Finance

What Will Happen to Crypto in 2023?

2022 was a tumultuous year for the crypto industry. Crypto markets have fallen over 50% since their peak in 2021, while stock markets and bond markets globally have fallen in double digits.

Terra (LUNA)

The Terra ($LUNA) crypto token crashed from $120 to $0.002, a 99.9% correction between May 11 to May 12. Along with LUNA, the TerraUSD ($UST) stablecoin endured a significant crash from $1 to $0.30. The Terra blockchain was a platform created to peg stablecoins to fiat money, initially founded by 31-year-old South Korean Do Kwon. 

Combined, $LUNA and $UST had a market capitalization of roughly $50 billion, and the reasoning behind the crash is still unconfirmed. Interpol issued an arrest warrant for Kwan but was recently thrown out by a South Korean judge.

Three Arrows Capital

In June, Three Arrows Capital, a Singapore-based cryptocurrency hedge fund failed to meet its margin calls and repay the money lent from cryptocurrency broker Voyager Digital. The hedge fund subsequently filed for Chapter 15 bankruptcy in the United States. Not surprisingly, Voyager Digital declared bankruptcy the following month.

FTX

Arguably the biggest crypto story of the year was the fallout of FTX, one of the world’s largest crypto exchanges and custodians led by founder Sam Bankman-Fried, also known as ‘SBF.’ 

At the moment, SBF has pleaded not guilty in New York federal court to eight charges related to the collapse of FTX and hedge fund Alameda Research. He is facing charges of conspiracy to commit wire fraud and securities fraud, individual charges of securities and wire fraud, money laundering and conspiracy to avoid campaign finance regulations. In total, SBF is facing 115 years in prison.

In sum, FTX was once valued as a $32 billion company that used QuickBooks for its accounting methods, freely transferred client funds back and forth between FTX subsidiaries and Alameda Research and spent millions of dollars donating to U.S. Democratic politicians and even shadow donations to Republican politicians. FTX filed for Chapter 11 bankruptcy in the U.S. in November.

At this time, it appears FTX will be remembered as one of the biggest financial frauds in history. Depending on the total amount of money and crypto that bankruptcy auditors uncover, it will likely rank as the second largest financial fraud, right behind Enron.

Scams in 2023?

2023 has only just begun, and we are already hearing rumblings about further scams and potential defaults.

Logan Paul and CryptoZoo

Uncovered by a leading investigative journalist in the financial industry, Coffeezilla has put forward information that could incriminate famous YouTuber Logan Paul on his crypto game titled CryptoZoo.

      Binance

      This may shock most of our readers, but those in the industry wonder if Binance is financially stable after the FTX collapse. Largely, Binance has never revealed its liabilities and in fact, Binance CEO, Changpeng Zhao (also known as ‘CZ’) has indicated that the big four auditors have difficulties auditing crypto firms.

      “Many of them don’t even know how to audit crypto exchanges” – CZ, December 2022 

      Binance originally invested as a shareholder in FTX in 2019 and exited while receiving $2.1 billion in its own stablecoin ($BUSD) and in $FTT (FTX Tokens) as part of the deal. Now if Binance is forced to claw that back to FTX creditors, one wonders if Binance can remain afloat.

      What Will Happen to Crypto in 2023?

      With 2022 behind us, let’s throw out some of our predictions on what will happen to crypto and Bitcoin in 2023.

      1) Bitcoin Sees Positive Returns

      Often regarded as a hedge against inflation, we were able to put Bitcoin to the test with elevated inflation levels across the globe in 2022. As it turns out, Bitcoin’s return performed worse than U.S. stock markets. That said, Bitcoin’s network and decentralized nature have remained strong throughout a tough 2022. Crypto’s reputation was dented by the crises and scandals, but the salability and strength of its network have cemented itself as here to stay for the long run.

      Even Cathie Wood, the CEO of ARK Invest who posted a 150% return on her ARK Innovation ETF in 2020, believes that Bitcoin’s price is still on pace for US$1,000,000 by 2030.

