Making 40,000 from trading cryptocurrencies requires paying 130,000 in taxes, which is what Musk satirizes about the U.S. tax law
Whether in terms of the adaptability of tax policies or the regulation of tax evasion and avoidance, U.S. tax law still has a long way to go.Author: Penny, BlockBeats
On January 3, Musk posted on his social platform: "A customer bought $7,000 worth of cumrocket and staked it for 3 months to earn a 6900% return. Then they sold and withdrew the profits to invest in NFTitties, but the developers rug pulled the project, and they only managed to liquidate 10% of the funds. Can the customer deduct the gas fees for minting to offset short-term capital gains tax?"
To truly understand what Musk was mocking and why he repeatedly dissed the IRS, BlockBeats consulted a professional tax advisor from TaxDAO, who has been providing professional financial management software and crypto tax consulting services in the Web3 space since 2023. They recently developed a professional crypto asset tax management software, FinTax, aimed at both B2B and B2C markets, using AI Agent to help users address their crypto financial and tax needs in a one-stop solution.
Through their explanation of U.S. tax law, using the numbers provided in the image as a case study, we can further elaborate on the current state and future of crypto taxation in the U.S.
Illustrated Interpretation: An Unreasonable Tax Story
First, let's interpret the sad story depicted in the image:
This is an example of calculating taxes on cryptocurrency investments, which can be broken down into three stages. The first stage is staking income, taxed as ordinary income under personal income tax, with a progressive tax rate ranging from 10% to 37%. The second stage is when the investor mints NFTs using the earned staking rewards, which is considered an investment activity and should incur capital gains tax. The third stage is investment failure, where the project rug pulls, resulting in a 90% loss. In 2023, the IRS issued a memorandum on the taxation of worthless or abandoned crypto assets, stating that if a taxpayer has lost control of their crypto assets (the investor in the image has already sold the depreciated crypto assets), the resulting loss can be used to offset taxes, but since this is an investment activity, it can only offset capital gains tax, with a maximum deduction of $3,000 against ordinary income depending on marital status.
Based on the situation in the image, let's assume the customer is single, the staking rewards are distributed in a lump sum at the end of the three-month period, and upon receiving the staking rewards, the customer sells all of it to invest in the NFT project, with no other income. The tax implications of this series of transactions can be calculated as follows:
(1) The customer purchased $7,000 worth of Cumrocket and staked it for 3 months, earning a 6900% interest. Therefore, the earnings amount to $7,000 * 6900% = $483,000. According to IRS regulations, this income is classified as ordinary income rather than capital gains.
(2) The amount invested in the NFT is $7,000 * 7000% = $490,000.
(3) After investing the crypto asset profits into the NFT project, due to the rug pull, they can only liquidate 10% of the funds, resulting in a 90% loss, which means there is a loss of $490,000 * 90% = $441,000. Since this amount has been liquidated, the loss is realized and meets the criteria for deductible capital losses.
Capital losses will first offset similar capital gains. In this case, there are no capital gains from price appreciation, so the $441,000 capital loss cannot offset any capital gains. Assuming the customer is single, according to IRS regulations, this capital loss can offset a maximum of $3,000 against ordinary income for that year, and the standard deduction for single filers is $13,850. Therefore, the customer's taxable ordinary income = $483,000 - $3,000 - $13,850 = $466,150. Based on the progressive ordinary income tax rate table, they need to pay $11,000 * 10% + $33,725 * 12% + $50,650 * 22% + $86,725 * 24% + $49,150 * 32% + ($466,150 - $231,250) * 35% = $1,100 + $4,047 + $11,143 + $20,814 + $15,728 + $82,215 = $135,047.
Thus, from the above calculations, we can see that after a series of financial activities, the investor ultimately only has a surplus of $50,000 (which includes the $7,000 principal), but in that year, they need to pay as much as $130,000 in taxes. This example precisely satirizes the unreasonable aspects of U.S. crypto tax law, and it’s no wonder Musk has repeatedly dissed the IRS's legislation.
