Want to know more about cryptocurrencies? How about blockchain ledger technology and why it matters? Are there tax considerations that should be taken into account when dealing with bitcoin? Find the answers to these questions and more with this comprehensive slide deck from a presentation given by Murray Plumb & Murray attorneys Andrew Helman and Chris Branson.

2. Cryptocurrencies Through the Lens
of Commercial Law and Tax Law
Presented by
Andrew C. Helman
Christopher Branson
September 6, 2018

3. Introduction

4. Presenters
For over 25 years, Christopher Branson has been serving the
legal needs of businesses and entrepreneurs. He often serves as
general counsel to clients and his experience covers the
spectrum of the business cycle, from start-up, to investment and
growth, to succession planning and exit strategies. Christopher
also has considerable experience with business disputes and has
successfully handled commercial litigation in both state and
federal courts.
Andrew Helman is a business, work-out, and restructuring
lawyer and works with all types of businesses, including those
in the health care sector, to help them protect their assets. A
large part of his work is focused on helping clients, both
debtors and creditors, find solutions caused by financial
distress and counselling clients on how to avoid those
problems in the future.

5. What We Do

6. Blockchain Ledger Technology

7. • “Blockchain” is a computer
technology that creates a public,
tamper-proof digital ledger of
transactions.
• To access the address on the
blockchain, one needs its “key”—a
unique string of numbers typically
held by the cryptocurrency owner.
• Transactions can be public or
anonymous and recorded with
public and private keys.
• Thus anyone can see the address
of the transaction but may not
know the name of the party
involved.
What is Blockchain
Ledger Technology?

8. • Blockchain technology is being
used in a number of contexts.
• Banking institutions like JP
Morgan are investing resources to
use it as a fast, ideally tamper-
proof way to record international
money transfers.
• The technology could be used as
a way to record investments in
securities.
• Other companies are using the
ledger to track goods and
products, their manufacturing, and
their shipment.
• The fact that a transaction cannot
be deleted creates a useful audit
trail.
Why does it Matter?

9. Cryptocurrencies

10. • Cryptocurrency is a generic term
for a wholly digital asset like
Bitcoin.
• The asset can be used as an
investment vehicle or a medium of
exchange and payment.
• It is not supported by any physical
asset, the full faith and credit of
any government, or the
creditworthiness of a business.
• Cryptocurrency derives its value
from the perception of its worth on
the market.
What are
Cryptocurrencies?

11. • Cryptocurrency is the specific form
of a digital asset that is used for
investment or as a medium of
exchange.
• Blockchain ledger technology is
the method by which transactions
involving cryptocurrency are
recorded or tracked.
How does it Differ
from BLT?

12. • Cryptocurrency is steadily working
its way into the traditional
economy as a payment system
and investment tool.
• As 2017 closed, 11 percent of
American surveyed said they
currently or previously owned
virtual currency, major financial
institutions were offering
cryptocurrency trading products,
and businesses like Dell and
NewEgg accepted it for payment.
• Several businesses are now
lending against cryptocurrency as
collateral.
Why does it Matter?

13. Tax Implications of Cryptocurrencies

14. • IRS Notice 2014-21
• Most thorough guidance from the
IRS to date.
• It starts by declaring that for
federal tax purposes,
cryptocurrency (aka, “convertible
virtual currency”) is “treated as
property” and “is not treated as a
currency.”
• This seemingly simple (and almost
obvious) statement leads to a
number of consequences which
the Notice then enumerates in
FAQ format.
IRS Guidance on
Cryptocurrencies

15. • 2017 Tax Act
• The 2017 Tax Act provides only a
little guidance.
• But it provides an important
answer to the question whether
cryptocurrency is eligible for 1031
exchange treatment.
• (Spoiler Alert: No)
IRS Guidance on
Cryptocurrencies

16. • Notice 2014-21: Crypto is treated
as “Property” not “Currency”:
• This means:
– Property gains/losses must be
calculated on every trade
– Even if trading one crypto for
another
– Even if no US Dollars are
received
– For people trading a few
times/day, this means
THOUSANDS of trades/year
Income Tax
Considerations

