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Archive for Cryptocurrency

A Crypto Quagmire: Civil And Criminal Charges Filed Against A Coinbase Manager For Insider Trading Of Securities

A Crypto Quagmire: Civil And Criminal Charges Filed Against A Coinbase Manager For Insider Trading Of Securities

Recently the SEC filed suit for insider trading of securities against a high-level employee at the popular crypto exchange, Coinbase. The SEC filed its civil suit in Seattle on July 22, 2022, against and his co-conspirators. On the same day, the DOJ announced the unsealing of a federal indictment against the same defendants in the Southern District of New York.[i] The following discusses the allegations and draws conclusions regarding the implications for the crypto industry.

Both crypto exchanges and issuers of tokens, should take heed of this development. Beyond the intrigue and drama, the facts of the case are instructive regarding the legal quagmire faced by many crypto industry participants. The relevant coins appear to have been designed to avoid definition as a security. Apparently, Coinbase’s due diligence and analysis agreed that the relevant tokens are not securities.

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Crypto Currency Legislation Pending In The 50 States

Crypto Currency Legislation Pending In The 50 States

Introduction

With the crypto industry’s dramatic loss of market capitalization in recent weeks, some of the shimmer and gravitational attraction has shaken off digital assets. Consequently, some of the impetus behind legislative efforts related to digital assets and technology may have been lost this year. But digital assets and the blockchain technology on which they reside are likely to continue to interest investors and consumers and to play an important, albeit sometimes disruptive, role in modern economies.

Therefore, state legislatures remain likely to pass several crypto-related bills that vary widely in their subject matter and scope, including proposals that clarify existing regulation, create new regulatory frameworks, and dedicate state resources to support or study the impact and use of digital assets. This month the National Conference of State Legislatures surveyed legislation pending in each of the U.S. states and territories. See Heather Morton (June 6, 2022), Cryptocurrency 2022 LegislationNCLS.ORG. This post synthesizes and summarizes the content of that publication, with a focus on identifying general trends in the subject matter of the pending bills.

Despite significant legislative interest in crypto, not all states have bills pending this year. The legislatures of Nevada, North Dakota, and Texas are at rest during this fiscal year, with no regular sessions scheduled. Others had no digital assets legislation introduced. At the time of the NCLS report, the following states and territories had not introduced digital assets legislation in 2022: Arkansas, Delaware, D.C., Puerto Rico, Guam, Maine, Maryland, Texas, Nevada, U.S. Virgin Islands, Wisconsin, and South Dakota.

New York, Hawaii, and Arizona are among the jurisdictions with the most bills pending related to crypto and digital assets. Filed bills in New York include one that would create a moratorium on cryptocurrency mining centers. Another would create new criminal offenses, including for token fraud, rug pulls, private key fraud, and fraudulent failure to disclose interests in virtual tokens. New York would also require certain disclosures in advertisements involving virtual tokens. California also has significant, substantive legislation pending.

Pending Legislative Proposals

Below is a list the subject matter addressed by the most common bills pending and the states in which they have been proposed. These proposals would:

(1) Allow or prohibit some or all political subdivisions or agencies to pay employees and others in virtual currency, to accept payment in virtual currency, or to use virtual currency as collateral in state financings.

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Asset Protection Trusts For Cryptocurrency And Digital Assets

Asset Protection Trusts For Cryptocurrency and Digital Assets

Asset Protection Trusts for Cryptocurrency and Digital Assets

With more investors diversifying their investment portfolios, cryptocurrencies and other kinds of digital assets (i.e., non-fungible tokens “NFTs”) have become a more popular option in recent years. With the Internal Revenue Service declaring that digital assets are property, they can be accessed by creditors, however, so certain kinds of trusts may be established to help protect these assets as well as enabling access to online accounts, especially for cryptocurrency assets. A state-based Domestic Asset Protection Trust (DAPT) enables a trust creator (“trustor”) to protect their exiting digital assets through a legal instrument that shields them from creditors. Previously, these types of trusts were only available offshore. Fortunately, many states across the U.S. have adopted DAPT statutes to allow this type of trust to be legally-established within their jurisdictions.

What is a Domestic Asset Protection Trust?

Before DAPTs were enacted, a trustor/settlor would have to establish an irrevocable trust created by a third party in order for asset protection. A DAPT is a self-settled trust that allows the trustor/settlor protection to be the beneficiary, transfer a portion of estate assets to the trust, and provide for certain protections from future creditors, legal complaints, malpractice claims, and other financially-consequential events. Formally known as a qualified spendthrift trust, it is a trust that enables the trustor to transfer assets into a trust of which the trustor/settlor is also a beneficiary to protect themselves from creditors. This type of irrevocable trust may assure that wealth can be safeguarded for future generations and protects wealth from liability risk.

