05 Sep 2017 Tax Treatment of Initial Coin Offerings
An Initial Coin Offering (ICO) is an event in which a new cryptocurrency project sells a portion of its cryptocurrency tokens to early enthusiasts in exchange for convertible virtual currency (e.g., bitcoin, ether) or government fiat. ICO “tokens” or “coins” are, in essence, digital coupons used by new cryptocurrency startups to raise funds for their operations, with most companies only accepting convertible virtual currencies in exchange for these tokens. Although some guidance regarding the tax treatment of convertible virtual currencies is available, no clear guidance has been provided regarding the tax treatment of tokens offered in an ICO.
Guidance on Tax Treatment of Convertible Virtual Currencies
The Internal Revenue Service (IRS) issued Notice 2014-21, Virtual Currency Guidance, in March 2014 to describe how existing general tax principles apply to transactions using convertible virtual currency. In general, the IRS considers the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services, a taxable event. The IRS explicitly stated that Notice 2014-21 only describes the tax treatment of convertible virtual currencies and “no inference should be drawn with respect to virtual currencies not described in this [N]otice.”
Notice 2014-21 defines convertible virtual currency as “virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency.” Examples of a convertible virtual currency include, but are not limited to, bitcoin and ether. The term virtual currency is defined as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value,” but “it does not have legal tender status in any jurisdiction.” Examples of a virtual currency include, but are not limited to, coins issued for an online game that allow users to purchase items within that game. As a general matter, convertible virtual currencies are treated as property and the general tax principles applicable to property transactions apply to transactions using . . .Continue Reading Article Disclaimer: This blog and website are public sources of general information concerning our firm and its lawyers, as well as the information presented. They are intended, but not promised or guaranteed, to be correct, complete, and up-to-date as of the date posted. This blog and website are not intended to be, and are not, sources of legal opinion or advice. The materials, information, and communications on this blog and website do not apply to any particular person, entity, or situation, and do not apply to you or to your specific situation. You will need to consult with an attorney and/or other appropriate professional about your specific situation. Thank you.