17. • Calculating Gain/Loss on Crypto
Sale Price x # of coins: $100 x 2 = $200
Less Purchase price: ($75 x 2 = $150)
Less Fees: ($0.50 x 2 = $1)
Equals Gain/Loss: $49
Income Tax
Considerations

18. • Challenges for tracking Crypto
Gains/Losses:
– Similar to day trading
– For each coin and for every
trade, you need to track both:
• The basis (purchase price)
• As well as the sale price
and fees.
Income Tax
Considerations

19. • LIFO, FIFO and Specific
Identification
• All 3 options are available for
Crypto
• But selecting the best option is
easier said that done
• Example:
Income Tax
Considerations
Lot Date BTCCost BasisPrice NowGain (Loss)
Oct. 1, 2012 100 $10 $5,710 $570,000
Nov. 16, 201610 $745 $5,710 $49,650
June 29. 20171 $2,470 $5,710 $3,240

20. • Programs for tracking trades and
calculating Gains/Losses:
• Many on the market:
• Examples:
– BearTax
– CoinTracking
– Bitcoin.tax
– Others
Income Tax
Considerations

21. • Notice 2014-21
• Q-4: What is the basis of virtual
currency received as payment
for goods or services in Q&A-3?
• A-4: The basis of virtual currency
that a taxpayer receives as
payment for goods or services in
Q&A-3 is the fair market value of
the virtual currency in U.S. dollars
as of the date of receipt. See
Publication 551, Basis of Assets,
for more information on the
computation of basis when
property is received for goods or
services.
Income Tax
Considerations

22. • Notice 2014-21
• Q-5: How is the fair market
value of virtual currency
determined?
• A-5: For U.S. tax purposes,
transactions using virtual currency
must be reported in U.S. dollars.
Therefore, taxpayers will be
required to determine the fair
market value of virtual currency in
U.S. dollars as of the date of
payment or receipt. If a virtual
currency is listed on an
exchange . . . the fair market
value of the virtual currency is
determined . . . at the exchange
rate . . .
Income Tax
Considerations

23. • Notice 2014-21
• Q-6: Does a taxpayer have gain
or loss upon an exchange of
virtual currency for other
property?
• A-6: Yes. 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.
Income Tax
Considerations

24. • Notice 2014-21
• Q-7: What type of gain or loss does a
taxpayer realize on the sale or
exchange of virtual currency?
• A-7: The character of the gain or loss
generally depends on whether the virtual
currency is a capital asset in the hands of
the taxpayer. 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.
For example, stocks, bonds, and other
investment property are generally capital
assets. A taxpayer generally 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.
Inventory and other property held mainly
for sale to customers in a trade or
business are examples of property that is
not a capital asset.
Income Tax
Considerations

25. • Notice 2014-21
• Q-8: Does a taxpayer who
“mines” virtual currency (for
example, uses computer
resources to validate Bitcoin
transactions and maintain the
public Bitcoin transaction
ledger) realize gross income
upon receipt of the virtual
currency resulting from those
activities?
• A-8: Yes, 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.
Income Tax
Considerations

26. • Notice 2014-21
• Q-9: Is an individual who “mines”
virtual currency as a trade or
business subject to self-
employment tax on the income
derived from those activities?
• A-9: If a taxpayer’s “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.
Income Tax
Considerations

27. • Notice 2014-21
• Q-11: Does virtual currency paid
by an employer as remuneration
for services constitute wages for
employment tax purposes?
• A-11: Yes. Generally, the medium in
which remuneration for services is
paid is immaterial to the
determination of whether the
remuneration constitutes wages for
employment tax purposes.
Consequently, 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.
Income Tax
Considerations

28. • Notice 2014-21
• Q-13: Is a person who in the course of
a trade or business makes a payment
using virtual currency worth $600 or
more to an independent contractor for
performing services required to file an
information return with the IRS?
• A-13: Generally, 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. Payments of
virtual currency required to be reported
on Form 1099-MISC should be reported
using the fair market value of the virtual
currency in U.S. dollars as of the date of
payment.
Income Tax
Considerations

