Interview with Daniel Gorfine, Director of LabCFTC and Chief Innovation Officer at the CFTC

This week, The Daily Bit interviewed Daniel Gorfine, Director of LabCFTC and Chief Innovation Officer at the CFTC. Although the conversation covered larger macroeconomic trends in the digital asset space, we forgot to ask whether we should buy the dip. If anyone finds themselves asking that question, we suggest heading over to the CFTC’s Bitcoin learning page to answer some basic questions.

Huge thank you to Daniel and the CFTC for speaking with The Daily Bit!

1. Can you talk about the atmosphere at the CFTC and how it has changed since cryptocurrencies became more prevalent?

Response: The Chairman and his fellow Commissioners have been incredibly forward-looking regarding the role that technology and innovation are increasingly playing in our markets, and the need for the agency to keep pace with inevitable change.

For this reason, the Commission launched the LabCFTC initiative during the summer of 2017, and I have been fortunate to have the opportunity to build-out the effort during my time here. LabCFTC is a cross-divisional effort focused on facilitating market-enhancing innovation, informing policy, and ensuring we have the tools and understanding to stay on top of market developments.

Given the significant uptick we have seen in terms of public interest in virtual currencies since the latter-half of last year, the Chairman and Commission look quite prescient in creating LabCFTC when they did, and working to foster a culture focused on careful understanding and balancing the benefits of innovation with the uncompromising need to ensure market integrity.

2. Recently, Tyler and Cameron Winklevoss proposed the creation of an industry sponsored self-regulatory organization for the U.S. virtual currency industry, specifically virtual commodity exchanges and custodians.

Has the CFTC released a statement on the Winklevoss’ proposition and do they foresee the creation of such a regulatory body in the future?

Response: Chairman Giancarlo has testified on the current regulatory framework for virtual currencies, and in his formal testimony on February 6, 2018 to the Senate Banking Committee, he expressed the view that policymakers should explore potential improvements to the existing patchwork approach to regulating spot markets for virtual currencies.

Any such effort should be thoughtful and deliberative, however, which means that there is an opportunity for industry participants to develop standards that could inform policy discussions and benefit retail market participants. We would accordingly view proper, effective and balanced self-regulatory efforts favorably.

3. Reddit, Facebook, and now Google have announced that they will be banning cryptocurrency-related advertisements, along with anything concerning cryptocurrency wallets and virtual currency trading advice. Scott Spencer, Google’s director of sustainable ads, said that “We don’t have a crystal ball to know where the future is going to go with cryptocurrencies, but we’ve seen enough consumer harm or potential consumer harm that it’s an area that we want to approach with extreme caution.”

Those unfamiliar with the space believe that this is an appropriate response given the highly speculative nature of cryptocurrency investments and widespread fraudulent activity in the market. And many individuals familiar with the space agree. However, this risks suffocating innovation in the space and cuts of key avenues to educate individuals about the space.

What is the CFTC’s stance on the ban and the use of advertisements in the future?

Response: I will not speak to specific cases, however, if an advertising platform does not believe it is capable of filtering out commercial speech that has a high likelihood of being false or misleading, then it would appear to be a reasonable decision to choose to reject such advertisements and their related advertising dollars.

Of course, as the ability to filter good actors from bad actors — or tailor restrictions narrowly — improves, I would imagine there would be many responsible advertising platforms willing to sell ad space regarding new products or services.

4. The Venezuelan Petro has been a major focal point of discussion in recent weeks. Not only is the Petro one of the earliest installations of a central bank digital currency (CBDC), but it is also a direct challenge to sanctions imposed by the United States. It is also problematic in the sense that many believe that the Petro is not backed up by oil like it claims to be.

Two sources familiar with administrative plans indicated that President Trump will be imposing new sanctions against Venezuela that restrict financial transactions involving the digital currency. What are the CFTC’s thoughts about the Petro, it’s longevity, and the installation of other CBDC’s that are intended to circumvent traditional regulations?

Response: As recently stated by the Treasury Department’s OFAC division, efforts such as the Petro intended to circumvent regulations or trade restrictions will not be permitted.

