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Hey friends 👋
If you're a regular reader of the newsletter, you'll know that I'm a big fan of the web3 creator economy. Protocols like Mirror, Paragraph, and Zora make it easy for fans to support their favourite creators by minting digital collectibles of their artworks, songs, writing, etc.
When these new primitives were introduced, no one knew how to price them, resulting in a lot of underpriced and overpriced collectibles. In an effort to provide the best user experience, Zora introduced the concept of protocol rewards. The flat fee of 0.000777 ETH that Zora charges when someone mints an NFT is divided among various stakeholders in a project. These stakeholders include the creator, referrers, the first person who mints the NFT, and, of course, Zora for providing the infrastructure.
As you can see from the above table, there are two versions of protocol rewards: one for free mints, which reward the creators more, and one for paid mints, which reward all other stakeholders. This is because the protocol fees are charged to the person who is purchasing (minting) the collectible, not to the creator.
These fees are, if you think about it, kind of like a tax, akin in some ways to sales tax, except handled entirely within the protocol's ecosystem. Like all taxes, how you feel about that is probably going to depend on whether or not you feel there is value being returned to you. In this example, I think Zora has done an excellent job in isolating all the key stakeholders and rewarding them for helping to propagate the protocol. I'm not alone in this view either, as a number of protocols have rolled out similar rewards structures and the response from the users has been largely positive.
This brings us to the subject of this month's newsletter...
Are Taxes A Good Thing?
Public goods are good, but they don't pay for themselves. Throughout history, we've seen that when private interests are left to handle infrastructure, they do so in ways that are shoddy, self-serving, and deeply inefficient.
For example, during the gilded age, railroad tycoons often built identical railroad lines parallel to each-other, working labourers to death in an effort to build faster and cheaper, for no other reason than to watch their competitors go out of business so they could become monopolies and once again raise prices.
In the years that followed, the US would move further away from trains towards transportation and transit by road vehicles. However, during this time, there was little to gain by building and maintaining roads, as it was difficult to extract value from the users. Tolls could work, but they are unpopular and require additional investment in toll booths and employees to operate them. Instead, it was the US government that funded the highways.
Regardless of what any of us think about car culture or urban sprawl, this government investment in the highway system undoubtedly helped to fuel the US's economic growth, further productive output, and entrench the US as a globalist economic superpower. Every business who serves physical products to their customers and every citizen who consumes physical goods likely owe some debt to the highway system.
And yet, for decades, the US government has ignored crumbling infrastructure, and private industry has not picked up the slack, opting instead for investments in products like drones that provide exclusive competitive advantage.
The example of roads was chosen instead of mentioning the environment, healthcare, or education as arguments for funding these kinds of public goods are often met with debate. But regardless of the specific cause, product, or service being offered, if the goal is to provide positive sum outcomes to the broadest target group for the lowest cost to the user, the easiest way to do so is by redistribution.
And you don't have to take it from me...
Adam Smith on Taxes
The great grandaddy of capitalism, beloved by classical liberals, in particular those on the right, Adam Smith was very much in favour of taxation.
Backing up a bit: Smith, the Scottish economist and philosopher, whose seminal work The Wealth of Nations was published in 1776, the same year the United States declared independence from Britain, is known for his concepts of the invisible hand of the market, free-market competition, and division of labour; ideas which many have come to view as core tenets modern capitalist economies.
But there amongst the pages of this multivolume work he posited what he perceived to be a rational system for taxation based on four core ideals.
I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state...
II. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person...
III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it...
IV. Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state...
Source: The Wealth of Nations (Book V, Chapter 2); Citation by Britannica
Smith's ideas about taxes are fundamental to the modern tax system, and while not all agree with them, one seems harder than others to argue. The ability-to-pay principle argues that taxes should be levied at the points where an individual has the capacity to pay them. Some obvious options are when income is earned (income tax), when one is in possession of substantial net worth (wealth tax), when one disposes of their wealth by spending it (consumption tax; sales tax), or when one inherits wealth (inheritance tax).
Each of these types of taxes have their critics. For example, some argue that consumption tax is preferable as it encourages saving, where income tax does not (at least not outside of modern tax-sheltered accounts). Others argue that wealth needs to be taxed to prevent those without clear income, like for example private art collectors and capital owners, who borrow against their assets rather than earning taxable income, to adequately contribute value to society. I'm a fan of this argument for one reason which neither Smith nor most economists tend to address.
As a collectivist, I worry that societies with an ultra-rich class resemble too closely feudalism. Hoarded wealth at such grandiose scale by people like Elon Musk and Jeff Bezos does not benefit society, industry, or even these wealthy individuals or their families. That is, except in one key, frightening way: hoarding wealth instantiates a class divide, forcing a power asymmetry. In other words, it ensures that the ultra-rich, like lords and kings before them, could do as they please and that effectively no one else could stop them.
