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Blockchain Based Digital Currency IRS Tax Software Launched, Bitcoin Monitoring to Become Easy

The problem with disruptive technology is that it transforms the legacy systems rooted deeply into the ecosystem. The existing systems can’t catch up with the developments and end up tainting innovation. Over a period of time, eventually the system accommodates the technology but not before hampering further innovation. This is exactly what has happened with Bitcoin and IRS in USA. Bitcoin is all set to transform the existing monetary system and IRS. The IRS has issued summons to Coinbase, one of the leading Bitcoin wallet services companies to reveal the details of its users.

Coinbase has committed to protect the privacy of its customers and so has been fighting the summons and the entire scenario has turned ugly for crytpocurrencies. Luckily, a US based blockchain firm has launched a software that monitors and records gains of  users of cryptocurrency. Let’s look into the details of the software and how it will be impacting cryptocurrency monitoring.

Monitoring the transactions


Launched on 22nd March, the software was developed by New York-based governance firm Node40. The firm is commonly known as the masternode host provider for Dash, a prominent cryptocurrency. The software has been named as ‘Node40 Balance’ and performs net profit/loss calculations on all the transactions in a calendar year. Since Bitcoin is being treated as an asset and not a currency, filing taxes for Bitcoin falls under IRS Form 8949. The form seeks taxpayers to report capital gains and losses from transactions related to investment in assets. The software sources data from Blockchain before directly filling in the details.

How the software works


CEO of Node40 Perry Woodin stated that a simple FIFO (First In First Out) strategy is not sufficient to deal with digital currency transactions. A method of asset valuation is FIFO where it is assumed that the first assets produced or acquired are the first products sold. This valuation is frequently used for traditional investments where assets are sold. However, when it comes to cryptocurrencies the transactions have multiple inputs and hedging across various cryptocurrencies will make it difficult to understand the dynamics as these currencies can also be used for transactions.

Woodin said:

Node40 Balance analyzes the blockchain and provides valuation data for all your transactions. You annotate your transactions according to your real-world needs and Node40 Balance provide reports with your gains, losses and income.

The major challenge with Bitcoin or any other cryptocurrency is that it can act both as an asset class for storing value or be used for transacting. This would make it difficult to distinguish how the currency is being used and what can be the pending implications. Hence a software of this sort that adjusts to the nature of the digital asset class would be an apt solution for the challenge at hand. In turn, this would lead to an ecosystem where digital currencies would be well regulated and well accepted.

Coinbase steps up the game, launches margin trading

The versatile Bitcoin exchange and wallet services provider, Coinbase has been in the limelight consistently from August last year after IRS issued summons to reveal the details of its customer base. While the firm is fighting off the summons, it has put in good efforts to re-affirms the customers’ confidence in the company. The successive campaigns have become successful as the company recently hit the landmark of 6 million customers.  In an attempt to woo and capture institutional investors, the wallet company cum exchange has introduced Margin feature. Let’s dive deep into how Coinbase has progressed after the law suit and what they have in store for the ever changing Bitcoin ecosystem:

Coinbase-IRS Lawsuit:


After a recent investigation, IRS has revealed that only a small number of people are declaring their bitcoin profits or losses in their yearly tax returns. The investigation followed after Coinbase decided to fight the summons issued by IRS through lawsuit in attempt to conserve the privacy of its customers. The first ever Bitcoin company with a Billion dollar valuation provides its services primarily in US and in other parts of the world and is committed to protect the identity of the customers. Coinbase said:

We will continue to work with the IRS to assess the government’s willingness to fundamentally reconsider the focus and scope of the summons. If it does not, we anticipate filing opposition papers in court in coming months.

Coinbase doesn’t support listing Bitcoin Unlimited:

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Recently a group of 20 exchanges signed a statement that they would be listing ‘Bitcoin Unlimited’ as another cryptocurrency in case of a hard fork. However, Coinbase’s CEO Brian Armstrong publicly agreed that he didn’t support the statement. He believes that listing any currency as BTC regardless of longest chain and presumably other factors of price and transactions is not healthy for Bitcoin development. The hard fork seems inevitable with  Bitcoin Unlimited having 40% network share which might occasionally hit 50% owing to the network variance.

Launch of Margin Trading Feature:


Coinbase’s GDAX digital asset exchange has included margin trading feature in an attempt to capture the market that comprises of institutional investors. From March 20th, eligible customers can trade with up to three times leverage in markets for Bitcoin, Ethereum and Litecoin. The increasing interest of institutional investors in cryptocurrencies has prompted the exchange to introduce the feature. However the feature is only available for selected investors/traders. With this launch, GDAX becomes the second US-based exchange to offered leveraged trading services for cryptocurrencies after Kraken.