29. • Notice 2014-21
• Q-16: Will taxpayers be subject to
penalties for having treated a virtual
currency transaction in a manner that
is inconsistent with this notice prior to
March 25, 2014?
• A-16: Taxpayers may be subject to
penalties for failure to comply with tax
laws. For example, underpayments
attributable to virtual currency
transactions may be subject to penalties,
such as accuracy-related penalties under
section 6662. In addition, failure to timely
or correctly report virtual currency
transactions when required to do so may
be subject to information reporting
penalties 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.
Income Tax
Considerations

30. • 2017 Tax Act
• 1031 Exchanges
• Prior to the 2017 Act, there were
many who argued that Crypto
were eligible for deferral of taxes
through1031 exchanges.
• However, the 2017 Tax Act
clarified that 1031 is almost
exclusively for Real Estate and
cryptocurrency does not qualify
under 1031.
Income Tax
Considerations

31. • Rules for Donating Crypto:
– For value < $500: No
appraisal needed (26 U.S.C.
§ 170(a)(11)(A)(i))
– Between $500 - $5,000:
Taxpayer must provide “a
description of such property
and such other information as
the Secretary may require.” §
170(a)(11)(B)
– If the value exceeds $5,000,
then it is necessary to obtain
and submit a “qualified
appraisal of such property” by
a “qualified appraiser” with the
tax return. § 170(a)(11)(C).
Estate Planning and
Charitable Donations

32. • Rules for Donating Crypto:
Appraisals of Crypto:
• A number of online sites provide
exchange rate info for crypto
coins. E.g.:
– Coinbase (largest)
– Gemini (launched by the
Winklevoss Twins of
Facebook fame)
– Kraken (17 coins)
– Others
Estate Planning and
Charitable Donations

33. Cryptocurrencies and Commercial Law

34. • Article 9 is a body of law that
governs security interests in
personal property (i.e. any form of
property other than real estate).
• Article 9 has be enacted in every
state.
• A security interest is typically
granted in a document called a
security agreement.
• Once granted, a security interest
is effective as between a debtor
and a secured party, but it is only
effective against third-parties
when perfected.
• Perfection can be thought of as
the steps needed to put the world
on notice of the existence of the
security interest. It takes different
forms.
Article 9 of the Uniform
Commercial Code

35. • The rules for perfection depend on the
type of asset involved.
• Article 9 contains many specifically
enumerated classes of collateral, and
several are easily ruled out:
o Cryptocurrency will not be
“instruments” because, by definition,
“instruments” only exist in a written
form and involve the payment of
money. UCC § 9-102(47).
o Cryptocurrency are not “inventory”
because “inventory” (a sub-type of
goods) is limited to tangible, physical
property. UCC § 9-102(48).
o Cryptocurrency will not be a “deposit
account” because those are accounts
at banks or other financial institutions
accepting funds for deposit. UCC §
9-102(29).
o Cryptocurrency will not be an
“account” because it is not a right to
payment for services or property.
UCC § 9-102(2).
How Does One Perfect
A Security Interest in
Cryptocurrency?

36. • Possible asset classes include:
o Investment property “means a
security, whether certificated or
uncertificated, security
entitlement, securities account,
commodity contract, or
commodity account” UCC § 9-
102(49).
o Money is a “medium of exchange
currently authorized or adopted
by a domestic or foreign
government[.]” UCC § 1-
201(b)(24).
o General Intangible is a catch-all
for “any personal property,
including things in action,” that is
not another form of property.
UCC § 9-102(42). Investment
property, securities, and money,
for example, are not general
intangibles.
Perfection, Continued