This kind of asymmetry undoubtedly creates turmoil in society, until the point at which the masses remember that they physically outnumber those in seats of power. Countless revolutions have served to remind us that kings, lords, and oligarchs have no place in modern society, and simple redistribution of wealth by taxation is a lot friendlier way to restore balance than the guillotines of revolutions past. Whether or not the ideal form of taxation is a straight tax on total wealth, a harberger tax on property, higher consumption taxes, or something else entirely is a discussion for another day.
For now, let's look move on to a more practical subject.
Crypto Tax Basics: Capital Gains
It's February which means it's time for to start thinking about the upcoming tax season. If you're a regular reader of my newsletter, you're probably the kind of person who owns some cryptocurrency, maybe buys and sells NFTs occasionally, or is at least curious. Those in the latter, curious crowd, may be interested in crypto and NFTs having previously explored other kinds of capitalist endeavours like stock trading or real estate investment.
Lucky for you, what I'm about to explain applies to all of these activities, and should be understood by those who participate. Let's start with with the basics...
What are Capital Gains?
A capital gain is, in simplest terms, the difference between the price you paid for an asset and the price you sold it for. If the difference is positive (i.e. I bought for $1000 and sold for $2000) this is a capital gain (of $1000). If the difference is negative (i.e. I bought for $1000 and sold for $500) this is a capital loss (of $500).
How these gains or losses are treated depends on the rules of your particular jurisdiction, as well as some nuances around the particulars of the investment. In the interest of brevity, let's focus on the two jurisdictions with which I have some familiarity: Canada and the US.
First though, a disclaimer.
I am not a tax professional. Nothing in this newsletter, or anything I've ever written, is financial or tax advice. It is ideal to speak to a tax professional about your particular needs.
With that out of the way, let's get into it.
Capital Gains Taxes in the Canada
In my home country of Canada, capital gains tax is relatively straightforward. For any given sale of an asset, we consider:
sale price - (purchase price + expenses like trading fees, blockchain gas fees, etc) = capital gain
In Canada, only 50% of a capital gain is taxable. And this amount is taxed as income at the progressive rate where it falls.
Let's look at an example:
I buy $1000 of DEGEN tokens on Base network
I don't pay any fees for the swap, but I do pay a $0.50 fee to the network
I sell that DEGEN for $5000 in USDC
Again I don't pay any swap fees, but I pay another $0.50 fee to the network
I send USDC to Coinbase using Coinbase wallet to avoid paying fees
I convert USDC to fiat on Coinbase to avoid paying fees
Therefore my capital gain is:
$ 5000 - (1000 + 0.5 + 0.5) = 5000 - 1001 = 3999
My taxable gain is then:
$ 3999 / 2 = 1999.5
So it's as if I earned $1999.50 more income which would be taxed according to the federal and provincial tax brackets where it falls. For me, personally I'd owe about 30% of this amount or:
$ 1999.5 * 0.3 = $599.85
So, with respect to this particular transaction, I'd want to have at least that much set aside until tax season.
Note: there are some nuances around frequency of trading, where up to 100% of the capital gain may become taxable. I think this applies mostly to those who are career traders and more specifically, day traders. If that's you, the above may not be a sufficient example.
(Short-Term) Capital Gains Taxes in the the US
In the US, Capital gains taxes are a bit more complicated. They are built in a way that is supposed to benefit long term investors, but the result seems to benefit the tax industry far more than anyone else. By my understanding, the following is true: short-term capital gains are taxed the same as income.
A short term capital gain is a gain from the sale of anything held for under 1 year. Like in Canada, we consider the capital gain to be:
sale price - (purchase price + expenses like trading fees, blockchain gas fees, etc) = capital gain
Using the exact same DEGEN example from above...
$ 5000 - (1000 + 0.5 + 0.5) = 5000 - 1001 = 3999
...our taxable short term capital gain is the full $3999.
Let's assume I lived in Colorado and make $50k a year. My exact tax burden requires calculating the different portions of my income in each marginal tax tier, but with respect to this $3999 we know that it will be taxed in the third tier federally an thus will be subject to 22% as well as the flat tax rate of 4.4% from Colorado, for a total of 26.4% combined.
So I could expect to owe approximately:
$ 3999 * 0.264 = $1055.74
So, with respect to this particular transaction, I'd want to have at least that much set aside until tax season.
