Category: Tax (Page 1 of 4)

Federal Securities Laws applied to ICO’s – Initial Coin Offerings

BITCOINNew “coins” or tokens and their platforms are all the rage.  Bitcoin, Bitcoin Cash, Ethereum, Litecoin, Zcash, Dash, Ripple, Monero, the list goes on and on and new ones keep popping up.  The new coins are either entirely their own platform or they are derivations, i.e. spin-offs of one of the existing virtual currency platforms.

The IRS took the position in 2014 that Bitcoin and coins like it were property, and not currency.  Interestingly, it did this as it referred to Bitcoin and other coins as “virtual currency.”  The classification of Bitcoin as property has certain effects on its treatment with respect to tax issues. The IRS has a decent FAQ on this here.

It was only a matter of time until the SEC weighed in.  Especially because the promoters of these new coins started calling the birth of new coin platforms as ICO’s (“Initial Coin Offerings”), and heavily advertising them to the public, such as Floyd Mayweather’s promotion of the Stox ICO on social media platforms, from which ICO he said he was going to make a “sh*t ton of money”.  That’s the type of situation and language that gets the SEC up in the morning.

Now under the federal securities laws (which I have described with respect to virtual world items in the past), an offering of “securities” must be done only after registration of such securities or pursuant to an exemption from registration.   The main issue present with these ICOs is whether the virtual currency is a “security” or not.   This would bring up the “Howey Test”, from SEC v. Howey Co., 328 U.S. 293 (1946), which can be summarized as whether the individual investing the funds into a common enterprise expects profits to come solely from the efforts of others (there are some other factors used in the test as well, but that’s it in a nutshell).  Usually the people pumping money into these ICOs are not the ones working on the platform (usually blockchain type information exchange platforms), and without that involvement it may come down to the investor’s expectation – are they expecting the money they invest to go towards the growth of the platform which would increase the popularity and hence value of the platform’s coin?  If so that may be an issue. What a coin (or sometimes called a “token”) is still has not been fully defined, and the characteristics of each coin or token vary by platform and change over time.

The SEC issued an Investor Bulletin that said that some ICOs depending on the circumstances “may” involve sale of securities.  It should be taken as a warning. While the application of the securities laws to coins and ICOs is a gray area, there is a line somewhere and the first very public ICO to cross it without registration or use of an exemption (which is doubtful if public advertising is used and investment is taken from anyone, regardless of circumstances), the SEC may come after.  Watch out Floyd, you may not be too worried about Conor McGregor but you should be of the SEC.

U.S. DOL’s Final Rule on Fiduciary Duties owed in connection with Retirement Plan Advice

USDOL_Seal_circa_2015_svgOn April 6, 2016, the United States Department of Labor issued a Final Rule with respect to the fiduciary duty owed by any individual or entity providing recommendations with respect to a retirement plan.  It takes effect in April of 2017.

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Best Practices for Issuing Stock Options to Startup Employees @ Paper this Deal

stock-optionsHere is a quick list a company can refer to prior to issuing stock options to its employees.  I’ve covered the basics of stock options in a previous post, as well as a more in depth pricing item related to stock options, but wanted this post to give the broad overview to founders.

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Updates to IRS Tax Partnership Audit Rules

There are changes coming to any business operation that is currently taxed as a partnership in the United States. The concept of the “tax matters partner” is being done away with in favor of what is called a “partnership representative.” 

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New York Qualified Emerging Technology Company (QETC) Incentives @ Paper This Deal

If your company operates in New York and meets the definition of a “qualified emerging technology company” (a “QETC”) it is eligible for New York tax credits.  Additionally if you are a New York State taxpayer and interested in investing in a QETC you may be eligible to claim a credit as well.

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New York Tax Department’s Voluntary Disclosure and Compliance Program @ Paper This Deal

If you become aware of the fact that you’ve failed to report and pay tax due to New York State, don’t think that it will go away.  It will only get worse.  Penalties, interest and especially criminal charges are serious business. The New York Tax Department has a Voluntary Disclosure and Compliance Program that you can avail yourself of.

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New York State Manufacturer’s Real Property Tax Credit @ Paper This Deal

If you are a “qualified New York manufacturer” doing business as a corporation and you paid real property taxes (either as the owner or as the lessee) for your business location where you perform the manufacturing activities, you are eligible for the New York State Manufacturer’s Real Property Tax Credit.

The Credit is equal to 20% of the eligible real property taxes paid by the manufacturer each year.   The manufacturer must exclude portions of the owned or leased real property that are not used in the manufacturing activities (such as parking lots, and common areas, etc.).

A “qualified New York manufacturer” is a manufacturer that either (1) has property in New York State of the type described for New York’s investment tax credit under Tax Law section 210.12(b)(i)(A) that has an adjusted basis for federal income tax purposes of at least $1 million at the end of the tax year, or (2) has all its real and personal property in New York State.

 

IRS Voluntary Disclosure Practice @ Paper This Deal

Faced with the situation that you or your company has been misreporting income or miscalculating taxes, you should not stick your head in the sand and hope that it never catches up with you.  You should work with your accountant and attorney and calculate the amount due.

First, the IRS has two voluntary disclosure programs.  The first is for domestic voluntary disclosure of tax issues, which I am discussing here.  The other is a separate program for Offshore Account Voluntary Disclosure (to be discussed in a later post).

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Partnership Taxation: Substantial Economic Effect @ Paper This Deal

Partnership taxation is a complex area of tax law. We’ll be walking through some of the issues you should be aware of.

The first is to ensure you are getting the deal you thought you were.  Partners (or LLC members where the LLC has multiple members and does not “check the box“) can agree on how to allocate the profit and losses of the business as they see fit in the agreement.  The allocations can be done in any manner the partners/members choose, provided that the allocations have “substantial economic effect.” See IRC 704(b); Treas. Reg. 1.704-1(b).

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Strip Rights @ Paper This Deal

In addition to the other ways we’ve discussed here (stock options, phantom stock, stock appreciation rights), another way to compensate individuals working for a startup is to give them a cash payment upon a change in control of the company, called in the industry a “strip right”.

For example if a startup company has four founders each owning 25% of the shares, and they bring on another but don’t grant him or her shares, the initial founders can agree to pay the new individual a percentage of the “net proceeds” received from a “change in control” of the corporation.   “Net proceeds” is usually defined as the gross proceeds received minus transaction costs and brokers commissions as well as some other items.   A “change in control” is defined as it normally is in these agreements, and covers if the company merges with another or sells substantially all of the company’s assets.  In such a case, the shareholders would receive cash (or assets it can sell for cash, like tradeable shares of the acquirer).  The strip right agreement would require the shareholders that granted it to pay to the holder of the strip right, either a percentage or flat fee before they received their cash for the change of control.

In the example, if the four founders grant a 10% strip right, and a couple years down the road the company is sold for one million dollars, with transaction fees of $100,000, the holder of the strip right would receive $90,000 (net proceeds of $900,000 x ten percent).    The shareholders would split the rest of the $810,000 and each receive $202,500.

One of the benefits of the granting of the strip right is that it is not taxable to the recipient.  The downside, at least to the recipient is that they are not a shareholder of the corporation and they may never receive a cent if there is never a change in control.  Due to its tenuous nature, the strip right is usually granted in connection with other compensation awards.

 

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