Kelsey Lemaster, Goodwin | CUBE Conversation Jan 2018
Channel: SiliconANGLE theCUBE
Date: 2018-01-18

Kelsey Lemaster, Tax Partner, Goodwin stops by the Palo Alto Studios to talk with John Furrier

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https://siliconangle.com/2018/02/08/deeper-look-taxing-cryptocurrency-regulating-icos-thecube-cubeconversations/

A deeper look at taxing cryptocurrency and regulating ICOs

Since federal tax reform was approved in December 2017, it has been an uphill battle for businesses to understand its effect on implementing popular but still unregulated initial coin offerings.

That’s according to Kelsey Lemaster, tax partner at Goodwin Procter LLP. Lemaster sits on an advisory group called the Ethereum Network Foundation, which meets every few weeks to chart the gray areas of the ICO market.

“I don’t think there are standards,” he said. “This is a space that barely existed eight months ago. And now we’re doing 40 ICOs at a time. So, it’s a very fast-paced, evolving space.”

Lemaster (pictured) spoke with John Furrier (@furrier), host of theCUBE, SiliconANGLE Media’s mobile livestreaming studio, at theCUBE’s studio in Palo Alto, California. They discussed the confusion around cryptocurrency taxing, the importance of tax advice for ICOs, and where the open transaction doctrine and Simple Agreement for Future Tokens, known as SAFT, fit into the equation.

Cryptocurrency and the current state of market
Cryptocurrency is a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. In an ICO, companies set up funding on a project solely using the digital currency as a means of business transactions.

Lemaster talks to clients of potential clients every day that want to go through an ICO process, but he knows there are many companies out there continuing operation without comprehensive tax advice. His biggest concern is that the Internal Revenue Service has not provided any significant cryptocurrency governance since 2014, when the IRS issued a notice on how cryptocurrencies such as bitcoin are taxed to individual investors.

“There are a lot of us learning together about the technology, the business terms, the deals … and the IRS has not caught up to any of this,” Lemaster said.

Companies need to move carefully, and there are plenty of red flags to watch out for, he added. For example, Lemaster has seen companies set up foreign foundations in Switzerland as a way to hide their business. The problem is withdrawing money out for personal use. Tokens are considered revenue for future services, he explained.

The open transaction doctrine may apply to some cases for deferment of tax. This means the acknowledgment of a gain or loss is postponed until the amount is readily ascertainable. For example, a transaction doctrine might be able to work if the platform never gets built, more like a “wait-and-see” approach, but he thinks that’s a losing argument and the IRS will look at this scenario as services income. Overall, he said a company can defer delivery of those services up to a maximum of three years to recognize their bitcoin or ether for tax purposes.

Setting up a subsidiary in a remote island? Think again
It comes as no surprise that companies use offshore locations to avoid tax. If the business has employees in the jurisdiction to help develop the intellectual property, move all the intellectual property there, and sell the ICO tokens out of that subsidiary, then the business may be able to defer some U.S. taxing, until it takes some money out of the subsidiary and repatriates it to the U.S., Lemaster explained.

The good news is that with the tax slash on federal income tax on corporations — at 21 percent this year — Lemaster said it’s not likely companies will pursue remote islands for their corporate headquarters.

“There’s been a huge reduction,” he added. “So that, coupled with smaller-sized ICOs, is going to drive fewer companies to set up these offshore structures.”

So the bottom line? Cryptocurrency trading is taxable.

In his work, Lemaster has learned many new concepts beyond traditional tax positions. One area he recommends that companies check out is SAFT, where venture capitalists invest a certain amount of money in a startup in exchange for promised tokens. The SAFT Project is a knowledge exchange site to help claw through legal uncertainties.

Watch the complete video interview below, and be sure to check out more of SiliconANGLE’s and theCUBE’s CUBE Conversations.