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Understanding FXRP


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So the burning question to me is that, for Americans, is the act of creating FXRP a taxable event? I saw in another thread someone thinking it was, but from this thread I get the impression that it may not be. Obviously that might be another thing cleared up depending on the forthcoming details, but curious to hear thoughts on this. To me it's a far bigger issue than taxation of the Flare drop.

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There seems to be a lot of confusion in people about what FXRP is, so I thought I’d try to clear this up. FXRP is XRP represented in the Flare block chain. It is a claim to locked up XRP. FXRP ha

The agents have to paid for minting the F-assets. 5% is the number used in the white paper, that doesn't necessarily mean it will be 5%. White papers are about the abstract ideas, not the specifics. W

Yes. The tokenomics of Flare are some of the most impressive parts of the system. They have clearly thought very deeply about the incentives and mechanisms of value, creating positive feedback loops.

2 hours ago, NGVd83sFk said:

So the burning question to me is that, for Americans, is the act of creating FXRP a taxable event? I saw in another thread someone thinking it was, but from this thread I get the impression that it may not be. Obviously that might be another thing cleared up depending on the forthcoming details, but curious to hear thoughts on this. To me it's a far bigger issue than taxation of the Flare drop.

My guess is no, it's not a taxable event, as you are neither trading it, nor selling it.

By "wrapping" the XRP asset, you are, essentially tying it up as collateral for a loan of FXRP.

So any gains or losses realized by trading the FXRP and reconciling all fees paid, would be taxable income (or write-offs).

( NOT financial advice, I'm unqualified in this topic. Consult a tax professional prior to all financial transactions !! ) 

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3 hours ago, NGVd83sFk said:

So the burning question to me is that, for Americans, is the act of creating FXRP a taxable event? I saw in another thread someone thinking it was, but from this thread I get the impression that it may not be. Obviously that might be another thing cleared up depending on the forthcoming details, but curious to hear thoughts on this. To me it's a far bigger issue than taxation of the Flare drop.

This is a million dollar question (maybe literally for some whales). Is an F-asset the same asset just ported across ledgers or are you selling one for the other? I think Flare said on Twitter that they would be coming out with some tax guidance without giving any specific tax advice before launch.

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1 hour ago, JASCoder said:

My guess is no, it's not a taxable event, as you are neither trading it, nor selling it.

By "wrapping" the XRP asset, you are, essentially tying it up as collateral for a loan of FXRP.

So any gains or losses realized by trading the FXRP and reconciling all fees paid, would be taxable income (or write-offs).

( NOT financial advice, I'm unqualified in this topic. Consult a tax professional prior to all financial transactions !! ) 

 

37 minutes ago, brianwalden said:

This is a million dollar question (maybe literally for some whales). Is an F-asset the same asset just ported across ledgers or are you selling one for the other? I think Flare said on Twitter that they would be coming out with some tax guidance without giving any specific tax advice before launch.

Right, it's the difference between dabbling in Flare and going all in. I'd bet asking 10 tax pros will get you 10 different answers, with the IRS giving an 11th answer. Feels like a situation where you'll have to play "hope-I'm-not-the-one-who-has-to-go-to-court-to-settle-the-issue."

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11 hours ago, xrpthestandard said:

How do you lock up XRP exactly, to get FXRP? Do you transfer your XRP to an agent for example?

Exactly.   (As I understand it...  I could be wrong)

Your XRP are sent on the XRPL to an agent.  There is a bit of smart contract software watching for that and as soon as it happens it issues the F-XRP to your Flare wallet.  The agent has already locked 2.5 times the value of the XRP of Spark with the contract,  so if you want your XRP back you can get the correct amount of Spark sent to you and then you manually sell that to buy XRP.

All sorts of questions remain in my mind about the details but that’s the essence I think.

So a lot of folk seem to think the XRP are still their own in some escrow or something...  but that is not the case.  They have traded their XRP for FXRP.   Notice the word ‘traded’.  I think the IRS could view it as a tax event.  That remains to be seen.

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5 minutes ago, BillyOckham said:

They have traded their XRP for FXRP.   Notice the word ‘traded’.  I think the IRS could view it as a tax event.

Interesting info, Billy, thanks.

To the IRS, I would argue the fact the transaction is not defacto trading, but simply an unwinding a collateralized contract - and that the mechanics of settlement are immaterial; given the fact the returned asset will always be the exact same amount of the original stake. 

It will be interesting to watch how our tax laws handle all these new fangled DeFi transactions.

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2 minutes ago, JASCoder said:

and that the mechanics of settlement are immaterial; given the fact the returned asset will always be the exact same amount of the original stake. 

Actually I don’t think that is correct.  As I mentioned above if you wish to get your XRP back you are redeemed and amount of SPARK that is the same value as the XRP.  So you can then trade that FLR for XRP but you will need to do it yourself manually.

So the “the returned asset will always be the exact same amount of IS NOT the original stake. “
 

(The bloody stupid new layout on this site has robbed me of the strikethrough option...  so consider the underlined text as struck through please.)