Charlie Lee evens the ground for cryptocurrency comparison, proposes volume weighted market cap

When it comes to cryptocurrency comparison, people immediately look up to market capitalization as the most reliable metric as it represents currency’s core market value. However, as the cryptocurrency ecosystem is still developing and is a nascent one, their unique characteristic pave way to practices which intentionally or accidentally influence market cap to a great extent. This is exactly what Charlie Lee explained in his series of tweets on 8th February. The creator of Litecoin and Director of Engineering at Coinbase explained through these tweets how market capitalization is not a fair ground for cryptocurrency comparison. The tweets explain how few cryptocurrencies are purposefully locking up coins or destroying them to increase market cap and hence the need for a new grounds for comparison. Let’s dive deep into what Lee is suggesting as alternate:

The problem with Market Capitalization:

Lee explains that with low volumes, the volatility will remain strong and only push prices higher. This would lead to increased market cap but in reality doesn’t reflect the true value of the cryptocurrency. A good example for this would be the launch of Z-cash.

During the first few days of the launch, Z-Cash was illiquid and had a dearth of volumes which increased the volatility. The prices touched an instant high taking Z-Cash’s market cap higher than few of the already existing cryptocurrencies. While in reality this wouldn’t be a measure of the actual value as the currency is new and low on volumes. This will lead to a possibility where a coin with $ 1 Million market cap, may really be worth only $1000 as the daily volume is only $10.

The proposed solution:

To lay down the alternate for the said problem, Lee bases his idea on the fact that Bitcoin and Litecoin volumes are a bit over 1% of their market cap. Using this 1% as the benchmark, Lee has suggested Volume weighted market cap. The volume weighted market cap would reduce the market cap by how much the trading volume is less than 1% of the market cap. Hence the Volume Weighted Market cap would be Market cap times minimum of 1 or percentage volume per market cap. Basing on this method Lee posted the comparison of VWMC in descending order of various cryptocurrencies and that provided a new perspective.

VWMC = MC * Min(1,VOL*100/MC)

Hence Bitcoin and Litecoin’s VWMC would be the same as their market cap because their daily volumes are more than 1% of their market cap. Similarly a coin with $10 Million market cap but only $50K in daily trade volume will have its VMWC reduced to $5 Million. Hence this indeed becomes a very accurate and better way of comparing cryptocurrencies.

4 Reasons Coinbase can’t seem to Divest its Many Controversies

Coinbase is one of the most popular Bitcoin exchanges in the world and it is probably the most reputable exchange. Coinbase was the first exchange to obtain U.S. regulatory approval, it has operations in 32 countries where it serves more about 5.3 million customers. Coinbase also lay claim to being the most user-friendly  platform for people cryptocurrency users, especially people new to Bitcoin. In fact, you can pay on Coinbase using EFT, ACH, SWIFT, credit cards, and PayPal among others.

One would think that Coinbase would have a smooth sailing to home because of the quality of its service. However, the firm always seems to find itself entangled in one controversy or the other as users find reasons to complain about some aspects of its service. This piece examines some of the major controversies in which Coinbase has been enmeshed in the recent past.

Sudden account closure and suspension

The first reason Coinbase doesn’t seem to have a good reputation in line with the quality of its service is the firm’s notoriety for freezing or closing user’s accounts. Coinbase tries to be compliant with necessary Anti-Money laundering (AML) and Know Your Customer (KYC) laws.

Hence, you can expect Coinbase to ask you to provide some personal information before you can use the full suite of its service. Ironically, many people use Bitcoin because of the privacy it offers on financial transactions; hence, they do not find it easy to corporate with the firm’s KYC efforts.

Accusations of Big Brother tendencies

Coinbase also tends to find itself in the blackbook of users who accuse it of having big brother tendencies in how it conducts its business. Many users accuse Coinbase of seeing your Bitcoin as its money; hence, it tends to track your spending to be sure that you don’t use its exchange for activities that it doesn’t endorse. For instance, you can’t use the exchange to pay for adult services, gambling is not permitted, and you can’t even resell your Coinbase Bitcoin on other exchanges.

A large volume of complains amplified by social media

Coinbase claims to have a user base of about 5.3 million users; hence, it is not surprising that the firm tend to have a huge volume of user complaints. However, many users have the misguided notion that coinbase support staff will be more inclined to expedite action on their complaints when made publicly via social media because any responsible firm will try to avoid bad press in the social media space.

The problem however is that every user with any semblance of complaint comes to air their grievances of social media. Hence, it is hard to filter out coinbase’s commendation from the condemnation amidst the din of social media.

Conflicts with the open source philosophy of Bitcoin

Nobody can lay claim to being the owner of Bitcoin or its underlying Blockchain technology. Blockchain technology and Bitcoin are firmly rooted in a philosophy that supports an open source nature. However, Coinbase management crossed the line when they tried to push 9 patent filings to lay claim to some important crytocurrency innovations. Their so-called innovations inclide “tips button”, “hot wallet” and “Bitcoin exchange” – these are applications that embody the very essence of Bitcoin and Coinbase was clearly overreaching in laying claim to the patents.

