January 6, 2025 | Premium Service | As the New Year began, worries were being expressed about the uptick in consumer delinquency seen as 2024 ended. Is the US economy finally slipping into recession after several false alarms last year? Maybe. Will consumer loan default rates be higher in Q4 2024? Probably, but this is not yet a crisis or even a traditional credit downturn comparable to 2008.
While loss rates in percentage terms are rising, the volume of loss affecting US banks remains very low, as we discuss below in our latest update on the largest US consumer lenders. Our suspicion is that the excess liquidity pumped into the US economy by the Federal Open Market Committee in 2020-2022 is finally dissipating, part of a recession of the monetary tide that caused crypto currencies to peak near $100k as measured by bitcoin.
Like all games of chance, trading in crypto currencies is a zero sum game that does not result in an increase in aggregate wealth. The buyer of bitcoin provides liquidity to the seller, but there is no increase in money in the system. The value of crypto can go up or down, but there is no carry and no net economic benefit. But the Internal Revenue Service and other tax agencies around the world are certainly focused on the exchange of value represented by trading in crypto tokens.
“The recent surge in Bitcoin prices has been a financial boon to its investors. Many have been cashing out with gains exceeding their wildest expectations,” notes Chris Amundson, President of Accounting Solutions in Chicago. Amundson publishes a must read comment on taxes and accounting each week that goes from individual to corporate perspectives.
“Bitcoins were trading in the $97K range yesterday,” Amundson wrote last week. “If you had invested in this asset four short years ago, your capital gain would be around $80K per unit. In response to this windfall, the IRS has significantly increased its oversight on these transactions.”
Amundson notes that new IRS initiatives include: 1) A question on both business and personal income taxes of whether or not the entity has sold any crypto assets inside the tax period, 2) -Broker / Dealers will be required to report all sales of digital assets to the IRS on newly created form 1099 - DA (Digital Assets) next year for the 2025 tax season, and 3) IRS and Justice Department Enforcement of the tax and criminal codes has increased substantially.”
He concludes: “Taxpayers should note that if you use a crypto currency to purchase anything directly from an investment account, that this constitutes the sale of the asset. As such, Short or Long Term Capital Gains Taxes are due and payable that year.” And yes, if you work in the world of banking, FINRA or the SEC and touch crypto assets, you are flagged by compliance for enhanced monitoring. Thank you.
The increased tax revenue collected by the IRS as a result of trading in crypto in 2024 does not represent true growth in economic terms, merely the allocation of losses to the seller (aka the greater fool). Warren Buffett noted that Bitcoin's price is rising only because Bitcoin holders are trading with each other – the private equity fund approach to investment. With each round, you hope that a greater fool will buy your asset for a higher price than you paid for it.
Of note, Gordon law writes that the IRS has issued guidance on how to claim losses from worthless and abandoned cryptocurrency investments on your tax returns. According to IRS Memo: 202302011, if an individual’s cryptocurrency has decreased significantly in value, they may be able to deduct the loss under IRC Section 165. But only maybe, we’re told by informed auditors.
The speculative gains on crypto are a blissful concern compared with the dire situation facing many low income consumers as Donald Trump returns to the presidency. There is even speculation that President Trump will attempt to start his second term with a $2,000 "stimulus" payment to struggling consumers, a modern version of the "bread and circuses" of ancient Rome.
The Consumer Lenders
In the final days of December, the Financial Times and other media published several reports about the fact that the Q3 2024 delinquency rate on credit cards was back up to 2010 levels, this after years of loss experience muted by the action of the FOMC. "Consumers are ‘tapped out’ after years of high inflation and as pandemic-era savings have evaporated," the FT reports.
The chart below showing data from the FDIC going back 40 years is the series in question. Yes, net loss rates in percentage terms post default are back up to 2010 levels, but the dollar volume of net charge-offs remains very low. Also, we should all note the total outstanding receivables for bank credit cards have almost trebled since 2008. What is the problem?
Source: FDIC