly convert it to U.S. Dollars for each transaction. Some vendors prefer this, as they do not want to assume the price volatility risk with Bitcoin for hundreds or thousands of Bitcoin transactions. See their web page at:  https://bitpay.com/business/

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #32

Taxable Cryptocurrency Transactions—Spend Bitcoin to purchase a product online or in person

Tuesday 06/07/2022

While it is possible to pay for everyday goods and services in-person with Bitcoin, it is not yet widespread. For instance, I live in New York City, and a Yelp search only found 30 establishments in NY City that accept Bitcoin. That Yelp search did not even list my favorite rock hobby store Astro West in my neighborhood, that has been accepting Bitcoin for many years.

See this article by Jordan Tuwiner, from April 11, 2022, that list many online and in-person retailers that now accept Bitcoin in some form, either directly from your Bitcoin wallet, or through a payment processor.

https://www.buybitcoinworldwide.com/who-accepts-bitcoin/ 

The daily price fluctuation in the price of Bitcoin, makes using it as money to purchase everyday goods and services, much more complicated than buying that item with U.S. Dollar cash or a credit card. 

The IRS does not consider Bitcoin a currency or legal tender—like the U.S. Dollar. The IRS considers Bitcoin a property, just like a share of a stock. Imagine for example, buying your coffee in the morning with fractional shares of your Tesla stock, from your brokerage phone app. That is essentially what you are doing when you purchase an item with a fractional quantity of your Bitcoin holdings.

There are no U.S. Tax reporting obligations when you purchase an item with cash, or with a credit card—because the U.S. Dollar is America’s legal tender currency accepted for all payments, of any sort. That is not true when you purchase an item with Bitcoin. The IRS considers that item purchased with Bitcoin as a purchase and sale of your Bitcoin property, that generates a capital gain or loss on that property transaction.

While sustained inflation has drastically reduced the purchasing power of the U.S. Dollar over the last 109 years since the Federal Reserve was created in 1913, it nonetheless has always been accepted for payments. The value of Bitcoin does not get “inflated away,” but the price volatility does change the value of your Bitcoin holdings, even on a daily basis. 

These then are the two current “problems” with using Bitcoin to pay for everyday goods and services.

  1. The IRS considers Bitcoin property, so you must keep track of the quantities you purchase, and the quantities you sell—which many times are not the same quantities—so you must use fractional accounting.
  2. The price volatility in Bitcoin makes the value of your Bitcoins rise and fall, literally every day. If the value of your overall Bitcoin holdings goes up—then when you sell or spend some, you make a profit. Conversely if Bitcoin drops below the price you purchased it at, if you sell or spend any, then you lose money.

The tax reporting requirements when you use some of your Bitcoin to purchase everyday goods or services, is that you must prove to the IRS if you had a short-term or long-term capital gain or loss, on that transaction. We saw these calculations in previous blog posts #5 and #8 that described when I used some of my Bitcoin holdings to purchase the kitchen bowls from Overstock.com and the Pyrite rock from Astro West. There are 3 steps for each transaction when you use Bitcoin to purchase an item or service.

  1. Calculate the Cost Basis of that fractional quantity of Bitcoin, you just used to purchase the item or service.
  2. Calculate the Proceeds, or the cost of the item or service purchased. You had to sell a fractional quantity of your existing Bitcoin holdings (the proceeds) to purchase that item, at the Bitcoin price at that moment you purchased the item.
  3. Calculate if you had a gain or loss on this transaction. It will be a short-term gain/loss if the Bitcoin you used for the purchase was held for one year or less, and a long-term gain if held more than one year.

So imagine if you had dozens, hundreds, or even thousands of these Bitcoin transactions in each tax year. That is a major deterrent to use Bitcoin to purchase everyday goods and services, at least in America, because the IRS considers each transaction a taxable property buy/sell event. Coinbase and the online cryptocurrency tax aggregators help organize this.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #31

Taxable Cryptocurrency Transactions — Taxing Short-Term and Long-Term Gain/Losses

Monday 06/06/2022

This is an IRS article about Capital Gains and Losses called “Topic No. 409 Capital Gains and Losses” with some pull-quotes listed below:

https://www.irs.gov/taxtopics/tc409 

“Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When you sell a capital asset, the difference between the adjusted basis in the asset and the amount you realized from the sale is a capital gain or a capital loss. Generally, an asset’s basis is its cost to the owner, but if you received the asset as a gift or inheritance, refer to Topic No. 703 for information about your basis. For information on calculating adjusted basis, refer to Publication 551, Basis of Assets. You have a capital gain if you sell the asset for more than your adjusted basis. You have a capital loss if you sell the asset for less than your adjusted basis. Losses from the sale of personal-use property, such as your home or car, aren’t tax deductible.”

“To correctly arrive at your net capital gain or loss, capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. To determine how long you held the asset, you generally count from the day after the day you acquired the asset up to and including the day you disposed of the asset.”

“If you have a net capital gain, a lower tax rate may apply to the gain than the tax rate that applies to your ordinary income. The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss for the year. The term “net long-term capital gain” means long-term capital gains reduced by long-term capital losses including any unused long-term capital loss carried over from previous years.”

“The tax rate on most net capital gain is no higher than 15% for most individuals. Some or all net capital gain may be taxed at 0% if your taxable income is less than or equal to $40,400 for single or $80,800 for married filing jointly or qualifying widow(er).

A capital gain rate of 15% applies if your taxable income is more than $40,400 but less than or equal to $445,850 for single; more than $80,800 but less than or equal to $501,600 for married filing jointly or qualifying widow(er); more than $54,100 but less than or equal to $473,750 for head of household or more than $40,400 but less than or equal to $250,800 for married filing separately. However, a net capital gain tax rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate.

See the chart below for the 2021 tax year long-term capital gain tax rates.

There are a few other exceptions where capital gains may be taxed at rates greater than 20%:

    • The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
    • Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
    • The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

Note: Net short-term capital gains are subject to taxation as ordinary income at graduated tax rates.”

“If your capital losses exceed your capital gains, the amount of the excess loss that you can claim to lower your income is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss shown on line 16 of Schedule D (Form 1040). Claim the loss on line 7 of your Form 1040 or Form 1040-SR. If your net capital loss is more than this limit, you can carry the loss forward to later years.”

The IRS classifies cryptocurrency as property, which is a capital asset. Cryptocurrency transactions are therefore taxed using short-term and long-term capital gain/loss rules. The next several Blog posts will explain the capital gain/loss results of many types of cryptocurrency transactions.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #30

Taxable Cryptocurrency Transactions — Buy and Sell Bitcoin for a Short-Term Gain

Sunday 06/05/2022

Purchase Bitcoin and Sell at a later date within one year

The Days #5 and #8 posts described how I originally purchased $100 of Bitcoin in October 2019, then used my Bitcoin to purchase kitchen bowls from Overstock.com and a piece of Pyrite rock from Astro West—all from that original $100 of Bitcoin. Then I purchase a second $100 of Bitcoin in December 2019. The spreadsheet above details those transactions.

I had 0.0045870 BTC remaining from that first $100 BTC purchase, and all of the 0.01305608 BTC remaining from the second $100 BTC purchase. That then totaled to 0.01763678 BTC remaining. I sold both of those quantities on August 2, 2020 for a $48.10 short-term gain. See that transaction in the Gain/Loss report from Coinbase below. The fractional accounting is shown in the spreadsheet above and Gain/Loss report below.

I had only used Coinbase for my Bitcoin purchasing/spending/selling since I had begun in 2019, so it was relatively easy for me to keep track of the fractional accounting necessary for my cryptocurrency activity so far. Coinbase uses the HIFI (Highest In, First Out) costing method, which means it will sell the most expensive (highest cost) Bitcoin lot you acquired first. Most cryptocurrency exchanges use this HIFI costing method.

When you buy and sell Bitcoin or any other cryptocurrency, you must keep track of the quantities you buy, at what price, on what date. Then you compare that with the quantities you sell, at what price, on what date. That then determines if you have a gain or loss on that sale, and if it is a short-term capital gain/loss (held less than one year) or a long-term capital gain/loss (held more than one year). You report those capital gain/losses on your tax return on the IRS Schedule D (Form 1040) and IRS Form 8949.

I had $44.34 worth of Bitcoin Cost Basis left from that original $100 lot I purchased on 10/29/2019, after I used $25.07 for the kitchen bowls, $1.44 for the shipping costs for the kitchen bowls, and the $29.15 I used for the piece of Pyrite rock. I had 0.00458070 BTC left from that lot #1, when Bitcoin was priced at $9,390.78/BTC.

I had the entire $100 Bitcoin Cost Basis left from the second $100 lot of Bitcoin I purchased on 12/5/2019 for a 0.01305608 BTC quantity, when Bitcoin was priced at $7,430.25/BTC.

I sold all my Bitcoin from both lots when the price had risen to $11,080.82—so I had a gain on both of those Bitcoin lots. Coinbase charged me a $2.99 fee to complete that sale transaction. 

My sales proceeds were $192.44 and my cost basis was $144.34, so I made a $48.10 short-term capital gain, to be reported on my 2020 tax return.

This becomes very difficult to keep track of, if you have hundreds of transactions in one tax year. Fortunately Coinbase organizes all this for you, and produces the year-end Gain/Loss report.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #29

Taxable Cryptocurrency Transactions — The IRS Cryptocurrency question and Buy/Hold

Saturday 06/04/2022

“At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”

Under penalty of perjury, every U.S. Taxpayer must answer this question about their taxable cryptocurrency activity each tax year.

This IRS Cryptocurrency question was first asked on a U.S. tax return on the 2019 tax year forms. It will remain on a U.S. tax return for many years to come, as the U.S. Government and the IRS are aggressively pursuing taxpayers who are not reporting, or are under-reporting, their taxable cryptocurrency transactions. Much of the pending cryptocurrency-related legislation and regulation in Congress—is designed to remedy this tax avoidance issue—to more efficiently collect the tax on these transactions. 

Therefore taxpayers need to know when their cryptocurrency transactions are subject to tax reporting, and how each transaction is taxed. The next several blog posts will explain 20 cryptocurrency transaction types.

  1. Purchase Bitcoin and Hold as an investment

Transaction: Buy $1,000 of BTC on 5/10/2022 at 8:21am EDT

  • o.03088129 BTC @ $31,906.70 per BTC
  • $985.32 + $14.68 fee = $1,000 Cost Basis
  • ($985.32)÷($31,906.70 per BTC)=o.03088129 BTC

Short-Term: 5/10/2022 to 5/10/2023 (one year or less)

Long-Term: 5/10/2022 to 5/11/2023 (more than one year)

Tax Reporting: None required if you just buy and hold.

This transaction was done on Coinbase, on May 10, 2022. I purchased $1,000 of Bitcoin when the price of one Bitcoin was $31,906.70. If I hold that quantity of Bitcoin throughout the 2022 tax year, this purchase BTC transaction does not need to be reported on my 2022 tax return. If I hold onto this for ten years, I won’t report the purchase until I sell this quantity of Bitcoin after ten years.

A “Purchase and Hold” cryptocurrency transaction does not need to be reported on that year’s tax return. Just when you sell, spend or exchange that Bitcoin.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #28

The Initial IRS Guidance on Cryptocurrency — IRS Notice 2014-21 (Continued)

Friday 06/03/2022

Q-14: “Are payments made using virtual currency subject to backup withholding?” 

A-14: “Payments made using virtual currency are subject to backup withholding to the same extent as other payments made in property. Therefore, payers making reportable payments using virtual currency must solicit a taxpayer identification number (TIN) from the payee. The payer must backup withhold from the payment if a TIN is not obtained prior to payment or if the payor receives notification from the IRS that backup withholding is required. See Publication 1281, Backup Withholding for Missing and Incorrect Name/TINs, for more information.”

This is for withholding Federal tax on certain payments to individuals.

 

Q-15: “Are there IRS information reporting requirements for a person who settles payments made in virtual currency on behalf of merchants that accept virtual currency from their customers?” 

A-15: “Yes, if certain requirements are met. In general, a third party that contracts with a substantial number of unrelated merchants to settle payments between the merchants and their customers is a third party settlement organization (TPSO). A TPSO is required to report payments made to a merchant on a Form 1099-K, Payment Card and Third Party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200, and (2) the gross amount of payments made to the merchant exceeds $20,000. When completing Boxes 1, 3, and 5a-1 on the Form 1099-K, transactions where the TPSO settles payments made with virtual currency are aggregated with transactions where the TPSO settles payments made with real currency to determine the total amounts to be reported in those boxes. When determining whether the transactions are reportable, the value of the virtual currency is the fair market value of the virtual currency in U.S. dollars on the date of payment. See The Third Party Information Reporting Center, http://www.irs.gov/TaxProfessionals/Third-Party-Reporting-Information-Center, for more information on reporting transactions on Form 1099-K.”

 

Q-16: “Will taxpayers be subject to penalties for having treated a virtual currency transaction in a manner that is inconsistent with this notice prior to March 25, 2014?” 

A-16: “Taxpayers may be subject to penalties for failure to comply with tax laws. For example, underpayments attributable to virtual currency transactions may be subject to penalties, such as accuracy-related penalties under section 6662. In addition, failure to timely or correctly report virtual currency transactions when required to do so may be subject to information reporting penalties under section 6721 and 6722. However, penalty relief may be available to taxpayers and persons required to file an information return who are able to establish that the underpayment or failure to properly file information returns is due to reasonable cause.”

This talks about the possible penalties for not reporting cryptocurrency transactions, as reportable income sources, on your yearly tax return.