      Bitcoin’s price chart since 2013. (Source: coinmarketcap.com).
      2) Global Bitcoin Adoption

      Currently El Salvador and the Central African Republic (CAR) are the only nations in the world where Bitcoin acts as legal currency. That will change in 2023 with likely candidates Saint Kitts and Nevis, Venezuela and Paraguay. In November 2022, Terrance Drew, the Prime Minister of the Caribbean nation of Saint Kitts and Nevis indicated the country may adopt Bitcoin Cash (BCH) as legal tender.

      Venezuela is a likely candidate as over 10% of its population owns cryptocurrency while its current year-over-year inflation rate stands roughly around 155%. Bitcoin would be regarded as a more stable currency for Venezuelans.

      Paraguay is a possibility as Carlitos Rejala, a member of Paraguay’s Chamber of Deputies has proposed a bill to have Bitcoin as legal tender in the country. Whether the bill is passed is up for debate, but Rejala has indicated he is willing to run for President which would accelerate the possibility.

      3) Regulatory Battles

      With the fall of FTX, the Ontario Teacher’s Pension Plan wrote down its stake to zero, taking a US$95 million loss barely a year after initially investing in the company. The loss has a limited impact due to the size of the fund ($242.5 billion) but these losses catch the attention of regulators and politicians. 

      We saw a movement towards further oversight in December in Canada and we will likely see more. The Canadian Securities Administration announced that it will require all crypto exchanges seeking registration to sign undertakings before they are formally under regulatory watch.

      This will take time as the wheels of government take a strong push to move, especially in an industry as complex and new as cryptocurrencies. Will 2023 be the year that regulators finally reach their limit?

      4) Rebuilding Trust

      Not only in crypto, but in many other industries like tech, rising interest rates, high inflation and a looming recession has forced many businesses to cut costs and cut them quickly. Years of zero interest rates will do that to an economy, where founders, venture capitalists and angel investors were flooded with cash and invested in any startup with a pulse.

      The crypto industry in 2023 will have to rebuild and regroup. Over-leveraged firms and poor exposure to bad counterparties will not be tolerated in crypto anymore. New firms that come into the space will have to demonstrate integrity, trust and positive cash flows in order for the industry to rise again.

      5) The Rise of Self-Custody

      Trust is at an all-time low in exchanges, which inevitably will lead to a rise in users holding their crypto in self-custody wallets. When trust is low, incumbents will consolidate, pushing investors to obtain crypto from financially stable institutions and place them in self-custody, which ultimately lowers the risk of default for many retail investors.

      If you do not own the keys, do you really own your Bitcoin?

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      Cryptocurrency and taxes in canada is a complicated subject
      Education

      Simplifying Cryptocurrency and Taxes in Canada

      Is Crypto Taxed in Canada?

      The short answer, Yes. The Canada Revenue Agency (CRA) is quite transparent about the fact that crypto is subject to income tax.

      It is important to note here that crypto is considered a commodity by the CRA and not cash. Bitcoin and other cryptocurrencies are also not recognized by traditional banks and brokerages as legitimate currencies. This will be useful as you read through the guide.

      As crypto is a relatively new commodity, tax implications have and continue to evolve. The CRA has a full guide for cryptocurrency users and tax professionals. That being said, crypto and tax are complicated subjects and we would advise speaking to a tax professional for further questions and information.

      When Do You Owe Taxes on Crypto?

      From a high-level perspective, you owe taxes when disposing of your crypto. Examples can include:

      • Selling or trading it
      • Giving it as a gift
      • Converting it to government-issued currency, such as Canadian dollars
      • Using it to buy goods or services

      Other types of tax implications involving crypto include:

      • Mining cryptocurrency
      • Being paid by your employer in cryptocurrency
      • Staking crypto in Proof-of-Stake currencies

      Because cryptocurrency is considered a commodity, simply buying and storing the crypto in a wallet will not trigger a taxable offense.

      Most people will pay tax on cryptocurrency gains from the disposition of crypto assets. When filing your income tax return, you will need to know how to value your cryptocurrencies. Valuing the crypto depends on whether it was used as capital property or inventory. The CRA has more detailed information on the difference between the two.

      Transferring crypto is tax-free. (Source: Koinly.io).

      Types of Taxes That Apply

      • Business Income

      Generally, if disposing of cryptocurrency is part of a business, the profits you make on the disposition or sale are considered business income and not a capital gain. Buying a cryptocurrency with the intention of selling it for a profit may be treated as business income.

