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HEALTH, WEALTH, AND HAPPINESS

Jan 25, 2022

“Wealth is the ability to fully experience life.” - Henry David Thoreau

Working Paper on CBDCs (U.S. Federal Reserve): Well-written, informative, and fairly short, this gives insight into how the Fed is thinking about finally rolling out a Central Bank Digital Currency.

Investor takeaway: Other nations (China, South Korea, etc.) have the lead in rolling out their own CBDCs. But the U.S. has a secret weapon: the dollar, which is the global reserve currency.

A move to a U.S. CBDC -- let's call it a "digital dollar" -- seems inevitable. It will likely be good for investors, as it will legitimize our digital investments, and accelerate the development of new ones.

Overall, this paper is a significant step forward for the move toward a digital dollar. Best of all, the Fed is asking for your feedback. We encourage you to fill out their survey with your support.

This chart from the Federal Reserve Bank of San Francisco shows what you already intuitively know: cash payments (green line) are going down, while digital payments (yellow and blue lines) are going up.

This data is four years old, so think about how this trend toward digital payments has accelerated during the pandemic. This is why we think a U.S. digital dollar is not only inevitable, but will be good for citizens, investors, and the economy.

Investor takeaway: If you don't have time to read the full report, read the Executive Summary, then fill out the survey form to give some positive feedback to the Fed.

In this alternate universe, real-world people are capitalizing on these opportunities, creating and developing NFTs that represent housing, amusement parks, casinos and museums.

And even in the real world, which seems, at times, well, made up, more and more professional offices are popping up, including accounting offices. 

In the end, taxes must be paid

While the metaverse may not seem entirely real, the gains made there are. As yesterday was the official start of the U.S. tax season, I wondered how these properties are treated as far as taxes are concerned. Are their virtual property taxes? Can you "flip" a property?

I spoke with Peter Ritter, principal at KPMG Tax, about these issues. Ritter said that at the moment, IRS guidance is sparse.

Most cryptoassets, including NFTs, are treated as property and not currency, but they can also constitute capital assets if held for investment. 

"Therefore, it is possible to have long-term capital gains (subject to preferential tax rates for individual taxpayers) with respect to crypto assets if they constitute capital assets and are held for more than one year."

But what about the coins spent in The Sandbox or Decentraland to purchase new clothes for my avatar?

In addition to simple sales of crypto, exchanges of cryptoassets, and even spending these assets, can trigger a gain or loss, and therefore taxes.

If a cryptoasset earns income by reason of ownership, and if there is ordinary income from these activities, in some cases, a gain or loss can be triggered. Past that, taxpayers need to consider state and local taxes too.

Additionally, with NFTs, taxpayers should be mindful of special rules that might affect the amount of tax owed, such as the higher long-term capital gains tax rate imposed on the sale of “collectibles."

Would an investor be able to defer their taxes by selling one parcel and then buying another "in-kind" in the metaverse? Unfortunately, the answer is no, Ritter said.

Frequently referred to as a 1031 exchange, taxpayers can defer taxes if they sell one property and then buy another for the same or greater amount.

However, the Tax Cuts and Jobs Act of 2017 revised the tax code to limit those exchanges to real property transactions. 

Moving from the digital world to digital currencies

I left Decentraland with lots of questions on how this virtual world will evolve, and how our real-life world will adapt.

And, speaking of adapting, the Federal Reserve issued its long-awaited white paper on the possibility of a digital dollar last week.

Given that more than 80 countries are testing a digital version of their fiat currency, what further impact would a digital currency have on the traditional banking model?

My latest research piece delves into this very matter. As always, thank you for reading!

Evamarie Augustine

Market Analyst

Bitcoin Market Journal is a daily newsletter focusing on blockchain and crypto investing. It is created by Evamarie Augustine, Charles Bovaird, Mati Greenspan, John Hargrave, and Steve Walters.

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