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Cryptocurrencies: How They Work

Cryptocurrencies: How They Work

The virtual currencies that have gotten the most attention are cryptocurrencies, which are used to transact business directly between two parties without going through a banking system.

Using a cryptocurrency is very different from paying with traditional currency. It’s a process with its own unique digital features, a distinctive underlying technology, and a highly specialized vocabulary.

To understand how cryptocurrency works, let’s look at a situation where it may be used.

Let’s assume you are selling a mountain bike to your cousin, using Bitcoin for the transaction. Each of you would each have a digital wallet that contains your private key—an alpha-numeric code of at least 16 characters (punctuation marks are encouraged!) that is far more comprehensive than a PIN. The private key, which should be kept entirely secure, enables you spend the Bitcoins allocated to your account.

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The Taxation Of Stablecoins

The Taxation Of Stablecoins

Over the past few years, cryptocurrencies such as Bitcoin and Ethereum have received the lion’s share of attention from crypto enthusiasts and investors, sending the price of these coins to new highs. The price of cryptocurrencies, however, is notoriously volatile. At any given moment, their prices can experience wild swings based on a regulatory crackdown from a country, an announcement of a hard fork upgrade, or even a tweet. This volatility has made the adoption of digital coins as a mainstream currency, on par with the U.S. dollar or other fiat currency, impractical. As a result, despite their popularity, cryptocurrencies continue to be viewed by many as speculative assets rather than a form of currency that can be used to conduct financial transactions.  Enter stablecoins.

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Founders Of Crypto ICO Plead Guilty To Tax Evasion After Raising $24 Million From Investors

Founders Of Crypto ICO Plead Guilty To Tax Evasion After Raising $24 Million From Investors

The owners of a cryptocurrency company have pleaded guilty to tax evasion, announced Acting U.S. Attorney for the Northern District of Texas Chad E. Meacham.

Bitqyck founders Bruce Bise and Samuel Mendez were charged with tax evasion in August. Mr. Bise pleaded guilty on Sept. 9; Mr. Mendez pleaded guilty this morning.

According to plea papers, Mr. Bise and Mr. Mendez admitted that Bitqyck raised approximately $24 million from more than 13,000 investors. Instead of fulfilling their promises to these investors, the defendants used Bitqyck funds on personal expenses, including casino trips, cars, luxury home furnishings, art, and rent.

“Transacting in virtual currencies does not exempt businesspeople from paying income taxes,” said Acting U.S. Attorney Chad Meacham. “These crypto-savvy defendants exploited an emerging technology, lying to their investors, pocketing the proceeds, and concealing the income from the IRS. The Department of Justice is committed to ensuring that every taxpayer pays his or her fair share – and to protecting the crypto space from bad actors.”

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New Tax Reporting Requirements For Cryptocurrencies And Other Digital Assets In Senate Infrastructure Bill

Digital Asset Reporting

On August 10, 2021, the U.S. Senate passed a $1 trillion infrastructure bill after months of negotiations. Tucked away within the sweeping legislation are measures that would extend Form 1099-B and cost basis reporting requirements to so-called “digital assets” such as Bitcoin and Ethereum. The requirements, which are expected to raise $28 million of revenue for the bill, could impose onerous tax reporting obligations on crypto miners, software developers, and other players in the industry that may not have the resources or capabilities to report user transactions.

The Proposed Reporting Requirements

Under the Senate bill, starting on January 1, 2023, a “broker” will be required to report transactions involving “digital assets” for the calendar year to the IRS on Forms 1099-B or another similar tax form. The legislation would treat digital assets as “specified securities,” meaning brokers would need to track and report such information as the identity of customers as well as the cost basis and gain/loss from the sale of digital assets. Under the bill, brokers would also be required to report transfers of digital assets to non-brokers. For purposes of the new requirement, digital assets would include any “digital representation of value” recorded on a blockchain or similar technology. This expansive definition would cover all cryptocurrencies and potentially other forms of digital assets such as non-fungible tokens (NFTs). As with traditional Form 1099-B reporting, taxpayers may be subject to substantial penalties for failure to file or timely file an informational return with the IRS.

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The Build Back Better Act – Tax Implications For Cryptocurrencies

The Build Back Better Act – Tax Implications For Cryptocurrencies

Free Attendee Ticket – Freeman Law International Tax Symposium

On November 3, 2021, the U.S. House Budget Committee introduced the latest version of the Build Back Better legislation (the “BBB Legislation” or “BBB Act”), which makes historical investments in education, climate change, and the economy. Although much has been written on the surcharge for certain high-net-worth individuals and a global minimum tax on corporations, other proposed changes in the legislation to the tax code stand to create ripple effects throughout the crypto ecosystem. We discuss the direct and indirect tax impact of the BBB Legislation for crypto investors, miners/validators, and other players further below.