Why IRS should adapt to Bitcoin and update its monitoring system

The problem with disruptive technology is that many a times, it affects the legacy systems rooted deeply into the ecosystem. The existing systems can’t catch up with the developments and end up tainting the innovation. Over a period of time, eventually the system accommodates the technology; but the real fear is in not letting it hamper further innovation. This is exactly what is happening with Bitcoin and IRS in USA. Bitcoin is all set to transform the existing monetary system and IRS is struggling to still acknowledge Bitcoin as a currency or as an asset. Instead it has attacked major Bitcoin exchanges and indirectly accused Bitcoin Users of Tax Avoidance. Let’s look into what exactly happened and how IRS should probably go about monitoring cryptocurrencies:

Coinbase fights IRS summons:


IRS issued guidance in March 2014 concerning income from bitcoin and “virtual currencies”. However, there has been no enforcement mechanism to ensure that bitcoin income is actually reported to the IRS. Having failed to create an enforcement mechanism, the IRS is taking a brute-force approach. The John Doe summons authorized on 30th November demands that Coinbase provide complete transaction records for all users between 1st January, 2013 and 31th December 2015. If the IRS succeeds in forcing Coinbase to turn over their records, this would be a massive invasion of privacy and guilt by association. Coinbase has filed to fight against these summons and the proceedings are underway.

Core of the problem:


Most of the experts feel that the problem lies in reporting Bitcoin transactions. There is no exact mechanism to monitor the filings and hence the problem arises.    The reporting requirements aren’t exactly clear and compliance is very complicated. Buying and selling of a Bitcoin will result in a profitable or loss transaction. For bitcoin that was purchased or received on different dates, the value of each input comprising a transaction is subject to a gain or a loss. Reporting numerous transactions of this type requires upgraded technological framework. This framework has to accurately calculate the values necessary for reporting to the IRS adhering to compliance.

Possible solution for the problem:


Experts believe that to counter this problem, IRS needs to first update its tax guidelines. Secondly, a software system or computer protocol needs to be developed so that any user or investor of cryptocurrency can compile a report at the end of the fiscal year. The report shows unrealized gains and losses from their entire virtual currency portfolio. This can be handed to accountants in a format that is easily understood and accurate. This can in due course of time evolve to become a national standard.

Bitcoin and Brexit

Bitcoin and Brexit

On June 24, 2016, immediately after the final Brexit vote was publicized, the pound sterling plunged to its lowest level since 1985; conversely, the US dollar and the Japanese yen rose to new levels.

It’s telling, though, that the price of bitcoin actually rose 6.5% in the 24 hours after the results of the Brexit referendum became publicized. Bitcoin had already been up 25% prior to the vote for reasons not directly related to Brexit.

Clearly, those who jumped in to bitcoin to drive up the price were looking for an alternative to conventional currency during a time of political unrest.

Bitcoin briefly became less volatile than the British Pound

In that role, bitcoin performs much like gold – an uncorrelated asset to which traders flock during times of geopolitical uncertainty. According to Coinbase data, the Brexit movement had a positive impact on bitcoin prices even before the referendum. In the week just before the vote, Coinbase, which offers a well-known bitcoin wallet and a bitcoin exchange, encountered a 55% increase in new account applications and a 350% increase in bitcoin purchases from the UK.

On the day of the referendum, the anticipation of Brexit affected bitcoin purchases before the actual vote, and Coinbase saw an 86% increase in UK signups. One Coinbase official observed a similar reaction with bitcoin when it served as an effective safe haven against the debt morass in Greece, and the capital regulations in China.

Founded in 2012, Coinbase now has 4 million users and operates in 32 countries. It launched in the UK only a year ago, and is making it possible for Brits to buy bitcoin in pounds, euros, or dollars.

Bitcoin and China

China is attempting to outdo the West in bitcoin activity by making large investments in server farms and carrying on immense speculative trading on Chinese bitcoin exchanges. In fact, Chinese exchanges account for 42% of all bitcoin transactions in 2016, according to a Chainalysis report commissioned by The New York Times.

2016 Bitcoins Movement

Just last week, the giant Chinese internet company, Baidu, along with three Chinese banks invested in the popular American Bitcoin company Circle.

Again, we would like to emphasize the effectiveness of a combined bitcoin/gold investment. Gold, of course, is a traditional risk-off safe haven for investors and traders looking to protect their wealth against the uncertainty of paper assets. Bitcoin, on the other hand, presents an excellent speculative opportunity for an investor looking for aggressive upside return. The combined bitcoin/gold strategy can be especially effective since the digital currency and the yellow metal are both non-correlated assets.

The current market cap of all bitcoins is now $10.7 billion.

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