5. As the use of digital currencies becomes more prevalent in society, it is expected that more governments will implement their own digital currencies. Does the CFTC anticipate that the United States will launch their own digital currency in the future to harness the benefits of blockchain technology?

Response: The Federal Reserve and other global central banks are exploring blockchain technology, and will continue to assess the merits of the technology as well as risks and limitations.

I personally believe that we are quite a ways off from solving significant scalability, security, operational, and economic challenges with the concept of a digital fiat currency, but I also recognize the hypothetical benefits of enhanced efficiencies, development of new financial architecture, and proliferation of new economic applications that could result from such an effort.

6. The U.S. Department of Energy and their National Renewable Energy Laboratory (NREL) partnered with blockchain startup BlockCypher to test the use of peer-to-peer energy transactions involving distributed energy sources over the dash cryptocurrency network at the NREL’s energy facility.

If possible, could you touch on other projects being conducted in conjunction with the CFTC and other U.S. government agencies at blockchain and cryptocurrency research labs?

Response: We currently lack statutory authority that would permit us to work iteratively on a proof of concept model with an innovator. That said, we will continue to leverage our LabCFTC initiative to explore application of DLT and blockchain models to capital markets infrastructure that could drive market efficiencies and improve future regulatory reporting frameworks.

Through our Technology Advisory Committee (TAC) sponsored by Commissioner Quintenz, we are seeking feedback from market participants regarding application of DLT in our markets, and whether our existing rulesets are permissive of such new technologies.

7. One of the dangers of the cryptocurrency markets is that they remain heavily manipulated, with one outspoken figure within the cryptocurrency community, known as Bitfinex’ed, claiming that an entity known as “Spoofy” is heavily manipulating the markets.

The CFTC announced a bounty for whistleblowers who provide “original information that leads to a successful enforcement action that leads to monetary sanctions of $1 million or more”. Has the CFTC seen any success in this field and are there any additional routes that the CFTC has taken to dampen widespread manipulation in the cryptocurrency markets?

Response: We rely on our whistleblower program as an important source of leads regarding potential fraud or manipulation in markets, and urge folks with credible information to help us find and pursue bad actors.

The CFTC has limitations on what it can discuss publicly about whistleblowers. As has been demonstrated by recent enforcement actions brought by the CFTC, we will work to ensure market integrity and pursue those who attempt to harm market participants with illegal scams.

8. The People’s Bank of China has long opposed the use of cryptocurrencies, having announced several bans in past months, banning cryptocurrency exchanges and ICO investment activity in September 2017. More recently, China announced a ban on cryptocurrency mining within the country as well as imposing a “Great Firewall” to curb the presence of cryptocurrency related content on social media platforms and chat applications.

Despite this, the government remains open to the idea of a digital currency, as long as it is ‘efficient and safe’. Furthermore, the PBoC announced that the central bank is developing its own digital currency called DCEP (digital currency electronic payments). What are the CFTC’s thoughts on that announcement?

Response: As previously noted, I expect that central banks around the world will continue to explore the merits and potential use-cases for digital fiat currencies. That said, innovation will emanate primarily from the private sector, which has made the American economy resilient, dynamic, and a model for the world.

This interview was originally featured in The Daily Bit newsletter.

How To Manage Your Cryptocurrency Taxes: An Interview With Camuso CPA

Lots cryptocurrency investors have deferred all discussion about tax season until a later date, namely because the experience will likely be a major headache. To alleviate the pain, we spoke with Patrick Camuso, owner of Camuso CPA, a top tier accounting firm and the first CPA firm to open their doors to crypto. Camuso CPA offers tax planning and preparation for investors and small businesses, focusing on building year-round relationships with clients.

The Daily Bit:

So Pat, about the actual business and reporting landscape, obviously cryptos are taxable for 2017, 2018. Could you touch on how those are actually applied on a tax return, in terms of fiat to crypto trades, or crypto to crypto trades, and how those would be reported?

Camuso CPA:

So that’s usually the biggest question that I get, it centers around like-kind exchanges and the impacts of these new tax law changes. From our CPA firms perspective and from most others firms’ perspective that we speak with, these tax law changes really didn’t have that large of an impact in terms of the cryptocurrency tax treatment, and that’s because like-kind exchanges never really were qualified.

