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US Needs ‘More Nuanced’ Cryptocurrency Regulations: Academic Paper

The patchwork regulatory setups at federal level mean it is “easy to see” how the U.S. has a bad reputation among crypto operators and investors.

United Statescryptocurrency regulations are creating a problematic image for the country as an innovator and it needs a “more nuanced approach.”  Two university professors have made this claim in an article Friday, Dec. 7, referring to a paper originally published Nov. 16.

Discussing the current regulatory setup governing cryptocurrency, Carol Goforth of Oxford University and Arkansas School of Law’s Clayton N. Little blamed the “overlapping” authority of various regulators as hindering progress.

The U.S. Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Internal Revenue Service (IRS) and more all attempt to govern cryptocurrency, the professors say, but each from a different perspective.

“Because different agencies in the U.S. have different regulatory powers and responsibilities, each agency has tended to classify the very same assets differently in order to assert jurisdiction,” the paper reads.

As Cointelegraph has often reported, representatives of the SEC and CFTC in particular continue to be vocal about the need to comply with existing laws when issuing, dealing in or trading cryptocurrencies.

In October, CFTC chairman Christopher Giancarlo acknowledged the complexity of the situation regarding his agency and the SEC.

“…Different orientation, different histories, so we do come at these things from different perspectives,” he told CNBC’s ‘Fast Money’ segment at a conference.

For Goforth and Clayton, however, the situation does more harm than good. In a summary of their work for the Oxford Faculty of Law Dec. 7, Goforth wrote:

“Although various authorities in the US have repeatedly claimed that they do not wish to over-regulate cryptoassets or to stifle innovation in the space, overlapping regulations produced by a multitude of distinct agencies with different missions and priorities have produced a confusing mix of classifications and requirements.”

It was “easy,” she said, to “see why the US is not regarded as being receptive to crypto.”

This year, cryptocurrency exchanges including Coinbase and Bittrex began a trend of setting up operations in a more permissive jurisdiction beyond the control of the SEC and CFTC in order to offer international clients additional coins not available to their U.S. counterparts.

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Report: US Congressman Announces Plans for Federal Cryptocurrency and ICO Regulation

U.S. Rep. Warren Davidson of Ohio announced plans to introduce a bill in the House of Representatives that would regulate ICOs and cryptocurrencies.

U.S. Rep. Warren Davidson (R) has announced plans to introduce legislation that would clearly regulate cryptocurrencies and Initial Coin Offerings (ICOs), local Ohio news agency Cleveland.com reports Dec. 3.

According to Cleveland.com, Davidson announced his intention to introduce new legislation at the Blockchain Solutions conference. The bill would create an “asset class” for cryptocurrencies and digital assets, which “would prevent them from being classified as securities, but would also allow the federal government to regulate initial coin offerings more effectively.”

This development would bring clarity to U.S. crypto regulation. Currently, state regulatory agencies classify tokens differently in ways that place them under their jurisdiction.

The Securities and Exchanges Commission (SEC) stance is that most cryptocurrencies are securities. The Commodity Futures Trading Commission (CFTC), on the other hand, treats cryptocurrencies as commodities.

In other words, the CFTC states that Bitcoin (BTC) has more in common with gold than with currencies or securities since it is not backed by a government and does not have liabilities attached to it. The Financial Crimes Enforcement Network (FINCEN), the agency managing anti-money laundering (AML) and know your client (KYC) standards, views crypto as money.

The U.S. Office of Foreign Assets Control (OFAC), which enforces economic sanctions, views crypto as money and blacklists wallets of sanctioned persons. Lastly, the Internal Revenue Service (IRS) treats cryptocurrencies as property, meaning that profits from selling them are subject to capital gains tax.

A group of U.S. Congressional representatives sent a letter in September to the SEC Chairman Jay Clayton calling for “clearer guidelines between those digital tokens that are securities.”

The same month, over 45 representatives of major crypto companies and Wall Street firms attended a Congressional roundtable discussion on cryptocurrency and ICO regulation. During meeting, which was hosted by Davidson, experts expressed concerns about a lack of regulatory clarity in the industry and discussed “token taxonomy.”

Davidson has previously demonstrated his support for the crypto industry, suggesting that the ICO market needs “light touch” regulation. A spokesman for the U.S. representative said in November that Davidson is working on a bill that, once law, would treat ICOs as products rather than securities at the federal and state level, effectively “sidestepping” security laws.

