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Author Topic: What, specifically, does "engaged as a business" mean?  (Read 7344 times)
haxxorboi
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September 12, 2013, 07:58:05 PM
 #1

Hello all,

I've been trying in vain to figure out what the recent FinCEN ruling specifically means by the phrase "engaged as a business." See the definitions section for user/exchanger/administrator at http://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html. Patrick Murch of the Bitcoin Foundation notes this lack of explanation in his critique of the FinCEN guidance ("Left unsaid are any specifics around the facts and circumstances that would constitute 'engaging as a business.'") See https://bitcoinfoundation.org/blog/?p=152.

I'm trying to specifically figure out what the guidance means with this clause. I've tried to find reference in past guidance and rulings, along with statutory materials, but I've come up blank. I even went through a decent amount of treasury regulations to see if I could find anything, also yielding nothing. I then tried to find a definition of "business" in general, and the closest I could find was a Hawaii state statute effectively saying "any exchange of value, except for casual transactions." Obviously, however, this is only a state statute, and what constitutes a "casual transaction" is rather grey as well.

Can anyone give me some idea of where FinCEN is pulling this clause from? They manage to define other terms, but completely fail to define this. I can't tell if they think "business" is just an obvious term (perhaps FinCEN is using Stewart's obscenity standard of "I know it when I see it...") or if they actually have a source term.

Thanks in advance!

TL;DR -- What does FinCEN mean by "engaged as a business"?
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NewLiberty
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September 13, 2013, 02:38:46 AM
 #2

It might not be perfectly answered yet.

Some definitions are here:
http://www.law.cornell.edu/cfr/text/31/103.11
But the particular facts and circumstances may be left to judgement.  (A court might decide)

http://www.fincen.gov/financial_institutions/msb/definitions/msb.html
gives a little bit of a criteria and references subpart (ff) in
http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&sid=b107c5dab4a6f575f300393188cdb545&rgn=div5&view=text&node=31:3.1.6.1.2&idno=31#31:3.1.6.1.2.1.3.1
which gives a longer list of definitions.

There seems to be an indicative arbitrary threshold of US$1000 per person per day, but it may be less clear than that.

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September 13, 2013, 05:07:17 AM
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The answer is: there is no specific definition. They won't tell you what it is until someone decides to come after you and the prosecutor makes up criteria after the fact.
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September 13, 2013, 05:16:03 AM
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Its not a bad idea to get a written legal opinion upon which you can rely, if it is something you are worried about with your particular facts and circumstances.

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September 13, 2013, 12:03:23 PM
 #5

The "engage as a business" language comes from 31 USC § 5312 & 5330.  It is in the text of the law that congress passed.  It is not given a more specific definition.


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September 13, 2013, 01:18:46 PM
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The "engage as a business" language comes from 31 USC § 5312 & 5330.  It is in the text of the law that congress passed.  It is not given a more specific definition.
Yes, not specific it the congressional text, but enforcement doesn't end there, that is just where the authority is asserted.
There are a number of specific definitions in the CFRs which is closer to where the rubber meets the road.

In practical terms, if the bulk of your business is this sort of trading and transfer activity, a court may rule that you are engaged in the business of money services.  If the majority of your business is selling plastic ducks and you do some balancing of accounts in bitcoin to maintain a particular level of cash on hand, or to keep enough bitcoins to pay suppliers, even if it is on a daily basis so long as it is not a significant line item in your general ledger, you may not be engaged in the money service business.  It is likely going to come down to your own particular facts and circumstances and how they are judged.

If you are trying to design a business sculpted around how to avoid the teeth of this law, you probably have a money services business on your hands.

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September 14, 2013, 02:45:52 AM
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What's confusing?Huh When I see engaged as a business that means you've registered to be an LLC or filed to become Incorporated or have registered for an FEIN [federal employer identification number]  I'm pretty sure I answered this in a different thread and gave examples that (yes true it is my opinion and should not be taken as professional legal advice) constitute as being exempt from needing to register with fincen vs not being exempt. 

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September 14, 2013, 02:54:30 AM
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What's confusing?Huh When I see engaged as a business that means you've registered to be an LLC or filed to become Incorporated or have registered for an FEIN [federal employer identification number]  I'm pretty sure I answered this in a different thread and gave examples that (yes true it is my opinion and should not be taken as professional legal advice) constitute as being exempt from needing to register with fincen vs not being exempt. 

Careful you don't need to register anything to be a business.  The most basic business is a sole proprietorship.  You operating a business in your name as the sole owner.  Generally speaking if you are operating an enterprise for profit (which doesn't necessarily mean making a profit lots of businesses lose money) then you are operating a business.

To answer the OP there is no single exact definition and there never will be.  The regulator is going to look at the whole body of evidence and make a determination.  If you are operating a service/activity for profit (doesn't mean you actually show a profit) it is highly likely a regulator (or the IRS) will determine you are operating a business.
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September 14, 2013, 03:59:56 AM
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I'm just chiming in to echo what some of the other intelligent folks have already said.  The "as a business" requirement is a threshold one.  Unless you are acting "as a business," you can't be a Money Services Business. Simply failing to incorporate or organize as a corporation, limited liability company, etc., is not dispositive.  It is only one factor, actually, in the "facts and circumstances" test that determines whether you can be fairly characterized as a business.

OP, you're right in characterizing this as a smell test, or a "I'll know it when I see it" test.  It might be frustrating, but FinCEN determined it was better than trying to give another paragraph of enumerated monetary thresholds. I'll leave up to debate the question of whether a list of monetary maximums would be more effective.