Crypto Tax Disputes: Inextricable and Confusing
Why has Musk long held a dissatisfied attitude towards U.S. crypto taxes? FinTax tax advisors analyze two main reasons:
The complexity of U.S. taxes, with each region having its own regulations and high compliance costs, almost ten times that of China;
Starting in 2023, the U.S. introduced targeted tax legislation for the crypto sector, but it did not consider the unique characteristics of the crypto industry and still approached it from a traditional industry perspective, which may inherently contain some irrationalities; even if the legal principles are reasonable, the government’s complete reliance on traditional tax collection methods to manage crypto enterprises makes it difficult for companies to truly comply.
The case depicted in the image is a typical problem: taxpayers have some businesses that are profitable and others that incur losses, but under specific tax scenarios, these profitable and loss-making businesses cannot offset each other. This can lead to the awkward situation where one ends up not making any money but still has to pay a lot of taxes. A similar case is the dispute between the Jarrett couple and the IRS regarding whether taxes should be paid on staked assets.
On the other hand, due to the decentralized and anonymous nature of cryptocurrencies, they have also become tools for some individuals to evade taxes, making such cases among the most common disputes in the crypto field.
Take the famous "Bitcoin Jesus" case as an example. The protagonist, Roger Ver, was born in Silicon Valley in 1979 and began investing in Bitcoin in 2011. Due to his active promotion of Bitcoin's application and value, he played a significant role in its early adoption, accumulating substantial influence in the crypto asset space, earning him the title "Bitcoin Jesus" from the media and crypto community.
In 2014, Roger Ver obtained citizenship in Saint Kitts and Nevis and soon after renounced his U.S. citizenship. According to U.S. tax law, individuals who renounce their citizenship must fully report their global capital gains, including their holdings of Bitcoin and its fair market value. The IRS believes Roger Ver concealed and undervalued his personal asset value before renouncing his citizenship and subsequently obtained and sold approximately 70,000 Bitcoins from his U.S.-based company, generating nearly $240 million in income, thereby evading at least $48 million in taxes owed.
In this regard, the IRS has primarily raised two charges: first, Roger Ver did not comply with exit tax regulations; second, Roger Ver violated his tax obligations as a non-U.S. tax resident.
The likelihood of Roger Ver winning his case may be influenced by various factors. On the favorable side, his legal team argues that the tax law's provisions on crypto assets are unclear, providing a basis for defense that there are loopholes in the tax system. They also accuse the prosecution of selective enforcement, and if sufficient evidence can be provided, it may undermine the legitimacy of the IRS's prosecution. Notably, the Trump administration intended to end the harsh regulation of crypto assets, which could bring a turning point to the case. However, on the downside, the prosecution has already gathered substantial specific evidence, including $48 million in unpaid taxes and a series of tax evasion records, which likely meet the legal requirements for tax evasion.
The Bitcoin Jesus case has sounded the alarm for tax compliance in the crypto industry, especially for individual investors in crypto assets. Strengthened international cooperation and advancements in technology continue to narrow the space for investors to evade taxes. For investors in the crypto industry, tax compliance has become an unavoidable key issue.
Wealth Tax: The Sword of Damocles Over the Crypto Industry
In addition, the series of "corporate taxes" and "wealth taxes" introduced during Biden's early presidency has indeed caused Musk significant financial strain.
After Biden took office in 2020, he initiated multiple rounds of large-scale infrastructure plans to realize his political ambitions. However, high expenditures must be supported by high tax revenues, with American corporations and the wealthy class being the first to bear the burden of high taxes to fund this plan, and Musk was undoubtedly targeted by Biden. When announcing the 2023 budget, Biden proposed a new tax scheme targeting the wealthy, imposing a 25% minimum income tax on citizens with a net worth of over $100 million, which includes the total annual earnings from standard taxable amounts and "tradable assets" (including stocks, bonds, mutual funds, and other securities). According to a report released by ProPublica in 2021, Biden's wealth tax would require tech giants like Musk to pay between $35 billion and $50 billion in taxes. That year, the news that "Musk will pay an $11 billion tax bill" became a hot topic, marking the highest single tax payment by an individual in U.S. history.
