In December, the New York State Department of Financial Services (DFS) published a proposal to create a public list of approved virtual currencies and a self-certification methodology for holders of NY Bitlicenses and New York trust companies approved to engaged in a virtual currency business to offer to New York consumers virtual currencies without the need for additional approvals of the DFS. If adopted, the proposal would be a significant step at the state regulatory level toward treating digital assets in a manner commensurate with other more traditional financial assets.
Pretty much from the introduction of Satoshi’s cleverly constructed currency, industry players and observers alike have waited to see how exactly the increasing population of digital assets would be categorized and regulated. Slotting “disruptive” technologies into existing regulatory regimes is hardly a swift process, but there has been some recent movement on behalf of U.S. regulators and Congress. In “All Eyes Are on Regulation of Digital Assets as Federal Agencies and Lawmakers Seek to Bring Clarity,” colleagues Cassie Lentchner, Daniel N. Budofsky and Aaron R. Hutman break down some of that activity. In the first of three alerts on the matter, they look in particular at the SEC’s recent no-action letter involving tokens released by the gaming company, A Pocketful of Quarters.
On January 8, 2015, New Hampshire House Bill 356 was introduced, proposing to exempt persons using private virtual currencies for internet commerce from the licensing requirements for money transmitters. H.B. 356 would define “virtual currency” to mean ” any type of digital unit that is used as a medium of exchange or a form of digitally stored value or that is incorporated into payment system technology.” H.B. 356 further provides that “[v]irtual currency shall be broadly construed to include digital units of exchange that: (1) Have a centralized repository or administrator; (2) Are decentralized and have no centralized repository or administrator; or (3) May be created or obtained by computing or manufacturing effort.” However, virtual currency would not include “digital units that are used solely within online gaming platforms with no market or application outside of those gaming platforms, nor shall virtual currency be construed to include digital units that are used exclusively as part of a customer affinity or rewards program, or can be applied solely as payment for purchases with the insurer or other designated merchants, but cannot be converted into, or redeemed of, fiat currency.”
In comments on October 14, 2014, Ben Lawsky commented on changes to the proposed bitlicense regulations. The main points he made were these:
- Regarding who will be required to obtain a bitlicense, he said the focus will be financial intermediaries, not software developers or individual users.
- To the extent that company may need both money transmitter and virtual currency licenses, for example – which is possible – the process will be streamlined to avoid duplication.
- Regarding concerns that banks were exempted, he said that is untrue. Banks cannot start providing virtual currency services without prior approval from DFS, and they will have to comply with any requirements that are otherwise imposed on virtual currency businesses.
- Mining, per se, will not be regulated. To the extent a miner engages in other virtual currency services, however – for example, hosting wallets or exchanging virtual currency – a license may be required for those activities.
- Consideration is being given to how to avoid excessive regulatory costs for startups – but no specific proposal was provided. He said the goal is not to stifle technological innovation, but if a software company is also taking on the responsibility of actually safeguarding customer money, it is a much more difficult calculation.
Join members of Pillsbury’s leading Virtual Currency practice, partners, James Gatto, and Deborah Thoren-Peden, to understand and analyze some of the key legal and business issues related to Bitcoin and other crypto-currencies. This webinar will highlight the history of Bitcoin and other digital currencies and associated unique business models. They will also address the latest developments in digital currency regulation and enforcement.
Topics will include:
- Background on Bitcoin and other crypto-currencies and the use of emerging, virtual currency-based business models
- Overview of the virtual currency legal issues (federal, state, international)
- Ramifications of recent IRS ruling
- Update on FINCEN Guidelines
- Recent enforcements and regulatory actions
Tuesday, April 22, 2014
12:00 pm PT
3:00 pm ET
RSVP by April 21
Please register for this complimentary presentation to receive log-in/dial-in information.
James G. Gatto, Partner, Social Media, Entertainment & Technology – Pillsbury
Deborah S. Thoren-Peden, Corporate & Securities, Pillsbury
The IRS has issued its first major ruling on the U.S.
federal tax implications of transactions in, or transactions that use, Bitcoin and other convertible virtual currencies.