(Long-Term) Capital Gains Taxes in the the US
A long-term capital gain is a gain from the sale of anything held for over 1 year. Once again, using the same examples as before:
$ 5000 - (1000 + 0.5 + 0.5) = 5000 - 1001 = 3999
We have $3999 of taxable capital gains. Long-term capital gains are taxed at a flat rate that is lower than income tax rates. Given my same example, this capital gain would be subject to 15% federal taxes plus 4.4% Colorado state taxes for a total of 19.4% combined.
So I could expect to owe approximately:
$ 3999 * 0.194 = $775.81
So, with respect to this particular transaction, I'd want to have at least that much set aside until tax season.
A Note on Crypto Taxes
If you're a regular user of cryptocurrencies, keeping track of all the details of your many transactions can be extremely difficult. To complicate things further, many of us are spread across several chains and even centralized exchanges. This is where specialized software is immensely useful. I've tried a number of options and nothing has worked as well for me as Crypto Tax Calculator. That's why, for the second year in a row, I reached out to them to sponsor and to provide discount codes for readers.
Use code TUTAKE15 for 15% off. Thanks to Crypto Tax Caluclator for sponsoring this issue.
From Sponsors to Patrons
While Crypto Tax Calculator has provided me with a free Pro plan for the year, I didn't receive any direct financial compensation from this sponsorship. In fact, it's been a while since anyone sponsored me to make content (I always mention it so you'd know). As I've written before, the people who make this content possible are my fans. Those of you who collect my articles on Mirror and Paragraph, send me tips directly, and mint my NFTs are all helping to ensure I can continue this little project of mine for a third consecutive year.
This year, I'm offering a new way to support directly ochain via Fabric's new Hypersub protocol. Here's a quote from my announcement of my new subscription, Subs Up, in December:
Subs Up is a way to become a monthly patron for the term of your choice by choosing how many months to support for and minting the corresponding NFT. It's paid with ETH on Optimism mainnet and each month is priced at 0.0042 ETH, or about $10 at today's prices. It's not a streaming payment and currently there's no way to pay by credit card, but that may be in the works so stay tuned.
I'm really excited about the unique opportunities this approach allows for, especially in terms of making it easy to offer perks to patrons.
Speaking of perks, here are some of the benefits for subscribers:
Q&A: For as long as a patron is active, they will have direct line of communication with me, allowing them to send in questions and comments which I will try to incorporate into future content. One example of this is Q&A, a feature for existing patrons that allows them to ask a question to be answered long-form in the monthly newsletter. Question-askers may request to be anonymous or have their social handle/ENS featured as a form of self-promotion.
Recognition: Each newsletter will include a list of all patrons active at the time of publishing. For patrons with higher value commitments there may be additional flair to indicate their support.
NFTs: Each patron who commits to 3 months of patronage or who renews for 3 months or more, will receive a free airdrop of my animated clay NFT "Hey Friends!"
More NFTs: During each month of active subscription, holders will receive any free mints from my thumbsup.eth or retrofuturist.eth projects as airdrops. Paid mints (should they occur) will either be discounted, whitelisted, airdropped at my discretion.
Subscriber rewards are enabled at 2.5% with bonus multipliers for early supporters.
Referral rewards are set at 5%
And there's even more, including unlockable stretch goals, all of which can be found here ⬇️
In our new Warpcast group chat for patrons, Taliskye asked the following question, which I've rephrased for clarity:
Lately I've been thinking about how culture develops around different projects. It's been great to see the way communities form around protocols (Zora, Basepaint, Farcaster) and tokens/airdrops (Degen), not just to speculate on price but to build things, collaborate, have fun, and support creators and developers.
What similarities have you noticed between these projects that has helped them to be build such great culture? What can other projects learn from them?
I think you've highlighted something that I've been thinking a lot about recently too: the complete shift in vibe in the crypto space. Through the bear market we lost a lot of the pump-and-dump culture. It's not dead, as we're seeing a bit more of it lately, again but it's way way less than during the last bull market. The people who stuck around through all this were builders and real devout decentralization enthusiasts and that's why the culture has improved.
All technologies go through phases. There's a mania where some get super rich and some get super rekt. That leads to a lot of negative opinions of the technology and abandonment by average users. Then there will be several more hype bubbles, some becoming manias as well; each proceeded by another bear market.
Through all of this, though, the technology is continually refined, finding new use cases and bringing in more people. At the same time, folks who've stuck around through the worst of times become better evangelists, and eventually people start to trust them and a new wave of oboarding can begin.
I think this is where we're at now and I think we owe a lot of it to projects like those you mentioned. Let's take a look at them and see if we can find some commonalities.
