It will be some time before we really know how much the cryptocurrency bubble and ensuing collapse have affected the retirement savings of people who can’t pay them in full.
But we already have an idea of the damage. And it’s worse than you could have imagined.
A massive analysis of more than a billion US tax returns spanning the years 2013 to 2020 shows how the crypto bubble spread from Wall Street to Main Street, coastal cities across the country, and people who primarily work in the financial and technology industries to people who work in every company.
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Jeffrey Hoopes of the University of North Carolina Kenan-Flagler Business School and Jaron Wilde and Tyler Menzer of the University of Iowa Tippie College of Business secured the cooperation of the IRS to analyze data (anonymized) from tax returns. Their research included feedback from over 200 million people. They looked at anyone reporting the sale of bitcoin or Ethereum, by far the largest cryptocurrencies.
Some 2.6 million returns showed crypto transactions.
Among their notable finds? More than a quarter of people who report cryptocurrency transactions on their tax returns earned less than $10,000 in taxable income. Less than half had taxable income over $40,000.
In 2020, the median taxable income for someone reporting cryptocurrency gains or losses on their tax returns was just $32,000.
Oh, and those numbers didn’t run until late 2020. That was before the last, massive blowout of 2021, the collapse of which wiped out $2 trillion in theoretical wealth that year. History and logic say that last year, at the highest prices, will be the year when most people on Main Street bet the most money.
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One of the many bitter ironies is the fact that the people pushing cryptocurrencies have marketed them as a way to “democratize” finance, to somehow make the “people” stronger than the ” elites”. The reality, of course, was almost the exact opposite. Beginning in the spring of 2020, amid the Covid lockdowns, ensuing social disorder, and an outpouring of money from the Federal Reserve, Wall Street insiders began using crypto everywhere they could, attracting suckers. These digital lottery tickets transferred wealth from ordinary people on the outside, who piled up high prices towards the end, and sharp people on the inside, who sold what others bought. .
In 2013, fewer than 7,000 U.S. taxpayers reported cryptocurrency gains or losses on their tax returns, according to the new research.
In 2017, the year of the first crypto bubble, there were 120,000.
2020? Try 1.6 million.
And, as said, we do not yet know the figures for 2021.
Driving everything was the dream to score big. Everyone knew someone who knew someone who had made “millions” from bitcoin or Ethereum or any of the other 22,000 digital currencies. Yes, it really happened, tax records show. But rags-to-riches stories were rare. The median cryptocurrency profit for everyone who traded was a princely $27.
And most of those who made a lot of money from crypto were already making a lot of money. The median salary income, among those who reported more than $1 million in crypto income, was $366,000.
The ultimate cost of these crypto losses at the lower end of the economic scale will be much higher than currently appears. After all, there is a pension crisis in America. It’s worse the less you have (obviously). And simple financial math tells us that a dollar lost by age 30 equals $7 — in constant money — lost in the retirement you’ll need for the last third of your life. A lost dollar, even if you’re in your mid-40s, will cost you about $3 in retirement savings.
The limited good news is that those who lost their shirt buttons on cryptocurrencies can at least use those losses to house capital gains and tax revenue for today and tomorrow. Provided you kept your documents, of course. Capital losses can be used to offset capital gains, and unused losses can be carried forward and used to offset losses in future years. You can also use up to $3,000 of your losses per year to offset your earnings. (Mean Congress hasn’t pegged that number to inflation over the years, so it’s becoming less and less valuable. Look on the bright side, though: Your congressman has heroically argued for massive tax loopholes for American billionaires. finance!)
The crypto crash once again raises the lingering issue of pensions. Once upon a time, the average person’s retirement account was managed by a pension fund. Nowadays we manage the money ourselves. Some or many will choose to play. If they run into scarcity, everyone will end up supporting them.
Meanwhile, there is also light comedy in the tax return, the researchers report.
Based on their online activity on Google, Nevada was the most popular state for crypto in 2020. Yet people in Nevada have reported virtually no crypto gains even in 2020.
“What is somewhat puzzling is the relatively low percentage of cryptocurrency taxpayers in Nevada, which had the highest Google trend for bitcoin out of the 50 states,” the researchers report.
My god, they couldn’t have left their crypto income on their tax returns, could they?