As Cointelegraph reported yesterday, seven Ohio funds will hand over $300 million to blockchain startups by the end of 2021. Of this funds, $100 million will be invested by nonprofit JumpStart.

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IRS Offshore Amnesty is Closing, But Crypto Investors Still Have Time: Expert Take

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision. This text shouldn’t be considered as legal advice.

In our Expert Takes, opinion leaders from inside and outside the crypto industry express their views, share their experience and give professional advice. Expert Takes cover everything from Blockchain technology and ICO funding to taxation, regulation, and cryptocurrency adoption by different sectors of the economy.

If you would like to contribute an Expert Take, please email your ideas and CV to george@cointelegraph.com.

The Crypto community is increasingly facing tax compliance issues, especially with the American IRS. And without an express crypto-centric amnesty, some people have joined the main IRS offshore amnesty known as the Offshore Voluntary Disclosure Program (OVDP). There may be offshore crypto accounts, or just offshore bank accounts that can be a hook for getting IRS amnesty.

Yet after a 10 year run, the OVDP will formally close on September 28, 2018, and some people are rushing to get in. The Streamlined program will still exist, but in comparing the two, one should consider Streamlined audits. Most commentators agree that the September 28 deadline is the date by which a taxpayer must submit their “Initial Submission” requesting admission.

A Preclearance Request is not enough. This is an optional first step before entering OVDP that involves a small number of details. The purpose of requesting preclearance is to confirm that the IRS isn’t already investigating you. Preclearance always has a yes or no answer. Usually the answer is yes, which means you can go to the next step to join the OVDP.

Preclearance requests are generally a good idea. But as the September 28 deadline inches closer, more people may forego this step and skip directly to the Initial Submission. A Preclearance Request only requires the following information:

  1. Information about Taxpayer: Complete Name, Date of Birth, Tax ID/Social Security Number, Addresses, Telephone Numbers
  2. Information about Undisclosed Foreign Financial Institutions, including Name of Financial Institution, Address, Telephone Number
  3. Information about Non-Public Entities (Corporations, Partnerships, LLCs, Trusts, Foundations) through which Undisclosed Foreign Accounts and Assets are Held, including Name of Entity (including d/b/a name), EIN (if applicable), Address of Entity, and Jurisdiction in which Entity was Organized.

It may take the IRS 30 days to respond. With the OVDP closing, a Preclearance Request should be submitted soon. With the September 28, 2018 OVDP deadline, assemble the Initial Submission while waiting for a response. In the past, once a taxpayer was precleared to enter OVDP, the taxpayer had 45 days to submit their Initial Submission. But it is not clear if you will get that time if it extends beyond September 28, 2018. 

The Initial Submission requires more information than the Preclearance Request. Initial Submissions include a cover letter that describes the facts and reporting history. In addition, two forms are included. The first is Form 14457. To complete it, include how you learned about OVDP, the source of the foreign funds, an estimate of the combined account/asset values for each year, and other general information. Only one Form 14457 is needed.

The second is Form 14454, and you need one for each foreign account. Form 14454 contains more detailed questions. For example, it asks whether you made deposits into the foreign account from the United States, or whether you transferred funds from the account to the United States. It also asks about the people at the financial institution who advised about the foreign account.

The most time-consuming aspects of an OVDP disclosure are collecting bank statements and preparing tax returns and FBARs. They are not required for the Initial Submission. They are normally completed and submitted with the “Final Submission,” which does not need to be completed by September 28, 2018.

For most people, paying the taxes, interest and penalties, even on up to 8 years as the OVDP requires, is not so bad. It is the bigger account-based penalty in the OVDP that is the hardest to swallow. It can be either 27.5 percent or 50 percent of the highest value of your account over the 8-year period. Yet if you enter the OVDP, the prospect of opting out can be worth considering, before you pay all the penalties and sign the closing agreement.

Entering the program to opt out sounds odd, and it certainly isn’t for everyone. But on the right facts, it can make a world of difference to the bottom line. The opt-out election is irrevocable, and is typically made after the IRS has calculated a proposed penalty. That might be a year or more after you enter the program. By then, you will have fully complied and fixed all of your errant reporting.

