Month: November 2020

 Preface: If you don’t believe it or don’t get it, I don’t have the time to try to convince you, sorry. – Satoshi Nakamoto

Virtual Currency: Looking Forward

Credit: Donald J. Sauder, CPA | CVA

The virtual currency ideal began conceptually in the early 1980s when David Chaum, while studying at Berkley, wrote a research paper on online advancement possibilities for economic payments and transactions with a system called eCash. In the early 1990s, he developed a second system called DigiCash that used virtual processes to make economical transactions.

As the forerunner of the virtual currencies, DigiCash was unable to scale successfully as the company lacked cohesive direction, partnerships with large financial institutions, and the fact that the internet and smartphone technology had not yet fully integrated with e-commerce. The archetype DigiCash disappeared from the virtual currency space after a Y2K coding glitch, and the intellectual property was sold, with an interesting footnote, to the ubiquitous online virtual payment space PayPal.

One defining feature of a virtual currency is that it is not issued by a central authority and backed by a central bank or authoritative organization. The United States government assigns responsibility for counterfeit money and other currency-related regulation to the United States Secret Service. Therefore the faith to transact in US dollar currency is maintained confidently without substantial fear of counterfeits.

On the contrary, virtual currencies are consequently effectively immunized from authoritative regulations, have no governing group to prevent loss of confidence, and are the Chief Shehaka’s developing western frontier of speculative virtual contrarians. Financial regulators are increasingly opposed to virtual currencies since they facilitate cross-border transfers, money laundering, tax avoidance, and other fraudulent financial practices.

With the omission of an authoritative security framework with virtual currencies lacking such inherent and government umbrella protections, certain risks are inherent in any virtual currency transactions, as outlined as follows.

Hackers can drain virtual currency wallets, and users and investors are entirely reliant on computer security systems and third-party systems. This lack of substantial internal control can lead to stolen passwords or compromised passwords with the same or similar effect as being denied access to an impenetrable vault with valuables. If a virtual currency wallet key is lost from operational risks with cryptography or stolen perhaps, the original account owner’s virtual assets will be lost forever, devoid of remedial measures. There are no safety nets or reversible transactions in the virtual currency system.

Market risks are also present with virtual currencies, and a lack of transactional liquidity and market manipulation can result in speculative volatility to the virtual asset value. Tax risks with Foreign Bank Account Reporting with virtual currencies stored abroad are also applicable and necessitate compound tax compliance factors.

While the Federal Reserve doesn’t have the authority to supervise or regulate virtual currencies, such as Bitcoin, Ethereum, Ripple, Litecoin, Tether, and EOS, it has not stopped virtual currencies from progressing and creating wealth for miners and speculative currency investors. Interestingly, the true legend of Bitcoin is the person credited with developing it, Satoshi Nakamoto may not be a real person, as no one has every met them. The name is likely a pseudonym for the creator or creators of Bitcoin who wish to remain anonymous.

Virtual currencies are here to stay. Legendary investor Jim Rogers has stated that virtual currencies will likely meet government defense departments’ force one day in the future. At that time, economies will experience a currency transformation, unlike any in human history.

Instituting appropriate compliance with relevant tax laws on pertinent virtual currency transactions, and being wary of the risk(s) is therefore advised. Please contact your tax advisor if you own virtual currency.

This article is general in nature, and it does not contain legal advice. Please contact your accountant to see what applies in your specific situation.

“Stay away from it. It’s a mirage, basically. In terms of cryptocurrencies, generally, I can say almost with certainty that they will come to a bad ending.”  –  Warren Buffett

Taxation of Bitcoins and other Virtual Currency

Credit: Donald J. Sauder, CPA | CVA

In recent years, The Internal Revenue Service has now issued a decree that all virtual currency transactions are henceforth taxable. This includes Bitcoin, Ethereum, Ripple, Litecoin, Tether, and EOS. Concerningly, to tax advisors in the age of information, many virtual currency users continue to be unaware of the increased non-compliance risks and continue to blissfully transact with any number of virtual currencies absent consideration of IRS tax implications.   

