1. So you want to do an ICO


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.


Should I sell my Tokens and realize a loss before year end?


I have now been asked almost a dozen times about the "Wash Sale Rules" and whether token holders should sell and repurchase tokens before year end.

The Wash Sale rules (IRC Section 1091) provide that if you sell a security at a loss and repurchase a substantially identical security within 30 days, your loss will be disallowed (and added to your tax basis in the purchased security).

People have been hearing that the Wash Sale rule doesn't apply to tokens because the IRS has not designated tokens as securities.  (Remember that the characterization of tokens as securities by the SEC or as something else by the CFTC is not relevant for tax law purposes.  Tokens may be securities for some purposes and not for others.)

If that's true, you could sell your BTC today and buy back BTC an hour later and trigger a loss that you can use to offset capital gain (or up to $3,000 of ordinary income) from some other source.

That's a very reasonable argument, but I want to hi…

Maximizing Qualified Small Business Stock Benefits


OK, so this isn't strictly about crypto, but I discovered something about QSBS benefits today that interested me.  The point is that it may be hugely beneficial to sell your low basis stock in year 1 and delay selling your high basis stock until a later year.

Generally, IRC Section 1202 says that if you hold QSBS for 5 years and then sell it, you are entitled to exclude the greater of $10 mm of gain or 10x your cost -- or at least that's how most people think about it. 

However, IRC Section 1202(b)(1) provides something a little different:

In general: If the taxpayer has eligible gain for the taxable year from 1 or more dispositions of stock issued by any corporation, the aggregate amount of such gain from dispositions of stock issued by such corporation which may be taken into account under subsection (a) for the taxable year shall not exceed the greater of—

     (A)     $10,000,000 reduced by the aggregate amount o…

Optimizing your structure further


I had a new thought the other day about setting up vehicles for promoters of new token networks.

As a starting place, assume there are 3 places that Tokens in your network can go:
You can give them back to your founders / early investors;You can sell them through SAFTs or Token sales for fiat or other crypto currencies that you then use to fund operations and possibly distributions to your shareholders; andYou can give them away either in an airdrop, to miners, to some kind of non-profit or simply to early adopters. I have been focused on maximizing the value to the founders and early investors -- which is why I've generally proposed that you set up an LLC HoldCo and deposit with it ~30% of the tokens (see

However, I have realized that there is an opportunity to increase that value further.

First (and simplest), you could retain a larger percentage of the network tokens in the LLC HoldCo.  Th…

Should we replace the SAFT with a DEFT?


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)


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


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


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.


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…