Direct Tax Impact on Cryptocurrency – Wash Sale and Constructive Sales

The BBB legislation takes further steps to treat cryptocurrencies like traditional securities by subjecting all digital assets to the (A) wash sale rules under Section 1091 and (B) constructive sale rules under Section 1295 of the Code. The new wash sale rules would be effective after December 31, 2021, and the amended constructive sale rules would apply as of the date of enactment.

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Crypto And §1031 – Still Relevant In California!

Crypto And §1031 - Still Relevant In California!
In 2019, California only partially conformed to the section 1031 changes made by the Tax Cuts and Jobs Act. For individuals below specified AGI levels in the year an exchange begins, the pre-TCJA version applies. These levels are under $500,000 of AGI for MFJ and HH and under $250,000 for single.
Besides real property, what might individuals exchange? Well today, the most common non-real property exchanged by the roughly 95% of Californians who are still subject to section 1031 is cryptocurrency! Many types of virtual currency can only be acquired with bitcoin or another virtual currency.
Of course, few people are dealing with virtual currency, but the number grows each day.
What are the factors that should be considered to know if one virtual currency held for investment or business is like-kind to another?

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New Tax Reporting Requirements For Cryptocurrencies And Other Digital Assets In Senate Infrastructure Bill

New Tax Reporting Requirements For Cryptocurrencies And Other Digital Assets In Senate Infrastructure Bill

On August 10, 2021, the U.S. Senate passed a $1 trillion infrastructure bill after months of negotiations. Tucked away within the sweeping legislation are measures that would extend Form 1099-B and cost basis reporting requirements to so-called “digital assets” such as Bitcoin and Ethereum. The requirements, which are expected to raise $28 million of revenue for the bill, could impose onerous tax reporting obligations on crypto miners, software developers, and other players in the industry that may not have the resources or capabilities to report user transactions.

The Proposed Reporting Requirements

Under the Senate bill, starting on January 1, 2023, a “broker” will be required to report transactions involving “digital assets” for the calendar year to the IRS on Forms 1099-B or another similar tax form. The legislation would treat digital assets as “specified securities,” meaning brokers would need to track and report such information as the identity of customers as well as the cost basis and gain/loss from the sale of digital assets. Under the bill, brokers would also be required to report transfers of digital assets to non-brokers. For purposes of the new requirement, digital assets would include any “digital representation of value” recorded on a blockchain or similar technology. This expansive definition would cover all cryptocurrencies and potentially other forms of digital assets such as non-fungible tokens (NFTs). As with traditional Form 1099-B reporting, taxpayers may be subject to substantial penalties for failure to file or timely file an informational return with the IRS.

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Cryptocurrency, Third-Party Subpoenas, And Personal Jurisdiction Collide – Strobel v. Lesnick

Cryptocurrency, Third-Party Subpoenas, And Personal Jurisdiction Collide - Strobel v. Lesnick

Coinbase, Mt. Gox, and Gemini are well-known virtual currency exchanges. It is through these exchanges that cryptocurrency users may execute transactions (e.g., a Bitcoin transfer—whereby a transaction announcement occurs on the blockchain). As noted in a previous blog post, cryptocurrency transactions are pseudonymous, not anonymous. Further, cryptocurrency users do not have Fourth Amendment privacy interests in their virtual currency transaction records. See Bare Bitcoins – No Fourth Amendment Privacy in Virtual Currency Records. However, in the civil context, are litigants privy to blockchain information to identify users? Last Friday, a federal district court dealt with whether a civil litigant could apply for leave to serve a third-party subpoena on certain cryptocurrency exchange platforms.

Strobel v. Lesnick, et al.

A. Background

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Cryptocurrency Investors Turn To Opportunity Zones For Tax Relief

Cryptocurrency Investors Turn To Opportunity Zones For Tax Relief

Whether you consider cryptocurrency an investment, a commodity, an alternative banking system or a form of legalized gambling, the rapid adoption and stunning recent volatility of cryptocurrencies has led to frenetic trading by investors. As a result of COVID-19 disruption, economic uncertainty and the entry of PayPal into the crypto-consumer market (allowing more than 300 million users to buy cryptocurrencies easily), the crypto market has seen a dramatic runup in the values of Bitcoin and many other cryptocurrencies.

Speculative crypto trading (as well as day trading of stocks) has made many crypto investors wealthy on paper. Their trading generated a substantial amount of short-term capital gains. The IRS has made it clear that Bitcoin and other cryptocurrencies should be treated as assets or intangible property — and not currency — since it is not issued by a central bank. This results in taxability virtually every time crypto is transferred or liquidated.

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