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Author Topic: Opinions on Impact to Bitcoin Securities  (Read 1891 times)
freedomno1
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September 24, 2013, 07:09:01 AM
 #1

As an offshoot of the are bitcoin securites legal thread I am curious what forum opinions are on the changes for non-accredited investors on US exchanges.

http://www.forbes.com/sites/tanyaprive/2013/09/23/general-solicitation-ban-lifted-today-three-things-you-must-about-it/

Here are three things that they must do starting today in order comply with the new regulations of Title II as they stand:

1. Allow only accredited investors into the funding round

The regulations state that if you do a Regulation D Rule 506 (b) offering, which is private fundraising, you can have up to 35 non-accredited investors participating in your round as long you have a pre-existing relationship with them. In the event you decide to carry out a public fundraising, you relinquish that option. Only verified accredited investors are permitted to invest in private companies that are generally soliciting.

For those not in the legal details
http://www.investopedia.com/terms/n/nonaccreditedinvestor.asp
Regulation D stipulates only 35 non-accredited investors are allowed to invest money into a private placement.

Companies like Emgateway or Rockthepost will benefit the most from this type of law
https://rockthepost.com/
http://www.emgateway.ca/

Others might be in legal limbo for a while
Anyways to the legal mulling  Wink
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Stephen Gornick
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September 24, 2013, 08:12:32 AM
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Others might be in legal limbo for a while

The "equity crowdfunding" that has been going on with BitFunder, BTCT.co, and others (and previously GLBSE) will never be allowed in the U.S., at least not as they exist today.  Firstly, these exchanges/brokerages don't require the investor's identity, and thus they can't (and don't) send out 1099-DIV's on dividends and the exchanges at which the shares trade don't report any trading activity.

There are other specifics coming in Title III (regarding the crowdfunding ammendment), which also put a huge wedge between what we've already seen with Bitcoin-based the cyber equity exchanges and what the SEC's rules will allow.

For instance, the expectation is that equity crowdfunding in the U.S. will be open for those in the U.S. only.   Additionally, the expectations are that no shares can trade on a secondary market for the first year after the IPO.  So anyone that invested is stuck for that first year.

There are other restrictions expected as well.

When equity crowdfunding starts to become more widely understood, it will be interesting what role Bitcoin will play.   There's not much the SEC can do if some online e-commerce LLC in Nevis accepts bitcoins for investment and pays dividends in bitcoins -- regardless of whether the investor is from the U.S. or anywhere.

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September 24, 2013, 08:46:09 AM
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It would be interesting to understand what the legal, regulatory status of this is in EU counries

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September 25, 2013, 05:08:12 AM
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Others might be in legal limbo for a while

The "equity crowdfunding" that has been going on with BitFunder, BTCT.co, and others (and previously GLBSE) will never be allowed in the U.S., at least not as they exist today.  Firstly, these exchanges/brokerages don't require the investor's identity, and thus they can't (and don't) send out 1099-DIV's on dividends and the exchanges at which the shares trade don't report any trading activity.

There are other specifics coming in Title III (regarding the crowdfunding ammendment), which also put a huge wedge between what we've already seen with Bitcoin-based the cyber equity exchanges and what the SEC's rules will allow.

For instance, the expectation is that equity crowdfunding in the U.S. will be open for those in the U.S. only.   Additionally, the expectations are that no shares can trade on a secondary market for the first year after the IPO.  So anyone that invested is stuck for that first year.

There are other restrictions expected as well.

When equity crowdfunding starts to become more widely understood, it will be interesting what role Bitcoin will play.   There's not much the SEC can do if some online e-commerce LLC in Nevis accepts bitcoins for investment and pays dividends in bitcoins -- regardless of whether the investor is from the U.S. or anywhere.

I agree with you Stephen and it raises some interesting points.

Equity regulation as currently written is strict on non-accredited investing.
When we apply it to bitcoin exchanges, there is a vast stretch beyond what would be recognized as legal and what we are observing when discussing American laws regarding non-accredited investors.

The question is to what extent does the United States have control of where American citizens spend their bitcoins or invest them, on places such as bitcoin exchanges.

Bitcoins are not transactable until converted to cash with regards to taxation.
That poses the question
Does the US believe that they have jurisdiction over bitcoin securities and where tax will be attributed to.

From Fincen we know that MSB's need to pay taxes but not individuals, with a bitcoin exchange it would be interesting to see how these rules are applied.

Example:
One person is selling an asset in Country X and the purchasee of the asset is in Country Y
Who would be charged in this transaction.
Logically the investors of the assets are the owners of the assets, but as long as the bitcoins are not converted to Fiat, a non-traditional exchange has occurred between the purchaser and the seller.

Applying this idea to equity crowdfunding and a strong argument can be made that a non-accredited investor, has every right to decide what to invest in, and when to realize income by turning their profits into revenue.
The fact that a non-accredited investor needs to be certified and identified remains an barrier that is not currently addressed in equity laws.

Another question along those lines is, if an exchange is just acting as an escrow service between the buyer and seller with a low fee transacted in bitcoin, no fiat gains or losses are made until those bitcoins are converted to cash.
Is there a tax liability and when is it due.

MSB's in bitcoin are classified as exchangers of Fiat for Bitcoin, on a Bitcoin per Bitcoin relationship however it becomes a bit more interesting.

Recently someone recommended I read The Sovereign Individual: Mastering the Transition to the Information Age
Since its related to what we are talking about I might get it for some light reading later Smiley

"When equity crowdfunding starts to become more widely understood, it will be interesting what role Bitcoin will play.   There's not much the SEC can do if some online e-commerce LLC in Nevis accepts bitcoins for investment and pays dividends in bitcoins -- regardless of whether the investor is from the U.S. or anywhere."