 

The next several posts will explain the taxable implications of these 20 types of cryptocurrency transactions, such as:

  1. Purchase Bitcoin and hold as an investment
  2. Sell Bitcoin that you had purchased at an earlier date
  3. Spend Bitcoin to purchase a product online or in person
  4. Pay a person in Bitcoin for personal services they provided you
  5. Receive Bitcoin for personal services you provided someone else
  6. Receive Bitcoin as wages providing services as an employee
  7. Receive Bitcoin as a Miner, when Bitcoin mining is a hobby
  8. Receive Bitcoin as a Miner, when Bitcoin mining is a business
  9. Receive Bitcoin as a Gift, when the donor is still living
  10. Receive Bitcoin as an Inheritance, after the original owner has died
  11. Donate your appreciated Bitcoin to a charity
  12. Send Bitcoin to another person in a peer-to-peer exchange
  13. Exchange Bitcoin for Ethereum, or another Altcoin
  14. Transfer Bitcoin from one exchange wallet to another wallet
  15. Receive Bitcoin as a reward, such as a friend sign-up promotion
  16. Receive cryptocurrency in an Air Drop from a Hard Fork
  17. Earn interest by lending out your Bitcoin to a bank
  18. Earn interest by Staking your Ethereum holdings 
  19. Earn interest by Yield Farming crypto to a liquidity pool
  20. Setup and sell an NFT (Non-Fungible Token) like on OpenSea

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #27

The Original IRS Guidance on Cryptocurrency — IRS Notice 2014-21 (Continued)

Thursday 06/02/2022

Q-8: “Does a taxpayer who “mines” virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger) realize gross income upon receipt of the virtual currency resulting from those activities?” 

A-8: “Yes, when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income. See Publication 525, Taxable and Nontaxable Income, for more information on taxable income.”

This explained how Miners must report their Bitcoin rewards.

 

Q-9: “Is an individual who “mines” virtual currency as a trade or business subject to self-employment tax on the income derived from those activities?” 

A-9: “If a taxpayer’s “mining” of virtual currency constitutes a trade or business, and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self-employment income and are subject to the self-employment tax. See Chapter 10 of Publication 334, Tax Guide for Small Business, for more information on self-employment tax and Publication 535, Business Expenses, for more information on determining whether expenses are from a business activity carried on to make a profit.”

This described when a Miner would have self-employment income.

 

Q-10: “Does virtual currency received by an independent contractor for performing services constitute self-employment income?” 

A-10: “Yes. Generally, self-employment income includes all gross income derived by an individual from any trade or business carried on by the individual as other than an employee. Consequently, the fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and is subject to the self-employment tax. See FS-2007-18, April 2007, Business or Hobby? Answer Has Implications for Deductions, for information on determining whether an activity is a business or a hobby.”

 

Q-11: “Does virtual currency paid by an employer as remuneration for services constitute wages for employment tax purposes?” 

A-11: “Yes. Generally, the medium in which remuneration for services is paid is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes. Consequently, the fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions  Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement. See Publication 15 (Circular E), Employer’s Tax Guide, for information on the withholding, depositing, reporting, and paying of employment taxes.”

This describes being paid in Bitcoin for your wages.

 

Q-12: “Is a payment made using virtual currency subject to information reporting?” 

A-12: “A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. For example, a person who in the course of a trade or business makes a payment of fixed and determinable income using virtual currency with a value of $600 or more to a U.S. non-exempt recipient in a taxable year is required to report the payment to the IRS and to the payee. Examples of payments of fixed and determinable income include rent, salaries, wages, premiums, annuities, and compensation.”

This affirms if you paid a person $600 or more in Bitcoin for work performed, you have to issue them a 1099-MISC or 1099-NEC form.

 

Q-13: “Is a person who in the course of a trade or business makes a payment using virtual currency worth $600 or more to an independent contractor for performing services required to file an information return with the IRS?” 

A-13: “Generally, a person who in the course of a trade or business makes a payment of $600 or more in a taxable year to an independent contractor for the performance of services is required to report that payment to the IRS and to the payee on Form 1099-MISC, Miscellaneous Income. Payments of virtual currency required to be reported on Form 1099-MISC should be reported using the fair market value of the virtual currency in U.S. dollars as of the date of payment. The payment recipient may have income even if the recipient does not receive a Form 1099-MISC. See the Instructions to Form 1099-MISC and the General Instructions for Certain Information Returns for more information. For payments to non-U.S. persons, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.”

 

The next post will continue these Q&A discussions from the Notice 2014-21. There are sixteen in total in the Notice.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #26

The Original IRS Guidance on Cryptocurrency — IRS Notice 2014-21 (Continued)

Wednesday 06/01/2022

This post continues the questions/answers from Notice 2014-21.

Q-2: “Is virtual currency treated as currency for purposes of determining whether a transaction results in foreign currency gain or loss under U.S. federal tax laws?” 

A-2: “No. Under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.”

This affirmed the stance of the IRS that cryptocurrency would not be considered Currency, but would be taxed as Property.

 

Q-3: “Must a taxpayer who receives virtual currency as payment for goods or services include in computing gross income the fair market value of the virtual currency?” 

A-3: “Yes. A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received. See Publication 525, Taxable and Nontaxable Income, for more information on miscellaneous income from exchanges involving property or services.”

This affirmed that a taxpayer who gets paid in cryptocurrency for goods or services, must report the fair market value of that cryptocurrency, in U.S. Dollars, as computed at the time they received it.

 

Q-4: “What is the basis of virtual currency received as payment for goods or services in Q&A-3?” 

A-4: “The basis of virtual currency that a taxpayer receives as payment for goods or services in Q&A-3 is the fair market value of the virtual currency in U.S. dollars as of the date of receipt. See Publication 551, Basis of Assets, for more information on the computation of basis when property is received for goods or services.”

 

Q-5: “How is the fair market value of virtual currency determined?” 

A-5: “For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars. Therefore, taxpayers will be required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied.”

Fair market value is the value of the cryptocurrency in U.S. Dollars at the time of the purchase, sale, spending, or exchange of the cryptocurrency.

 

Q-6: “Does a taxpayer have gain or loss upon an exchange of virtual currency for other property?” 

A-6: “Yes. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency. See Publication 544, Sales and Other Dispositions of Assets, for information about the tax treatment of sales and exchanges, such as whether a loss is deductible.”

This defines whether there is a capital gain or loss, on the taxable cryptocurrency transaction, like the sale of Bitcoin you previously purchased.

 

Q-7: “What type of gain or loss does a taxpayer realize on the sale or exchange of virtual currency?” 

A-7: “The character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer. A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment property are generally capital assets. A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer. Inventory and other property held mainly for sale to customers in a trade or for business are examples of property that is not a capital asset. See Publication 544 for more information about capital assets and the character of gain or loss.”

This defines whether you have a capital gain/loss or an ordinary gain/loss on your cryptocurrency transaction.

 

The next post will continue these Q&A discussions from the Notice 2014-21. There are sixteen in total in the Notice.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #25

The Original IRS Guidance on Cryptocurrency — IRS Notice 2014-21

Tuesday 05/31/2022

IRS Guidance documents are the official statements the IRS publishes that define and explain tax law matters. There are seven types, as described in this IRS article called “Understanding IRS Guidance—A Brief Primer.”

  1. Regulations
  2. Revenue Rulings
  3. Revenue Procedures
  4. Private Letter Rulings
  5. Technical Advice Memorandums
  6. Notices
  7. Announcements

https://www.irs.gov/newsroom/understanding-irs-guidance-a-brief-primer

The IRS describes a Notice as:

“A notice is a public pronouncement that may contain guidance that involves substantive interpretations of the Internal Revenue Code or other provisions of the law. For example, notices can be used to relate what regulations will say in situations where the regulations may not be published in the immediate future.”

The original guidance the IRS issued relating to cryptocurrency tax matters was Notice 2014-21 issued in March 2014. The introduction stated:

 “This notice describes how existing general tax principles apply to transactions using virtual currency. The notice provides this guidance in the form of answers to frequently asked questions.” 

See that link at: https://www.irs.gov/pub/irs-drop/n-14-21.pdf

The following text is quoted directly from this IRS Notice 2014-21.

SECTION 2. BACKGROUND

“The Internal Revenue Service (IRS) is aware that “virtual currency” may be used to pay for goods or services, or held for investment. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance — but it does not have legal tender status in any jurisdiction. Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin is one example of a convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.”

SECTION 3. SCOPE

“In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability. This notice addresses only the U.S. federal tax consequences of transactions in, or transactions that use, convertible virtual currency, and the term “virtual currency” as used in Section 4 refers only to convertible virtual currency. No inference should be drawn with respect to virtual currencies not described in this notice.”

SECTION 4. FREQUENTLY ASKED QUESTIONS

Q-1: “How is virtual currency treated for federal tax purposes?” 

A-1: “For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.”

This question #1 and its answer, defined from that point on, the declaration from the IRS that they would consider cryptocurrency transactions as a purchase and sale of property—just like if you had purchased and sold shares of a stock. It would not be considered as a currency transaction.

This IRS declaration then necessitated a U.S. Taxpayer would need to account for every cryptocurrency transaction they made in each tax year, and report the capital gain or loss, on each transaction, on their yearly tax return. Understanding “Crypto Fractional Accounting” was then necessary.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #24

What factors affect the value of Bitcoin?

Monday 05/30/2022

“What Determines Bitcoin’s Price?” is a great article by Andrew Bloomenthal on Investopedia, that suggests six factors affect Bitcoin’s price.

    • Supply 
    • Demand
    • Cost of Production
    • Number of Competitors
    • Regulation 
    • Media Coverage

https://www.investopedia.com/tech/what-determines-value-1-bitcoin/

    1. Supply

Only 21 million Bitcoins will ever be minted into existence 

This limitation was programmed into the Bitcoin protocol to guarantee that Bitcoins would remain scarce—to control the inflation of Bitcoin. Contrast this with the unlimited supply of U.S. Dollars the Federal Reserve keeps pumping (printing) into the U.S. and world economies. The more you have of something, will tend to make it less valuable. Conversely the less you have of something, and if its rate of issuance is decreasing over time, the more valuable it will become. New Bitcoins are mined, or minted into existence, every ten minutes. But that minting rate decreases by half every four years, from the original 50, to 25, to 12.5 to the current 6.25 Bitcoin rate. It will drop to 3.125 in 2024, to 1.5625 in 2028, etc.

    1. Demand

The worldwide market/users of Bitcoin create the demand 

People all over the world see the value of Bitcoin today, and they believe the price of Bitcoin will increase over time. That demand is growing.

    1. Cost of Production

What does it cost a Miner to mint 6.25 BTC every 10 minutes? 

The Bitcoin Miners have to purchase expensive mining computers to acquire the computing power to solve the “Nonce Puzzle” to have their new Block of transactions be added to the Bitcoin Blockchain. They also purchase electricity to run their mining farms 24-hrs/day, 365-days/yr. They currently “win” 6.25 BTC plus transaction fees in BTC, when they add the next verified Block of transactions into the Bitcoin Blockchain. Those rewards in Bitcoin must pay for their costs and generate a profit for them. The price of Bitcoin historically correlated with the cost to produce them.

    1. Number of Competitors

Altcoins (Alternative Coins) create competition for Bitcoin

Thousands of Altcoins have been created since Bitcoin was launched in January 2009. Ethereum is the most popular Altcoin after Bitcoin, due to its programmable capabilities—like Smart Contracts and DeFi (Decentralized Finance) applications. See this comparison from Coinmarketcap.com.

If Bitcoin’s market capitalization decreases as compared to Ethereum or other Altcoins, then its demand could decrease, and the price will drop.

    1. Regulation 

U.S. Congress and Government Agencies regulate Bitcoin

Will future regulation affect the U.S. markets for cryptocurrencies, and will that be detrimental for their market acceptance, and their general use as money and for an investment? These future regulations could enhance the use cases for Bitcoin, or they could be extremely detrimental—with both of those possible outcomes affecting the long-term price of Bitcoin.

    1. Media Coverage 

Will media coverage be positive or negative for Bitcoin?

How the general and investment media write about and cover Bitcoin can have a dramatic positive or negative affect on its daily price activity.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #23

How does Gold, the U.S. Dollar and Bitcoin compare with the last 6 Store of Value Traits of Money?

Sunday 05/29/2022

    1. Scarce

Money must not be available in large quantities. It must be difficult to obtain or produce in quantity—unless you exchange value for it—like your labor, your products or another asset.

      • Gold has been scarce for millenniums, but new sources of gold can be discovered—liked mined on the ocean floor or from asteroids.
      • The U.S. Dollar is not scarce by any logical measure.
      • Bitcoins are the most scarce of the three, as the total supply of Bitcoins will never surpass the 21 million designed into the protocol.
    1. Established History

Members of a society grant faith to their money as a store of value by using that money to pay for items in their lives, with the money they earned from their labors or investments.

      • Gold has been accepted as valued money for thousands of years.
      • The U.S. Dollar has several hundred years of service as money, but since the Federal Reserve was created in 1913, the purchasing power of the U.S. Dollar has dropped dramatically.
      • Bitcoin has only 13 years of use history, and its frequent periods of price volatility is a detriment to it being a trusted money source.
    1. Censorship-Resistant

Can a financial institution or government, prevent you from accessing your money by seizing/freezing your accounts?

      • Gold has at times in history been confiscated by governments.
      • The U.S. Dollar definitely can be seized by the government.
      • Bitcoins cannot be seized if held in non-custodial wallets. Custodial exchanges like Coinbase, which must verify your identity, can seize/freeze your Bitcoins if governments force them to do that.
    1. Unforgeable Costliness

Money that is difficult to create adds to its value. Does it need to be mined to produce additional units of that money?