To give a little background on what authority is out there and where the current law stands: In March 2014, a private letter ruling was issued that designated cryptocurrencies as intangible properties. However, no guidance was provided on Form 1031s, the like-kind exchange provision, which would allow for crypto-to-crypto to be a non-taxable event.

Following that, the AICPA and other large governing bodies representing CPA associations contacted the IRS for further clarification, yet no public response was provided. From a CPA’s firm perspective, to take a position that would protect the clients’ assets from interest and penalties, you need to have a substantial authority to rely upon that can substantiate that position to the IRS in any event of an audit. Since there’s never been any guidance issued, there’s no substantial authority to rely upon.

So, strictly speaking from a technical perspective, we don’t recommend like-kind exchanges, even for years before 2018. And even going further from there, I have spoken with a lot of other CPA firms and professionals in the space, and they don’t recommend it either. They looks at it from a common sense perspective — the IRS did leave this gray area in the initial rulings, and it’s a lot of money that’s on the table — we don’t really expect that money to be left on the table.

So, that’s what we’re working with a lot of investors on, protecting their assets and establishing their cost basis in these assets so that down the road, when they do want to liquidate, it’s all legal, it’s on the books, and they’re able to utilize them without concern of an audit in 3 or 4 years down the road.

The Daily Bit:

Yeah, absolutely. And in regards to structuring deals for clients, a lot of questions that we have gotten is whether net gains can be reported or if it can be done on a trade-by-trade basis. From what we’ve seen, a lot of our readers are regularly day trading, swing trading, and they don’t have much experience when it comes to keeping a running tab on that.

Camuso CPA:

I will say that day traders and algorithmic traders usually have the most unpleasant time around tax season from my experiences so far, unfortunately. As for net trades, even net gains, no you can’t really account it by net gains. You need to track portfolios and for each trade you’re required to report it to the IRS. It’s a taxable event, it’s a reporting event.

Okay, so let’s say you purchased bitcoin on Gemini at $5,000. That would establish your cost basis at $5,000. You transfer it over to Bittrex, and you let it sit there for a month, which we obviously don’t advise you do, but you let it sit there for a month. It goes up to $10,000. As long as it is still sitting there, there is no gain realized.

Say now you make a trade into NEO. The second that you trade the Bitcoin into NEO, we would calculate a gain or a loss on the sale of your bitcoin. So, when you traded it, it was $10,000, your initial cost basis was $5,000, so we would calculate a $5,000 gain, and then whatever the price of NEO is at the time would also be your new cost basis.

So you know, we are tracking that on a trade-by-trade basis. Obviously, when you have a high volume of trades, it does create a compliance burden.

The Daily Bit:

Definitely. As for portfolio tracking, there is software out there, but for the most part I don’t believe it is something readily available in the market. Is there a tool that you recommend clients use, or perhaps a method, such as recording trades on an excel file or some other means, to ensure that they are accurately reporting their trades?

Camuso CPA:

Well, you know, we see a few out there right now that aren’t very user friendly. Plus, in terms of reliability, there’s a lot of data scrubbing that goes into making any of the current systems work. I think over the next year or two, you’re going to see a lot of new players in the space and a lot of more user-friendly systems integrated into exchanges’ APIs that will allow you to view this in real time.

But yeah, we’re early adopters. So as it stands right now, there really isn’t any standard, audited, reliable, user-friendly system that we could recommend. Although, we do expect there to be in the very short future.

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The Daily Bit:

Switching to cryptocurrency mining. Of course, if you can identify a profitable coin and can cover the initial investment for the equipment, cryptocurrency mining can be a very lucrative business.

Camuso CPA:

Absolutely.

The Daily Bit:

Is there a difference in reporting standards for mining, such as when receiving bitcoin as a block reward? Would that be considered revenue from business?

