Exchange crash dumps bitcoin back toward $9k

Bitcoin's popularity appears to be putting unsustainable strain on some major cryptocurrency exchanges, with a number of platforms forced offline by heavy load on servers or suffering intermittent service. The price of bitcoin is retreating in sympathy.

In a period of heightened and continuing volatility, after shooting past $11,000 yesterday, bitcoin later fell 2,000 points, only to bounce back to trade at around $10,300 last night. It is currently nearer $9,300.

San Francisco-based Kraken's website continues to be inaccessible and the largest dollar exchange in the world, Coinbase, is not able to take bitcoin or Litecoin trades, although Ethereum has been available to buy and sell.

And Coinbase received another blow to its business Wednesday after it lost a court case in California, which now means it must hand over the account details of certain bitcoin account holders to the US tax authority, the Inland Revenue Service.

Specifically, the exchange must divulge to the IRS the account details or all those who bought, sold, sent, or received a sum greater than $20,000 worth of Bitcoin between 2013 and 2015. 

Although not a ruling of the court, account holder who have handled similar amounts between 2015 and 2017 can expect a proverbial knock on the door from the taxman.

The full US v Coinbase ruling can be read here.

US citizens are liable for a capital gains tax charge on cryptocurrency gains.

The situation is similar, although slightly less clear in the UK.

The HM Revenue & Customs (HMRC) briefing on cryptocurrencies in March 2014 states that:

"As with any other activity, whether the treatment of income received from, and charges made in connection with, activities involving Bitcoin and other similar cryptocurrencies will be subject to CT, IT or CGT [corporation tax, income tax or capital gains tax] depends on the activities and the parties involved." 

The briefing adds this caveat:

"Therefore, depending on the facts, a transaction may be so highly speculative that it's not taxable or any losses relievable… For example, gambling or betting wins are not taxable and gambling losses cannot be offset against other taxable profits."

HMRC says it will consider case by case whether CGT can be applied to bitcoin as a taxable asset and "highly speculative" could be said to apply to crypto and, therefore, may be interpreted in certain cases as non-chargeable events, but it is probably safest to assume gains are chargeable under CGT. The current annual tax-free CGT allowance is £11,300, and you can also make use of your spouse's allowances too.

Aside from the wake-up call on taxes, the unwelcome test for major choke points of crypto infrastructure points to a failure to anticipate the surge in account openings and related growth in activity. Consequently, there's been under-investment in the hardware resilience necessary to maintain service.

As at 22:36 Pacific time Coinbase's 'Ongoing Maintenance" notice on its status page, in part, read:

"Coinbase is performing maintenance to improve performance under high traffic given the large volumes we saw today. Ether buys and sells are online. Bitcoin and Litecoin buys and sells are offline and we are actively working on restoring full functionality."

There is no information provided by Coinbase on when it expects full services to resume. Coinbase customers wanting to sell bitcoin, or who would now like to move holdings to another exchange, or better still, perhaps, send their funds to an offline wallet, can still do so because withdrawals of bitcoin from Coinbase are, at the time of writing, still possible.

Even in normal times, investors who buy bitcoin on Coinbase are unable to access their private keys, unlike on most other exchanges or if you use your own online, desktop or hardware or paper wallet to store bitcoin. This is part of the trade-off which comes with ease of use and means bitcoin holders at Coinbase don't get free coins when bitcoin forks and new bitcoin clone coins are created.

Coinbase's popularity has come back to bite it.

Kraken has been plagued by poor uptime for the past few months.This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.