      • Gold has been mined by humans for thousands of years. The costs to find and mine new gold adds to its value. The supply of gold is limited until new sources are discovered and mined.
      • The U.S. Dollar is not difficult to create, as the Federal Reserve demonstrates every year by just “printing” the Dollars the U.S. Government needs to fund its deficit spending—thus causing inflation. 
      • Bitcoins have a built-in difficulty factor, as the Mining Difficulty for the Bitcoin Network is updated every two weeks, to ensure the 6.25 new Bitcoins are created approximately every ten minutes.
    1. Openly Programmable

Can new features be added to the money, to improve how it is utilized by the very users of that money? 

      • Gold has no capacity to acquire programmable features.
      • The U.S. Dollar could in the future be “programmable” if the Federal Reserve introduces a CBDC (Central Bank Digital Currency).
      • Bitcoin was designed to be programmable, but that capability has not really been utilized, like it has with Ethereum—the leading programmable cryptocurrency. Bitcoin can use Smart Contracts.
    1. Decentralized

Is money centrally controlled by an institution or government to allow censorship—or does it function without supervision of  entities—therefore it cannot be censored or controlled?

      • Gold is not literally controlled by any Government, but many have put limits on how much gold their citizens can hold or own.
      • The U.S. Dollar is absolutely controlled by the Federal Reserve and the U.S. Government. They both can dictate who can use U.S. Dollars, be it an individual or a sovereign country.
      • Bitcoins by their nature are decentralized, as no single financial institution or government controls the Bitcoin Network. The control over your access to your Bitcoins, is determined by what exchange or wallet you use to hold your Bitcoin. Custodial exchanges like Coinbase can seize/freeze your Bitcoin if ordered to by a Government.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #22

How does Gold, the U.S. Dollar and Bitcoin compare with the first 5 Store of Value Traits of Money?

Saturday 05/28/2022

Refer to the Thursday 05/26/2022 post for an introduction of the eleven Store of Value Traits of Money. The first five are explained below.

    1. Durable

Money must be long-lasting and not easily destroyed

      • Gold has the best durability quality of the three, as all of the gold that humans have ever mined and forged into ornament, jewelry, coins and bars, is still in existence today—unless it was buried or lost.
      • The U.S. Dollar exists as bills, coins, and in digital forms like bank accounts, credit cards, etc. Its durability comes from the belief it is backed by the “full faith and credit” of the U.S. Government.
      • Bitcoins are issued or minted every 10 minutes by the Miners on the Bitcoin Network. No central authority issues new Bitcoins. Bitcoins will be durable so long as the immutable Bitcoin Blockchain is maintained on the distributed network of computers all over the world that approve and secure new Bitcoin transactions.
    1. Portable

Money must be easy to move, secure against theft, and store

      • Gold is the worst for portability, as it is very heavy in large bars. It is also not convenient to pay for everyday goods with gold.
      • The U.S. Dollar is very portable as cash/coins and through online accounts. But banks, credit card companies, and the U.S. Government can seize/restrict access to your electronic Dollar accounts.
      • Bitcoins have the best portability value of the three. They can be sent to anyone in the world as easily as sending an email, without the permission of a banking intermediary. A Bitcoin wallet can be backed up onto a USB stick drive, containing a billion dollars of Bitcoin value, to then be carried, stored or electronically sent anywhere.

3.  Fungible

Money must be interchangeable in equal unit quantities 

      • Gold has the best fungibility quality of the three because when you melt it down, it has the same quality as any other ounce of gold. Only the purity grades distinguish the gold between 18 or 24 karat.
      • The U.S. Dollar is only as fungible as the Federal Reserve and the U. S. Government allows it to be. They both can seize/restrict access to your U.S. Dollar holdings, as an individual or a country.
      • Bitcoins are very fungible, as any individual Bitcoin is the same as any other Bitcoin represented on the Bitcoin Blockchain. This is true whether that Bitcoin was “minted” into circulation in 2009, or just recently in 2022. Only the market value of Bitcoin changes.
    1. Verifiable

Money needs to be easily identified and proven as authentic

      • Gold can easily be proven authentic by a skilled jeweler. But there have been some gold forgeries with gold-plated tungsten bars.
      • The U.S. Dollar is not easy to counterfeit, but many criminals have successfully done just that. The modern U.S. Dollar paper bills are very carefully designed to thwart counterfeiters.
      • Bitcoins are the most verified of the three, because every Bitcoin ever created, bought or sold, has been recorded on the immutable Bitcoin Blockchain. Secured with the mathematical certainty of the cryptographic hash of each new Block added to the Blockchain.
    1. Divisible

Money needs to be easily subdivided to allow any purchase

      • Gold held in the hands of users, cannot be easily divided into smaller quantities, to match the purchase price of an item.
      • The U.S. Dollar is easily divisible down to the penny, which is always sufficient to purchase any item, or pay any bill.
      • Bitcoins can be divided down to a hundred millionth of a Bitcoin, to eight decimal places as 0.00000001, known as a Satoshi. This allows any quantity of Bitcoin to be sent or received, as one Satoshi is much, much smaller than a U.S. penny.

The next post will describe the last six Store of Value Traits of Money.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #21

What is the classic definition of money and how good is the U.S. Dollar, Gold and Bitcoin as money?

Friday 05/27/2022

The definition from Britannica.com:

“Money is a commodity accepted by general consent as a medium of economic exchange. It is the medium in which prices and values are expressed. It circulates from person to person and country to country, facilitating trade, and it is the principal measure of wealth.”

The U.S. Dollar satisfies the definition above, as it is used all over the world and is still considered the world’s reserve currency. The central banks of many countries hold U.S. Dollars as “reserves” in their accounts, making it easier for their governments, large corporations, and institutions to trade with other countries and pay with dollars. This eliminates the need and higher costs of converting their native currency to another currency. 

See this chart for the history of global reserve currencies since 1400.

What did all five countries that lost their global reserve currency status have in common? They “printed” too much of their currency, or depreciated its value, which reduced its utility to the world, to the extent they lost their status as the world’s reserve currency. The question in 2022, is how much longer will the world tolerate the U.S. Government funding its deficit spending, with U.S. Dollars the Federal Reserve “prints” to fund that very government deficit spending? Many very smart financial experts believe that Bitcoin is going to be the world’s reserve currency some day. Losing its decades long status as the world’s reserve currency is the greatest threat to the U.S. Dollar—as constant inflation reduces its value to the world.

Gold has for thousands of years, been revered as the most durable store of value, from the Egyptian Pharos to the central banks of today. Many central banks keep huge stores of Gold bars in their vaults that they can use to stabilize their economies. Gold reserves function as “value” as an internationally accepted asset to support the value of their national currency.

Bitcoin is referred by many as the new “Digital Gold” because it will ultimately be more scarce than Gold, as only 21 million Bitcoins will ever be minted.

The U.S. Dollar could lose its status as the world’s reserve currency in the next few decades, if the Federal Reserve cannot control inflation, and the U. S. Government cannot stop its addiction to deficit spending.

Gold will always hold its centuries long appeal as the best store of value humans have ever used. But it is not easily divisible, it is very heavy to transport, and is not very convenient to use for everyday purchases.

Bitcoin could evolve to replace the most revered traits of the U.S. Dollar and Gold, to become the preferred digital currency used by people all over the world, anchored by its status as the new world reserve currency. 

History over the next few decades will reveal which path money takes. Many very smart people believe Bitcoin will win this battle of the moneys.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #20

What are the Characteristics of Sound Money?

Thursday 05/26/2022

Merriam-Webster defines Sound Money as:

“Money not liable to sudden appreciation or depreciation in value. Stable money specifically. A currency based on or redeemable in gold.”

What characteristics of Sound Money does the U.S. Dollar have, and not have. The same could be asked of Bitcoin—what Sound Money characteristics does it have and not have. Gold also has many of these traits.

Here are two great articles that explain Sound Money.

The “Bullish Case for Bitcoin” by Vijay Boyapati at:

 https://vijayboyapati.medium.com/the-bullish-case-for-bitcoin-6ecc8bdecc1

The “Planting Bitcoin” 4-part series by Dan Held at:

 https://danhedl.medium.com/planting-bitcoin-sound-money-72e80e40ff62

Money is a medium of exchange, a store of value, and a unit of account. Bitcoin meets all three of these uses, to a more or lesser degree. It needs wider acceptance to overcome Gold and the U.S. Dollar as Sound Money.

Bitcoin as a Medium of Exchange

For Bitcoin to serve as a medium of exchange, it must be accepted as a method of payment for the goods and services people need to buy.

Bitcoin as a Store of Value

For Bitcoin to serve as a store of value, it has to be used as an asset that can be stored and retrieved at a later date without losing its value.

Bitcoin as a Unit of Account

For Bitcoin to serve as a unit of account, it must be divisible, countable, and fungible. Fungible as one Bitcoin interchangeable for another Bitcoin.

Vijay Byapati described and illustrated in his “Bullish Case for Bitcoin” that money has eight store of value traits, with his table comparing Bitcoin, Gold, and Fiat Currencies (like U.S. Dollars, Euros, British Pounds, etc.). See that image below.

    1. Durable
    2. Portable
    3. Fungible
    4. Verifiable
    5. Divisible
    6. Scarce
    7. Established History
    8. Censorship-Resistant

Dan Held in his “Planting Bitcoin” 4-part series added three more traits of money, as shown in his image below.

    1. Unforgeable Costliness
    2. Openly Programmable
    3. Decentralized

What value traits does the U.S. Dollar excel at—making it the world’s reserve currency? Why has Gold been so revered for thousands of years? How has Bitcoin revolutionized the definition of digital money and inflation protection? These questions and how these three money examples satisfy these value traits will be explained in posts over the next several days.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #19

What computers are needed today to be a Miner on the Bitcoin network?

Wednesday 05/25/2022

When the first 50 Bitcoins were mined by Satoshi Nakamoto on January 3, 2009, a person could easily mine Bitcoins on a typical personal computer, just using the built-in CPU (Central Processing Unit) power of that computer. Then Laszlo Hanyecz in May 2010 tried using the GPU (Graphics Processing Unit) to mine Bitcoin, and discovered that was much faster. He routed the Bitcoin mining process to the GPU on his computer.

The most recent breakthrough in Bitcoin mining hardware was the use of ASIC (application-specific integrated circuit) chips that were designed solely to mine Bitcoin. That happened in January 2013, when Avalon released and shipped their first ASIC mining rig machine. 

You can no longer economically mine Bitcoin with a personal computer. It is just not powerful enough anymore. Specialized ASIC mining computers designed only to mine Bitcoin can cost over $9,000 for the most powerful retail machine available. The Bitmain Antminer S19 Pro is one of the most powerful, as seen on Amazon’s web site below.

The more affordable Antminer S9j is only $759, as shown below. Someone setting up a mining rig in their garage could use these.

Entire rooms of these Bitmain Antminer S19 Pro or similar Bitcoin Mining computers are used to create mining rigs—like the photo below.

Mining Pools also have been setup, that “pool” together many of these machines, across a network they create over the Internet. Then the combined computing power of all those mining rigs, on that Mining Pool network, create a very powerful hashing machine to win Bitcoins.

 A U.S. based Mining Pool is Foundry at:

https://foundryusapool.com/

An issue the Bitcoin Mining industry is trying to improve upon is the amount of electricity that is required to run these mining machines. Many are switching to using renewable energy sources like Solar or Geothermal.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #18

How do the “halving” events every four years increase scarcity to control Bitcoin inflation?

Tuesday 05/24/2022

The reward for mining Bitcoins is reduced by half every four years to control inflation in the Bitcoin market. It is called the “halving event.” It has been reduced from the original 50 Bitcoin reward to the current 6.25 Bitcoin reward. The price of Bitcoin historically has risen after each event.

See how this has occurred in the historical price data from this site:

https://www.investing.com/crypto/bitcoin/historical-data 

    1. 1st reward period (01/03/2009 to 11/28/2012) 50 BTC Reward
      • Bitcoin priced at a low of $1 to a high of $13.50 (a 1,250% increase)
    2. 2nd reward period (11/28/2012 to 07/09/2016) 25 BTC Reward
      • Bitcoin priced at a low of $12.40 to a high of $1,237.60 (a 9,880.65% increase)
    3. 3rd reward period (07/09/2016 to 05/11/2020) 12.50 BTC Reward
      • Bitcoin priced at a low of $467.30 to a high of $19,870.60 (a 4,152.21% increase)
    4. 4th reward period (05/11/2020 to 05/27/2024) 6.25 BTC Reward
      • Bitcoin priced at a low of $8,235.60 to high of $68,990.60 (a 737.712% increase) 
    5. 5th reward period (05/27/2024 to 05/xx/2028) 3.125 BTC Reward
      • The Bitcoin Reward is Halved every 210,000 blocks

These web pages calculate the Percentage Increase between two numbers as shown in the above increase statistics.

https://www.calculatorsoup.com/calculators/algebra/percentage-increase-calculator.php 

https://www.calculatorsoup.com/calculators/algebra/percent-change-calculator.php 

Bitcoin will always be scarce, with only 21 million ever being released into circulation, and it is impossible to counterfeit. Currently just over 19 million Bitcoins have been minted into existence, at a current pace of 900 per day, for 328,500 per year. This is using the current 6.25 bitcoin reward.

900 times $30,000/BTC = $27,000,000/day of value added to the Bitcoin network, or $9,855,000,000 per year. This is one component that “adds value” to the Bitcoin price—the “halving” of the Bitcoin reward.

How many Bitcoins have been “minted into existence” each year? The Miner’s reward is Halved every 210,000 blocks.

