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JPMorgan Casts A Sly Glance At Bitcoin: But Don’t Get Too Excited Yet

If BTC is a commodity, tax implications could disincentivize long-term holders.

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Not for the first time, JPMorgan & Chase is raising a stir in the crypto community. In a recent note, the bank’s strategists announced that they had calculated a fundamental valuation for Bitcoin (BTC), with a cost of production determined from the energy and resources used in the mining process, as Bloomberg reports.

The community’s reaction was a smug one. Here was one of crypto’s most vocal critics, whose CEO had called Bitcoin a fraud, now tacitly suggesting that there might be something in this crypto malarkey after all. A volte-face never looks good, especially if you’re supposed to be leading the march.

But in fact, the JPMorgan note may have a long-lasting, detrimental impact on the cryptocurrency community. To determine bitcoin’s ‘intrinsic value’, the strategists assumed that it was a commodity: a tradeable asset not controlled, or in any way created, by a single producer.

SIMETRI Research

Although there is still no standard classification for cryptocurrencies, the IRS currently treats cryptocurrencies as an investment property for tax purposes. Any U.S. citizen who trades virtual assets must report their gains and losses when they file their return at the end of the tax year.

‘If Bitcoin is classified as a commodity, its tax treatment will be different than what we discussed [as an investment property],” says Sharon Yip, a cryptocurrency tax specialist at Crypto Tax Advisors.

As a commodity, traders would still be required to report gains and losses on bitcoin. But they would be taxed regardless of their actual holding period, unlike the present system which distinguishes between holdings held for more than, or less than, a year.

Commodities are considered section 1256 contracts for tax purposes,” Yip explained to Crypto Briefing. “60% of gains from trading commodities are treated as long-term capital gains and 40% are treated as short-term capital gains. It does not matter how long your holding period is.”

Although there are no hard and fast rules for what serves investors best, Yip suggested that long-term holders would be liable to pay more taxes if bitcoin was treated as a commodity. Short-term speculators, she wrote, could actually pay less tax than under the existing system.

“A taxpayer with all long-term capital gains from trading BTC as an investment property will pay less tax if BTC is treated as a commodity,” Yip wrote. “On the other hand, a taxpayer with all short-term capital gains from trading BTC as an investment property will need to pay more tax if BTC is treated as a commodity.” 

Bitcoin as a commodity

This wasn’t the first time Bitcoin has been placed in the ‘commodity’ bucket. Before the Cboe and CME began trading BTC futures in December 2017, the CFTC had to sign off on bitcoin as a commodity with characteristics akin to wheat, coffee or physical gold.

Not everyone agrees with the classification. Professor Emilios Avgouleas, who is loosely affiliated with IOHK, told Crypto Briefing back in December that bitcoin could not be a commodity because it did not have a tangible entity. He argued that shoe-horning cryptocurrencies into existing asset-classes not only negates their unique characteristics but may ultimately be a detriment to their adoption.

But most countries have no legal definition or guidance for categorizing cryptocurrencies, leading regulators to classify them on an ad hoc basis.

The SEC saw many tokens sold in ICO sales as unregistered securities, even ordering some to refund investors. The CFTC is currently in “very early stages of conversations” with Facebook, the Financial Times reports, to determine whether GlobalCoin falls under the regulator’s remit.

Not all classifications are as clear-cut. The SEC concluded Ether (ETH) is not currently a security, primarily because the sale was so long ago that any form of enforcement now would largely be ineffective. Regulators have not taken action against XRP, but private suits continue to be heard.

There is no suggestion that the IRS, or any other government authority, would automatically take JPMorgan’s note into consideration when drawing up additional guidance for Bitcoin. But the views of the world’s largest investment bank could count for something.

If the tax authorities come round to JPMorgan’s point of view, they could remove an incentive for users to ‘hodl’ their bitcoins.

 


Additional reporting by Darren Kleine.

 

DISCLOSURE

Authors at Crypto Briefing are invested in cryptocurrencies. The author of this post may be invested in digital assets mentioned here.

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