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.


Staking Income and Block Rewards


Staking Income and Block Rewards

As new proof of stake networks come on-line, new focus is being brought to the question of how block rewards and staking income should be taxed. Ideally, of course, tax exempt and foreign recipients of staking income and block rewards would have no obligation to pay US tax, but alas, that may not be the case. While it may be that the concerns described below are over-blown (or more likely, that it will be many years before the IRS is sophisticated enough about crypto currency to pursue these arguments), I’m always interested in evaluating what the risks are and how they might be hedged.

I have yet to see any definitive guidance on staking income or block rewards other than the 2014 IRS Notice that focused on mining rewards. Nevertheless, I think it’s a safe bet that the IRS will seek to treat any increase in the number of tokens you own as income as soon as those tokens are credited to your private key. (While I know some ver…

New Revenue Rule on Crypto


The new rule (Rev. Rule 2019-24) can be found here.  It has not yet been published in an Internal Revenue Bulletin, but presumably will be soon.  There has also been an update to the IRS's FAQs on Crypto located here.

The point of the new Rev. Rule is to address what happens when you receive a new series of tokens in connection with a hard fork (you have taxable ordinary income once you can trade the tokens received).

However, there are a number of other statements in the ruling that were interesting.

First, there had been some ambiguity before as to whether you had taxable income if the protocol changed in a material way, but you simply kept the same number of tokens.  This Rev. Rule now clearly says that such a change is not a taxable event -- apparently even if the network changes dramatically, say from an ERC-20 network to something else.  I believe that conclusion supports the suggestion elsewhere in this blog that Crypto Sponsors should create a genesis block to ho…

Advice for Early Uber Shareholders


If you are lucky enough to be an early Uber Shareholder with more than $10 million of gain, there are still some tax planning opportunities for you. 

The Qualified Small Business Stock tax benefit has at least two anomalies worth keeping in mind. 

You are entitled to the greater of $10 mm or 10x the cost of the stock sold during the year -- so ordinarily, you want to sell low basis stock first and higher basis stock in a subsequent year because that will maximize the total amount of shelter.However, the Uber Series Seed preferred was issued before September 27, 2010, so it is only entitled to a 75% exclusion of the gain (but the eligible gain is still limited to $10 million).  So if you own stock bought before that date and stock bought after that date, you want to sell the later purchased shares earlier (and in a different tax year ideally).Finally, QSBS status travels with gifted stock.  So if you plan to give your mother some benefit from your good fortune, you can give s…

Staking Income


I've been asked several times recently about the appropriate tax treatment of Staking Income.  Staking Income arises from "staking" a validator with tokens to allow it to validate more transactions, for which the validator pays the party providing the tokens a fee.

As discussed below, I think there are enough issues here that funds should consider a small restructure to eliminate the risk.


Usually the question is posed by a fund that has foreign and/or tax exempt investors who wants to be sure that receiving "Staking Income" does not result in those investors being allocated "Effectively Connected Income" ("ECI") or "Unrelated Business Taxable Income" ("UBTI").  If the validator is not operating in the US, the foreign investors don't have an issue, but the tax exempt ones are still at risk if the income is "business income".

The problem, as with most crypto questions is that t…

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…