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5 minutes ago, BillyOckham said:

So you can then trade that FLR for XRP but you will need to do it yourself manually.

I see what you're saying. So if the settlement of the unwinding is under the user's control in its timing, then it is a trading action itself will result in possible gains or losses as decided by the user. 

I'm so glad I stayed in IT, and not pursued law or accounting, lmao.

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25 minutes ago, JASCoder said:

I see what you're saying. So if the settlement of the unwinding is under the user's control in its timing, then it is a trading action itself will result in possible gains or losses as decided by the user. 

I'm so glad I stayed in IT, and not pursued law or accounting, lmao.

To be honest I don’t understand why they have done it that way...  surely the smart contract could trade the FLR on a DEX and then send the exact orig amount of XRP back to the original wallet?

Then it would be a lot less like a trading action and more like a wrapped asset. (Tax implications of wrapping... I have no idea...)

It seems a bit cumbersome to me.  And also a bit of an obstacle to participation...   not “programmatically one click reversible” if you get what I mean.

To be honest I’ve seen really smart programmers make really dumb use-case decisions many, many, times over a thirty year IT career,  so it wouldn’t surprise me if there are kludgy bits to all this at inception.

 

 

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So where I'm ending up after all this is, instead of setting aside funds just to pay tax, I'm better off just buying FXRP after it's been converted and participating that way. Now if the FLR rewards are enormous enough that taxes just don't matter, maybe I go all in. But it's probably good to go in with realistic expectations.

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Regarding the launch of the FN and FF apps...

There's a lot that can go awry when the pedal hits the metal.

Hopefully they've hired some veterans of MMO launches at Blizzard or some other game studio companies. Even the best devs and designers can be surprised what the great unwashed masses of Internet monkeys are capable of ! 

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16 hours ago, BillyOckham said:

The agent has already locked 2.5 times the value of the XRP of Spark with the contract,  so if you want your XRP back you can get the correct amount of Spark sent to you and then you manually sell that to buy XRP.

Just to clarify, agents will work both ways - you can go through them to both mint and unmint F-assets. The situation you described where you receive the value of your token in FLR and have to buy it yourself is the failsafe for if the agent fails to deliver your token to you.

Edited by brianwalden
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I can think of three reasons why Flare is doing its F-asset system in this complicated way instead of the much more intuitive way where FXRP gets issued by (and only by) sending XRP to a certain wallet. The XRP is then held there until you send The FXRP back and redeem it for XRP again.

1) F-assets are supposed to be completely trustless and we don't yet have a way for a smart contract to make transactions on different ledgers (I don't really understand why, but it appears to be the case). So holding the native assets in custody would rely on trusting the agent to hold those assets for as long as the F-asset exists. With the system they chose, once the minting transaction is complete, there is no further trust needed between the agent and the person holding the F-asset.

2) Holding assets in custody can get you labeled as a financial services business and make you come under all kinds of regulations. Those regulations are a big part of what makes our traditional financial system so slow and expensive. Hugo got salty on Twitter when it was claimed that Flare agents would be holding assets in custody. This also makes me wonder if the way wrapped coins are usually done would create problems of they ever attracted the attention of regulators.

3) The more I learn about Flare, the more it looks like they specifically designed everything that happens in the network to increase the price of FLR. Think of the XRPL where in theory you can trade all the issued currencies (IOUs) you want and you only need to use a little bit of XRP for reserves and transaction fees. That's not possible in Flare. If F-assets become popular, they will drive up the price of FLR.

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6 hours ago, brianwalden said:

I can think of three reasons why Flare is doing its F-asset system in this complicated way instead of the much more intuitive way where FXRP gets issued by (and only by) sending XRP to a certain wallet. The XRP is then held there until you send The FXRP back and redeem it for XRP again.

1) F-assets are supposed to be completely trustless and we don't yet have a way for a smart contract to make transactions on different ledgers (I don't really understand why, but it appears to be the case). So holding the native assets in custody would rely on trusting the agent to hold those assets for as long as the F-asset exists. With the system they chose, once the minting transaction is complete, there is no further trust needed between the agent and the person holding the F-asset.

2) Holding assets in custody can get you labeled as a financial services business and make you come under all kinds of regulations. Those regulations are a big part of what makes our traditional financial system so slow and expensive. Hugo got salty on Twitter when it was claimed that Flare agents would be holding assets in custody. This also makes me wonder if the way wrapped coins are usually done would create problems of they ever attracted the attention of regulators.

3) The more I learn about Flare, the more it looks like they specifically designed everything that happens in the network to increase the price of FLR. Think of the XRPL where in theory you can trade all the issued currencies (IOUs) you want and you only need to use a little bit of XRP for reserves and transaction fees. That's not possible in Flare. If F-assets become popular, they will drive up the price of FLR.

Excellent points.  
 

Thanks very much for going to the trouble of explaining your insights in detail.  I think you have probably put your finger on the important reasons.
 

Regarding the manual redemption...  yeah it was a while ago I read all that and I’ve obviously retained only the worst case.  Says something about my ‘plan for the worst’ mindset I suppose.  :) 

 

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