Camuso CPA:

So that’s a really good question. The treatment of cryptocurrencies when you’re buying is also the same treatment as any other time that you’re actually receiving cryptocurrencies. So say you’re a consultant that’s getting paid cryptocurrencies — you’re a merchant — you’re doing business, you accept cryptocurrencies as payment. If our firm accepts cryptocurrencies for professional services, or if you’re buying cryptocurrencies, it’s all the same thing when it comes to reporting. Any time that you take in a cryptocurrency for payment, it’s taxable income on the coin’s fair market value on the date of receipt. That also establishes your cost basis in that cryptocurrency.

Back to the example, if you’ve received bitcoin for payment and it was valued at $5,000 on the date you received it, you would have a taxable income event of $5,000. Say you held that bitcoin for a year, and sold it when it was $20,000; you have a long-term gain of $15,000.

We see a lot of merchants that aren’t personally heavily invested in cryptocurrency, they just use it as a form of exchange. You know, their practice involves receiving cryptocurrency and immediately liquidating them. By doing that, they manage their cash flows, but also avoid this capital gains exposure and consideration regarding that whole perspective.

But yeah, anytime you’re receiving cryptocurrencies there’s two taxes — there’s income and actually capital gains if you do decide to hold it.

The Daily Bit:

And in terms of the actual taxation, the amount for capital gains, in the short-term I believe it’s 39% capital gains tax, and then long-term would be 20%, anything held over a year.

Camuso CPA:

Yeah, so the long-term capital gains rate is 15–20% if you hold it for more than 12 months, and the short-term capital gains rate is for anything you hold less than 12 months. And that is according to your tax bracket.

The Daily Bit:

Pivoting toward ICOs — these are obviously another hot topic — there’s a lot of money entering the market from that avenue.

Camuso CPA:

Absolutely.

The Daily Bit:

If you were to invest into an ICO, and that project hits the secondary markets several months later — usually there is kind of a lock-up period during the ICO — are there any ways in which you could be taxed with long-term capital gains instead of short-term? Perhaps rebuying a different coin or something like that?

Camuso CPA:

The way that works, it just comes back to the fundamental way that we’re tracking your portfolio, it all comes down to USD. If you send some ethereum to participate in an ICO, your initial cost basis or holding period would be established by the fair market value on your date of contract — on the date that you trade that ethereum away.

So on the date that you contribute to an ICO, you would have capital gains exposure in terms of a potential gain or a loss depending on your holding period for that ethereum. Once you send that away, that would be the gain or loss, and then that would be the cost basis in the new coin.

If you’ve held it for a month, short-term. If you do hold it for 12 months, long-term.

The Daily Bit:

Ok terrific, thank you. So in terms of storing your coins in a wallet — desktop, mobile, whatever it might be — suppose you lost access to that by forgetting your password or losing a hard drive where your private keys are stored. Is there any special way to deal with that come tax season?

Camuso CPA:

Basically, what happens if you store on an exchange or a faulty wallet and you lose your coins. You know there are tax provisions for that, but I wouldn’t recommend claiming that. To claim a tax loss, you would have to have a reasonable expectation that you didn’t expect this to happen. And in the cryptocurrency market it is sort of part of the game.

You could argue, that if you’re playing in smaller coins with newer wallets, you’d have the potential to lose your coins. The same thing goes for ICOs. So, the conservative approach would be not to claim any of that.

The Daily Bit:

Sure, okay. Regarding hard forks — I know, especially so in the past couple months, there have been a number of alternate currencies announcing hard forks. Bitcoin as well, and Zclassic is a fork of Zcash that recently saw a significant rally. Is there any special way to account for those?

Camuso CPA:

It always comes back to the same thing in terms of a taxable event — it would be income to you. And you’d establish a holding period in the new coin, and then, if and when you sold it, you’d have capital gains exposure.

The Daily Bit:

Sure okay. So I expect that would be applied for any air-drops that would happen for coins.

Camuso CPA:

Absolutely. Exactly, exactly.

The Daily Bit:

Okay, good to know. Let’s say you were gifting somebody cryptocurrency. Would that be treated the same way as regular goods and services?

Camuso CPA:

Yeah, it would be treated as any other gift. You have $14,000 that you can give per each individual, up to an unlimited amount of individuals, as a gift without any reporting requirements. So that’s where it stands.

