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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. ...
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New Revenue Ruling on Staking Income

  Disclaimer On August 1, 2023, the IRS issued a new Revenue Ruling ( Rev. Rul. 2023-14 ) holding that income received from delegating tokens to a validator (" Staking Income ") is taxable at the time the taxpayer has "dominion and control" over the newly received tokens. No one I know thought that was a surprise.  Arguments that staked tokens were like self created intellectual property or agricultural produce (and therefore not taxable until sold) were theoretically possible (and certainly seem to apply to genesis block tokens held by founders), but they were always a stretch.  Arguments that tokens received from staking were like stock splits or simply inflationary (slicing the pizza into more pieces) denied Treasury's fundamental need to have a clear measurement date and benchmark. The meaning of "Dominion and Control" is discussed in Rev. Rule 2019-24, which can be found here , in the context of hard forks, but if there ever was any doubt, the ne...
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How Should a Crypto Fund handle Carried Interests?

Disclaimer How Should a Crypto Fund handle Carried Interests?   In 2017, the law applicable to carried interests was changed so that GPs didn’t get long term capital gain unless the underlying asset had been held for 3 years (instead of one year).   In addition, it was recently proposed that such holding period should be increased to 5 years and measured from the later of the date the fund was substantially invested and the date the asset was acquired.   That proposal does not look like it will become law soon, but it will likely continue to be a part of future proposals.   So what can a fund do to minimize the tax paid by its GPs?   One solution is to never sell an asset that has less than a three year holding period.   That might work for VC funds or PE funds, but it doesn’t work for funds that need to sell assets to fund redemptions or for funds that continually rebalance their portfolio.   In that case, even if 20% of the...
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Token Compensation Income -- to 83(b) or not to 83(b)

  Token Compensation Income   As I’ve said multiple times in this blog, I don’t think that conventional wisdom from the VC world translates all that well into the crypto world.   One example relates to tokens issued as compensation.   Leaving aside all the questions about whether a four year vest makes sense, and more significantly, whether a double trigger acceleration on change of control is even relevant (on Network Launch I get it), there are some significant economic questions for employees.   In the VC world, you may often want to early exercise a stock option, make an 83(b) election (which causes you to be taxed as if you’d received the shares on the exercise date without any restriction (vesting)), and then hope that the stock appreciates so that you have income that is taxed as long term capital gain.   That’s a good plan where the exercise price is low enough and there is no market for the stock.     But out...
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