Most of the lawyers dealing with this issue are pure transactional folk, so, as a lawyer who actually litigates, maybe I can bring a more concrete perspective to this.  To be sure, there is no single circumstance or fact that determines whether you are a business.  Instead, you should think about the only thing that ultimately matters: a courtroom.  If you had to describe your trading activity to a jury, what characteristics of your activity would you want them to see?  You'd probably want them to see that you only trade infrequently; that you typically trade with a single counterparty or a small group of counterparties; that those counterparties are registered MSBs; that you don't advertise; that you don't have any website or brick and mortar location; that you don't claim any deductions against any profit on your tax returns; that you don't have any investors; that you don't have employees or regular assistants ...that sort of thing.

Thinking like a litigator helps avoid litigation!

Marco Santori is a lawyer, but not your lawyer, and this is not legal advice.  If you do have specific questions, though, please don't hesitate to PM me.  We've learned this forum isn't 100% secure, so you might prefer to email me.  Maybe I can help!  Depending upon your jurisdiction, this post might be construed as attorney advertising, so: attorney advertising Smiley
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September 17, 2013, 02:34:44 PM
 #10

Thanks for all the replies.

I'm not a business, nor do I intend to become one. It was more of an academic question for something that I've written and is being questioned by an editor. My statement, effectively, is that FinCEN left ambiguity for Bitcoin (and analogous e-currencies) by not defining "engaged as a business." Essentially, where would we draw the line for small and/or infrequent transfers, and where might that trend go toward.

My research tended to support the fact that there was no exact definition of "engaged as a business"; however, my editor thought that someone, somewhere, must have assigned a definition, or at least a factor test, to "engaged as a business" or at least "business" generally. Your replies, at least, seem to validate my research and opinion.

A few other interesting notes, although not quite on point:
"A natural person who engages in an activity identified in paragraphs (ff)(1) through (ff)(5) of this section on an infrequent basis and not for gain or profit." 31 C.F.R. 1010.100.

"Trade or business. The term trade or business has the same meaning as under section 162 of title 26, United States Code." 31 C.F.R. § 1010.330.

"For purposes of paragraph (f)(1)(iv) of this section, a person is not “engaged in the business” of a dealer in foreign exchange or a money transmitter if such transactions are merely incidental to the person's business." 31 C.F.R. § 1010.605.

"“financial institution” means—
(Y) any business or agency which engages in any activity which the Secretary of the Treasury determines, by regulation, to be an activity which is similar to, related to, or a substitute for any activity in which any business described in this paragraph is authorized to engage; or
(Z) any other business designated by the Secretary whose cash transactions have a high degree of usefulness in criminal, tax, or regulatory matters." 31 U.S.C. § 5312.
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September 17, 2013, 02:56:30 PM
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My research tended to support the fact that there was no exact definition of "engaged as a business"; however, my editor thought that someone, somewhere, must have assigned a definition, or at least a factor test, to "engaged as a business" or at least "business" generally. Your replies, at least, seem to validate my research and opinion.
Thank you for explaining the purpose of the question (cloud sourcing your research project) Well done.  Smiley

These are both correct.  There is not an exact definition.  There is a factor test.  (Referred to previously as facts and circumstances)

You noticed some of the factors in your last post there:
- Frequency
- For profit or not
- Incidental or routine

Other facts and circumstances for consideration:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Does the taxpayer depend on income from the activity?
- If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
- Has the taxpayer changed methods of operation to improve profitability?
- Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
- Has the taxpayer made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
- Is the activity undertaken for commercial reasons?
- Is the purpose and is there a prospect of making a profit?
- Are the activities a regular and repetitive undertaking?
- Is the activity planned, organised and carried on in a business-like manner?

There is a huge body of case law in regards to what constitutes a business.  Most of it is in the tax courts.
When a business gets downgraded to a hobby, you lose some tax benefits for loss carried.  (Revenue is taxed regardless of classification)

I hope we get to see the result of your research posted when it is completed.

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September 17, 2013, 03:35:01 PM
 #12

'm not a business, nor do I intend to become one. It was more of an academic question for something that I've written and is being questioned by an editor. My statement, effectively, is that FinCEN left ambiguity for Bitcoin (and analogous e-currencies) by not defining "engaged as a business." Essentially, where would we draw the line for small and/or infrequent transfers, and where might that trend go toward.

Your editor is wrong in that there IS no exact definition.  As Mr. Santori pointed out above that is 100% intentional to allow one to become "not a business" as a technicality by structuring operations to avoid meeting the threshold.

However FINCEN does carve out a specific exception in the regulations in 31 CFR §1010.100

Quote
(Cool Limitation. For the purposes of this section, the term “money services business” shall not include:
(i) A bank or foreign bank;
(ii) A person registered with, and functionally regulated or examined by, the SEC or the CFTC, or a foreign financial agency that engages in financial activities that, if conducted in the United States, would require the foreign financial agency to be registered with the SEC or CFTC; or
(iii) A natural person who engages in an activity identified in paragraphs (ff)(1) through (ff)(5) of this section on an infrequent basis and not for gain or profit.

So it is limited only to natural persons (i.e. not legal entities like partnerships, corporations, etc).  It also uses the vague term "infrequent basis".  I have no cite but IIRC there was a ruling on "infrequent" (not related to Bitcoin specifically) in which a person engaging in regulated activity 6 times a year was found to be infrequent.  Remember there is never going to be a hard fast standard.  It will be based on the conditions around the event.
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September 17, 2013, 10:53:57 PM
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authorities do not like defining things as it actually limits the options.

but in generalisation is: if your advertising products/ services to the general public (not just family/friends) then your a business

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