David W. Klasing Esq. M.S. -Tax CPA Advises on Cryptocurrency ICO's

Initial Coin Offerings (ICO's) are a method for startups to raise capital without following SEC regulation. Unlike an IPO that must be passed through regulatory processes of the SEC, ICO's involve investors exchanging real or digital currency for tokens.

Tokens in a startup can vary dramatically. A token may grant an investor the right to receive future profits of the venture. Alternatively, a token may act as a pre-purchase, whereby the investor gets a unit of cryptocurrency the new venture produces.

With ICO's increased popularity, the SEC has grown concerned that some tokens are actually securities, which fall under federal regulation. In response, the SEC has issued subpoenas to those engaged in setting up and participating in ICO's.

ICO Tax Consequences

In Notice 2014-21, the IRS defined cryptocurrency as property and its sale is governed by the rules dealing with the disposition of property. The tax treatment of tokens is less certain. Tokens themselves are not cryptocurrency in the sense that transactions are recorded in their own blockchain. That is not to say that there isn't a market for tokens received in an ICO. Although a token can only be used functionally within its own venture, tokens are traded on exchanges, sometimes selling for much more than their cost.

Although a token may be viewed as a voucher of sorts, redeemable for other property, it is possible that like cryptocurrency, tokens fall under the guidance of Notice 2014-21 because they could have an equivalent value in real currency.

Investors should consider the tax implications of participating in an ICO. Assuming that tokens fall under the guidance of Notice 2014-21 or are considered property generally, using U.S. dollars to buy tokens in an ICO appears to give the buyer a cost basis in the token. Because real currency is used in the purchase, it is unlikely that there would be any gain or loss recognized by the recipient of tokens in an ICO.

If an investor used cryptocurrency to participate in an ICO, gain or loss may be recognized on the exchange. If an investor purchased a unit of cryptocurrency for $100 two years ago and is now exchanging the same unit for $200 worth of tokens, the investor would appear to recognize $100 of capital gain (assuming that he or she held the cryptocurrency for investment and not as inventory). See Full Article HERE

Contact:
David W. Klasing Esq. M.S. -Tax CPA
Email [email protected]
www.taxesqcpa.net

SOURCE Tax Law Offices of David W Klasing, PC

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