Blockchain Bill Fails in Colorado

Unfortunate that Colorado is not following states like Wyoming and opening up their state to innovation:

HB 1426, a piece of state legislation that would have created guidelines for identifying “open blockchain tokens” as securities, was voted down in the Colorado state Senate on May 9, according to public records.

https://cointelegraph.com/news/colorado-blockchain-bill-voted-down-in-state-senate

Crypto Regulation in New York

If New York were looking to give crypto companies even more reason to move to Wyoming or Arizona, they just succeeded.  My Penn Law classmate Jon Sorkowitz has this post at Law360 about the NY AG investigating already-licensed crypto firms:

The office of the New York State Attorney General has opened a second regulatory front for cryptocurrency firms doing business in New York. On April 17, the attorney general’s office sent letters to 13 leading crypto exchanges requesting wide-ranging disclosures about their business practices, asserting the AG’s authority to protect investors, investigate, and sue over deceptive and unfair practices.

https://www.law360.com/securities/articles/1041513/a-new-regulatory-avenue-for-ny-cryptocurrency-exchanges

This is regulation gone overboard.  The BitLicense already includes an extremely rigorous review and monitoring process.  For those unfamiliar with its burdens, Coindesk has an excellent article on the subject: https://www.coindesk.com/contortions-compliance-life-new-yorks-bitlicense/.  Subjecting those who obtain it to yet more oversight just encourages them to leave New York entirely.

Centra

is providing a lesson in how to go to jail for fraud:

104. “Michael Edwards” was listed as the Chief Executive Officer and Co-Founder of Centra. Edwards’s LinkedIn profile stated that he had an M.B.A. from Harvard University and an extensive career in banking, first as a Financial Analyst at Bank of America, then as a VP of Business Banking at Chase Bank, and most recently as a Senior VP at Wells Fargo.

105. “Jessica Robinson” was listed as the Chief Financial Officer, and she had purportedly served most recently as the CFO at Johnson Communications for nearly five years.

106. Neither Edwards nor Robinson is a real person. A photo of Edwards used in earlier iterations on Centra’s website and in a published White Paper was that of a Canadian professor with no relationship to the company. The picture of Robinson in early iterations on the website and in a published White Paper appears to be a stock photograph, i.e., of an actor. Centra also created fake LinkedIn profiles for Edwards and Robinson, both of which were deleted after an online blogger raised questions regarding the two executives and whether they existed.

. . . .

109. That same day, Sharma sent Trapani another message that he “had one girl
contact me lol [and] said take my picture off your site.” Sharma then sent Trapani the picture of “Edwards” used in the early White Papers and website and asked: “U know anyone [t]hat looks like this guy . . . I need someone who kinda looks like him[.] I can’t just change him now People are gonna be like wtf.” Later that same day, Sharma reiterated to Trapani that he “need[ed] to find someone who looks like Michael” for the “[t]eam photos.” Soon after, he described the team members on the website to Trapani: “Everyone real Except Jessica And Mike.” Several hours later, Sharma asked Trapani: “Who do we know looks like Jessica Robinson”? Later that evening, Sharma said to Trapani: “Gonna kill both Ceo and her[.] Gonna say they were married and got into an accident.”

https://www.sec.gov/litigation/complaints/2018/comp-pr2018-70.pdf

Crypto Like-Kind Exchanges

As April 15th rapidly approaches, articles covering the many nuances of crypto tax treatment become more and more important:

One important exception to the general rule that exchanges of property are immediately taxable is the “like-kind” exchange rule under Section 1031 of the Code.

Under Section 1031, no gain or loss is recognized if property held for investment (or for productive use in a trade or business) is exchanged solely for property of like kind.

For crypto traders, the ability to use like-kind exchange rules to avoid U.S. tax on their trades is a bit of a “good news/bad news” story.

First, the bad news. Buried deep in the massive tax bill enacted at the end of 2017 was a provision that limits like-kind exchanges to real estate transactions, effective after December 31, 2017.

As a result, there seems to be zero ability for crypto traders to claim that their coin trades undertaken after 2017 qualify as Section 1031 like-kind exchanges.

Trades before 2018

Crypto traders still may be able to argue that their transactions undertaken in 2017 and prior years were not taxable under the Section 1031 like-kind exchange rules. But, the application of the like-kind exchange rules to crypto transactions is far from certain.

https://www.coindesk.com/owe-irs-crypto-crypto-trades/

Delta Replaces Frequent Flyer Program With Ether

Spectacular leap forward in crypto adoption:

Delta Air Lines will be the first major global carrier to adopt digital currency in lieu of its existing loyalty program, effective January 1, 2019. It will transition from having its members accrue SkyMiles, which are currently awarded based on dollars spent on the ticket fare, to earning Ethereum, which is one of the many types of cryptocurrencies currently in the market.

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Happy Easter, everyone!
(And April Fool’s.)

The ABA on Hard-Fork Taxation

An undercovered topic in crypto has been the tax treatment for hard forks, like the Bitcoin / Bitcoin Cash split in 2017.  With April 15 looming on the horizon, the IRS desperately needs to clarify its treatment of hard forks.  Though I am not a tax lawyer, it has long seemed to me that two sensible approaches exist:

(1) Treat the received crypto as dividends.  This is the safest approach for taxpayers because you pay tax on the received coins effective when you received them, so the IRS can’t possibly complain that you have underpaid.  But there are multiple problems.  First, it is difficult to assign a value to newly forked coins.  Their liquidity is usually small because few exchanges immediately support them, and their price therefore fluctuates wildly.  Second, the recipient may not actually have access to the forked coins, but under the doctrine of constructive receipt, the IRS may still hold them liable for the taxes on it. (https://www.forbes.com/sites/tysoncross/2017/10/17/yes-the-bitcoin-hard-fork-really-is-taxable-income-heres-what-you-need-to-know/#da9a1372d078)  Third, believe it or not, the goal is not to pay the IRS the most you possibly can, but rather the amount you actually owe under the law.

(2) Treat the received crypto as an asset with a basis of $0 on the day of the fork, and pay capital gains under the normal rules on the day you dispose of it.  This resolves the problems above.  By the time someone sells the crypto, they are satisfied that liquidity is sufficient and, in any case, they receive a clear, unambiguous amount in return.  They never need to pay taxes for property they don’t control.  And they don’t pay early.

The second approach has recently been suggested to the IRS by the ABA Section on Taxation.  (https://www.americanbar.org/content/dam/aba/administrative/taxation/policy/031918comments2.authcheckdam.pdf)