37. • Article 9 incorporates the definition of “security” from Article 8.
• Under UCC § 8-102(15), the term “security” is defined as follows:
o “except as otherwise provided in Section 8-103, means an obligation
of an issuer or a share, participation, or other interest in an issuer or
in property or an enterprise of an issuer:
– (i) which is represented by a security certificate in bearer or
registered form, or the transfer of which may be registered upon
books maintained for that purpose by or on behalf of the issuer
– (ii) which is one of a class or series or by its terms is divisible
into a class or series of shares, participations, interests, or
obligations
– (iii) which:
» (A) is, or is of a type, dealt in or traded on securities
exchanges or securities markets
» (B) is a medium for investment and by its terms expressly
provides that it is a security governed by this Article”
Perfection (Asset Classes), Continued

38. • Most cryptocurrency will not be “money” because it is not official currency established by
a government. (Switzerland, Venezuela, and the Marshall Islands could be exceptions.)
• Cryptocurrency will most likely only be “investment property” if it qualifies as a “security.”
Based on available information, there appear to be several impediments to this:
o It is not an “obligation of an issuer or a share, participation, or other interest in an
issuer or in property of an issuer”
– No “obligation”
– Assuming an exchange is an “issuer,” is it a “share, participation or other
interest” in the “issuer or in property or an enterprise of an issuer”?
– Is an exchange even an “issuer” in the first place?
o There is no paper certificate nor registration books maintained identifying the
specific owner of a unit of cryptocurrency
o Exchanges do not appear to “create” bitcoin or act as guarantors, ruling out UCC
§ 8-201(b)
o Bitcoin is not fungible, ruling out sub(ii) of the definition
• General Intangible is the only definition that seems to clearly apply.
Perfection (Asset Classes), Continued

39. o A security interest in one form of collateral will attach to and be
perfected in “proceeds” for at least 20 days, and perhaps longer. UCC
§§ 9-102(64), 9-315(e).
– The security interest will be perfected in proceeds even if the
proceeds are held by a third party.
Why Does The Asset Classification Matter,
Continued?

40. o Assume a company has pledged its general intangibles to secure a loan and then
uses bitcoin to buy tickets to an NBA game from a team accepting cryptocurrency as
a perk for management or business entertainment.
o Assume a corporate traveler pays for a meal at an airport accepting cryptocurrency
(which is owned by the employer).
– In both examples, the vendor takes the cryptocurrency subject to any security
interest.
– The debtor will have no recognizable “proceeds” for these types of experiential
purchases.
– The vendor could become a litigation target of the secured party.
– In litigation, the secured party may benefit from the identifiable nature of
cryptocurrency and likely would not have to engage in tracing for commingled
proceeds of cash.
o Assume the vendor has a secured party with a lien on all assets, including general
intangibles, with an “after acquired” clause in its security agreement.
– Even if the vendor takes the cryptocurrency free of a security interest (because
there was none or the disposition was authorized), a further disposition of the
cryptocurrency would likely be subject to the security interest of the vendor’s
lender.
Horrible Hypos

41. • State and federal law provide
remedies allowing parties to avoid
transfers that are made with the
intent to hinder or delay creditors
or for a lack of reasonably
equivalent value.
• Remedies available to plaintiffs
include a damage award or
recovery of the specific asset.
• The audit trail associated with
cryptocurrency and the blockchain
ledger may make it easier to
identify specific units of
cryptocurrency to recover.
Fraudulent
Transfer Law

42. • Cryptocurrency owned by a debtor
on the date of a bankruptcy
petition would be property of a
debtor’s bankruptcy estate and
identified in a schedule of assets.
• Bankruptcy trustees seeking to
identify and liquidate assets will
need to rely on an honest debtor
to self-report the asset or track
down purchases based on a
debtor’s records.
• Once identified, the trustee can
enforce the bankruptcy estate’s
rights to obtain a turnover of the
property from the party holing it.
Bankruptcy Law

43. • John Oliver recently cursed his
way through a general discussion
of cryptocurrencies that is worth a
watch just to learn some of the
lingo so you can comfortably hang
with all the cryptocurrency
#HODL:
– https://www.youtube.com/watc
h?v=g6iDZspbRMg
• If you prefer a more PG guide to
#HODL, here it is:
– https://cryptojh.com/download/
cryptocurrency-trading-terms-
infographic/
FOR FUN

44. Q + A

45. Thank You
Maine Society Of CPAs!