Posts

1. So you want to do an ICO

Disclaimer

The number of token offerings through ICOs or otherwise that have crossed my desk in the last 12 months has exploded.  Many of those transactions have been put together with such speed that corporate structure and tax treatment are an afterthought with expensive consequences.  Even now, most of the focus seems to be on the securities law treatment of Tokens.  The following is a brief outline of some issues that are worth considering -- primarily in order to avoid adverse tax issues for founders, issuers and investors.  Following posts will discuss different structures mentioned below in greater detail.

Before we get to actual structures, however, it's important to understand what kinds of adverse things can happen to you.  Many people think that selling Tokens should be taxed the same way as a stock sale is taxed -- but there is a specific Internal Revenue Code section that provides stock sales are tax free -- and it doesn't apply to Token sales.

TAXATION OF TOKENS

Should we replace the SAFT with a DEFT?

Disclaimer 

In the last year, many pre-sales of tokens have been structured as "SAFTs" ("Simple Agreement for Future Tokens"), partly because it's hard to sell a token that doesn't exist yet and partly because SAFTs were seen as a pathway through securities laws and other issues.

More recently, I've been hearing about the death of SAFTs.  The word "future" in the title implicates CFTC rules (with a potential related significant increase in the required net worth of purchasers), and the promise to issue tokens that don't currently exist make it questionable whether a SAFT is "property" for tax purposes, which is a prerequisite for an "83(b) election".

It's also not possible to use a SAFT to make an acquisition of another company or assets without having the seller be taxed on the value of the SAFT on the date of issuance regardless of when the tokens ultimately are issued -- i.e. when the SAFT recipient can't sel…

Taxes on Token Sales (in particular CA State taxes)

Disclaimer 

Assuming you have successfully designed a Token Network and are selling Tokens (whether directly or through SAFTs) you need to determine where you owe tax and at what rate.

The new federal rules  (Section 14202 of the Tax Cuts and Jobs Act) may provide significant benefits to Token sellers who can show that their income from Token sales is "foreign derived" (a reduced rate to 13.125%).  Unfortunately, the term "foreign derived" is not well defined and its unclear if Token sellers merely need to prove that the buyers have a foreign address or will need to show actual foreign residence and use, but it's worth watching and tracking whatever information you have on buyers.

Fortunately, the California rule is more straight forward and may offer some opportunities.

It says that the income from sales of intangible property may be allocated instate (subject to CA tax) and out of state (not subject to CA tax) as follows:

"Sales from intangible property are i…

Treatment of Foreign Token Vehicles -- PFIC rules

Disclaimer

I've been thinking about how a foreign corporation formed to hold and manage tokens should be treated for US tax purposes.  [Note, all of the following would be changed by the current Tax Bills being reviewed in Congress, but who knows what any new law will actually say.]

Elsewhere on this blog I've discussed whether such a corporation could avoid generating "Subpart F Income" if it is a CFC ("Controlled Foreign Corporation" -- one that is more than 50% owned by US persons who each own more than 10% of the foreign corporation).  My conclusion was that there was a significant risk that, other than in the case of certain utility tokens, it was likely the IRS would claim the income of that foreign corporation was "Foreign Personal Holding Company" income ("FPHC income"), which would essentially eliminate the benefits of running the business through a foreign vehicle.

I did not discuss, however, what would happen if you caused the…

Token Linked Employee Bonus Plan

Disclaimer

The following is draft of a possible plan to provide employees with the benefits of Token ownership without having to deal with distributing ownership before Network Launch, IRC Section 83 or IRC Section 409A.

Any comments or thoughts would be appreciated.


[COMPANY NAME]
TOKEN LINKED BONUS PLAN

1)Purpose. a)[COMPANY NAME] (the “Company”) hereby establishes the Token Linked Bonus Plan (the “Plan”) to enhance the ability of the Company to reward the historic contribution of certain employees and other service providers and to attract and retain highly skilled and competent executives, employees and contractors and to induce such individuals to exert their utmost efforts in furtherance of the business of the Company by the payment of bonuses designed to imitate the benefits of owning [TokenName] (“Tokens”) as described herein. b)The structure of the Plan is a cash bonus plan designed to avoid adverse treatment under IRC Section 409A as follows: i)a Participant does not vest in any r…

2. Structural Alternatives (Outline)

Disclaimer

There are at least three basic structures for Crypto Companies, which will be discussed in separate posts:

A.     International Structure  (very hard to make work)
In order to have any reasonable argument that this structure work, you have to assume: Existing network development is extremely limited (e.g., pre White Paper); andSale of Tokens will be part of an operating business where the Sponsor provides software or services to users.OpCo forms a wholly owned foreign subsidiary ("ForCo")OpCo and ForCo enter into a "Cost Sharing Agreement" pursuant to which each will fund a portion of the development costs of the Network, based on the projected share of income from foreign sources and domestic sources.  OpCo funds a portion of its share of those costs by contributing all the foreign rights to the Network to ForCoEach of OpCo and ForCo sell Tokens or SAFTS to raise money to fund the expenses of developing the network and operating the system  (Read …

2(A). Potential International Structures (No Longer Viable)

Disclaimer
NOTE, THE 2017 TAX ACT VIRTUALLY ELIMINATED ANY BENEFIT FROM THIS STRUCTURE.  IT'S INCLUDED HERE SIMPLY FOR HISTORY
Potential International Structure
Many Crypto companies would like to avoid taxation altogether by selling their tokens through a foreign corporation.If the original technologist is neither a US citizen nor a US resident, this should be relatively easy to do.A foreign corporation that does not do business in the US should not be subject to US tax on the sale of Tokens or the operation of a business (although it may still be subject to US securities law rules on the sale of tokens or other interests).
Where the original technologist is a US Person or a US corporation, however, it is much more difficult and often impossible.
US tax law makes it very hard to transfer intellectual property to a foreign corporation.There is no reason why intellectual property exists in any specific location – and the US does not want taxpayers to deduct all the costs of develo…