The ruling stresses that it relates to convertible virtual currencies. The legal landscape with respect to Bitcoin and other convertible virtual currency continues to evolve at a more rapid pace. Last March, FinCEN issued its now famous virtual currency guidance. Shortly thereafter, a number of high profile enforcements ensued. If history is any lesson, it is likely that following this ruling will likely will be followed by some tax enforcements. Therefore, miners, exchanges, businesses transacting in Bitcoin and others dealing with virtual currencies should promptly assess this guidance and ensure compliance.The IRS made clear that penalties apply for failure to timely comply. This should be of particular concern to the extent the ruling is applied retroactively.
Among other things the IRS has stated:
One of the most significant pronouncements of the notice is that the IRS has determined that virtual currency is treated as property for U.S. federal tax purposes and therefore general tax principles that apply to property transactions apply to transactions using virtual currency. The notice indicates that this means that:
- Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
- Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
- The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
- A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
Additional points made by the IRS include the following:
- Convertible virtual currency is a virtual currency that has an equivalent value in real currency,
or that acts as a substitute for real currency, such as Bitcoin
- The sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.
- Virtual currency is NOT treated as currency for purposes of determining whether a transaction results in foreign currency gain or loss under U.S. federal tax laws.
- For purposes of computing gross income, a taxpayer who receives virtual currency as payment for goods or services must include the fair market value of virtual currency received as measured in U.S. dollars, as of the date that the virtual currency was received.
- The basis of virtual currency received as payment for goods or services is the fair market value of the virtual currency in U.S. dollars as of the date of receipt.
- For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars using the fair market value of virtual currency as of the date of payment or receipt.
- If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.
- A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer and realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset
in the hands of the taxpayer (e.g., inventory and other property held mainly for sale to customers in a trade or business).
- Mining virtual currency triggers gross income at the fair market value of the virtual currency as of the date of receipt.
- If a mining of virtual currency constitutes a trade or business,
and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self-employment income and are subject to the self-employment tax.
- Payments in virtual currency received for services performed as an independent contractor constitute gross income, if related to any trade or business carried on by the individual as other than an employee, at the fair market value (in U.S. dollars) as of the date of receipt and constitutes self-employment income and is subject to the self-employment tax.
- The fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement.
- Payments made using virtual currency is subject to information reporting to the same extent as any other payment made in property (e.g., payments in virtual currency with a value of $600 or more for fixed and determinable income including rent,
salaries, wages, premiums, annuities, and compensation).
- A person who in the course of a trade or business makes a payment of $600 or more in a taxable year to an independent contractor for the performance of services is required to report that payment to the IRS and to the payee on Form 1099-MISC, Miscellaneous Income.
- Third party settlement organizations are required to report payments made to a merchant on a Form 1099-K, Payment Card and Third Party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200, and (2) the gross amount of payments made to the merchant exceeds $20,000.
- Taxpayers may be subject to penalties for failure to comply with tax laws (e.g., underpayments attributable to virtual currency transactions such as accuracy-related penalties under section 6662, and failure to timely or correctly report virtual currency transactions when required to do so under section 6721 and 6722).
However, penalty relief may be available to taxpayers and persons required to file an information return who are able to establish that the underpayment or failure to properly file information returns is due to reasonable cause.Conclusion
If you have any questions, Pillsbury has one of the leading virtual currency practices in the country. Our team of over 70 professionals includes a number of tax specialists.
Explore the Future of Bitcoins
After taking Inside Bitcoins to Las Vegas this past winter, this definitive Bitcoin event is returning to New York City, April 7-8 at the Javits Convention Center. Join us in New York City as our industry experts, business visionaries, and virtual currency veterans converge to analyze the first digital, decentralized, peer-to-peer based global currency. These thought leaders will also share their insights and knowledge on the implications of bitcoin, along with predictions on what lies ahead. Whether you’re a venture capitalist, lawyer, technologist, entrepreneur, regulator, cryptographer,
payment pioneer, or public policy expert, our agenda offers the latest intelligence for everyone and anyone interested in learning more about bitcoin.
Can bitcoin carve out a significant place for itself alongside today’s mainstream payment technologies? What technical and regulatory obstacles does bitcoin need to overcome? Will large-scale bitcoin mining help to push the price of bitcoins higher? Is bitcoin going to save the global economy, or is it today’s answer to 17th-century tulip mania? Be sure to attend Inside Bitcoins and get answers to all of your burning questions!
