"They're showing us a lot of florals right now, so I was thinking..." The Devil Wears Prada (2006)
Hey fintech friends,
Who needs to watch the Met Gala when we can follow one of the biggest trends that emerged this past tax season?
That's right: The IRS completed its Direct File pilot for the 2023 tax year, so free direct tax filing could be fully released as soon as early 2025. Meanwhile, major US neobanks have announced that they've embedded free tax filing this season, which begs the question: Will US taxpayers need a direct filing option in 2025?
This year when I have to file taxes, I’m just sending the IRS $750 and tell em “make it enough.”— Tre (@trestewart_) September 29, 2020
Before we dive into that, another trend emerging in the fintech fundraising world...
Convertible notes
So far this year SoFi has issued $750 million in convertible notes; Flexport $260 million, and Coinbase a whopping $1.1 billion in convertible debt.
Why is convertible debt so appealing to large fintechs right now?
With interest rates at a 23-year high in the US, fintech funding has dipped to its lowest levels since early 2017. Companies looking to raise funding in this environment are left with a couple options:
Raise equity investment albeit with smaller checks, at a lower valuation, or on deal terms that might be less favorable than they would've been in the ZIRP days.
Borrow from lenders, assuming the company has an established credit record and the appetite to finance debt costs at today's APRs.
Nobody's excited about these choices, so some larger fintechs are opting for a third option: Convertible debt.
The beauty of convertible debt is that issuers are effectively taking out a loan, but getting to pay well below the interest they'd pay on a corporate bond (Coinbase's convertible notes due in 2030 bear interest of 0.25%). The downside of a convertible note is that if the issuer's stock price hits a predetermined target, noteholders can convert the debt to equity at a steep discount– suddenly diluting the issuer's equity.
From an investor's point of view, Coinbase is basically selling a 0.25% coupon bond. If all goes well, Coinbase's stock jumps and investors get a call option on $COIN through 2030. If not, investors get repaid like they would on a regular bond.
Convertible debt might not make sense for high-growth startups that have limited ability to forecast their future stock price. Companies of Coinbase's size, though, can make reasonably confident estimates of what their shares will be worth in x years and set a conversion price above this estimate in order to prevent notes from converting into discounted equity. Coinbase's 2030 notes would give noteholders the option to convert if $COIN hits $333.54 per share– up about 56% from $214.34 at market close yesterday.
Assuming Coinbase's stock price doesn't actually reach $333.54 before these notes' maturity, Coinbase is getting a 0.25% loan with zero dilution.
What does Coinbase plan to do with this money?
From the press release:
Coinbase intends to use the net proceeds from the offering to repay at maturity, or repurchase or redeem prior to maturity, from time to time and subject to market conditions, its outstanding 0.50% Convertible Senior Notes due 2026, 3.375% Senior Notes due 2028, and 3.625% Senior Notes due 2031 and for other general corporate purposes...
Refinance its other outstanding convertible notes, essentially.
I have a hunch we'll be seeing more large fintechs raise funding through convertible notes this year.
ok we talked about stocks for two days I think that’s plenty let’s move on— Sophia Benoit (@1followernodad) January 28, 2021
Free tax filing
This past tax season the IRS released its free tax filing tool, Direct File, and the pilot results are in: Over 140,000 people used Direct File to file their 2023 taxes, saving over $5.6 million in aggregate federal tax preparation fees. In a survey, 90% of respondents rated the experience as "excellent"(!).
If "free tax filing tool from the IRS" sounds familiar, it might be because the IRS already offers an E-Filing tool through private software partners in the Free File Alliance. The IRS's decision to roll out Direct File is probably a response to the fact that while an estimated 70% of Americans qualify for free filing through E-File (incomes >$73,000), only 2% of taxpayers actually use the program. In total, taxpayers who qualify for E-File overspend on tax preparation services by over $4 billion each year.
Intuit has argued that a government-run program is unnecessary because about a third of its TurboTax users already receive tax services for free.
Sorry– Intuit, the company that left the Free File Alliance years ago and has since come under fire for shadow-banning and deceptively marketing TurboTax's own "free" filing options to trick customers into paying for services– is calling direct free tax filing "unnecessary"? Intuit, which has spent $47.2 million on federal lobbying since 2003 and been one of the most vocal opponents to the US government simplifying tax preparation, isn't cool with the IRS offering free tax prep? ☹️
finding out i get a $19 refund after paying $70 for turbotax pic.twitter.com/2zHmjF1Cqr— rob from online 📱 (@robfromonline) February 3, 2021
The IRS is evaluating whether to release Direct File based on the results of this limited pilot (and the IRS's ability to secure funding for a full roll-out). At the same time, a number of fintechs– Varo, Chime, Current...– announced that they'll be offering free tax filing through integrations with Column Tax and april.
If Direct File does go live next season, but free tax prep is embedded in interfaces that consumers are already using (presumably with a sleeker UI, better connectivity to consumers' external financial accounts, and support for a broader range of tax situations) it feels like Direct File could be too little, too late for a lot of Americans?