Zora
distinct visual language
encourages customization (web1 vibes)
uses abstract language like imagine, create, explore
makes it easy to get started for crypto newbies (example: lazy minting)
focused on Layer 2 to keep gas fees low
discourages financialization by encouraging open-ended free mints
value accrues to artists and their patrons
Basepaint
easy to understand concept
retro / web1 vibes
social / collaborative
focused on Layer 2 to keep gas fees low
value accrues to artists
Farcaster / DEGEN community
social / collaborative
open-source anyone can build
focused on Layer 2 to keep gas fees low
deeply integrated with NFT platforms to allow overlap
and I'll include one more:
Mirror
easy to understand concept
social
focused on Layer 2 to keep gas fees low
makes it easy to get started for crypto newbies (example: lazy minting)
value accrues to artists and their patrons
So what do these all have in common?
Well to my eyes, they're all focused on building upon easy-to-understand concepts, abstracting away any need for technical expertise, and creating an experience which is collaborative, inexpensive, and accrues value back to those who build/create. These are great examples of why web3 is such an improvement over web2. Zora in particular is really leading the way here.
Speaking of Zora, I've got a quote from Jacob on my mind right now:
With that, how about I wrap this up in the usual way.
Recommendations
In the section above on Adam Smith, I took a side-step into what it would look like to tax wealth and I mentioned Harberger taxes in passing. These are a pretty unusual concept, but a really interesting one. I learned about them from this article by Ethereum co-founded Vitalik Buterin. It's about Glen Weyl's book Radical Markets, which I haven't read yet but I've been meaning to. I mentioned Glen in the newsletter Punks in Space, because alongside Vitalik and Puja Olhaver, he co-authored the Decentralized Society whitepaper.
On Radical Markets
Recently I had the fortune to have received an advance copy of Eric Posner and Glen Weyl's new book, Radical Markets , which could be best described as an interesting new way of looking at the subject that is sometimes called " political economy" - tackling the big questions of how markets and politics and society intersect.
Speaking of decentralized society, here's a really cool episode of Bankless that's all about decentralized science (DeSci) and what/how it's hoping to improve the world of research.
And now for something comepletely different! Here's an article from The Blockchain Socialist all about what crypto can learn from Daft Punk. It's a fun read and I can't recommend it enough.
How Daft Punk Sold Techno to the World: A Map for Crypto
How Daft Punk's second album Discovery and accompanying full feature music video offers us a new map for navigating the crypto adoption territory.
Until next time,
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Thank you for your article, I have to respectfully disagree with you though. You cite the highway system and it's economic benefits as an example of why taxes are a good thing. There is zero mention of all the harm and death taxes have helped pay for. Governments around the world, especially the United States, have used taxes to fund murder, theft of private property (through abuse of civil asset forfeiture and eminent domain, theft funded by theft), mass imprisonment for victimless drug crimes, inhumane involuntary experiments (Tuskegee airmen, mk ultra), and mass illegal surveillance. The government uses a monopoly on violence to force you to help pay for their crimes. You say the government has ignored crumbling infrastructure and private industry has not picked up the slack as evidence that we need taxes for public goods. Here is an example of why that is false. https://www.businessinsider.com/dominos-repairing-roads-revealing-troubling-trend-in-spending-2018-6 that is a link to an article about Dominoes fixing potholes in all fifty states. "Experts say the initiative is part of a wider trend of companies taking over the upkeep of civic services traditionally funded by government." Private entities would probably do more for infrastructure if they weren't prevented by reams of contradictory and inefficient government regulations. Here is a man in Britain who built his own road because the government was taking too long fixing the road. ( https://www.bbc.com/news/uk-england-somerset-28639196 ) The fact is people like roads and running water, they would help pay for these things on a voluntary basis, without any need for extortion by a violent oppressive government. Government taxes are always immoral and always a bad thing, the little bit of good that comes from them doesn't make up for the bad. The ideal form of taxation is no taxation.
I appreciate you taking the time to write this response. I think your first point is a good one. It's not really anything at all to do with taxes though but it is an ideology I'm sympathetic to. I think you misrepresent this as being an issue of taxes more broadly, when it's quite clearly a problem with structure of the system and what we citizens allow taxes to be used for. I'm for dramatically limited government with far fewer powers and thus far less ability to use taxes. I'm also pro-anarchy/pure democracy, and for the abandonment of paid politicians altogether, something you can read about in my newsletters and posts on Farcaster and twitter. Still I think many of your arguments hinge on misrepresenting symptoms of this systemic corruption/failure as the cause of the problem. Again, I'm sympathetic to what you're getting at but I don't think you've successfully refuted my points. Also I found that your examples of private businesses/individuals funding road construction feels cherry picked and anecdotal. You've inspired me to look more into it, but from what I know about the state of the US highway system I'm doubtful I will find that "the slack has been picked up"