    1. 210,000 times 50 BTC/block equal 10,500,000 BTC created (2009 to 2012)
    2. 210,000 times 25 BTC/block equal 5,250,000 BTC created (2012 to 2016)
    3. 210,000 times 12.5 BTC/block equal 2,625,000 BTC created (2016 to 2020)
    4. 210,000 times 6.25 BTC/block equal 1,312,500 BTC created (2020 to 2024)
    5. 210,000 times 3.125 BTC/block equal 656,250 BTC created (2024 to 2028)
    6. 210,000 times 1.5625 BTC/block equal 328,125 BTC created (2028 to 2032)

So 19,687,500 of the 21 million total Bitcoins will have been mined by May 2024 when the next halving event will occur. 900 per day, for 328,500 per year. This using the 6.25 bitcoin reward. 

That will drop to 450/day using the 3.125 BTC reward until 2028. That will then drop to 225/day using the 1.5625 BTC reward until 2032. 

This is the “Inflation Protection” built into the Bitcoin Network, as Bitcoins are designed to become more scarce as time passes. This is the exact opposite of the U.S. Dollar—which since 1913 with the creation of the Federal Reserve—has been designed to lose value over time. See this web page and image, from the VisualCapitalist.com that shows the declining purchasing power of the U.S. Dollar since 1913.

Purchasing Power of the U.S. Dollar Over Time

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #17

What is Hashing and how does Bitcoin use it?

Monday 05/23/2022

From Investopedia: 

https://www.investopedia.com/terms/t/target-hash.asp#

“Bitcoin uses the SHA-256 hash algorithm. This algorithm generates verifiably random numbers in a way that requires a predictable amount of computer processing power.”

Hashing uses a small computer program, called an algorithm, that takes a specific quantity of data as an input, and generates a unique number associated with that data, as the output. If you change any aspect of that original input data that goes into the hashing algorithm, the resulting hash number will change as the output.

This feature of hashing generating a unique number, is used in Bitcoin, to ensure the approved transactions in each Block, remain unaltered once permanently inserted into the Bitcoin Blockchain. The final approved hash of that Block can never be changed, as all future subsequent Blocks reference back to its unique hash number. The hash of the previous Block, is always included in the next Block, and the next Block, and so forth.

See this link for a “live” demonstration of the SHA-256 Cryptographic Hash Algorithm. Type in a phrase, change it, and see the changed hash.

https://www.movable-type.co.uk/scripts/sha256.html

I typed my name as Michael D. Meyer, EA for my own unique hash.

The Target Hash, that is defined by a certain number of leading zeros, is the feature that defines the Mining Difficulty of the Bitcoin Network, which is updated every two weeks. The Bitcoin Network uses the SHA-256 cryptographic hash algorithm.

Once the Miner has approved and bundled the new Bitcoin transactions into their Candidate Block, and has found the “winning” Nonce number, all of the data for that completed Block, is hashed using the SHA 256 hashing algorithm. That produces the unique, final hash of this completed Candidate Block. Once the other Miners on the Bitcoin Network approve this Candidate Block, to be the next permanent Block added to the Bitcoin Blockchain, they use that hash of that just approved Block, to be the first data point carried forward to their own new Candidate Block.

See this Bitcoin Block 737453 that was mined on Sunday, 5/22/2022. The Block Hash is indicated on the first line as:

00000000000000000007c18765c6268e70938c80d278657fa1dabd0876262be6

The Target Hash rate currently requires nineteen leading zeros to satisfy the current Mining Difficulty setting for the Bitcoin Network. The Nonce number that “solved” for this approved Block was 1,863,258,901.

SlushPool was the Mining Pool that won this particular block.

https://help.slushpool.com/en/support/solutions/articles/77000417314-introduction-to-mining-%E2%98%85

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #16

How is the Mining Network Difficulty setting changed to control the rate of creating new Bitcoins?

Sunday 05/22/2022

Every time a new Block is approved into the Bitcoin Network, 6.25 new Bitcoins (BTC) are “minted” into existence by the winning Miner. They receive those new 6.25 BTC into what is called their Coinbase transaction, which is their Bitcoin wallet address, added as the first transaction to that approved Block. These newly minted 6.25 BTC cannot be spent or sold by the Miner until that new Block has received at least 100 block confirmations in the Blockchain—meaning after 100 new Blocks have been added. See this site for a fantastic, in-depth “Blockchain Tutorial” at JavaTpoint.

https://www.javatpoint.com/coinbase-transaction

The Mining Difficulty is updated every two weeks to keep the pace of new Blocks added to the Bitcoin Network, at about one new Block every ten minutes. If new Blocks are being created too fast, the number of leading zeros requirement increases, making it more difficult for the Miners to solve for the Nonce number. Conversely, if the pace of new Blocks is too slow, the next Mining Difficulty is made easier, by requiring a lesser number of leading zeros.

The Nonce is the last random number the Miner adds to their Candidate Block, so their overall final Hash number of that block, will result in using the required number of leading zeros. The Miner’s computers “test” for this Nonce value at a pace of billions, and even at times trillions of tries, or hashes, per second.

This task of finding this random Nonce value, is known as the “Proof of Work” the successful Miner accomplished, as they have to purchase and setup massive amounts of computing power, to cycle through the literally billions/trillions of Nonce possibilities per second, that will arrive at the “magic” Golden Nonce. This all is accomplished within the 10-minute “deadline” to add a new Block to the Bitcoin Blockchain and mint those new 6.25 BTC.

If that one “lucky” Miner finds this “magic” Golden Nonce number, they immediately upload their completed Candidate Block to the Bitcoin Network, for review and approval by all the other “nodes.”

The other “nodes” re-verify all the transactions in that Candidate Block, and confirm that Golden Nonce number can indeed satisfy the current Target Hash Value, or Mining Difficulty parameter of leading zeros. Once that new Block is confirmed by the Network it is permanently added to the Bitcoin Blockchain, and the “Nonce Race” begins anew, all over the world, trying to be that one next Miner to solve this Nonce puzzle.

See these links for further learning about the Nonce and the Mining Difficulty, and the roles they assume within the Bitcoin Network.

Definition of a Nonce, by Investopedia at:

https://www.investopedia.com/terms/n/nonce.asp#

“A nonce is an abbreviation for “number only used once,” which is a number added to a hashed—or encrypted—block in a blockchain that, when rehashed, meets the difficulty level restrictions. The nonce is the number that blockchain miners are solving for, in order to receive cryptocurrency.”

 

Definition of a Nonce, by Mycryptopedia at: 

https://www.mycryptopedia.com/bitcoin-nonce-explained/

“The Bitcoin nonce is an arbitrary number that miners change in order to produce a hash that is less than or equal to the target hash.”

 

Definition of Cryptocurrency Difficulty, by Investopedia at:

https://www.investopedia.com/terms/d/difficulty-cryptocurrencies.asp

“In order to ensure that the network produces a new block at a steady average rate, the software is set to automatically adjust the target hash up or down, which results in lower or higher difficulty, respectively.”

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #15

What are the Contents of a typical proposed Candidate Block in the Bitcoin Blockchain?

Saturday 05/21/2022

 

 

Each Bitcoin Block of transactions contains these five components:

  1. The “Hash” of the Previous Block 
    • The “Hash” is the encrypted summary for that previous block.
  1. The Timestamp of the Block
    • This records when that new Block was created.
  1. The Merkle Transaction Root
    • Which is the “Index” of all the new transactions in the Block.
  1. The Nonce
    • Number that “solves” the mathematical “puzzle” in each new Block.
  1. The “Hash” summary of the new Block
    • That will be carried forward to the next Block.

 

How do the Miners compile a new Candidate Block to be added to the Blockchain, that contain these five components?

The Miners run the free Bitcoin Core software on their network of computers, which then connects them to the thousands of other computer “nodes” on the Bitcoin distributed worldwide network, running the same software and referencing the same Blockchain. They each all share the current version of the most recently completed Blockchain of transaction data, which at this time is over 407 GB of data, containing every verified and approved Bitcoin transaction since that first Genesis Block created in 2009.

A part of their software called the MemPool, or Memory Pool, collects the new Bitcoin transactions that have recently been presented up to the Bitcoin Network for verification. The software then begins what is called a Candidate Block, which is local to each Miner’s computer. That Candidate Block begins with the “Hash” summary of the previous Block in the Blockchain — which links it back to every transaction since 2009.

The Miner then takes enough new transactions from their MemPool to fill up to 2 MB of data into this Candidate Block. They then verify each of those thousands of transactions, referencing each transaction’s history back into the Blockchain, to verify they indeed have the Bitcoins to spend or send to another person, or can receive Bitcoins into a wallet. They then summarize these new transactions into the Merkle Transaction Root, which is the cryptographic index of all the new transactions in this block.

The last task for the Miners is to find a random number, called the “Nonce,” that when added to all the transactions, the Merkle Root, the Previous Hash, the Timestamp and other identifying data in this Candidate Block—will produce the new “Hash” Block summary value that is small enough to satisfy the network’s current Target Hash Value. That value is controlled by the number of leading zeros in that Target Hash Value number. That number could look like this with 19 “leading zeros”: 

00000000000000000005d33f374003ecd3b535159eed292c489fab93b96d069d

This “leading number of zeros” requirement, called the Mining Difficulty, is updated every 2,016 Blocks, or about every two weeks.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #14

The Blockchain ledger 

How do the “Miners” verify and secure it?

Friday 05/20/2022

The “Miners” are the individuals who secure the Bitcoin online ledger called the Blockchain. Miners operate a worldwide distributed computer ledger of over 8,000 “nodes.” The Bitcoin Core client software is installed onto one or more computer “nodes” within their mining setup. 

The free open source software can be downloaded at:

https://bitcoin.org/en/download

Each Miner has four responsibilities to perform with their Bitcoin Core software node, running on their Mining computer or computer network.

  1. Verify the new Bitcoin transactions that arrive into their software, into what is called the Mempool.
  1. Compile about 1 to 2 MB of new transactions, which is usually a few thousand, into their Candidate Block, preparing it for possible inclusion as the next Block in the Blockchain.
  1. Solve the mathematical “nonce number” Hash problem, to create the Hash number representing the new Block, within the required leading number of zeros defined by the network Mining Difficulty value.
  1. Publish that completed, approved Block up into the Bitcoin Network, as a Candidate Block, to be considered as the next permanent Block inserted into the Blockchain.

Completing these four tasks demonstrates their “Proof of Work” that the Miner accomplished to demonstrate they are legitimate “auditors” of the approved, verified transactions in their Candidate Block, that they propose to add to the permanent Blockchain.

The Blockchain is a self-regulating network, that rejects transactions that cannot be verified. The Miners have huge financial incentives to keep the network secure from hackers, and to verify and confirm the authenticity of each new transaction.

They verify that each new transaction is an actual “transfer” of a certain quantity of Bitcoin—from the current owner—to the new owner. This change of Bitcoin ownership is permanently recorded into the Bitcoin Blockchain ledger—to prove the transferred ownership of this Bitcoin, from the seller to the buyer, or from the sender to the recipient.

The Bitcoin ownership literally changes hands as a new digital record in the ledger, the same as if you had given that person cash. It is a permanent change of Bitcoin ownership. The digital object—the quantity of Bitcoin transferred—is digitally sent and credited to the recipient. The Blockchain keeps track of Bitcoin ownership and who sends/receives them.

The first Bitcoin Block generating 50 Bitcoins was in January 2009, called the “Genesis Block.” Each Block of transactions after that, is linked back to that first block, as the “Hash” or summary of each Block, is carried forward to the next Block, to the next Block, and so forth. Each successive Block is therefore related to all previous Blocks, connected in a successive “chain” of Blocks, i.e. the Blockchain.

The secure mathematics of Cryptography formats the information in each Block, such that the several thousand new verified transactions contained within that new Block are permanently, securely encrypted to be tamper and hacker proof. 

As of May 20, 2022, there were over 737,100 Blocks of transactions in the Bitcoin Blockchain, containing almost 735 million transactions, since that first Genesis Block was added to begin the Blockchain in 2009. There has never been a successful hack of the Bitcoin Blockchain. Only some online Bitcoin Exchanges have had hacking events where some of their customers lost Bitcoins, due to the security breach in those Exchanges. 

See this Blockchair web site for these all-time Bitcoin statistics:

https://blockchair.com/bitcoin

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #13

What is the definition of a Blockchain? 

How does Bitcoin operate its own?

Thursday 05/19/2022

A definition from the Oxford Dictionary:

“A Blockchain is a system in which a record of transactions made in bitcoin or another cryptocurrency are maintained across several computers that are linked in a peer-to-peer network.”

It is a distributed database of transactions, simultaneously residing on thousands of computers all over the world, with no single point of failure. It is approved and maintained by the consensus of a majority of these computers on the network. Bitcoin uses such a distributed Blockchain ledger system.

Here is a 6-minute YouTube video explanation of how a Blockchain works, from the “Blockchain Technology Defined ” article at:

 https://builtin.com/blockchain

See also the YouTube channel “Simply Explained” by Xavier Decuyper, who authored this terrific video shown below. He explains many other computer topics.

How does the Bitcoin Network verify and permanently store a simple transaction—like purchasing my first $100 of Bitcoin through Coinbase?

The transaction is uploaded by Coinbase, on my behalf, to the Bitcoin Network nodes, called the Miners. The Miners, the “accounting” computer “nodes,” then verify the transaction. They confirm the person indeed previously owned at least $100 worth of Bitcoin, that they then sold to me, who just bought $100 of Bitcoin, from this person.

The record of how that person previously acquired the Bitcoin, what quantity they purchased, for what price, and on what date—is stored in the worldwide Bitcoin network ledger, called the Blockchain. The Miners locate and confirm that previous Bitcoin transaction—that proves the ownership of enough Bitcoins, that I just bought $100 worth.