The Daily Bit:

Looking towards your personal opinion on the space, obviously, it’s very difficult for the IRS to identify who has cryptocurrencies, and with the recent lawsuit against Coinbase, it seems that most of their attention is going to be focused on those accounts. Do you think there could be an olive branch of sorts extended to people as an incentive to report their gains in the future?

Camuso CPA:

You know, I wouldn’t really foresee an olive branch. I think it will probably be more of a stick mentality, honestly.

The Daily Bit:

Sure.

Camuso CPA:

I do think cryptocurrencies are a new asset class developing. Like other asset classes like cash, I do think there will always be an element of underreporting on cryptocurrencies. But in that same regard, it always comes back to the question of how are they actually going to catch people and identify — with their perspective would be referred to as a “bad actor” — and it really comes down to bottlenecks, and Coinbase is the perfect example.

It’s still very early in this game. I think we’re going to see a lot more of that, and we’re also going to see a lot of exchanges moving towards compliance and having their own personal reporting standards and self-reporting.

Right now, how do they catch you? On the exchanges. If you have more than 20k on Coinbase, they already have your records. Probably if you have anything at all on Coinbase they have your records. If you’re on a U.S. exchange, I would say you’re probably not safe. And the smaller exchanges that you get on, the harder it is to catch you.

But at a certain point, you will have to cash out. And at a certain point if you accumulate any substantial amount of assets, you’re going to want them. And if these aren’t on the books, it’s basically like cash that is illegal, and it starts to be very restrictive in terms of what you can do with it.

So, that’s really what it comes back to is, is one, the front-end elements of where did you originally purchase it — how much cash you have on exchanges. On the back-end, if you are doing everything peer to peer, say even down the line if you want to purchase a home, or something else: how are you going to do something like that? So, those are the questions that at the end of the day, some people probably won’t report.

The other question that I do get a lot is privacy coins. I do think that with all the regulations this year in the U.S. and abroad, it’s probably going to be a good year for privacy coins. But again, you have to always keep in mind paper trails and bottlenecks when you’re dealing with privacy coins. So if someone is in various altcoins and they say they can move into a privacy coin and now nobody knows about it, it definitely doesn’t work that way.

If you are using any privacy coins, you also are relying on that technology. So you truly do have to believe in it 100%. And you have to be 100% sure that not only the coins, but the wallet that you’re holding, and you’re not taking on an extra amount of risk. If you go down that road, as it becomes more mainstream, so is tax reporting. In a few years I really don’t think people are going to not report their cryptocurrencies as much, because it is just going to become something that is much more mainstream.

But, like I said, it’s a new asset class, it’s decentralized, there’s definitely the anonymous element to a lot of the coins, so in that same token there will always be an element of underreporting as well, I think.

The Daily Bit:

Yeah, absolutely. You mentioned a larger adoption of cryptocurrencies down the road. Segwaying, another interesting development is happening with governments. Russia is exploring a crypto ruble, Venezuela is attempting to launch the petro, to name two.

These are going to be centralized currencies controlled by the government. From a tax perspective, it seems clear that filing will be made easier with government issued digital currencies. Is there anything else that you are seeing with those developments?

Camuso CPA:

I think governments definitely don’t want to be left in the dust with cryptocurrencies. I think the nature of them definitely threatens a lot of their positions in the world right now, so what they do, coming out with these coins, will be very interesting, and what people’s perception of them is as well.

And I’m sort of watching the space to see what happens. You brought up before in terms of incentivizing people to pay taxes, and incentivizing other types of actions. There, it can be an effective tool for them as well. It’s brand new and it’s going to be interesting to see if and how they can execute in the space and what sort of talent they can bring to the space.

The Daily Bit:

I completely agree. And that goes in line with the panic felt with reporting cryptocurrency taxes. While everybody knows about bitcoin, at the same time people don’t know about bitcoin — and that’s going to make tax season kind of a nightmare for people.

For those that are opting out of reporting their taxes, either due to the complexity of reporting, lack of a framework, or a general lack of knowhow as to how to go about it, what would you say to those thinking about ignoring their taxes for this year?