You have also paid all the taxes and interest you owed, plus penalties on your under-reporting. But the biggest penalties are based on the size of your account, and that is what can be at stake in an opt out. Of course, an opt out carries risks too. The IRS may assess civil fraud or information return penalties. According to the Taxpayer Advocate Service, over 1,000 taxpayers opted out of the 2009 and 2011 offshore voluntary disclosure programs.

Most involved small dollars, which seems counter-intuitive. For some tax lawyers, the situation is the reverse, where opt outs can involve big money. The incentives to opt-out seem much higher if large dollars are at stake. If you might pay a $50,000 penalty in the OVDP, opting out probably can’t save you too much, even if you end up with non-willful penalties.

A $500,000 penalty within the OVDP, however, may make opting out hard to resist, particularly if you have good facts. If you face a $1M penalty or higher, it may be even more compelling. Although potential FBAR penalties can be high, opt out results can be quite dramatic on the right facts. Past admissions, even OVDP the submissions, can be used against the taxpayer if he or she opts-out. Thus, it is important to consider what you’ve told the IRS prior to making the opt-out election.

The OVDP is predictable, while opting out is much less so. But the time and expense can pay huge dividends. If you have no evidence of willfulness, the sheer numbers may make opting out attractive. Individual advice about your particular facts is important. Facts that suggest willfulness may be especially so. However, moving money from one bank to another does not always spell willfulness. Even shell companies do not necessarily preclude opting out. For those with the right facts and a willingness to endure some risk, opting out can sometimes save large dollars. It can be worth evaluating carefully, even as one enters the program.

Robert W. Wood  is a tax lawyer representing clients worldwide from offices at Wood LLP, in San Francisco. He is the author of numerous tax books, and writes frequently about taxes for Forbes.com, Tax Notes, and other publications. This discussion is not intended as legal advice.

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FinCEN Director: Agency Receives 1,500 Suspicious Activity Reports on Crypto per Month

Kenneth A. Blanco, director of the U.S. Financial Crimes Enforcement Network (FinCEN), has revealed that the agency has seen a surge in filings of crypto-related Suspicious Activity Reports (SARs). The number of complaints now exceeds 1,500 per month, according to him.

Blanco’s remarks were made as part of a speech he delivered at the 2018 Chicago-Kent Block Legal Tech Conference August 9.

The director outlined FinCEN’s ongoing role in regulation and law enforcement for the emerging crypto space, which it coordinates in tandem with the Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC). He noted that,

“[While] innovation in financial services can be a great thing… we also must be cognizant that financial crime evolves right along with it, or indeed sometimes because of it, creating opportunities for criminals and bad actors, including terrorists and rogue states.”

Blanco emphasized that in order to safeguard the “incredible innovations” of the fintech frontier, actors’ compliance with specific regulatory measures is critical, given that “harm can be done with devastatingly increasing speed, breadth, and obscurity in the digital world.”

As indicated in FinCEN’s March 2013 guidelines, any acceptance or transfer of value that substitutes for fiat currency – including crypto – is considered to be money transmission, and entails specific regulatory obligations under the U.S. Bank Secrecy Act (BSA).

As money transmission businesses (MSBs), crypto exchanges are therefore required to report both SARs and Currency Transaction Reports (CTRs), as well as to comply with anti-money laundering (AML) and countering the financing of terrorism (CFT) frameworks.

Blanco clarified that identical obligations pertain to businesses that provide anonymizing services — often dubbed “mixers” or “tumblers” — that seek to conceal the source of the transmission of crypto. Exchanges located outside of the U.S. but that nonetheless do business in part with residents of the country are also monitored by the agency.

The director gave the example of FinCENs action in 2017 against Russian crypto exchange BTC-e for flouting AML laws as a case in which SARs had “played a critical role,” with filings by both banks and other crypto exchanges providing crucial leads for law enforcement.

He commented that while SARs are increasingly being submitted, the agency has been “surprised” to see businesses taking appropriate steps to meet their regulatory requirements “only after they receive notice [that an examination is forthcoming].” “Let this message go out clearly today:  This does not constitute compliance,” he stressed.

According to Blanco, FinCEN, BSA examiners and the Internal Revenue Service (IRS) have examined over 30 percent of all registered crypto exchangers and administrators since 2014.  

Blanco further devoted attention to initial coin offerings (ICOs), stressing that while they may fall under overlapping jurisdictions of different U.S. regulatory agencies, their AML/CFT obligations remain “absolute.”