The IRS classifies virtual currency as a digital representation of value, other than a representation of the U.S. dollar or a foreign government authorized currency that functions as a unit of account, a store of value, and a medium of exchange. Some virtual currencies are convertible, which means that they have an equivalent value in real currency or act as a substitute for real currency; and are a digital medium of exchange, such as digital currency and cryptocurrency.

Cryptocurrencies are a type of virtual currency that utilizes cryptography to secure transactions digitally recorded on a ledger, such as a blockchain. Units of cryptocurrencies are generally called coins or tokens.

Fortuitously, the IRS has instituted property tax laws to virtual currencies instead of currency for federal tax purposes. Therefore, in exchanges of one virtual currency for another, while a taxable transaction is subject to propitious capital gains taxes instead of higher ordinary income tax rates.

However, mining activities for virtual currencies and payments received for services from virtual currency payments representing earnings income may be ordinary income tax rates. You join a group of virtual currency miners, and your share of electricity is $10,000, and you receive $17,000 of coin value. You will have $7,000 of ordinary taxable revenues for IRS purposes.

Payments for services as an independent contractor from virtual currency are subject to self-employment income and self-employment FICA taxes. Additionally, wages or salaries paid in virtual currency are per the IRS code remuneration for employment tax purposes and subject to federal income withholding and both FICA and FITA reporting. Since Federal taxes on the IRS form are subject to U.S. dollar currency values, the income you must be recognized is the fair market value of the virtual currency in U.S. dollars when received if you’re receiving payments for services in the virtual currency, you’re advised to keep costs tabulated and tax implication measures.

The IRS continues to closely monitor the growing fields of virtual currency exchanges, and in 2017 they investigated Coinbase. Coinbase’s extensive crypto exchange has almost 6 million registered members and fewer than 1,000 of those filed a tax return for implicit gains on the virtual currency. Following a legal directive, Coinbase delivered a few thousand names to the IRS. A corresponding number of IRS letters were issued to virtual currency account holders issuing a warning. They would be advised to begin tax compliance before an audit as a good faith encouragement. Taxpayers incorporating virtual currency transactions are advised to regularly consult with their tax advisors on increasing tax compliance and regulations to keep apprised of tax law revisions regarding virtual currencies.

Also, paying for services with virtual currencies held as a capital asset, upon the exchange will incorporate a taxable transaction with either a reportable capital gain or loss. Virtual currency received as a gift will not be recognized as income until exchanged or sold. If you cannot substantiate the donor’s basis, your tax basis is zero in the virtual currency property. The capital gain on virtual currency gifts is either the day you receive the gift or the day from documentation substantiating the donors holding period of the virtual assets.

A charitable organization receiving virtual currency donations will attribute such gifts to non-cash contributions and advised to consult with a tax advisor before embarking on such contribution receipts.

Preface: “Talent wins games, but teamwork and intelligence win championships.”  Quote from Michael Jordan

Are Leading Entrepreneurs Considering the Ants? (Segment IV)

Credit: Donald J. Sauder, CPA | CVA

Teamwork

Ants, like robots, have an innate talent to work admirably as a team. Ants carry upwards of an incredible fifty times their weight. Ants travel in large numbers when hunting or farming, and this gives them a significant probability of warding off risks that individually would be insurmountable. Again, together ants can accomplish what would impossible individually, from defending the colony to vast territory hunting and farming collection activities. Ants very infrequently can join a new colony. If an ant colony is destroyed or an ant is separated from their native colony, most new colonies will reject the foreigners. However, infrequently, if the captive orphan ant can contribute successfully towards the new colonies’ progress, they will be adopted. This gives ants fierce loyalty to their fellow members and teammates in their native settlement. Ants understand and appreciate their position and responsibilities in their colony and peacefully conduct their activities unless threats occur to the colony’s status quo.

Google is a ubiquitously known organization in both households and businesses, and one quest that they continually invest in is to understand teams better. Project Aristotle was one such specific initiative for this purpose. Many Google executives believed that building the best business team was to assemble the best people into a group. You combine the best engineers, MBA’s and Ph.D.’s, and you’ve automatically created the best team for a business.

