It’s going to be some time before we really know how badly the cryptocurrency bubble and subsequent collapse has hit the retirement savings of people who can’t really afford it.
But we are already getting some idea of the damage. And it’s worse than you might have imagined.
A massive analysis of more than 1 billion U.S. tax returns covering the years 2013 to 2020 shows how the crypto bubble spread from Wall Street to Main Street, from coastal cities across the country, and from people working mostly in finance and technology to people working in every trade.
Jeffrey Hoopes, of the University of North Carolina’s Kenan-Flagler Business School, and Jaron Wilde and Tyler Menzer, of the University of Iowa’s Tippie College of Business got the cooperation of the IRS to analyze (anonymized) tax return data. Their research covered the returns of more than 200 million people. They looked at all those who reported sales of bitcoin or Ethereum, by far the biggest cryptocurrencies.
Some 2.6 million returns showed crypto transactions.
Among their remarkable findings? More than a quarter of the people reporting cryptocurrency trades on their tax returns earned less than $10,000 in taxable income. Less than half had taxable income above $40,000.
In 2020, the median taxable income of someone reporting cryptocurrency gains or losses on their tax returns was only $32,000.
Oh, and these numbers only ran up to the end of 2020. That was before the final, massive blowout in 2021—from which this year’s collapse has wiped out $2 trillion in notional wealth. History and logic say that the final year, at the highest prices, will be when the most people on Main Street bet the most money.
Among the many bitter ironies is that the people pushing cryptocurrencies marketed them as a way of “democratizing” finance, of somehow giving power to “the people” versus the “elites.” The reality, of course, was almost exactly the opposite. From the spring of 2020, amid the Covid lockdowns, the resulting social disorder, and a torrent of Federal Reserve money, Wall Street insiders began hustling crypto everywhere they could, drawing the suckers in. These digital lottery tickets have resulted in a transfer of wealth from regular folks on the outside, who piled in at high prices toward the end, and toward sharp people on the inside, who sold what the others bought.
In 2013, according to the new research, fewer than 7,000 U.S. taxpayers reported cryptocurrency gains or losses on their tax returns.
In 2017, the year of the first crypto bubble, it was 120,000.
In 2020? Try 1.6 million.
And, like I said, we don’t yet know the figures for 2021.
Driving it all was the dream of scoring it big. Everyone knew somebody who knew somebody who had made “millions” from bitcoin or Ethereum or some of the other 22,000 digital currencies. Yes, this truly happened, tax data show. But rags to riches stories were rare. The median cryptocurrency profit across everyone who traded was a princely $27.
And most of those making big money from crypto were already making big money. The average wage income, among those reporting over $1 million in crypto gains, was $366,000.
The ultimate cost of those crypto losses at the bottom of the economic ladder will be much greater than they seem right now. There is, after all, a retirement crisis in America. It’s worse the less you have (obviously). And simple financial mathematics tells us that a dollar lost at 30 is the same as $7 — in constant money — lost from the retirement savings you’ll need for the final third of life. A dollar lost even in your mid-40s will cost you about $3 in retirement savings.
The limited good news is that those who have lost their shirt buttons on cryptocurrencies can at least use those losses to shelter today’s and tomorrow’s capital gains and income from taxes. So long as you kept your documents, of course. Capital losses can be used to offset capital gains, and any 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 income. (Mean Congress hasn’t indexed that figure to inflation over the years, so it is becoming less and less valuable. Look on the bright side, though: Your Congressperson has heroically defended massive tax loopholes for the hedge fund billionaires who finance their campaigns!)
The crypto crash raises again the persistent pension problem. Once upon a time, the typical person’s retirement account was managed by a pension fund. Today we’re handling the money ourselves. Some or many will choose to gamble. If they end up in penury, everyone else will end up supporting them.
Meanwhile, there is also some light comedy in the tax returns, the researchers report.
Based on their online Google activity, by 2020 the hottest state for crypto was (appropriately enough) Nevada. Yet Nevadans reported hardly any crypto gains, even in 2020.
“Somewhat puzzling is the relatively low cryptocurrency taxpayer reporting rates in Nevada, which had the highest Google Trend for bitcoin out of all 50 states,” the researchers report.
Gosh, they couldn’t have left their crypto gains off their tax returns, could they?