At a recent hearing on crypto and ICOs in Washington DC, Coinbase’s Chief Legal and Risk Officer called out the gamut of American regulators —  including the SEC, CFTC, IRS, and FinCEN — over an extreme “lack of coordination” that he considered to be negatively impacting innovation.

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IRS Joins the J5, Should We Prepare to the International Enforcement? Expert Take

In our Expert Takes, opinion leaders from inside and outside the crypto industry express their views, share their experience and give professional advice. Expert Takes cover everything from Blockchain technology and ICO funding to taxation, regulation, and cryptocurrency adoption by different sectors of the economy.

If you would like to contribute an Expert Take, please email your ideas and CV to george@cointelegraph.com.

The views expressed here are the author’s own and do not necessarily represent the views of Cointelegraph.com

The IRS’s Swiss Bank enforcement efforts may be winding down, but not its push for global tax compliance.  Over the past decade, the IRS has brought in over $10 billion by “encouraging” U.S. taxpayers with undisclosed foreign bank accounts to, well, disclose those accounts.   Although the program will end this September, the IRS is now gearing up to focus on cryptocurrency as the next big compliance push.

The recently formed J5 may provide a preview of what’s to come.  The J5 stands for an alliance of Joint Chiefs of Global Tax Enforcement from the United States, U.K., Canada, Australia, and the Netherlands who have come together to work on information sharing, with cryptocurrency high on the agenda.

In its mission statement, the J5 notes that they will work with other countries where appropriate.  So much for the U.S. bucking multilateralism! When it comes to tax enforcement, it appears that the U.S. remains eager to work with foreign governments to improve its detection and enforcement capabilities. 

Simon York, who is director of Fraud Investigation Service at HMRC in the U.K., said that cyber criminals have evolved, and what’s “changed is them using virtual currencies and the dark web.” In response the J5 promises to:

  • Enhance existing investigation and intelligence programs.
  • Identify significant targets for new investigations.
  • Improve the tactical intelligence threat picture now and into the future.
  • Lead the wider community in developing its strategic understanding of the methods, weaknesses and risks from offshore tax crime and cybercrime.
  • Raise international awareness that the J5 is working together to reduce transnational tax crime, cybercrime and money laundering, and create uncertainty for those who seek to commit such offenses.

What does this mean in practice?  Again, a look back at the IRS’s Swiss Bank efforts may provide some clues.  To convince Americans with foreign accounts to come forward, the IRS used a mix of sticks and carrots, including the threat of prosecution and fines for those who tried to stay hidden, as well as the promise of leniency for those who entered one of the IRS’s voluntary disclosure programs.  

But the key piece to the whole program was information gathering.  The IRS made foreign banks open their books and turn over U.S. account holders.  Once the IRS had this information, it wasn’t hard to convince taxpayers to come forward.    

The IRS is likely to apply this same model to cryptocurrency tax enforcement. For example, the IRS is likely to try to get its hands on foreign cryptocurrency exchange information, and start connecting users to accounts to see who hasn’t paid taxes.  Its summons to Coinbase may be just the tip of the iceberg.

In addition, the J5’s mission statement may provide a preview of some other features of this coming enforcement push.  It’s interesting that the J5 appears to be grouping tax evasion together with “money laundering” and “cybercrime,” at least in the language it uses.  Even more striking is that the J5 is using military and intelligence terminology to talk about its enforcement response. It’s not atypical for the U.S. government to use military and intelligence tools to go after international criminals, for example large-scale drug and weapons smuggling rings.  

But using military and intelligence tools to go after run-of-the-mill tax evasion involving cryptocurrencies?  That would be a new direction. And yet, it can’t be ruled out. The J5’s mission statement notes that it was formed “in response to the OECD’s call for countries to do more to tackle the enablers of tax crime.”  The IRS, and the other members of the J5 appear to be taking this call seriously, and it’s possible that cryptocurrency tax evasion will be dealt with even more aggressively than offshore accounts were in the IRS’s Swiss Bank efforts.

With this backdrop, tax compliance is essential, and it will likely not pay to assume the IRS won’t find out about an account or a wallet.  At the same time, in our democracy it’s important for enforcement agencies to be careful not to overstep their bounds. Civil liberty lawyers and libertarians among others will be certain to monitor this closely.   Using military and intelligence tools to combat offshore tax evasion may be overkill, especially when voluntary compliance efforts have proven to be so successful.