The collaborative research resulted in struggling with the lenses in ideas and practices to determine a great team’s characteristics leading to a conclusive five key points that top teams exhibit. 1.) Dependability: A successful team member must be dependable and get things done on time and within expectation. 2.) Structure and Clarity: High-performing teams have clear goals and well-defined roles within the group. 3.) Meaning: The work has personal significance for each member. 4.) Impact: the group believes their work is purposeful and positively impact the greater good. 5) Psychological Safety: the Project discovered unnervingly that quantitative data alone, as may be hoped, was not the core platform of great teams, such as superior IQ, credentials, and education.

Google discovered with Project Aristotle that they began to make noticeable breakthrough progress when they started looking at specific intangibles of the teams, such as group norms. The researchers’ recurring progress was in part from analyzing the existing research theme from earlier psychologists and sociologists that reflected on “group norms” – the traditions, behavioral standards, and unwritten rules that govern how teams function when they gather.

Group norms can be unspoken or openly acknowledged, but their influence is often profound. Therefore, business teams assembled with safe zones for employees, where they feel secure from seeming incompetence, or other fears of risk in voicing their opinions, or asking judgment-free questions or other danger(s) and insecurities from a lack of shared group norms, was the underlying foundational component for a business to a building and excel with a dream team.

In entrepreneurship, shared “group norms” are one of the big secrets to great teamwork.

Ants also exemplify perfectly one of the greatest secrets of successful and champion teamwork aligned and similar to “group norms”– the right chemistry. The “Miracle on Ice” U.S Hockey team of 1980 was chosen based on chemistry and not talent alone. We can learn from Malcolm Merkin who wrote the following in his article How Teamwork Led Mike Eruzione to Olympic Victory 

(In the 1980 Winter Olympic Games), Twenty-five-year old captain Mike Eruzione played a prominent role in bringing home the gold for the USA (and from) Soviet professionals. Eruzione’s parents taught him to pursue and expect success, but not to take anything for granted. Sporting his older sister’s white hand-me-down figure skates, the future gold medallist learned to skate on the sand traps of a nearby golf course.

Since his mother would not allow young Michael out on the lake with the older kids, iced-over sand traps provided an excellent training ground for a small but determined, Eruzione. By the age of eight, he had demonstrated that he was committed to becoming a hockey player, so, with saved up S&H green stamps, his mother bought him a pair of bona fide hockey skates. “The only rule that we had around the house was that if you signed up for something, you had to commit yourself to work hard and stay with it.

You couldn’t quit the team or pout if you didn’t score any goals. It was a case of playing because you wanted to enjoy yourself.”…. I wouldn’t come home and say `I’m the best player on the team,’ or `I’m going to be a pro player because I’m better than the next guy.’ I always took things in stride and was part of a team. To me, the team was always more important than how well I was playing.”

Both Olympic teams in the famous US Olympic victory were chosen for their teamwork chemistry instead of individual sheer talent. Ants excel at shared group norms and importantly the chemistry feature of teamwork. The ants have no personal ego, pride, or other individual motives in their endeavors, because of supposed superior ability.

The worker ant’s dedicated teamwork focus is on the commitment to the successful furtherance of their colony. That teamwork approach has helped them successfully thrive for millenniums. This is team “chemistry” and “group norms” core component is genuinely most clearly evident among successful family entrepreneurial teams. Likewise, when (entrepreneurial) teams are procured with the right chemistry, amazing things happen that talent alone cannot achieve.

 

Preface: I believe that robots should only have faces if they truly need them. Quote from Donald A. Norman

Are Leading Entrepreneurs Considering the Ants? (Segment III)

Credit: Donald J. Sauder, CPA | CVA

Set Deadlines

Ants know what task(s) they are responsible for as members to further the colonies’ vitality. Because they are respectable, responsible “social entrepreneurs,” they approach each colony’s responsibility or task with fastidious and accountable action. There isn’t time to be lazy in a nation of ants or time to look for short-cuts of responsibility or shifting the burden. Ants exhibit the same 20-Mile March theory outlined in the business book Great by Choice. This is steady, consistent, and uniform progress towards the project destination or goal, day after day, and month after month.

Those readers who have had the privilege to enjoy a homework assignment in school will understand the pressure of deadlines. Classroom success requires preparing the essay before a particular class day or have today’s lessons designed before class tomorrow. Sometimes multiple mid-year exams were on the same day. The ultimate goal of these individual classroom deadlines is for responsible participants to understand thoroughly the concepts being taught to be prepared for the final class examination(s).