Who Should Attend?
Anyone with a vested interest in bitcoins and other virtual currencies, including:
- Financial professionals
- Private equity, corporate, angel and venture capital investors
- Banks and financial institutions
- Brick-and-mortar merchants and online retailers
- Credit and loyalty solution providers
- Daily deal and group buying networks
- Data and payment processors
- Legal professionals
- Security solution providers
- Founders of early stage and emerging growth companies
James G. Gatto, Partner, Social Media, Entertainment & Technology, Pillsbury
Deborah Thoren-Peden, Leader, Consumer &
Retail; Co-Leader, Privacy, Data Security & Information Use, Pillsbury
Originally seen in
MoneyBeat – a Wall Street Journal blog.
One thing we can tell you about the Mt. Gox bankruptcy case: It won’t be like any other bankruptcy case you’ve seen.
MoneyBeat had a very enlightening and interesting talk with Christopher Mirick, a partner at the international law firm Pillsbury Winthrop Shaw Pittman, operating in the firm’s Insolvency & Restructuring practice. He is also one of two educational directors at American Bankruptcy Institute’s international committee and co-author of the book “Strategies for Creditors in Bankruptcy Proceedings.”
One point he made,
that seems obvious in retrospect, is that there’s never quite been a bankruptcy case like this one. It involves a new technology, a company that seemed to operate with only a few employees and almost no presence in the countries across the globe where it did business, and questions of cross-border bankruptcy law.
What follows is a paraphrased version of our conversation.
How messy is this bankruptcy going to be?
It’s going to be “very messy,” Mr. Mirick said. There are a couple of things to think about. For one thing, Mt. Gox has creditors all over the world. Of their roughly 130,000 creditors, only about 1,000 are in Japan. According to Mt. Gox, they don’t have U.S. bank accounts. “So what’s a person in Illinois going to get? There’s nothing there,” Mr. Mirick said. Mt. Gox did business in a lot of places where it didn’t have any physical existence. “What’s there to recover?”
Is your firm involved in the case?
Mr. Mirick said this kind of case would be “up our alley,” but the firm isn’t currently involved, although it does have a Tokyo office. “But we would jump at the chance.”
“You’ve never had a case like this.” It involves a cutting-edge technology, and questions about cross-border enforcement of bankruptcy proceedings. Mr. Mirick pointed to Lehman Brothers, for comparison [a case that, we’d note is still being settled.] Unlike Mt. Gox, Lehman had entities in each jurisdiction where they operated. “This [Mt. Gox] is just like a couple of guys with some computers who happened to be in Japan, and handling half a billion dollars that went missing.”
What can a creditor hope to recover?
Mr. Mirick said creditors of Mt. Gox should be looking for a way to track the money and bring it back, if possible. They should also examine the timeline, for when the money first disappeared, he said. Was it three months ago? Six? “If they were making payments during that time, maybe you could claw some of that back.”
From the creditors’
point of view, Mr. Mirick said, somebody has to be blamed, whether it’s the Mark Karpeles, the directors, or the officers. That person or people may have insurance, if not assets, and creditors may be able to go after that, he added.
“But, for a company without physical assets, the ability to get a recovery is quite limited.”
Both the Central Bank of Russia and the Russian Prosecutor General’s Office explained that the rouble is the country’s sole official currency and that the production of alternative monetary products, such as Bitcoin and other virtual currencies, is illegal under current law. Russian regulators also warned that anyone who exchanges virtual currency for national or foreign currency, goods, or services will be treated as if they are potentially involved in suspicious activities, money laundering, or terrorism financing.
Although many of you are obviously fascinated by the fast-paced virtual currency industry, trying to read a news article or blog can sometimes be incredibly difficult due to the sheer number of acronyms and terms of art commonly used by industry participants. The author of the attached document endeavored to capture the key acronyms, abbreviations and definitions relevant to the VC industry to assist you so that you can keep up with key developments. Still have questions or additional acronyms, abbreviations or definitions that you would like us to add? Please contact the author, Amy Pierce, or any of our Social Media & Games attorneys.
Check out our helpful guide here: Virtual Currency – Acronyms Abbreviations and Key Definitions