Dashiell Shapiro is a Tax Partner at Wood LLP in San Francisco, CA, and a former DOJ Tax Attorney. His practice focuses on tax controversy and audit defense and includes international tax and financial products/cryptocurrency tax planning work.

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International Task Force Notes Use of Cryptocurrencies in Financial Crime

The Internal Revenue Service (IRS) announced Monday that a new joint force of tax enforcement authorities will combat international and transnational tax crimes – including cybercrimes facilitated through cryptocurrencies.

Tax enforcement agencies from the U.K., Australia, Canada and the Netherlands will join the IRS in forming the Joint Chiefs of Global Tax Enforcement (J5) to prosecute tax crimes, according to a press release. The organization was formed in response to “a call to action” by the Organization for Economic Co-operation and Development (OECD) to “do more” on the crackdown on tax crimes.

The entity has already met, with cryptocurrencies coming up as an area of concern in financial crimes.

In a statement, Dutch Fiscal Information and Investigation Service general director Hans van der Vlist said:

“The unique thing about the J5 is the operational collaboration between five countries on tackling professional enablers that facilitate offshore tax crime, cybercrime and the threat of cryptocurrencies to tax administrations, as well as making best use of internationally available data and technology.”

Johanne Charbonneau, general director of the Canada Revenue Agency, also said that J5 is building a “serious commitment” in an international cooperation that will fight against serious international tax crimes, including cybercrimes through “the use of cryptocurrencies.”

No details are disclosed regarding how J5 will work together to end the threats received from cryptocurrency-related tax crimes, but an update on its initiatives is expected in late 2018, according to the news release.

Internal Revenue Service image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Five Nations Launch Tax Enforcement Alliance to Tackle Crypto, Cybercrime 'Threat'

The US Internal Revenue Service (IRS) has launched an international taskforce together with tax enforcement authorities from four other countries to take on cryptocurrency-enabled crimes, according to a press release published Monday, July 2.

The new coalition, dubbed ‘The Joint Chiefs of Global Tax Enforcement,’ or ‘J5,’ comprises tax enforcement agencies from five countries in total –– Australia, Canada, the Netherlands, and the United Kingdom, alongside the U.S.

As part of J5, the agencies will cooperate on intelligence and criminal investigations “to reduce the growing threat to tax administrations posed by cryptocurrencies and cybercrime,” as well as to target transnational tax crime and money laundering.

According to the IRS, the decision to form a transnational taskforce via J5 was in response to the intergovernmental Organisation for Economic Co-operation and Development (OECD)’s call to action for countries to step up their efforts against the enablers of tax crimes.

Don Fort, chief of the Internal Revenue Service-Criminal Investigation (IRS-CI) –– which will act alongside the IRS as part of the newly launched J5 –– told Forbes today that a multilateral effort “can pressurize the global criminal community in ways we could not achieve on our own.”

In February of this year, the IRS-CI assembled a team of 10 new investigators to tighten its pursuit of those who use crypto to evade taxes.

As well as subjecting cryptocurrencies to federal property taxes, the IRS has also taken part in joint action alongside the US Department of Justice (DOJ) and the FBI in crypto-related criminal cases, including a major indictment against listings website Backpage.com this spring –– the site was charged with laundering half a billion dollars in illegal revenue, partly via cryptocurrency.

To overcome difficulties in tracking anonymous crypto transactions, the IRS has long been pursuing crypto-enabled crimes by harnessing third-party blockchain intelligence tools such as Chainalysis, as Cointelegraph reported back in 2017.

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Supplemental IRS Guidance on Taxation of Cryptocurrencies is Needed: Expert Take

In our Expert Takes, opinion leaders from inside and outside the crypto industry express their views, share their experience and give professional advice. Expert Takes cover everything from Blockchain technology and ICO funding to taxation, regulation, and cryptocurrency adoption by different sectors of the economy.

If you would like to contribute an Expert Take, please email your ideas and CV to george@cointelegraph.com.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. This article does not contain investment advice or recommendations. Every investment and trading move involves risk, you should conduct your own research when making a decision.

In the US, cryptocurrencies at a federal level are regulated by the Financial Crimes Enforcement Network (FinCen), the Office of Foreign Assets Control (OFAC), the Internal Revenue Service (IRS), the Commodity Futures Trading Commission (CFTC) and the Securities Exchange Commission (SEC) which characterize cryptocurrencies as money, property, commodity and a security respectively.    