When an (entrepreneurial) project matters, and that is most of the time, assigning project deadlines and focusing those resources involved and responsible for prioritizing time to complete that task or project either individually or as a team effectively, whether preparing an ice-cream cone for sale or painting a vehicle. The planning and accountability on a project deadline can help keep workload appraisals realistic.

Project deadlines help manage scheduling with preventions extra projects or meetings that could interfere with a deadline. Unfortunately, some managers drive deadlines and project workload expectations that require 101% or 110% from the team to achieve. This compels long hours and stressful work expectations and can lead to eventual failures in diminished energy for a team’s long-term success. Although on the contrast periodically from time to time, extra demands are typical of many roles. Procrastinators often fail in environments with tight deadline expectations, and being responsible for nonessential projects or task specifics are more appropriate for team management.  

Keeping project completion deadlines and achieving them on schedule and budget are the fields of top-teams. When used effectively, setting realistic deadlines and completing them successfully can provide the satisfaction of a job well-done, and the sweet taste of achievement, as enjoyed by leading performers. The setting, keeping, and achievement of realistic deadlines satisfactorily reveals the true capabilities of any team.

Division of Work

Henri Fayol, who started his career as a mining engineer in France in the 1860s, and eventually became director of a company with more than 1,000 employees, developed Fayol’s 14 principles of Management. The first of those 14 principles is the division of work. During the Dark Ages, markedly concluding with the Bubonic Plague that brought a profound shift to the world from the effects of an array of social, economic, cultural, and religious changes in ways of life – blazed the trail towards a new ear, leading to the Renaissance. This was the beginning bud of the most significant epochs for art, architecture, literature in human history, and the early blossoms of the division of work. This concept of division of work was introduced early in Plato’s Republic “Well then, how will our state supply these needs? It will need a farmer, a builder, and a weaver, and, I think, a shoemaker and one or two others to provide for our bodily needs”.  Yet, until the years of the Renaissance, these concepts gained limited mileage towards more free markets, and therefore the division of work that is enjoyed in today’s economies. 

Friedrich A. Hayek, in the written work The Use of Knowledge in Society first published in September 1945, proposed that a centrally planned economy could never match the efficiency of the open market because what is known by an individual member of society is only a small fraction of the sum of knowledge held by all members of the community. 

A decentralized economy thus complements the dispersed nature of information spread throughout society. Quoting “The price system is just one of those formations which man has learned to use (though he is still very far from having learned to make the best use of it) after he had stumbled upon it without understanding it. Through it, not only a division of labor but also a coordinated utilisation of resources based on an equally divided knowledge has become possible. The people who like to deride any suggestion that this may so usually distort the argument by insinuating that it asserts that by some miracle, just that sort of system has spontaneously grown up, which is best suited to modern civilisation. It is the other way round: man has been able to develop that division of labour on which our civilisation is based because he happened to stumble upon a method which made it possible. Had he not done so, he might still have developed some other, altogether different, type of civilisation….”

One ant study performed with the observations of organizational researchers objectively proved that in one ant colony, a single ant transported 57% of all items moved in a colony emigration, suggesting that small colonies are incredibly dependent on a few key individuals. This free-market observation provides a landscape feature of when the ambition to work is given appropriate latitude. Secondly, on observation, each ant’s amount of work was more evenly distributed in larger colonies. From scout ants to carrier ants, these social entrepreneurs instinctively divide responsibilities effectively  to maintain, build and grow existing and new colonies successfully. With this clear and classified division of work, ants successfully continue to thrive as “social entrepreneurs” in their colony environments as they have since the ancient days of the Proverbs writer’s reflections.

As (business) knowledge continues to exponentially lead to innovations, from candlestick makers to electricians and shepherds to fence builders and doctors to surgeons, and laborers  to robots, the concept of division of labor continues to successfully segregate the production or manufacturing of the product(s), distribution warehouses, and retail sale storefronts into individual enterprises for entrepreneurship. Have ant colonies developed this economic model in colonized successes over period of time or have they been quietly and industriously implementing this economic model since the first days of their creation?