They then verify that Coinbase properly setup my Bitcoin “wallet,” so the $100 worth of Bitcoin can be “transferred” into my new Bitcoin wallet, as a ledger entry. Once both sides of this transaction—the buy and sell—are verified, then the Miners bundle this new transaction, along with thousands of others, into their new Candidate Block. If they solve the complex cryptographic “nonce puzzle” that will approve the addition of all these transactions—then my $100 transaction along with the others in that Candidate Block—are added to the Bitcoin ledger, called the Blockchain.

Only one Miner in the entire world about every ten minutes, “wins” the “Proof of Work” computational “nonce puzzle” contest, to be the one to add their next Block of transactions to the Bitcoin Blockchain. For that, they receive 6.25 Bitcoins plus some transaction fees, also paid in Bitcoin.

One new Block containing around two thousand new, verified Bitcoin transactions, is permanently added and inserted into the Blockchain about every 10-minutes. Then every “node” on the Bitcoin network verifies that the Miner did the proper “Proof of Work,” to add that new Block of transactions into the Blockchain. They verify the transactions are valid, and that the Miner solved the cryptographic “nonce puzzle” required to confirm each new Block. The Miners then begin the process over, competing to be the next  unique “nonce puzzle” winner for the next Block in ten minutes.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #12

What is the Bitcoin Blockchain?

Online Ledger to record all Bitcoin transactions

Wednesday 05/18/2022

The Bitcoin Blockchain is the immutable online accounting ledger that keeps track of every Bitcoin transaction that has occurred, since the first Genesis Block that was created on January 3, 2009. It is updated approximately every 10-minutes, stored as a multi-gigabyte file, on every computer in the world running the Bitcoin mining software that is used to verify new Bitcoin transactions. Currently there are over 8,000 Mining nodes. You can view the Bitcoin blockchain statistics on this Blockchain.com address at:

https://www.blockchain.com/explorer

Currently the Bitcoin Blockchain is an over 400 GB file, growing by about 200 MB per day. See this link for the daily Blockchain size statistics.

https://ycharts.com/indicators/bitcoin_blockchain_size 

Hard drive capacity has always been well ahead of the Blockchain size.

These components, procedures and questions about the Bitcoin Blockchain will be discussed in blog posts for the next several days:

  • What is a Blockchain and how did Bitcoin implement its own?
  • What computers are needed to be a Miner on the Bitcoin network?
  • What is the Bitcoin Core Software that creates a network “node?”
  • What other Core Software can be used for a “node” on the network?
  • Who are the Miners? People on the Nodes that verify transactions.
  • What are Mining Pools? Node groups combining computing power.
  • What is the “Proof of Work” to add the next Block to the Blockchain?
  • What is constantly changing network difficulty? Network hash rate.
  • How often is a new Block of confirmed Bitcoin transactions added?
  • How then are new Bitcoins Minted by the Miners?
  • What is the 6.25 BTC Miner Reward with transaction fees?
  • What is the “Halving” of the Miner Reward every four years?
  • How does this “Halving” help control inflation in the Bitcoin market?
  • Why is Bitcoin Mining energy intensive, and how can that improve?

The Bitcoin worldwide ledger accounting system is secure and immutable, meaning the Bitcoin transactions are permanent once confirmed. There are over 8,000 “nodes”—or distributed “accounting” computers—setup across the globe who review, secure and approve Bitcoin transactions about every 10-minutes. These are called “Miners,” and they compete to verify transactions, and add them to the worldwide ledger system, called the Blockchain. Each Miner currently receives 6.25 Bitcoins plus small transaction fees, when they successfully add a “Block” of around two thousand newly verified transactions into the worldwide Bitcoin Blockchain.

Every Bitcoin transaction since 2009 has been permanently stored in this online Blockchain ledger. The transactions are permanent and cannot be reversed. The distributed Bitcoin Network can easily verify if you own Bitcoins in your wallet, to confirm any transaction you might enter into, to spend or sell those same Bitcoins.

The Blockchain is a self-regulating network, that rejects transactions that cannot be verified. The Miners have huge financial incentives to keep the network secure from hackers, and to verify and confirm the integrity of every new transaction. The Bitcoin network has never been hacked, and it would be impossibly expensive to try and overpower the network to hack it.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #11

News Sites that report about Bitcoin

What current events drive the Price of Bitcoin?

Tuesday 05/17/2022

The previous Question #10 talked about the price volatility in Bitcoin over the past 14 years, and the last year in particular. What events caused such large price swings? What news moves the price of Bitcoin each day? 

I personally view CoinDesk every day to learn the “latest” news about Bitcoin and the Cryptocurrency world in general. See their page at:

https://www.coindesk.com/

At the top of their web page they show the “live” prices of the most popular Cryptocurrencies, with the latest headlines below that. They also have a market recap video each day and presentations during the day.

I personally am more of a Technical Analysis investor, anticipating upcoming price moves as shown and developing on the daily price charts. Fundamental Analysis focuses more on the “daily news” and how that moves the price of Bitcoin. I still try to keep informed about Bitcoin news.

Another great site is CoinTelegraph, which also has news, price charts, and many educational links about Cryptocurrency. See their page at:

https://cointelegraph.com/bitcoin-price

The point is to find your own resources on the Internet, that you trust, to keep yourself informed about the Cryptocurrency markets. Being an “informed” investor most often leads to being a “successful” investor, in my honest opinion. Develop your trusted resources and review them daily.

I personally believe Bitcoin is here to stay, due to the “breakthrough” it created in the use of electronic, scarce, sound money—and the ability millions of people now benefit from—with their worldwide access to near instantaneous, low fee, money transfers. Time will tell if my belief is correct.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #10

Investing in Bitcoin—Can You Profit from Price Volatility?

Monday 05/16/2022

These were the yearly low | high | year-end price ranges for Bitcoin, for each year since 2009, from the CoinMarketCap web site at:

https://coinmarketcap.com/currencies/bitcoin/historical-data/

  • 2009: Bitcoin was not traded on any Crypto Exchange, so its market price was $0
  • 2010: Bitcoin’s price never topped $1 in 2010, with its highest price around 30¢
  • 2011: Bitcoin’s price range was between 29¢ and $29.48, ending the year at $5.10
  • 2012: Bitcoin’s price range was between $4.19 and $13.70, ending the year at $13.34
  • 2013: Bitcoin’s range was between $13.31 and $1,133.08, ending the year at $754.01
  • 2014: Bitcoin’s range was between $289.30 and $1,017.12, ending the year at $320.19
  • 2015: Bitcoin’s range was between $176.90 and $495.56, ending the year at $430.57
  • 2016: Bitcoin’s range was between $354.91 and $979.40, ending the year at $963.74
  • 2017: Bitcoin’s range was from $755.76 and $20,089.00, ending the year at $14,156.40
  • 2018: Bitcoin’s range was from $3,191.30 and $17,712.40, ending the year at $3,742.70
  • 2019: Bitcoin’s range was from $3,391.02 and $13,796.49, ending the year at $7,193.60
  • 2020: Bitcoin’s range was $4,575.36 and $27,370.72, ending the year at $27,362.44
  • 2021: Bitcoin’s range was $30,023.21 and $66,930.39, ending the year at $46,444.71
  • 2022: Bitcoin’s range was $26,350.49 and $51,814.03, ending the year at $ ?????

This is the daily price chart for Bitcoin over the last 12-months, which clearly shows a prolonged downtrend, with prices making a new one-year low last week. From a high of $68,906/BTC in November 2021, to a low of $25,920/BTC in May of 2022. That is an almost $43,000 price drop in 6 months. 

Conversely the price made a low of $28,958/BTC in June 2021, rising then to a high of $68,906/BTC in November 2021. A price rise of almost $40,000 in five months. How many investors profited from that rally in prices?

Is Bitcoin poised for another multi-month rally to new highs? Nobody knows that answer, but following price charts can give you an indication of when the new uptrend has begun.

I setup that chart above with these indicators:

  • The blue dots/up arrows indicate an uptrend
  • The red dots/down arrows indicate a downtrend
  • The 12-month highs/lows with the 50% retracement level
  • The pink 50-day moving average
  • The orange 20-day moving average
  • Support and resistance points with the half moon indicators

I was fortunate to make profits on that June to November 2021 rally. Where will the price of Bitcoin be a year from now? That story will be told in the daily price chart of Bitcoin. Will you be following your price chart?

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #9

What is online Cryptocurrency tax software? 

The solution to “fractional accounting” for all your Bitcoin and Cryptocurrency transactions.

Sunday 05/15/2022

The previous Questions #6, #7 and #8 explained the “fractional accounting” for my two 2019 purchases using Bitcoin, for the kitchen bowls from Overstock.com and the Pyrite rock crystal from Astro West. It is very useful to understand the concept of “fractional accounting” as it relates to your Cryptocurrency transactions each tax year—but it is very laborious if you do the calculations yourself in a spreadsheet.

If you only use one exchange for your entire yearly Cryptocurrency transactions—like Coinbase or Robinhood Crypto—then those two more established exchanges provide very good year-end Gain/Loss reports, and Robinhood Crypto produces the IRS approved Form 1099-B detailing your transactions made on the Robinhood Crypto platform. Both also seamlessly import their Gain/Loss history directly into tax software like TurboTax®.

Many Cryptocurrency investors, though, invest on multiple exchanges, that might not yet have the best tax reporting features. Several companies have created online Cryptocurrency Tax Software—that can “aggregate” all your taxable transactions, from many exchanges, into one consolidated tax report. I personally use CoinTracker and CoinLedger. See their links below.

https://www.cointracker.io  &  https://coinledger.io

The programs link directly with your many Cryptocurrency exchanges in a “read-only” mode, to “pull-in” your taxable transactions for that tax year. They then can generate consolidated tax reporting forms for that tax year, like the IRS Form 8949, IRS Form Schedule D, and IRS Form Schedule 1. They also generate the CSV (Comma Separated Value) or TXF (Text Exchange Format) files that can be imported into TurboTax®, for example.

These are the “Tax Reports” screens in CoinTracker that can generate the following forms, files and reports. CoinLedger creates similar information, forms and computer files.

  • IRS Forms tab: 
    • IRS Form 8949: Details every single Cryptocurrency transaction.
    • Condensed IRS Form 8949: Sorts transactions per Cryptocurrency type.
    • IRS Schedule D (Form 1040): Summarizes short-term, long-term trades.
    • IRS Schedule 1 (Form 1040): Shows ordinary income like referral rewards.
    • IRS Form 1040: Generates the 2-page Form 1040 that you can fill out.
  • Tax Filing Software tab:
    • TurboTax Online File (CSV format): directly imports into TurboTax®.
    • TurboTax CD/Download (TXF format): imports into TurboTax® desktop.
    • H&R Block Online: supports import into this tax preparation software.
    • TaxAct File: supports import into this tax preparation software.
    • Wolters Kluwer CCH File: supports import into this accounting software.
  • CSV Reports tab:
    • Transaction History CSV: Excel type file for your Tax Professional to use.
    • Capital Gains CSV: Excel type file for your Tax Professional to use.

I work full-time Monday through Friday, year-round, as a TurboTaxLive® Credentialed Tax Expert, so I can attest first-hand how helpful these online Cryptocurrency Tax Software programs are. 

Taxpayers that use multiple Cryptocurrency exchanges, and have multiple Cryptocurrency wallets, have used these “aggregator” programs to organize their entire 2021 tax year transaction “library” into one set of reports and computer files, to then properly report that on their tax return.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #8

What was the fractional accounting for my 3rd 2019 Bitcoin transaction to buy a piece of Pyrite rock.

Saturday 05/14/2022

I Purchased a $21.92 Pyrite crystal on 12/05/2019 from a local rock collection store, Astro West, in my neighborhood—paying with more of my Bitcoin from that original $100 of Bitcoin I purchased on 10/29/2019.

There is a fantastic Rock Collection store in my New York City neighborhood called Astro West, near the Museum of Natural History. See their web page store at:

https://astrowest.com

I was an avid rock collector as a young boy in Indiana, and particularly liked Pyrite, otherwise known as “Fools Gold.” So I purchased a small crystal of Pyrite with my Bitcoin holdings.

   • My Cost Basis on this purchase was $29.15.

   • My Sales Proceeds were the $21.92.

   • The short-term Capital Loss was -$7.23

This purchase was very easy, as I just sent the Bitcoin payment to the owner’s public Bitcoin Address, from my Coinbase phone app account. 

  1. To pay Astro West $21.92 from my Bitcoin holdings, I had to send them 0.00301120 BTC, when Bitcoin had dropped in price to be $7,279.49 per Bitcoin at the time of my purchase on 12/5/2019.
  1. $21.92 / $7,279.49 = 0.00301120
  1. The “Cost Basis” of that quantity is 0.00301120 / 0.01033035 to equal 29.15% of my original $100 Bitcoin quantity, for $29.15. I had to use 29.15% of that original $100 Bitcoin quantity, to pay Astro West.
  1. The “Sales Proceeds” are the $21.92 I paid to Astro West.
  1. Sales Proceeds ($21.92) minus Cost Basis ($29.15) equals a short-term Capital Loss of (-$7.23).

See the spreadsheet below that now summarizes the “fractional accounting” for my first three Bitcoin transactions in 2019.

I bought that original $100 of Bitcoin when the price was $9,390.78 per Bitcoin. Bitcoin dropped in price to $7,279.49 less than two months later when I bought that Pyrite crystal from Astro West. So I had to use a larger fractional quantity of Bitcoin to get to the purchase price of $21.92.

It was a learning experience for me, to first understand how to “pay” with Bitcoin, and then understand the associated “fractional accounting.”

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #7

What was the IRS Gain/Loss on my Overstock.com purchase when paying with Bitcoin?