The multi-classification of cryptocurrencies pose uncertainties to the taxation of cryptocurrency and blockchain technology transactions which industry participants are eagerly awaiting answers and clarification to.

On May 30th, the American Institute of Certified Public Accountants (AICPA) for a second time, sent a letter to the IRS asking for more direction on cryptocurrency taxation beyond Notice 2014-21 which treats them as property.  The AICPA’s first letter to the IRS was sent two years ago, on June 10, 2016.  

“We recommend the IRS release immediate guidance regarding the tax treatment of virtual currency transactions, similar to that of Notice 2014-21 so that authoritative guidance exists,” said Annette Nellen, CPA, CGMA, Esq., chair of the AICPA Tax Executive Committee.  

“Specifically, we request additional guidance that will address items from the original Notice 2014-21, and new issues that are relevant to the 2017 tax year, such as chain splits, forks that have arisen subsequent to the release of the original notice” an issue which the American Bar Association’s Tax Section also addressed in a letter to the IRS during the first quarter of this year.

Cryptocurrency events: Cruptocurrency events including chain splits, forks, airdrops and giveaways are subject to price discovery and therefore, create a unique challenge in determining a USD translation for virtual currencies that newly come into existence for US tax purposes.

For example, Ethereum Classic on May 29th “forked” in an attempt to solve a mining issue.  The change necessitated all users of the original blockchain to update their software but disable a feature designed to make mining more difficult.  This feature was originally coded in as a way to switch from a Proof of Work, to a Proof of Stake concept. The developers of Ethereum have decided to stick to Proof of Work for now.

Notice 2014-21 does not address the tax treatment of forks, chain splits, airdrops, giveaways, or other similar activities that are unique to blockchain technology and cryptocurrencies.  

AICPA’s letter to the IRS suggests that taxpayers should report virtual currency events, by making an “Election to Include a Virtual Currency Event as Ordinary Income in Year of Transfer” within 30 days of the event.  If a taxpayer does not make the election, then the virtual currency event is reported as ordinary income when a taxpayer later disposes of the virtual currency received in a prior event. If the virtual currency is a capital asset in the hands of the taxpayer, future disposition of the asset would generate a capital gain or loss and the income reported would become the basis in the virtual currency.

Expenses of obtaining cryptocurrencies: Users of cryptocurrencies can obtain it by exchanging it or borrowing it for fiat currencies; or other cryptocurrencies including ICO tokens; or by “mining,” which is the process of having computers compete to solve complex mathematical problems.

Section 4, Q&A-8 of Notice 2014-21 states that when a taxpayer successfully mines virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.  This implies that mining is akin to a service activity. Therefore, it is appropriate to treat the costs of mining virtual currency similar to expenses incurred in providing other services which are expensed as paid or incurred.

As Cointelegraph writes, in a new case of permissioned use of cryptomining, news site Salon.com gave its users the option to allow Salon.com to access their “unused computing power” as an alternative to seeing advertisements.   This alternative form of monetization to traditional advertising by Salon means that any Moneros that Salon mined off of its visitors would be taxed appropriately.

AICPA’s letter to the IRS, suggests that cryptocurrency mining should be treated as ordinary income in the year it is mined, and the expenses of mining deducted as incurred.  Because the matching of income and expenses are consistent with other service activities. Crytpocurrency mining equipment should be capitalized and depreciated like any other property whose useful life extends beyond one year.

AICPA’s letter to the IRS however does not address, how expenses incurred by taxpayers in crypto asset lending transactions or in attaining ICO tokens should be handled.  

For example, how would holders of BAR tokens issued by Titanium Blockchain Infrastructure Services, whose founder squandered portions of the firm’s $21 million ICO sale proceeds, to pay for his Hawaiian condominium treat it for tax purposes?  

“The rapid emergence of virtual currency has generated several new questions on how the tax rules apply to various transactions involving virtual currency and activities and assets related to it.  Moreover, the development in the number of types of virtual currencies and the value of these currencies make these questions both timely and relevant to a growing number of taxpayers and tax practitioners”, Nellen added.  

Initial coin offering (ICOs) companies –which increasingly utilize the Ethereum blockchain platform — are anticipating a formal statement from the SEC on its classification of Ether (ETH) so that they have regulatory clarification between securities classification by the SEC and commodities classification by the CFTC.  In the absence of a pronouncement from the SEC, the IRS’s job of addressing these new questions could be all the more challenging.  