Under the new regulations, U.S. capital gains tax will reach a historical high, image source from the U.S. Department of the Treasury
After raising the fiscal year 2025 budget to $7.3 trillion, Biden proposed a plan to tax unrealized gains and plans to tax unrealized gains from trusts, corporations, and other non-corporate entities that have not had confirmation events in the past 90 years. Taxing unrealized gains means that even if individuals or corporations (with a net worth over $100 million) hold stocks, bonds, and other tradable assets without selling them, they still need to pay taxes at a 25% minimum income tax rate when their value increases.
This legislation is tantamount to declaring war on the venture capital circle, which bases its underlying logic on valuation growth. Bill Ackman commented on this tax plan, stating that the Democrats should not implement a tax policy "that will destroy the U.S. economy." He said, "If someone invests $1 billion in your startup, and you own 50% of the company, you will immediately incur $100 million in taxable income… All American startups will go bankrupt, and no one will want to start a business in the U.S." In the latest podcast episode, two founding partners of A16Z expressed similar views. This legislation hangs like a precarious Sword of Damocles over startups, where massive taxes could deliver a fatal blow at any moment, stifling the development of entrepreneurship and investment.
David Sacks stated at a tech conference earlier this year that this tax could stifle the practice of offering stock options to founders and employees in the startup industry, calling it "an important reason for Silicon Valley to seriously consider who to vote for." The investment community believes this tax policy will significantly distort American investors' investment behavior, especially concerning small-cap stocks and startups. These companies are typically engines of economic growth and innovation, relying on investors willing to take risks for future returns. However, when unrealized gains are also subject to taxation, investors will be less inclined to favor growth-oriented companies, as their valuations tend to fluctuate more than those of larger, more established firms.
What Does the Future Hold for Crypto Tax Law?
Since the inception of the cryptocurrency market, the issue of taxation on its transactions has been a focal point of debate. The core conflict lies in the differing positions of the government and investors: the government seeks to increase fiscal revenue through taxation, while investors worry that excessive tax burdens will diminish investment returns.
Even in South Korea, where enthusiasm for trading cryptocurrencies is high, authorities have consistently attempted to regulate the crypto sector through high taxes. This involves not only a struggle between regulatory bodies and the market but also a contest for discourse power between the Democratic Party and the People Power Party.
The South Korean Democratic Party planned to impose a 20% tax on cryptocurrency gains (22% for local taxes), originally set to take effect on January 1, 2022. However, due to strong opposition from investors and the industry, the plan has been postponed twice to January 1, 2025. After a press conference on December 1, 2024, the tax collection was postponed again to 2027. The ruling People Power Party has also proposed delaying the implementation until 2028.
Overall, South Korea has taken a relatively cautious approach to cryptocurrency taxation, not imposing strict regulations on the market. On one hand, this provides the market with time and space for natural development; on the other hand, it offers South Korea a valuable window to observe the policy implementation effects of other countries and global regulatory trends, allowing them to establish a more comprehensive tax system based on the lessons learned from others.
In contrast, the U.S. attitude towards the crypto market has been positive since Trump took office. From the SEC chairman to the Treasury Secretary, and the overall coordination of the "crypto team," the Trump administration's "crypto dream team" not only represents significant policy adjustments but also indicates a potential major turning point for the U.S. cryptocurrency industry. However, regarding the government's stance on taxation, FinTax tax advisors hold a conservative view, believing that although Trump promised many favorable policies for the crypto industry before taking office and would continue to roll out policies afterward, tax regulations will only become stricter. This is because Trump's initial support for the crypto industry stemmed from recognizing its important role in the U.S. financial system and technological development, believing it could bring new growth to the fintech sector, and this growth must be reflected in tax revenues. Therefore, future crypto taxes will become increasingly clear, and tax collection will trend towards stricter enforcement.
Musk's satirical image sparked a frenzy for a coin and left new imaginations for the crypto field. In the U.S. Treasury's 2025 crypto tax regime, the rules related to DeFi and non-custodial wallet providers have been temporarily shelved, indicating the government's cautious attitude towards formulating crypto tax policies. In the future, whether in terms of the adaptability of tax policies or the regulation of tax evasion and avoidance, U.S. tax law still has a long way to go. We hope that as the crypto industry gallops forward like a runaway horse, there will also be a strong rein guiding it in the right direction.
