2018 edition€¦ · public key –the address that you share to receive bitcoins. private key...

Cryptocurrency Law: Bitcoin and more

2018 Edition

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Bitcoin and Cryptocurrency Law

Presented by:

Eric Boughman, J.D. and Brian Page, J.D., L.L.M.

Messrs. Boughman and Page are attorneys at the Law Firm of Forster Boughman Lefkowitz & Lowe, and can be reached via email: [email protected] or [email protected], or by phone at (407) 255-2055. They welcome questions and comments from fellow professionals.

Agenda

I. Introduction

II. How Cryptocurrencies and Blockchains Work

III. Bitcoin and Business

IV. Overview of Cryptocurrency for Federal Income Tax Purposes

V. Potential Risks

VI. Should Attorneys Accept Bitcoin (or other cryptocurrency) as Payment?

VII. Cryptocurrency Compliance

VIII. Conclusion

Q&A / Open Discussion

A. Cryptocurrencies – digital assets (or money) designed to be secure and, in some cases, anonymous.

B. Bitcoin - one of the first and currently the most popular cryptocurrency.

C. Federal vs. State Interpretations

D. The VCBA

***Note the distinction between Treasury Guidance and IRS Guidance demonstrating a certain confusion among

regulatory authorities***

I. Introduction

A. Blockchain

i. It is a database technology that enables cryptocurrencies and serves as a distributed ledger to track cryptocurrency transactions.

ii. The Bitcoin blockchain serves as a public ledger for Bitcoin transactions.


B. Bitcoin Features

i. Decentralized

ii. Secure

iii. No intermediaries

iv. Irreversible

v. Exchanged

vi. Pseudonymous

vii. Fair market of value

viii. Miners

ix. Borderless and international


C. Using the Wallet / Key / Address

i. Wallet – Place which stores the public key and the private key.

Public Key – The address that you share to receive bitcoins.

Private Key – The “password” you use to send/spend bitcoins.

ii. Holding Cryptocurrencies -Types of Wallets

1. Hardware / Cold Storage

2. Desktop / computer file

3. Web and Cloud

4. Mobile devices and apps

5. Paper / Brain wallets


D. Acquiring Cryptocurrencies

i. Peer-to-Peer (“P2P”) marketplace (e.g., LocalBitcoins.com).

ii. Exchange – provides a platform that matches buyers with sellers.

iii. Initial Coin Offerings (“ICOs”) – permitted crypto-investors an opportunity to acquire newly created cryptocurrencies.


A. Accepting Payments – Internal Revenue Code (IRC) – The holder of the cryptocurrency must determine if he or she has a taxable gain under IRC 1001.


B. Token Sales (ICOs)

i. A “crypto-coin” or “token” is offered to a participant in exchange for cash or Bitcoin.

ii. ICO tokens can be traded and sold, may increase or decrease in value, and may confer certain rights to profits.

iii. Securities/ Registration Implications – The “Howey” test.

iv. The SEC Report on the DAO found the Howey test was satisfied.

v. Following the Report, the SEC took action against several companies involved in ICOs.


A. Fin-2013-G001 – “Convertible Virtual Currency”

B. IRS Notice 2014-21 – cryptocurrency is considered property, not currency.


C. Unanswered Questions

i. How a taxpayer may account for tax basis?

ii. May cryptocurrency be subject to like-kind exchange treatment?

iii. When is a cryptocurrency wallet considered foreign and subject to FBAR requirements?

iv. Is cryptocurrency an asset which must be reported under FATCA?

v. Is cryptocurrency is a security or commodity or neither?

vi. Is cryptocurrency is a passive asset for income tax purposes?

vii. Is cryptocurrency subject to probate?


D. Overview of Tax Basis

i. Introduction


***There are other ways to receive property, such as in in-kind distribution from a corporation or other entity or as a salary.

In addition, basis in property is often adjusted up or down through capital improvements and depreciation.***

ii. Purchased Property – Cost Basis

iii. Property Received By Gift – Carry-Over Basis

iv. The determination of the type of capital gain is based on the holding period for the cryptocurrency

E. Basis of Property Acquired from a Decedent

F. Exception to Step-up or Step-down Rule


G. General Treatment for the Disposition of Cryptocurrency

– It is subject to the short and long-term capital gain tax treatment under the Internal Revenue Code (IRC).


H. Basic Income Tax Rules for Cryptocurrency

i. Trading cryptocurrency to fiat currency for US Dollars is a taxable event.

ii. Using cryptocurrency for goods and services is a taxable event.

iii. Giving cryptocurrency as a gift is not a taxable event.

iv. A wallet-to-wallet transfer is not a taxable event.

v. Purchasing cryptocurrency with USD is not a taxable event.


***Essentially, anything other than buying, holding, or transferring cryptocurrency is a taxable event***

I. Examples of Dispositions

i. Sale of cryptocurrency for fiat currency (sales transaction).

ii. Exchange of cryptocurrency for other goods and services (barter).

iii. Exchange of cryptocurrency for other forms of cryptocurrency (exchange).

J. No Like-Kind Exchange for Cryptocurrency


K. Tax Compliance Issues

i. Form 1099-K reporting.

ii. Different Treatment for Investors, Traders and Dealers.

L. Federal Income Tax Characterization of Cryptocurrency

i. What is a Security?

ii. What is a Commodity?


M. Tax Treatment of Cryptocurrency by Federal Courts

i. SEC v. Shavers

ii. Treas. Reg. § 1.731-(2)(c)(2)

iii. Mark to Market Accounting for Traders.

N. Determination of Accounting Method

Due to the fungibility of cryptocurrency, taxpayers may have difficulty determining which unit of cryptocurrency will be exchanged in a transaction.


A. Cybersecurity

B. Wallets – Lost Keys

C. Limited market

D. Volatility

E. Uncertain Regulatory and Legal Environment

F. Manipulation

V. Potential Risks

G. Forks

i. Bitcoin/Bitcoin Cash

ii. Ethereum/Ethereum Classic

H. Bitcoin Mixers

I. Cyber-Ransom

V. Potential Risks

A. Attorneys are Different

i. Trust Account issues

ii. Fair value issues – Volatility

iii. Responsibilities and duties – Taxable event

B. The ideal environment is one where a client can pay in cryptocurrency, but the payment is first (or immediately) converted to cash before delivery to the attorney.

VI. Should Attorneys Accept Bitcoin as Payment?

A. Federal Income Taxes – United States v. Coinbase Inc.

B. Foreign Bank Account Reporting (FBAR) – FinCen 114 –U.S. v. Hom

C. Foreign Asset Tax Compliance Act Reporting (FATCA)

D. https://fincen.gov/resources/statutes-regulations/adminstrative-rules


E. Cases of Interest

i. US v. Faiella

ii. State of FL v. Espinoza

iii. U.S. v. Ross William Ulbricht


***A common theme running through these cases is the government position equating Bitcoin to money***

VI. Conclusion

Eric Boughman – [email protected]://www.linkedin.com/in/ericboughman/

Brian Page – [email protected]://www.linkedin.com/in/brianpage/

(407) 255-2055 | (855) WP-Groupwww.ForsterBoughman.com

Questions?

2018 edition€¦ · public key –the address that you share to receive bitcoins. private key...

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