Acceptable valuation documentation & computation of gains and losses of cryptocurrencies: A cryptocurrency has an equivalent value in fiat currency or acts as a substitute for real currency based on its determinable value in the market.

Section 4, Q&A-5 of Notice 2014-21 refers to exchange rates established by market supply and demand used to determine the fair market value of virtual currency in USD as of the date of payment or receipt. It also recommends that taxpayers use a “reasonable manner that is consistently applied” to calculate the fair market value of virtual currency.

AICPA’s letter to the IRS suggests that further guidance and examples are necessary to define “reasonable manner” since there could be considerable differences in cryptocurrency pricing on different exchanges.  That taxpayers should be allowed to use an average of different exchanges as long as they are consistent in how they calculate the valuation and in how they make this determination for every cryptocurrency transaction.  And choose either specific identification or FIFO as long as the method is consistently applied from year to year to calculate their cryptocurrency gains and losses.

This would be particularly important since so many companies began developing cryptocurrency and blockchain-oriented accounting and tax software that US taxpayers rely on as a reasonable and consistent method for determining fair value of their cryptocurrency gains and losses for US tax purposes.

Foreign reporting requirements for cryptocurrencies:  Some virtual currencies are traded on centralized exchanges that operate in jurisdictions outside the US. The exchanges are either a pure virtual currency exchange or a virtual currency exchange which allows virtual currencies to exchange into fiat currencies. These foreign virtual currency exchanges have custody of customers’ virtual currencies and an exchange failure results in the loss of customer funds which are similar to a Foreign Financial Institution (FFI) because they behave in the same manner.

Notice 2014-21 does not address tax foreign reporting requirements for cryptocurrencies.  

AICPA’s letter to the IRS, suggests that taxpayers should report the value of cryptocurrencies and fiat currencies held at those foreign exchanges for FBAR and FATCA purposes if they meet the necessary threshold, but not when a taxpayer holds cryptocurrency in a wallet which the taxpayer owns, controls and is in possession of a private key.

“Virtual currency transactions, in which taxpayers increasingly engage, add a new layer of complexity to the analysis of a client’s reporting requirements.  The issuance of clear guidance in this area will provide confidence and clarity to preparers and taxpayers on application of the tax law to virtual currency transactions” concluded Nellen.

Selva Ozelli, Esq., CPA is an international tax attorney and CPA who frequently writes about tax, legal and accounting issues for Tax Notes, Bloomberg BNA, other publications and the OECD.

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Taxes on Restricted Crypto and Options Can Be Confusing: Expert Take

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision. This text shouldn’t be considered as legal advice.

There is considerable talk today about crypto investments for everyone, for individual retirement accounts, via index funds, and more. There are also plenty of crypto-related startups, some of which have gotten quite big and quite valuable. That means options, crypto bonuses, restricted crypto, etc. All of these raise tax issues, and can be confusing.

Before we address crypto itself that is awarded to workers in connection with services, let’s start with stock options, and options to acquire crypto.

Two types of options

There are two main types of options: incentive stock options (ISOs) and non-qualified stock options (NSOs). ISOs (only for stock) are taxed the most favorably. There is generally no tax at the time they are granted, and no “regular” tax at the time they are exercised. When you sell your shares afterwards, you pay tax, but hopefully as long-term capital gain.

The usual capital gains holding period is more than one year. But to get capital gains treatment for shares acquired via ISOs, you must: (a) hold the shares for more than a year after you exercise the options; and (b) sell the shares at least two years after your ISOs were granted. This two-year rule catches many people. Even though exercise of an ISO triggers no regular tax, it can trigger alternative minimum tax (AMT).

Non-qualified options

Non-qualified options are not taxed as favorably as ISOs, but there is no AMT trap. There is no tax when the option is granted. But when you exercise a non-qualified option, you owe ordinary income tax – and, if you are an employee, Medicare and other payroll taxes – on the difference between your price and the market value.

For example, you receive an option to buy stock at $5 per share when the stock is trading at $5. Two years later, you exercise when the stock is trading at $10 per share. You pay $5 when you exercise, but the value at that time is $10, so you have $5 of compensation income. If you hold the stock for more than a year and sell it, any sales price above $10 – your new basis – should be a long-term capital gain.