Friday 05/13/2022

The “Question 6 — How does “fractional” Bitcoin accounting work?” from yesterday’s Blog post explained how I spent $23.81 worth of my original $100 worth of Bitcoin to buy kitchen bowls online from Overstock.com. Here is a review of those numbers.

  1. On 10/29/2019 I purchased a fractional amount of 0.01033035 of Bitcoin for $100, when the Bitcoin price at the time of that purchase was $9,390.78.
  1. On 11/7/2019 I spent $23.81 worth of my Bitcoin holdings to purchase plastic kitchen bowls from Overstock.com, when the Bitcoin price at the time of that purchase was $9,192.34, which meant I had to send a fractional amount of 0.00259020 of my Bitcoin holdings to Overstock.com. 

The IRS considers this a purchase and sale of “Property” in this case of Bitcoin. The IRS uses the formula “Sales Proceeds” minus “Cost Basis” equals “Gain/Loss” on that transaction.

The Sales Proceeds were the $23.81 for that 0.00259020 quantity of my Bitcoin sent to Overstock.com.

The Cost Basis is what that 0.00259020 quantity of my Bitcoin was worth from the original $100 of Bitcoin I originally purchased on 10/29/2019, when Bitcoin was priced at $9,390.78 per Bitcoin.

We divide the quantity of Bitcoin I sent to OverStock.com of (0.00259020) by the original Bitcoin quantity purchased of (0.01033035) to get a percentage value of 25.07%. So I had to spend 25.07% of my original $100 of Bitcoin, or a $25.07 Cost Basis, to send that required quantity of Bitcoin to Overstock.com.

Bitcoin had dropped in price from $9,390.78/BTC when I bought that $100 worth on 10/29/2019, down to $9,192.34/BTC when I sent some Bitcoin to Overstock.com on 11/7/2019.

So I lost money on that transaction, because I “sold” some of my Bitcoin when the price of Bitcoin was at a lower price than what I paid for it originally. This is the downside of the price volatility in Bitcoin.

(Sales Proceeds of $23.81) minus my (Cost Basis of $25.07) yields a (loss of -$1.26). So I lost $1.26.

Coinbase keeps track of all this for you, by creating a Gain/Loss report at the end of each tax year. Then you can import that data into your tax software to populate the IRS Form 8949. See the sample 2019 Form 8949 below—that lists this transaction of buying kitchen bowls for $23.81 of my Bitcoin.

This is why the IRS, in my opinion, has made paying with Bitcoin for everyday goods and services, very inconvenient. The IRS does not consider Bitcoin as a “Currency,” but as “Property,” just like if you bought $100 of a stock then sold $23.81 of that stock at a later date. The IRS requires all U.S. Taxpayers to calculate the gain/loss result on every “purchase and sale” cryptocurrency transaction, for each tax year.

Since the IRS considers Bitcoin property, every buy/sell transaction using Bitcoin has this Gain/Loss calculation. Imagine if you did this hundreds, or thousands of times per year. It becomes unwieldy very quickly. Most U.S. Citizens therefore use Bitcoin only as an investment, not to pay for goods or services.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #6

How does “fractional” Bitcoin accounting work?

Thursday 05/12/2022

The first “fractional accounting” task is to determine how much of a Bitcoin quantity you purchased, or how much of a Bitcoin quantity you sent to a merchant, or sold for a profit/loss. I’ll use my example from the Question 5 blog post about the kitchen bowls I bought online from Overstock.com. 

I bought $100 of Bitcoin on 10-29-2019 in my Coinbase account. How was that 0.01033035 fractional quantity of Bitcoin determined for that $100 I spent? See that transaction summary below in “Bought Bitcoin.” Coinbase saves these screens for every single cryptocurrency transaction you make.

  1.   Of the $100 I spent to buy some Bitcoin, Coinbase charged me a $2.99 transaction fee. So that left me with $97.01 to buy a ‘fractional” Bitcoin quantity with.
  1. The market “Price per coin” of Bitcoin at the very moment I purchased some Bitcoin was $9,390.78 per Bitcoin.
  1. So my $97.01 divided by that $9,390.78 equals my quantity of Bitcoin purchased at 0.01033035 BTC.
  1. I invested a total of $100 with fees to buy some Bitcoin, so the IRS considers that as my $100 “Cost Basis” in that 0.01033035 BTC quantity I purchased on 10/29/2019.

 

I spent (sent) $23.81 of Bitcoin on 11-07-2019 for those kitchen bowls at Overstock.com. How was that 0.00259020 fractional quantity of Bitcoin determined? See that transaction summary below in “Sent Bitcoin.” Coinbase saves these screens for every single cryptocurrency transaction you make.

  1.   I needed to send $23.81 of Bitcoin to Overstock.com to pay for those kitchen bowls.
  1. My Coinbase phone app read the QR barcode of Overstock.com to “load” their Bitcoin Public address into this Sent screen. The “To” address is their 34-digit Public Bitcoin address at:

3FFfkgDFoEyxikF7cQcbKw9aYXTX9DL4T2

  1. The market “Price per coin” of Bitcoin at the very moment I sent my Bitcoin was $9,192.34 per Bitcoin.
  1. So $23.81 (BTC being sent) divided by $9,192.34 (BTC price at that time) equals 0.00259020 BTC sent to Overstock.com.  

The IRS considers this $23.81 of Bitcoin I sold as my “Sales Proceeds,” as I received the kitchen bowls in exchange for that 0.00259020 BTC sent to Overstock.com. The next Blog post will show the “fractional” accounting to determine if I had a short-term Capital Gain or Loss on this transaction.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #5

How does the Bitcoin network process a real transaction?

Wednesday 05/11/2022

 What happens, for example, when you use some of your Bitcoin holdings to buy a product from Overstock.com, which has been accepting Bitcoin for years. I actually did this in 2019 when I was first learning about Bitcoin. I purchased a plastic set of kitchen bowls from Overstock.com and paid for them in Bitcoin. See this image of those bowls, that my kind photographer wife took. She made them look quite nice, better than they appear in person.

I paid $23.81 for these bowls on 11/7/2019 with a “fractional” quantity of the first $100 of Bitcoin I had purchased on Coinbase earlier on 10/29/2019.

I originally purchased 0.01033035 of one Bitcoin for my $100, and sent 0.00259020 of Bitcoin to Overstock.com to pay them their $23.81 in an equivalent value of Bitcoin.

Bitcoin is divisible into eight decimal places with a 0.00000001 of Bitcoin called a Satoshi, after Satoshi Nakamoto, the inventor of Bitcoin.

When I was ready to pay Overstock.com for the kitchen bowls, the online order page brought up a QR barcode for their Public Bitcoin address which looks similar to the one shown below. With my Coinbase app open on my smart phone, I clicked the Send Bitcoin button, and then Coinbase read the QR code with my phone’s camera. That set the $23.81 price in my Coinbase phone app, for which it would send the equivalent $23.81 of Bitcoin to the Overstock.com Public Bitcoin address. I clicked send to approve Coinbase to send that $23.81 of Bitcoin to Overstock.com to pay for my new kitchen bowls. It only took a few minutes to pay with Bitcoin from my Coinbase smart phone app.

It is really as easy as sending someone an email. I could have just as easily paid for a product in India, for instance. The Bitcoin transactions are all done over the Internet, from anywhere to anywhere in the world.

The Bitcoin network then performed its “magic” by first confirming I had the $23.81 of Bitcoin in my Coinbase Bitcoin wallet to send to Overstock.com. Then it confirmed that Overstock.com had a current Bitcoin wallet address into which I could send them my Bitcoin. This dual confirmation process usually takes about 10-minutes, as a new Block of approved Bitcoin transactions is added to the permanent Bitcoin Blockchain ledger, about the same every ten minutes. Currently about 2,000 new Bitcoin transactions are added every ten minutes to the Blockchain. If the Bitcoin network is really busy, your transaction might take longer to be approved, as it will be added to the subsequent Block in the next 10-minute interval. See this link from YCharts.com for the daily values of average of transactions per Block.

https://ycharts.com/indicators/bitcoin_average_transactions_per_block 

How the Bitcoin network technically processes each transaction is a bit more complicated, that I will explain in a future blog post. One unique feature of the Bitcoin network is the transactions are permanent, as the charges cannot be reversed or cancelled like with credit cards. This prevents the “charge back” or “double-spending” problems that vendors that accept credit cards can experience. Customers buy the product with a credit card, receive the product, then dispute the charge. Then the credit card company “takes back” the disputed charge/payment to the vendor, but the vendor is “out” the product the customer bought, but did not ultimately pay for. Eliminating “double-spending” was another innovation that Bitcoin solved. Satoshi Nakamoto was a genius, in my humble opinion.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #4

What is the Cryptography used in Bitcoin?

Tuesday 05/10/2022

Cryptography is a method to code a message so that only the sender and the recipient can read that message. In Bitcoin, the Public/Private Key set uses cryptography. 

During the period of the 1970s/1980s, the mathematicians at Stanford and MIT caused breakthroughs that made this possible. Previous to their discoveries, encryption technology was only available to the U.S. Government and the Military.

Bitcoin relies on cryptography to verify and secure transactions. The Bitcoin network verifies the person sending the Bitcoins actually owns them to send, as the network can confirm with 100% certainty that person possesses those Bitcoins. This verification process happens before they can spend or send them to another person or vendor. The network then confirms the Bitcoin wallet this user is sending the Bitcoins to, is indeed a legitimate Bitcoin wallet, that can receive their Bitcoins.

Public-Key Cryptography—built into the Bitcoin wallet software—is the cryptography implementation that confirms ownership of Bitcoin, and the authenticity of the Bitcoin wallet it is being sent to.

Every user who creates a Bitcoin wallet receives an up to 34-character alphanumeric public key, that serves as a public Bitcoin address that could be given out freely, like an account number.

Every user also receives an up to 64-character alphanumeric private key, which is only known by the user, and is associated with their unique Bitcoin wallet. This is like the Bitcoin wallet password.

For example, this is from page 358 of the hard cover book “Digital Gold,” by Nathaniel Popper. This Bitcoin address is empty and is only given as an example in the book, so don’t send Bitcoins to it.

The Public Key is a string of up to 34 characters like:

16R5PtokaUnXXXjQe4Hg5jZrfW69fNpAtF

The Private Key is a string of up to 64 characters like:

5JJ5rLKjyMmSxhauoa334cdZNCoVEw60LfMpfL8H1w9pyDoPMf3

The two keys are related cryptographically so uniquely—that the Bitcoin owner with their Bitcoin private key, can only unlock transactions sent to their Bitcoin public key—and they can only sign off on transactions associated with their Bitcoin public key, being sent to another Bitcoin wallet holder.

The relationship between each public and private key is determined by cryptographic math equations built into the Bitcoin wallet software. That relationship is so cryptographically secure that no thief with a particular public key would ever be able to figure out the corresponding private key. This unique relationship between each Bitcoin wallet holder’s public/private key, has never been “hacked” in the entire history of Bitcoin—starting in January 2009. This is why Bitcoin wallet addresses are so secure—by using the cryptographic relationship between the Public/Private keys. 

An exchange like Coinbase manages the security of these two keys. It is all done “in the background” within your Coinbase account. It is as easy as trading stocks at a brokerage. More sophisticated Bitcoin users employ “cold storage,” by backing up their public/private keys onto a stick drive.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #3

What is Coinbase?

Monday 05/09/2022

Coinbase is one of the largest and most trusted Cryptocurrency Exchanges that operates in the United States. The declaration on their web page states “Over 89 million people and businesses trust us to buy, sell, and manage crypto.” You can create and manage your Coinbase account on your personal computer through a web browser or on your smartphone via an app. 

See their web page at this address, and I earn $10 if you sign up for a Coinbase account as my “friend.”

https://coinbase.com/join/meyer_wip

This CoinMarketCap web site ranks Coinbase third behind Binance and FTX, with Coinbase processing over 2 billion dollars in daily trading volume. See that web page at:

https://coinmarketcap.com/rankings/exchanges/

Coinbase is a hosted, custodial exchange—meaning it manages/stores/safeguards the Public/Private key set to your Bitcoin or any other cryptocurrency you buy/sell/hold/exchange on their site. The Public Key in Bitcoin is your Bitcoin wallet account number, that you can give to anyone so they can send you Bitcoins. It’s similar to an email address, in that anyone can send you an email to your public email address. The Private Key to your Bitcoin wallet is like the password to your account, and you never give that to anyone. Coinbase holds and backs up your Bitcoin Private Key, so you don’t ever lose it. If you ever lose your Bitcoin Private Key—your Bitcoins are lost forever. Coinbase assumes the responsibility to never lose your Bitcoin Private Key. They also use 2-factor authentication as added security—by sending you a 6-digit unique code to your smart phone every time you sign into your account.

Coinbase charges small commission fees when you buy and sell Bitcoin or other cryptocurrencies—usually in the range of about 1.5% to 3%. So for instance, if you bought $100 worth of Bitcoin, they charge a $2.99 fee. Or a $14.68 fee if you bought $1,000 of Bitcoin. Or an $11.55 fee if you sold $755 of Bitcoin. They have instant access to the 24-hr/day, 365-days/year worldwide Bitcoin market to fill your orders almost instantly—and for that market access they charge their transaction fees.

Coinbase also has to adhere to the U.S. Government’s and State Government’s “Know Your Customer” or KYC rules. That means when you sign up for a Coinbase account, you have to give and authenticate your true identity information, including uploading a scan or photo of your current driver license or State ID. This obviously removes some of the famed “anonymity” of cryptocurrency lore, as Coinbase knows what cryptocurrency account activity you have transacted during the year. Governments can also force Coinbase to “freeze” an account—like what the Canadian Government did during the 2022 Trucker’s Strike.