      • Capital Gains

      If the sale of a cryptocurrency is not for carrying on a business, and the amount it sells for is more than the original purchase price or its adjusted cost base, then the taxpayer has a capital gain.

      • Goods and Services

      Where a taxable property or service is exchanged for cryptocurrency, the GST/HST that applies to the property or service is calculated based on the fair market value of the cryptocurrency at the time of the exchange.

      Source: Canada.ca/en/revenue-agency

      How To Calculate and Report Crypto On Your Taxes?

      It is very important to keep track of all financial records of your activities relating to your cryptocurrency. This information is vitally important when filing your tax returns for the 2022 fiscal year.

      Keeping full records of all crypto-related activities is absolutely necessary when filing tax returns.

      First and foremost, you should figure out whether your cryptocurrency earnings are capital gains or business income.

      Making profits while trading cryptocurrencies, such as Bitcoin or Ethereum is considered a capital gain, much in the same respect of stocks and gold.

      What does this look like? We’ll outline an example scenario below:

      Johnny purchases 1 Bitcoin, which at the time was valued at $2,000. He then decides to hold onto it for two years, during which the value of 1 Bitcoin comes to $5,000. Johnny decides to convert his lone Bitcoin into Canadian dollars.

      The difference in value when Johnny bought and sold is:

      $5,000 – 2,000 = 3,000

      Johnny has earned $3,000 from his cryptocurrency trading activity. His earnings are due to capital gains and thus he is taxable on 50% of the value, or $1,500.

      If Johnny had earned his 1 Bitcoin by mining, it would be a different scenario and actually be considered as business income. The CRA considers 100% of the amount you make from mining crypto for tax purposes and must be reported on your returns using a T2125 form.

      Avoiding Tax on Crypto

      You cannot outright avoid all taxes, but there are ways to reduce your tax bill. This may seem obvious, but at the moment you cannot directly invest in cryptocurrency through a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA).

      BUT, you can buy into an Exchange-Traded Fund (ETF) that invests in Bitcoin through a brokerage in these registered accounts.

      The gains on crypto ETFs in your RRSP are not taxed, provided you do not convert them to cash and withdraw the money. For TFSAs, your gains from crypto ETFs are not subject to tax on withdrawals.

      These crypto ETFs track certain coins and ultimately you would not own the actual coins, but shares in the ETF.

      Donating Crypto to Charity

      Donating crypto is rather interesting because it is viewed as a commodity, not as a currency, which complicates matters. An example of this is detailed below:

      You buy 1 BTC in December 2019 for $5,000. You then donate this BTC to a registered charity in December 2022 when the fair market value of BTC is $20,000.

      According to the CRA, the charity you donate to can only issue a $5,000 receipt for your donation and your donation is a disposition. You’ll need to pay Capital Gains Tax on the difference in value, so $15,000.

      Can The CRA Track My Crypto?

      Part of the essence of cryptocurrency is its anonymity. It’s almost 2023 and we still do not know the identity(s) of Satoshi Nakamoto, the founder and creator of Bitcoin. It is along these same lines that it may seem that the CRA will not find out if someone does not report their earnings or dispositions.

      The reality is, the CRA is very capable of tracking your income and finding out if you did not report all your income through audits and investigations.

      The consequence of failing to report any instance where crypto is taxable is the same with Canadian dollars: tax evasion. This should be avoided at all costs and it is wise to report your earnings as accurately and honestly as possible.

      Bitcoin Taxation in Canada Still Evolving

      It is important to understand that cryptocurrency is still a relatively new innovation for investors. The CRA does provide a detailed guide on the tax obligations associated with crypto.

      An area that could receive some attention is the possibility that a single Bitcoin transaction can include thousands of sub-transactions inside it. The idea of keeping track of thousands of transactions seems rather daunting for a single individual. Possibly there may be a solution to this in the future.

      Another example is the lack of consistency in accounting methods for Canadian crypto businesses, whether they use the First In First Out or Weighted Average methods.

      That said, the CRA is continuing to develop and correctly detail taxable instances for crypto.

      While much of the phrasing used by the CRA may not correctly correspond to the phrasing used in the cryptocurrency space, it is evolving and becoming easier to understand and apply than in prior years.

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