Tuesday & Wednesday, January 28‐29, 2020 Hya� Regency Columbus, Columbus, Ohio Workshop CC Harnessing the Blockchain for Tax … Practical Business Strategies to Incorporate Technology and How Fully Implemented Blockchain Technology Will Transform Business Tax Departments Wednesday, January 29, 2020 11:00 a.m. to 12:30 p.m.
Biographical Information Colin M. Battersby, CIPP/US, Member, McDonald Hopkins, PLC 39533 Woodward Avenue, Suite 318, Bloomfield Hills, MI 48304 248-593-2952 cbattersby@mcdonaldhopkins.com Colin is a member in McDonald Hopkins’ national Data Privacy and Cybersecurity Practice Group. Colin advises clients on best practices to prevent and respond to data privacy and cybersecurity concerns, including leading data breach incident response efforts in combination with forensic technical vendors and company decision-makers, provides counsel on post-breach notice obligations in accordance with state data breach notice statutes or specific contractual obligations, drafts and coordinates the delivery of required notice throughout the United States, and advises on post-breach remedial measures. Colin also counsels businesses on proactive measures to secure and process protected data in conformity with best practices and existing and emerging regulatory requirements. Colin also represents large and small businesses across many industries in claims alleging breach of contract, tort, product liability, legal and accounting malpractice and securities violations. He earned his J.D. from Wayne State University Law School in 2007. Colin received a Bachelor of Economics from the University of Michigan in 2004. Michael Meisler CPA, J.D., LL.M. (Taxation), Partner, Ernst & Young LLP 5 Times Square, New York, NY 10036-6530 914.773.3579 michael.meisler@ey.com Michael is a Partner in EY’s National Tax Practice, where he leads the firm’s Blockchain/Cryptocurrency Tax Center of Excellence. Michael previously served as the firm’s Global Blockchain Tax Leader between November 2016 and September 2019. Michael previously served as a partner in EY’s Financial Services Organization. He has over 30 years of experience providing tax consulting services with respect to financial products and transactions for securities industry clients, including commercial and investment banks, broker-dealers, hedge funds, private equity funds and securities and commodities firms, both domestically and internationally. Michael also provides tax consulting services to fintech companies and to partnerships that specialize in investing in real estate and infrastructure projects, both domestically and internationally. He continues to serve financial services clients as he works to implement EY’s strategy related to Blockchain and related technologies, while also providing tax guidance to our client serving teams and clients around the world with respect to transactions involving cryptocurrencies, initial coin offerings and security token offerings. Michael is a CPA, licensed in the state of New York. He is also a member of the New York State Bar, Second Department, and a member of the New York State Bar Association’s Tax Section. In addition, he is a member of the Wall Street Tax Educational Corp. Michael holds a LL.M. from the New York University School of Law, a J.D. from Fordham University’s School of Law and a B.S. from the Leonard Stern School of Business at New York University. He serves as an adjunct professor at New York University and Baruch College and serves as the co-chair of the Introduction to Partnership Taxation course at NYU’s Summer Tax Institute.
Harnessing the Blockchain for Tax… January 29, 2020
Speakers Michael Meisler Colin Battersby Ernst & Young LLP McDonald Hopkins Partner Member 2
Polling Question #1 Based on your knowledge, do you believe the regulation of crypto assets is consistent across regulators? 1. Yes 2. No 3. I have no idea 3
Objectives • Understand the technology behind crypto assets • Understand security risks and preventative measures • Provide an overview of the relevant U.S. federal income tax authorities that govern the taxation of cryptocurrency • Understand U.S. federal tax issues that holders of cryptocurrencies face • Understand U.S. federal tax issues that issuers of cryptocurrencies face • Provide an overview of current IRS enforcement activities • Provide an overview of what areas may be addressed by future guidance • Discuss potential tax implications of blockchain technology 4
Agenda • Overview of Terminology – Crypto Assets • Tax Considerations for Holders and Purchasers of Cryptocurrencies – Capital asset vs. ordinary asset – Exchange considerations and IRC Sec. 1256 – IRC Sec. 864(b) and trading safe harbor – Wash sale rules – Straddle rules – Crypto lending (monetizing without selling) – Forks and airdrops – Computing amounts realized – Determination of basis 5
Agenda (continued) • Tax Considerations for Issuers of Crypto Assets – Initial Coin Offerings (ICOs) – Security Token Offerings (STOs) – Simple Agreement for Future Tokens (SAFTs) – Simple Agreement for Future Equity or Tokens (SAFE-Ts) • State and local tax considerations • Reporting and enforcement considerations • Future Guidance on Crypto Assets • Potential Tax Implications of Blockchain Technology 6
What is Blockchain? 7
Overview – Crypto Assets What are tokens? – Transferable units generated within a distributed network that tracks ownership of the units through the application of blockchain technology – What are virtual currencies/payment tokens? – What are security tokens? – What are utility tokens? What is a distributed ledger? – Database that is shared and administered in a decentralized form across a network with the ledger built on a data structure known as “blocks” that combine to make a “chain” Network of computers or users (referred to as “nodes”) broadcast transactions to the network and a consensus mechanism validates the transactions and adds them to the ledger Most common consensus mechanisms are “mining” and “staking” What is blockchain? – One type of distributed ledger – Secure environment that encrypts transactions – Blocks store data and through the blockchain, new blocks are cryptographically validated through nodes and added to the end of the chain What is a digital wallet? – Stores private and public keys that are needed to access a blockchain – Hot vs. cold wallets 8
Practical Benefits of Blockchain • Transactions are leaner – middle men can be cut out because system practically guarantees accuracy • Distributed ledger ensures records cannot be tampered with 9
Security Threats to Cryptocurrency • Cryptocurrency is a tangible asset – Susceptible to modern day train robberies and shipwrecks • Risks vary depending on nature of wallet – Hot, cold, cloud‐based • Risks vary depending on ownership – Direct vs. Exchange • Risks vary in nature – Malicious vs. pure negligence 10
Best Security Practices • Cold wallets – Securely stored, backups • Good cyber hygiene – Up to date virus protection, attention to detail • Constant vigilance and attention to threat landscape – ICOs • Due diligence – Investor beware, capitalization, and contracts 11
Tax Considerations for Holders and Purchasers of Cryptocurrencies 12
For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency. IRS Notice 2014-21 25 March 2014 13
Additional guidance (Since Notice 2014-21) • Rev. Rul. 2019-24 (Issued 9 October 2019) – Addresses issues related to tax treatment of taxpayers following a hard fork of a blockchain – More on forks later! • Frequently Asked Questions (Issued 9 October 2019 and updated 31 December 2019) – Provides additional guidance regarding transactions involving cryptocurrency in accord with the issues addressed in Notice 2014-21 14
Tax considerations for holders and purchasers of cryptocurrencies • Capital vs. ordinary – Notice 2014-21 and FAQs provide that cryptocurrencies are property Mining – Notice provides that mined tokens give rise to ordinary income upon award, which may be subject to self-employment taxes No discussion of how to treat tokens received for “proof of stake” Rev. Rul. 2019-24 provides that tokens received following a hard fork give rise to ordinary income on “receipt” • Exchange considerations and IRC Sec. 1256 – Possibility of 60/40 treatment (long-term vs. short-term capital gain/loss) Mark-to-market treatment for timing – Applicability to Bitcoin futures Trade on a Qualified Board or Exchange (i.e., CME) – What about other futures contracts? – Mixed straddle elections? • IRC Sec. 864(b) and trading safe harbors • Wash sale rules • Straddle rules 15
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