There are many non-custodial wallets, with the one from Bitcoin.com being a very popular one. See their article about “Custodial versus non-custodial wallets” at this web page:

https://www.bitcoin.com/get-started/custodial-non-custodial-bitcoin-wallets/

With non-custodial accounts, you control the Private Key to your Bitcoin wallet, and also bear the responsibility if you lose it. That’s why so many new cryptocurrency investors start with Coinbase.

As a licensed Enrolled Agent, the U.S. Government already knows everything about me, and monitors every tax return I prepare for taxpayers. So I don’t mind the identity scrutiny at Coinbase.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #2

Is Bitcoin an investment or money or both?

Sunday 05/08/2022

The Daily / Weekly / Monthly / Yearly price of Bitcoin (BTC) can be very volatile, as seen in this daily price chart for Bitcoin during the last year. The low was set at $28,958/BTC on 6/22/2021 and the high of $68,906/BTC was reached on 11/10/2021—a $40,000 price swing in just five months—for one Bitcoin. Price swings are what professional investors make money from, as they buy low and sell high. They are “greedy when everyone else is fearful, and fearful when everyone else is greedy.”

Some very sophisticated investors like the Winklevoss Twins, believe the price of Bitcoin will eventually rise to be worth $500,000/BTC. See their article “The Case for $500K Bitcoin” at: 

https://winklevosscapital.com/the-case-for-500k-bitcoin/ 

Investing in Bitcoin at this point in time is a personal choice, if you feel comfortable with the rather large price swings, and you can learn how to profit off those wide price movements.

El Salvador and the African nation of The Central African Republic now accept Bitcoin as legal tender in their countries—that their citizens can use to pay for everyday goods and services. This is Bitcoin serving as Money. Many of their citizens do not have access to, nor cannot afford, the services of the traditional banking or credit card companies. Many of those same citizens do have access to inexpensive smart phones—which contain their Bitcoin wallets. They are their own “Bank of One” as they can receive Bitcoin value into their smart phones, and pay with Bitcoin from those same phones. They also can receive remittances as Bitcoin from their relatives, working in other wealthy nations, without paying the very high transaction fees typical remittance services charge.

How is that “experiment” with Bitcoin as Money going in these two countries? You can find many articles through a Google search describing both sides of the argument for and against Bitcoin as Money, in these two countries. Some citizens love the freedom and convenience a Bitcoin phone wallet gives them as they never had a traditional bank account, while others don’t appreciate the software “glitches” that have arisen with the Bitcoin phone wallets, and the huge price volatility of Bitcoin—that makes their holdings rise and fall in value, sometimes on a daily basis. Others appreciate how easy it is to receive money from distant relatives into their Bitcoin wallet, for very low fees, if any.

These two countries are testing the theory of “Bitcoin as Universal Money.” Will it prove a success, or validate the critics of Bitcoin as nothing more than a fad? It will be fascinating to watch.

©2022 Michael D. Meyer, EA — All Rights Reserved


Day #1

What is Bitcoin?

Saturday 05/07/2022

Bitcoin is “electronic cash” that can be sent anonymously anywhere in the world in just a few minutes, 24-hours/day, 365-days/year, over the Internet, as easily as sending an email—without the normal “permission” of a bank, credit card company, or remittance service—to “approve” or “decline” that transaction. Your personal information is not shared to send Bitcoin, nor is the recipient’s personal information shared to receive that Bitcoin. It is described as a “peer-to-peer, permission-less” transaction, without the use of a “trusted third party.”

Bitcoin is a “payment method” that allows you to purchase goods and services, if that store, vendor or service provider accepts Bitcoin. 

Bitcoin is a “remittance service” allowing relatives in the U.S. or any Country, to easily send Bitcoins to relatives in other countries, without paying high service fees to typical remittance services.

Bitcoin is “divisible” into very small quantities, that can be purchased and sold, using U.S. Dollars, Euros, Yens, Pesos, Canadian Dollars, Swiss Francs, and dozens of other national currencies. 

Bitcoin is a “Universal Currency” not limited by national borders, that necessitates a currency exchange at each border—like exchanging U.S. Dollars for Euros—when you visit Europe.

Bitcoin is a “store of value” like Gold or Silver has historically been, but with built-in inflation controls—as the issuance of new Bitcoins is decreasing over time—making Bitcoins more scarce as time passes. The final number of Bitcoins ever to be “minted” into existence is set at 21 million, with over 19 million already in circulation, since the first 50 Bitcoins were minted on January 10, 2009. 

Currently only 900 new Bitcoins are minted into existence every day, for 328,500 per year. That will drop to 450/day around May of 2024, then to 225/day in mid-2028, etc. The rate of “minting” new Bitcoins is automatically “halved” every four years—thus the built-in inflation protection. Bitcoin was designed from its inception to become more scarce over time, thus becoming more valuable over time.

Bitcoin is held in your “electronic wallet” either on a “hosted” custodial exchange like Coinbase, or residing locally on your smartphone or computer. You use a pair of Public/Private keys to control access to your Bitcoin holdings. The Public key is like an account number, and the Private key is like a password. The current estimate is that 81 million people throughout the world are using Bitcoin wallets.

Bitcoin has been called the “Internet of Money” allowing people to become a “Bank of One.”


Just email me at Mike@TaxesAreEasy.com with any questions or comments you might have.

©2022 Michael D. Meyer, EA — All Rights Reserved


Starting Saturday 05/07/2022, I will be posting a Bitcoin and/or Cryptocurrency question/answer every day, for the next 100-days. This is part of my research for the “Cryptocurrency and Taxes” book I am writing.

I hope you enjoy these upcoming 100 posts to learn interesting facts about this fascinating new world of cryptocurrency. Just email me at Mike@TaxesAreEasy.com with any questions or comments you might have.


HOW TO USE THIS BLOG NOW THAT IT HAS BEEN RETIRED

I stopped adding to this Blog in the Summer of 2019, so I could self-publish my first book on taxes, based on the Tax Cuts and Jobs Act blog I had finished up to that time. The Blog format turned out to not be well suited to such a long topic to explain, so I converted it into my first book. See those updated links below.

This Blog is a very good example of my early writings about taxes, and my goal to “Make Taxes Easy” for any person I helped with their “Tax Story.” Most of the Blog explanations specific to tax forms, are for the 2016/2017/2018 tax years, so obviously they are now somewhat outdated. But there is a wealth of information about general tax theory that is still relevant—as that information does not change much year over year, with the new tax forms.

If you invest a an hour to read this Introduction Blog post, you will have a very good sense of “who I am” in the tax world, and my passion to help all taxpayers understand their tax situation each year.

Just email me at Mike@TaxesAreEasy.com with any questions or comments you might have.


Update: November 2021

I am working on my third book tentatively entitled “Cryptocurrency and Taxes” with the goal of publishing that by the end of 2022. Click the link below to view the preliminary book cover.

Michael_Meyer_Cryptocurrency-and-Taxes_BookCover


Update: January 2020

I self-published my second book in January 2020, as a 2019 tax year update to the first “Tax Cuts and Jobs Act” book. See the Amazon link below. I also added a new chapter on Cryptocurrencies in this 2nd book.

That Crypto chapter will be expanded upon greatly in my upcoming book, to explain all aspects of Cryptocurrencies, how the IRS treats transactions, and how to report those in TurboTax®.

TAXES are EASY: The “Tax Cuts and Jobs Act” – TCJA, the Second Year – 2019 Tax Law and Forms


Update: September 2019

I have converted my “Tax Cuts and Jobs Act” Blog post into a 100-page 6″x9″ book, that published on Amazon in September 2019. See the Amazon link below.

TAXES are EASY – The “Tax Cuts & Jobs Act”, TCJA, an Introduction. 2018 Tax Law and Forms

I plan no further updates to this Blog, as I am incorporating all the knowledge in the three years of Blog posts, into further books to be published on Amazon in 2020 and beyond.


This Blog began in the Summer / Fall of 2017, with the goal of explaining to individual taxpayers the (3) tax forms the IRS uses to process an Individual tax return. Those are the forms 1040EZ, the 1040A and the long form 1040. As a result of the major tax legislation passed in December 2017, the IRS has decided to retire these (3) forms, starting with the upcoming 2018 tax year. Therefore most of this Blog, in its current state, relates to the 2016 / 2017 tax years, for which the IRS will continue to use the older forms 1040EZ, the 1040A and the long 1040.

The IRS, for the 2018 tax year will begin using the new single page 1040 form.  See the explanation below, that describes how the IRS began releasing the draft forms on June 29th, 2018. This is the new tax form, onto which you will report your 2018 income and deductions you are generating this 2018 tax year. See this new Blog post that explains the new forms What Tax Form Should I Use? (2018 tax year) .

Some major Tax Law changes have been made, but at the same time, most of the information you report on the tax return is the same. What has dramatically changed, is the IRS will only be using one tax form. So taxpayers will have to learn where their expected tax information will now appear on the new single page 1040 form and its (6) new related Schedules.

Taxes can still be easy, even with the new IRS forms for the 2018 tax year. I will revise this Blog, so you too will be able to say “Taxes Are Easy” when you file next year’s taxes, with the new IRS forms.

Until then, the time you invest reading the posts in this Blog, will still teach you many aspects of Individual Taxes, that will be used for next year’s tax season, beginning Wednesday, January 2nd, 2019.

This entire Blog series is essentially a free, very high level tax course on Individual taxes. Like any complex subject matter, the more time you can invest to master the material, the greater you will benefit from the knowledge. If you read and study every Blog post, you will understand every line on your tax return. The US Tax Code is very large, complicated, and convoluted. The entire Tax Code, does not, affect each individual taxpayer. You just need to learn the Tax Law information, that affects your own Tax Story. This Blog series can help you achieve that line-by-line understanding of your tax return. Your own study time is the only element you need to invest, to master your Tax Story. I’ll help you achieve that understanding.

You can click my Bio link Bio for Michael D Meyer , to read about my qualifications as an IRS Enrolled Agent, and how and why I was attracted to Taxes. I also give advice in the second Blog post, What Tax Form Should I Use? (2016 & 2017 tax years) , about being truthful with the IRS in how you report your income and deductions. You can read those recommendations at the bottom of that Blog post.

The IRS actually just wants you to be compliant with your yearly obligation to file a tax return, which reports your self-declared tax obligation. You then will receive a refund, or owe a tax payment, based on the tax withholding / estimated payments you made during the year, and any additional Refundable Tax Credits you qualify for, that could increase your tax refund. This blog will help you stay compliant by filing a truthful and accurate tax return, that will maximize your refund, or minimize your tax due.

As always, just email me at Mike@TaxesAreEasy.com if you have any comments or questions. I will promptly respond to any emails within 24-hours.


The IRS on Friday, June 29th, 2018 – released the draft version of the new single page 1040 form, for the 2018 tax year. See that form attached, Form 1040 (2018) , as well as the (6) new supporting schedules. See those attached, Form 1040 (2018) New Schedules , that support the new single page 1040 form.

For the upcoming 2018 tax year, the IRS has eliminated the previously used form 1040EZ, the form 1040A, and the long form 1040. It has reduced the new 1040 form to fit onto one page, that can be folded in half and mailed. The lines the IRS eliminated from the previously used long form 1040, have been transferred to, and are now handled in the new (6) supporting schedules.

This new “one size fits all” single page 1040 will be used by all taxpayers. Of course all tax software will be updated to use and print this new single page 1040 form, with its new (6) supporting schedules.

Other existing schedules like the Schedule A, B, C, D, E, F and SE – will remain virtually the same after being updated for the new tax laws, and will be synchronized with the new (6) schedules that support the new single page 1040 form.

If you go to a tax professional to file your taxes, or use online or downloadable tax software, the tax interview process will remain the same. The new updated software will do the work to organize your tax information, flowing that tax information to the new single page 1040 form and the (6) new supporting schedules.

If you prepare your own taxes by hand, and mail them in, you will have to study the new instructions to properly understand how your typical tax information will now flow to the new single page 1040 form and its (6) new supporting schedules.

The IRS issued a press release, saying the draft single page form 1040 and (6) supporting schedules are now open for comment. The IRS will then approve and publish the final forms later in the year in the late Fall of 2018. See that press release attached, IRS Press Release (new form 1040) .


Taxes Are Easy – Let Me Show You Why!

That statement might sound preposterous to you, but taxes really are easy for me.

Taxes can be easy for you also – as you just need to acquire the specific knowledge to understand each line on your tax return. That is the educational purpose of this entire Blog – to teach and thus give you that line-by-line understanding of your tax return.

This first introductory page will explain why taxes are easy for me, and how they can become easy for you. If you invest an hour to read and study this introduction – you will understand the learning path that will teach you to master your own unique “Tax Story.”

First an introduction to myself as a tax professional, and why I am qualified to teach you about taxes.


I was a seasonal Tax Professional for 4-years at H&R Block in New York City from January 2013 through April 2017, and was given the privilege to complete well over 700 paid tax returns for H&R Block Clients during that tenure. Most of those 700 tax returns were completed with the Clients sitting at my desk, watching me input their tax data, as we discussed their own “Tax Story” situation for that year.

For the 2018 Tax Season that began on January 2nd, 2018, I assisted New York City taxpayers in the Upper West Side neighborhood with my own Tax Practice that I began in May of 2017. I use the software ProSeries® from the tax and accounting software company Intuit. ProSeries is the professional version of TurboTax. I have used TurboTax for my own personal tax returns, for over 30-years.

I am an Authorized IRS e-File Provider, so I can e-file tax returns I complete for my Clients. The IRS considers me an “Electronic Return Originator”, as I prepare and e-file completed tax returns with the Intuit ProSeries® software. Intuit then forwards these e-filed tax returns to the appropriate IRS and State tax departments. I then monitor the acceptance progress of these e-filed tax returns, and report that to my Clients. Click this link to see my name listed in the New York City ZIP code 10025 for e-file Providers E-File Businesses in ZIP code 10025. Scroll down through the M’s listed, and you will see my business name listed as “Michael D Meyer”. My full contact information is listed.

