CRYPTOCURRENCIES AND THE LAW:

Presented by Ali Mirsaidi (Duke Law, Start-Up Ventures Clinic) and Chris Boone (Duke Law)

WHAT LEGAL ISSUES MIGHT MEAN FOR YOU

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Legal Disclaimer

• We are happy to be here today, but as law students, we cannot offer legal advice.

• Nothing presented today should indicate that we are forming an attorney-client relationship or offering any legal advice

• While we are happy to try and answer general questions you may have, please be sure to seek the advice of an attorney if you are engaged in activity that might involve your legal rights and duties

Preview

• Our goals for today are to educate you about– Whether your business/activity may qualify as a

“money transmission service” and thus require you to take certain actions with the federal and state governments

– How to think of certain tax issues that may be present when dealing in CCs

– Other things to keep an eye out for as the legal landscape around CCs develop

What Do We Know?

• Not a whole lot!• The law is slow to adapt to new technologies

and many federal and state agencies are still scratching their heads, figuring out what the technology means

Preliminary Issues

• CC is not considered legal tender / fiat money– Creditors are not required to accept Bitcoins as

they would be legal tender• Because of their nature, not protected by

guarantees such as the FDIC Insurance Coverage

• But still recognized, at least in the U.S., as “money”

Federal Regulatory Activity• The Department of Treasury’s Financial Crimes Enforcement

Network (FinCEN) has issued guidance and rulings governing Bitcoins

• Why this matters:– Bank Secrecy Laws (BSA) require “money transmitters” to register

with FinCEN and implement AML and KYC policies– Money transmitters: “person who provides money transmission

services”– Money transmission services: “the acceptance of currency, funds,

or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means”

FinCEN Guidance

• Three classifications in the guidelines– Exchanger (“person engaged in a business of

exchanging virtual currency for real currency, funds, or other virtual currency”)

– User (“a person that obtains virtual currency to purchase goods or services on the user’s own behalf”)

– Administrator (irrelevant for our purposes)• According to FinCEN, exchangers are money

transmitters; users are not

FinCEN Rulings: What about Miners?

• Guidelines were unclear whether miners were users or exchangers

• Rulings state that the user/exchanger distinction relies on “[1] what the person uses the convertible currency for, and [2] for whose benefit” – importantly, the rules look at whether the activity involves acceptance and transmission

FinCEN Rulings: What about Miners?

• Thus, “[t]o the extent that a user mines Bitcoin and uses the Bitcoin solely for the user’s own purposes and not for the benefit of another . . . the user is not an MSB . . . because these activities involve neither ‘acceptance’ nor ‘transmission’”

• Does not matter whether the user mining is an individual or a corporation

FinCEN Rulings: Sale of Cryptocurrency?

• The guidelines were ambiguous as to what classification individuals would have if they sold Bitcoins for their themselves– Not a user because CC was not used to purchase

goods and services– Not an exchanger because (probably) not engaged

in the business of such activity

FinCEN Rulings: Sale of Cryptocurrency?

• Current rulings state that users can purchase goods or services for their own use, pay debts previously incurred in the ordinary course of business, make distributions, and convert CC into a real currency “so long as the user is undertaking the transaction solely for the user’s own purposes and not as a business service performed for the benefit of another”

FinCEN Wrap-Up

• What type of businesses should be concerned about being “exchangers?”– Businesses that “transfer[] to third parties at the

behest of sellers, creditors, owners, or counterparties” should be examined closely

– Possible examples: exchanges, tumbler services, conversion intermediaries, wallet services

FinCEN Wrap-Up

• But this is only part of the picture!– Most states have money transmission laws in

effect– May not expressly address CCs, but can be

interpreted to incorporate CC transactions– If you are caught by the FinCEN umbrella, likely

caught by state regulation as well

Tax Issues

• How is CC treated for tax purposes?– The IRS has not made any definitive ruling or

comment on the issue– Unclear whether CCs will be treated as capital

assets or as a fiat currency

• Regardless of classification, other issues still remain

Tax Issues: What’s in a Basis?

• Taxable gains are the “excess of amount realized over the adjusted basis”

• What is “amount realized”?• What is “basis”?– Basis is cost: what did it cost you to obtain the object

in question (e.g., the CC)– If you bought a Bitcoin at T0 for $100 and sold it at T1

for $250, your taxable gain would be $150.• Pretty straightforward, right?

Tax Issues: Basis? Which basis?

• Now, suppose you bought a Bitcoin at T0 for $100, another at T1 for $200, and another at T2 for $300. At T5, you sell a Bitcoin for $1,000.– Which basis do you use? Treatment of stock may

provide the best insight. – If you can identify the CC, you will use its basis;

but this is incredibly difficult– A FIFO application would be prudent (safest

choice)

Tax Issues: More Basis Issues

• Where’s the problem?– Given the nature of CC (e.g., microtransactions,

input/output valuation), who’s keeping track?– Keeping transactions organized by wallet makes

them easier to identify, thus allowing basis selection easy

• What about miners?– If basis is cost, what about newly mined coins?

• Other basis rules for gifts, receipt of goods, etc.

Tax Issues: Sales Tax

• For businesses deciding whether to accept CCs, consider sales tax implications

• The government is still figuring out how to handle CCs but is still going to want to collect tax on sales (at least for the foreseeable future) in dollars

• Given price volatility associated with these currencies, accepting CCs can cause businesses to incur losses– Potential solution: exchange CCs quickly or deal with a

business that does it for you (e.g., Coinbase)

Other Issues: More State Regulation

• Another issue to consider is how state regulation will impose on businesses that deal in CCs.– California and New York are two states in the

forefront of determining how to handle CCs (e.g., BitLicense)

– This may be in the form of money transmission service regulation, but can be other regulations

Other Issues: Financial Account Reporting Requirements

• Ownership of CCs in foreign account may trigger certain reporting requirements to the IRS– Aggregate ownership in foreign financial account >

$10,000 IRS Form 114, Report on Foreign Bank and Financial Accounts (FBAR)• Issue: do foreign CC exchanges qualify as foreign financial

accounts?– Aggregate ownership of foreign financial assets >

$50 - 75,000 IRS Form 8938• Issue: can CCs be classified as ‘foreign’ financial assets?

Other Issues: Conflict of Laws

• Other countries’ laws may apply when your CC lands in their territory

• Also, given the novelty of the technology, it is unclear how existing international treaties, norms, etc. may apply to conflicts and issues surrounding CCs

Other Issues: Legal Remedies

• While CCs remain largely unregulated, they are still governed by private contract

• For example, using an exchange requires you to agree to some agreement (e.g., terms of service / use)

• Your legal remedies against the other party will either be defined or limited in these agreements, so it is important that careful consideration is given to each one

Wrap-Up

• Be on the lookout for forthcoming information and keep track of your transactions!

• Questions?