Options to buy crypto

Options to buy crypto are treated just like nonqualified options to buy stock. Usually the tax is applicable when you exercise the option, not when you are given the option.

Restricted stock or crypto means delayed tax

Suppose that you receive stock or any other property – including crypto – from your employer with conditions attached. Say you must stay at the employer for two years to get it or to keep it. Special restricted tax rules in Section 83 of the Internal Revenue Code kick in.

Let’s consider pure restricted property. As a carrot to stay with the company, your employer says if you stay for 36 months, you will be awarded $50,000 worth of crypto. You don’t have to “pay” anything for them, but it is given to you in connection with performing services. You have no taxable income until you receive the crypto. In effect, the Inland Revenue Service (IRS) waits 36 months to see what will happen. When you receive the crypto, you have $50,000 of income – or more or less, depending on how the crypto has done in the meantime. This income is taxed as wages.

The IRS won’t wait forever

With restrictions that will lapse with time, the IRS waits to see what happens before taxing it. Yet some restrictions will never lapse. With such “non-lapse” restrictions, the IRS values the property subject to those restrictions.

For example, your employer promises you crypto if you remain with the company for 18 months. When you receive it, it will be subject to permanent restrictions under a company buy/sell agreement to resell it for a fixed price if you ever leave the company’s employ. The IRS will wait and see – no tax – for the first 18 months. At that point, you will be taxed on the value, which is likely to be stated fixed price in the resale restriction.

You can elect to be taxed sooner

The restricted property rules generally adopt a ‘wait and see’ approach for restrictions that will eventually lapse. Nevertheless, under what’s known as an 83(b) election, you can choose to include the value of the property in your income earlier – in effect disregarding the restrictions.

It might sound counter-intuitive to elect to include something on your tax return before it is required. Yet the game here is to try to include it in income at a low value, locking in capital gain treatment for future appreciation. To elect current taxation, you must file a written 83(b) election with the IRS within 30 days of receiving the property. You must report on the election the value of what you received as compensation – which might be small or even zero.

For example, you are offered crypto by your employer at $5 per coin when it is worth $5. However, you must remain with the company for two years to be able to sell them. You are paying fair market value for the crypto. So filing an 83(b) election could report zero income. Yet by filing it, you convert what would be future ordinary income into capital gain. When you sell the crypto more than a year later, you’ll be glad you filed the election.

Restrictions + options = confusion.

As if the restricted property rules and stock options rules were each not complicated enough, sometimes you have to deal with both sets of rules. For example, you may be awarded options that are restricted – your rights to them “vest” over time if you stay with the company. The IRS generally waits to see what happens in such a case.

 

Robert W. Wood  is a tax lawyer representing clients worldwide from offices at Wood LLP, in San Francisco (www.WoodLLP.com). He is the author of numerous tax books, and writes frequently about taxes for Forbes.com, Tax Notes, and other publications. This discussion is not intended as legal advice.

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Azerbaijan’s Taxes Ministry Says Crypto Revenue Is Subject To Taxation

Revenue from crypto-to-fiat transactions will be subject to taxation in Azerbaijan, local news outlet Trend reported Saturday, May 5. Nijat Imanov of the country’s Taxes Ministry outlined the new measures during the second Finance and Investment Forum (FIF 2018) in Baku Saturday.

During the Forum, Imanov stated:

“This is formalized as a profit tax for legal entities and income tax for individuals. If someone bought a cryptocurrency and then sold it after its price increased, this amount is recorded as income and therefore should be attracted to taxation.”

Trend further reports that the Azerbaijani cryptocurrency market has seen significant growth between May and December 2017, with crypto trading becoming an increasingly popular means of income.

Crypto-to-crypto and crypto-to-fiat trading, as well as mining, are recognized as taxable events in most countries, falling under either income or profit (known as capital gains) taxation laws. France, for example, has recently brought most cases of crypto trading – excluding mining and ‘industrial level’ trading – under capital gains laws, taxed at a 19 percent flat rate, as opposed to income tax evaluations which can be as high as 45 percent.

The American tax authority, the IRS – which treats cryptocurrency as property and the purchase, sale, trade, and mining of crypto as taxable events – recently required major U.S. crypto exchange Coinbase to hand over customer data, after concerns that many traders were failing to file tax returns on their gains.