I also worked with Intuit, in my capacity as an IRS Enrolled Agent, as one of their remote “Credentialed Tax Experts” for their new TurboTaxLive® online product. I provided phone and interactive online video Tax Advice and Tax Return Review – for online TurboTax® Customers throughout the United States, and actually the World. I began this job on January 4th, 2018 and it ended on April 17th, 2018. I was able to help over 650 TurboTax customers with their tax issues.

Both of these tax jobs were performed at my home office at 306 W. 93rd Street in New York City.


I fully understand the Individual Tax Laws and the (3) IRS 1040-series forms that can be used to file a 2016 or 2017 Individual tax return. That is why taxes appear in my world as easy. Taxes can be easy for you too, because this Blog explains the (3) IRS 1040-series forms you may use to file an Individual tax return. Each year you will use one of these (3) forms to file your taxes, up through the 2017 tax year only.

This Blog is designed to teach you about Individual taxes – so you can understand every line on your tax return. You will learn the rules and requirements to file an IRS Individual 1040-series tax return – to pay the lowest legal tax liability due to the IRS or to receive the largest legal refund from the IRS. You will understand the Tax Laws that relate to your unique tax situation, or what I call your “Tax Story”.

The (3) forms the IRS publishes each year for taxpayers to complete their U.S. Individual Income Tax Returns are the 1040EZ, the 1040A, and the 1040. Your Tax Story is told, by using one of these (3) IRS Individual tax forms. The IRS publishes new versions of each of these (3) forms every January, to comply with the most current Tax Laws that will be in effect for that upcoming tax season that typically starts the first week each January. For the upcoming 2018 tax year, the IRS will only be using one form, the single-page 1040 version of the older long form 1040, used in previous tax years.

Click the blue underlined hyperlinks below to see each 1040-series form open as a PDF file in a new browser window, that you also can print or download. These many blog posts will teach you about these (3) 1040-series tax forms. Each year you will use one of them to file your tax return with the IRS, up through the 2017 tax year. A new single-page 1040 will replace these (3) forms for the upcoming 2018 tax year.

IRS form 1040EZ

IRS form 1040A

IRS form 1040

You can mail in your IRS Individual tax return, or use online or downloadable software to e-file that same IRS tax return. You can also pay a tax professional who will prepare and e-file your IRS tax return on your behalf. All of these filing methods use one of these (3) IRS Individual 1040-series tax forms.

All U.S. Citizens, U.S. Permanent Residents with Green Card status, and U.S. Resident Aliens who have lived in the U.S. the required time period per the Substantial Presence Test – use these (3) IRS Individual 1040-series tax forms. U.S. Nonresident Aliens and U.S. Dual Status Aliens must use the 1040NR Individual tax forms. The 1040NR Individual tax forms are not covered or explained in this Blog.


All tax software will automatically determine which of the (3) 1040-series Individual tax forms is most appropriate for your Tax Story. But that software is only as good as the person inputting the Tax Story data. Online or downloadable software is designed to “Interview” you, to guide you through the process of inputing your Tax Story data. What if you are not aware of an Adjustment, Credit or Deduction you are entitled to, that would reduce your tax liability, or increase your refund? Will the software’s “interview process” alert you to these tax savings tips? Having the knowledge beforehand to understand your Tax Story is the key. Then you can interact properly with the “tax software interview” to produce the tax returns you are entitled to – that will maximize your refund, or limit your tax liability.

Experienced tax professionals already know what your tax return should look like, before they enter your Tax Story data into the tax software. The tax professional most often will ask you many questions about your Tax Story to ensure you take every Adjustment, Deduction and Credit you are entitled to.

For example you might bring a W-2 form from your salary job, a bank statement listing the Interest and Dividends you earned, a form showing the Student Loan Interest you paid, and a statement for the distribution from your (HSA) Health Savings Account from your job.

The tax professional already at that point has a very good sense of what your tax return will look like – based on their experience with these forms that describe your Tax Story. They then manage the professional tax preparation software to maximize the results of your tax returns – to have you pay the least amount of tax or receive the greatest possible refund.  Many tax professionals also will explain every line on your completed tax return, so you thoroughly understand your Tax Story for that current tax year.


This Blog will give you that same tax knowledge so you can understand every line on your Individual tax return. You will learn the basics about Filing Status, Dependents, Exemptions, Income, Adjustments, Deductions, Credits, Tax Liability, Tax Withholding, Payments and the Affordable Care Act. This will help you determine if you qualify for any of the tax saving features allowed by the Tax Laws.

Each blog post will have blue underlined hyperlinks so you can view and/or download the PDF version of the IRS tax form being discussed in the blog. These PDF files always open in a new browser window so you can switch between the lessons being learned in the blog post, and the actual IRS form being discussed. Often there will also be a hyperlink to the PDF file of the related IRS Instruction booklet. Your web browser will most often allow you to print or download these PDF files, for off-screen reference use. Tax professionals often print out hard copies of these IRS forms, instructions, and publications to compile into reference binders to build their Tax Law library.

The written content of this entire Blog series is substantiated by the Tax Laws described in the IRS forms, instructions and publications posted in these blog posts as PDF hyperlinks. I wrote the entire Blog series based on my own personal experience as a tax professional, with references to the Tax Laws as described in the most current IRS forms, instructions and publications.

The entire Blog is based on the Tax Laws relating to the 2016 and 2017 tax years, for Individual tax returns that were due on April 18th, 2017 and April 17th, 2018, respectively. The IRS forms, instructions, and publications listed in the Blog as PDF blue hyperlinks, also relate to the 2016 and 2017 tax years.

Update Note – Many of the PDF links in this Blog were for the 2016 tax year, when I wrote the Blog in the Summer of 2017. Some have been updated for the 2017 tax year, but most will no longer be updated. The IRS is redesigning its tax forms for the upcoming 2018 tax year, so many of the PDF’s will be obsolete for that upcoming 2018 tax year.

The IRS issues updates to all their forms in January of each year. In reality, the IRS forms, etc. do not change that much, year over year, unless there is a major change in the Tax Laws. The Cost of Living changes to the Standard Deduction, Personal Exemptions, and the Tax Tables – are the major changes year over year. The new “Tax Cuts and Jobs Act” that went into effect on January 1st, 2018, will most certainly change many, if not most of the IRS forms – for the future 2018 tax year forms due on April 15, 2019. Time permitting, I will update the Blog for those new forms.

The Tax Law information referenced in this Blog is available to the public as downloadable PDF files from the IRS.gov website at IRS.gov/publications. Every tax form, instruction booklet, and publication referenced in this Blog as a blue underlined hyperlink can be downloaded from this IRS web site. The copyright ownership of these IRS downloadable PDF materials is held by the ©2018 Department of the Treasury Internal Revenue Service IRS.gov. They are free for the public to download and use. In my opinion, the IRS does a fabulous job keeping these tax forms, instructions and publications current. There are literally hundreds of forms, instructions and publications the IRS is required to update each year as the Tax Laws change.

Congress each year passes new tax-related legislation that the current President signs into law. The IRS then has to incorporate these new Tax Laws into its forms, instructions and publications. The IRS publishes this updated information on their web site, and works with the software vendors so they can update their tax software applications to comply with the new Tax Laws for the upcoming tax season.


I personally am an IRS Enrolled Agent and operate my own tax preparation and representation practice. Clients pay me to complete and e-file their tax returns, and to represent them when they have issues with the IRS or any of the States. Click the link below from the National Association of Enrolled Agents (NAEA), for an explanation of who Enrolled Agents are and how they participate in the tax world – as America’s Tax Experts. Click the link below that to see my firm’s listing on the NAEA’s Find a Tax Expert site. My entire contact information is shown on that Find a Tax Expert listing. Feel free to contact me by mail, cellphone, text or email. NAEA members are also held to a very high standard of Ethics and Professional Conduct. See that 10-page document in the 3rd blue hyperlink shown below.

What is an Enrolled Agent?

An Enrolled Agent (EA) is a person who has earned the privilege of practicing (that is, representing taxpayers) before the Internal Revenue Service. Enrolled Agents, like Attorneys and Certified Public Accountants (CPAs), are unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can practice before. Enrolled Agents are licensed by the IRS within the US Treasury Department, which is a Federal jurisdiction, allowing EAs to practice in all 50-States. Attorneys and CPAs are licensed by the individual States they practice in. Some States have additional requirements for EAs to practice and/or register in those individual States.

See my NAEA “Find a Tax Expert” firm listing

NAEA Code of Ethics and Rules of Professional Conduct

My business purpose is to make taxes easy for my Clients, so each person understands their Tax Story for that tax year. You might still choose to pay myself or another tax professional to complete your taxes, but I believe you should come away from that tax appointment completely understanding your Tax Story. I have a very good comprehension of these (3) IRS Individual 1040-series tax forms, so I can intelligently and efficiently input a Client’s Tax Story into the tax software to generate their tax return. Clients pay for that time-saving expertise, as often they do not want to invest their free time learning and mastering the tax software. Many Clients also do not want to invest the time required to learn the particular Tax Laws that affect their Tax Story. They entrust me with that role.

The desired result for everyone – is that you understand your Tax Story each year – by knowing the purpose and result of every line on your tax return. That is my job as a paid tax professional – to provide that line-by-line Tax Story certainty for my Clients.


The intention of this Blog is to provide you with that same line-by-line Tax Story understanding – so you can master the knowledge contained in each line of your tax return. You might not become your own tax expert to the point you want to file your taxes online or through the downloadable software, but you should understand your Tax Story each year. I will teach you to understand the basics of Individual taxes so your own unique Tax Story is clear to you. You will understand which of the (3) 1040-series tax forms you should use each year, and what Adjustments, Deductions and Credits you might qualify for, to reduce your tax liability, or increase your refund.

You might only use the Blog to research specific tax topics. Or you can complete the entire series of blog posts, to gain that total understanding of all (3) 1040-series Individual tax forms. Or you can ask me a question, and I’ll point you to the Blog post that best answers that question. The Blog is the resource you can use, to reach a comfort level with your own Tax Story.

Your personal study time is the only investment you need to make, to arrive at the point you understand every line on your tax return. Each blog post takes between a half hour and an hour to read and understand. The (3) 1040-series tax forms are explained with a series of blog posts related to each form.

  • The form 1040EZ is explained with (2) blog posts. ( will be obsolete for the 2018 tax year )
  • The form 1040A is explained with (11) blog posts. ( will be obsolete for the 2018 tax year )
  • The form 1040 is explained with (approximately 35) blog posts. ( will be obsolete for the 2018 tax year )

If you can invest the time to complete all the Blog posts, you will acquire a very good knowledge of your Individual tax situation, by completing this free tax course. I wrote the Blog as a great, ongoing review of Individual taxes, that I also use as a reference. A wise man very long ago told me the best way to master a subject matter, is to write a “book” about it. This is my tax book on Individual taxes.

If you have a question about anything you learn just email the question to me at Mike@TaxesAreEasy.com.


The Blog can also be a tax information resource for you, to reinforce new information you learn at your tax appointment. For instance, let’s say you are new to self-employment – as you started a new home business selling hand-made fashion apparel through the Internet.  I can explain and show you how to report your self-employment income on the Schedule C, but you might not remember every detail of my explanation – at the tax appointment. You could then refer to the self-employment blog posts, to review and reinforce what you just learned about self-employment and your tax return. This type of self-paced tax learning will always be available to you through these blog posts. This then helps to make the learning permanent – as you can always return to the blog to refresh your tax knowledge, as required.

You also can search by keywords, to locate a specific tax topic in a blog post. For instance, you might have heard that you can take a deduction if you pay interest on your student loans. Just type “Student Loans” into the search box, for a listing of blog posts that mention student loans. This is a quick way to answer specific tax questions – by reviewing the contents of previous blog posts.

I promise if you invest your time to read and study these Blog posts, you will gain a better understanding of your own Tax Story, and the current events and news about Individual taxes. You then might eventually discover for yourself that Taxes Are Easy! I’ll do my best to help you get to that level of tax understanding.


You can also type TaxesAreEasy.com into the web page browser on any of your mobile phone or tablet devices – so you can learn taxes anywhere you can connect to the Internet. These Blog posts and PDF hyperlinks read surprisingly well on these smaller devices.

Refer to the Recent Posts section for the (40) most recent posts. You can also use the Search … box above that to find a tax topic you are interested in, that is described in an earlier blog post no longer listed.


The next blog post answers the question What Tax Form Should I Use? Click that hyperlink below to see which of the (3) 1040-series IRS Individual tax forms is appropriate for your Tax Story. This again applies only to the 2016 and 2017 tax years, to learn about the forms 1040EZ, 1040A and the long 1040.

For the 2018 tax year, only the single-page 1040 form will be used. Click that link below to learn about the single-page 1040 form that the IRS will be using next year.

What Tax Form Should I Use? (2016 & 2017 tax years)

What Tax Form Should I Use? (2018 tax year)

You can also view my Bio by clicking that link listed below. My photo is also in the Bio, and I explain how and why I was attracted to the world of taxes.

Bio for Michael D Meyer


Feel free to send me an email at Mike@TaxesAreEasy.com

Blog Written Content ©2018 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2018 Department of the Treasury Internal Revenue Service IRS.gov


Legal Disclaimer: Nothing written or expressed in this Blog shall be construed as legal, accounting, or tax advice. This Blog is for informational purposes only, to inform Individuals about the IRS tax forms required to file an individual tax return, and the instructions that accompany such IRS tax forms.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any tax transaction or filing any tax form.