Camuso CPA:

Well, what I would say is good luck. You definitely can’t catch everyone, I will say that — I’m not gonna sit there and tell you you’ll get audited if you decide not to do it. However, what I see personally is that anyone that does have or accumulates any substantial amount of assets, they want to minimize their taxes, but, foremost, they want to protect their assets. They don’t want to have it come down the road 4 years later in the form of penalties and interest — which the IRS does have the power to do.

At the end of the day, that’s what the bet really comes down to, it’s either you pay your taxes and you know you walk away clean with the gains that are left over, or you sort of just always have that exposure of underreporting a tax return blowing open your statute of limitations and just having this ongoing exposure to an audit. That’s really where it stands.

The last thing I’ll leave people with is this: Even if you’re just like, well, I want to take the risk on the 1031 exchange — any investors this year — they’re left with a decision, and its between three choices really.

One would be what we’re suggesting — take the conservative approach, protect your assets, and we’ll do everything to minimize your taxes as well, but, first and foremost, we do want to protect your assets. They’re not going to qualify like-kind exchanges, so we’re not going to go that route. We’ll claim all your gains.

Route 2 would be to claim for a like-kind exchange, but even if you want to file for a like-kind exchange, there are specific forms that you have to file, and you still would have to report your cost basis to the IRS. So you have to file those forms. For someone that says they are just not going to do anything, the decision they’re doing is to falsely report their tax return and be exposed to the IRS forever. So for anyone with a substantial amount of assets, it’s usually just not worth it. But it’s a personal decision at the end of the day.

The Daily Bit:

Right, while you can’t force someone to pay their taxes, with the IRS, it’s really a one way street. If you don’t pay, they’ll come after you — or at least try to.

Camuso CPA:

Yeah, if you don’t pay, you’re always exposed to them. They’ll always be able to come after you. They will definitely be looking to get actors in the cryptocurrency space. But, to argue to the other side of things, they have limited resources, just like everyone else. There are a lot of people out there, so there are two sides to it. But again, we recommend not risking all your assets, just not to report 30–40% of your gains. It is substantial but it’s not worth the penalties and interest 4 or 5 years down the road.

The Daily Bit:

Yeah, absolutely. Pat, thank you very much. I’m sure this is going to be very helpful for all of our readers. So, just just closing thoughts, where can everyone find you — I know you have a website, Camuso CPA? Is there an email address people can use to contact you?

Camuso CPA:

I would encourage everyone who wants to get in contact with us to visit our website at CamusoCPA.com. My email is Patrick.Camuso@CamusoCPA.com, and our phone number is (704) 249–3179. We’re happy to answer any questions and speak in detail regarding one’s portfolio and give them the lay of the land in more detail, like we did here as it relates to them.

2018 Altcoin Report

2018 Altcoin Report

Meet John. John is a contributor for The Daily Bit and a second semester junior at UC Berkeley. John likes talking cryptos. So much, in fact, that he created his own major, which is essentially Cryptocurrency Market Analysis. Talk about the road less traveled. Oh, and we mentioned he rows Crew, right? The bar has been set quite high for John.

The Petrodollar and the Rise of the Petro-yuan

The Petrodollar and the Rise of the Petro-yuan

To understand the core of monetary policy and why some believe so strongly in the value of a competing digital currency and its un-inflatable store of value, we must take a brief look at the history of United States monetary policy in order to comprehend the primary driver of the cryptocurrency movement.

Pump and Dump: The McAfee Effect

Pump and Dump: The McAfee Effect

While we know our readers consist of stand-out-gentlemen and women-in-business, we felt the current market climate called for a level-headed discussion on the dangers of speculative investments in a particular corner of the cryptocurrency market. This niche has been provided a calling name, and the title was awarded for good reason. They are known as $h*tcoins.

In Layman’s Terms, a $h*tcoin is the Natural Ice of cryptocurrencies. The contents of a $h*tcoin have no substantive value, but they have the uncanny ability to render you profoundly banged up. They consist of a wide array of alternate currencies, most of which possess low market capitalization, low trading volume and are featured on less esteemed secondary exchanges.