I agree there is not much they can do, but what will they try to do becomes the question.
I hope to see a good outcome.

Thanks for the interesting opinion.

(On EU Countries)
Merkel just won Germany's elections
Germany recognized bitcoin as private money
Germany controls the EU policy to a fair extent
It would be interesting to say the least what type of impact it will have
The second question is how much freedom does each EU member have over these type of economic decisions.
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September 25, 2013, 10:28:49 AM
 #5


Bitcoins are not transactable until converted to cash with regards to taxation.


From Fincen we know that MSB's need to pay taxes but not individuals,

It would be interesting to find citations for either of these, if you have seen them.

We do have guidance from FinCEN on registration fees, but haven't reviewed anything much from them on taxation (which would likely come from IRS instead).


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September 26, 2013, 06:22:48 AM
 #6

It would be interesting to find citations for either of these, if you have seen them.

We do have guidance from FinCEN on registration fees, but haven't reviewed anything much from them on taxation (which would likely come from IRS instead).



Bitcoins are not transactable until converted to cash with regards to taxation.

That is an interpretation based on the guidelines set forth by the Canada Revenue Agency in April.

I assume a barter transaction is taxable but the conversion to fiat is where the tax is applied not in the bitcoin transaction itself.
Canada does have a set rule on the books regarding it as a barter, but to my knowledge the US does not which is where my question was poised.
Currently the burden of proof is dependent on the user until such a time when taxation information is given to the government.

http://www.cbc.ca/news/business/revenue-canada-says-bitcoins-aren-t-tax-exempt-1.1395075

The CRA told the CBC there are two separate tax rules that apply to the electronic currency, depending on whether they are used as money to buy things or if they were merely bought and sold for speculative purposes.  

"Barter transaction rules apply where BitCoins are used to purchase goods or services," Canada Revenue Agency spokesman Philippe Brideau said in an email.

Barter is the exchange of one good for another good without the use of cash, such as when a farmer who grows vegetables trades with another who raises chickens. Many Canadians don't realize such exchanges are taxable, but they are.

Paragraph 3 of the CRA's Interpretation Bulletin IT-490  clearly states that in a barter transaction between arm’s-length persons, "we generally consider that the value of whatever is received is at least equal to the value of whatever is given up."

In the above example, that means whatever you've received in exchange for your $1 worth of vegetables must be documented as a taxable gain of at least $1 somewhere.

Investing gains

When it comes to trading BitCoins for profit, the tax man says there are tax implications there, too.

"When BitCoins are bought or sold like a commodity, any resulting gains or losses could be income or capital for the taxpayer depending on the specific facts," ruled the CRA.

That section is covered in paragraphs nine through 32 of the CRA's section IT-479R, Transactions in Securities , "which provide general comments for purposes of determining whether transactions are income or capital in nature."
freedomno1
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September 26, 2013, 07:15:31 AM
 #7

Double post it was running super long



From Fincen we know that MSB's need to pay taxes but not individuals,

For the second quote

Canadian Law does not have a distinction for MSBS at this time, while the US does.
I meant Fincen regards MSBs as taxable but we are not sure when individuals will need to pay their taxes and bitcoin exchanges until they convert their transaction fees into fiat.  

This reference was made to the March 18th FinCEN document which clarified the rules for the United States
http://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html

It expands into increased detail on the differences between Currency and Virtual currency.

A user of virtual currency is not an MSB under FinCEN's regulations and therefore is not subject to MSB registration, reporting, and recordkeeping regulations. However, an administrator or exchanger is an MSB under FinCEN's regulations, specifically, a money transmitter, unless a limitation to or exemption from the definition applies to the person.

With the crowdfunding rules and applications to non-accredited investors along with the rules regarding taxes in the US context we are starting to see a clearer picture but in my opinion some areas are still fairly blurred.

For the Canadian side the current bitcointalk thread is fairly old so it is in need of some updating on Canadian Taxes and Law
https://bitcointalk.org/index.php?topic=77186.0

____
In regards to the European Union
Not aware of any statues they have passed but then again I need to keep an eye on the press forum Smiley
EU member states and EU as a whole are different so that might be a bit messy.

Germany treats it as a taxable private money and by extension this was a response to the Trendon Shavers or Pirate incident regarding scamming that happened in the United States.
http://arstechnica.com/tech-policy/2013/08/germany-recognizes-bitcoin-as-a-private-money-subject-to-capital-gains-tax/
http://arstechnica.com/tech-policy/2013/08/federal-judge-bitcoin-a-currency-can-be-regulated-under-american-law/

To my knowledge the best answer I can give is neobees reply to my question on the difference between a European Credit Union and Bank.
The impact it has on individual taxes I assume is the European equivalent of a T5 Slip in Canada (Statement of Investment Income)
https://bitcointalk.org/index.php?topic=289730.msg3127587#msg3127587


What is the difference between say a bitcoin bank and a credit union.
Regarding the European Union is European law a bigger factor than Cyprus laws.


European Law does preside over Cypriot law, however there is only the European Court of Human Rights and the European Court of Justice, industry regulations are set at a local level.

A credit union is owned by its members thus making it different to what we are offering, some of the credit unions in Cyprus are also reported as to facing financial difficulties.

On the topic of the impact to bitcoin securities
Depending on the country or each EU each member state, we see interesting dynamics on how laws are handled.
It will be interesting to see what each tax agency does.

I hope that answered your questions I noticed I mentioned in the OP specifically on the impact on US securities but went into Canada for my quote.
The overall topic is the impact to bitcoin securities as a whole but I was using the US as an example.
In either case I missed the target and my apologies since part of my response was in reference to Canada, but if you find any references to new rules and regulations feel free to correct them.
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September 26, 2013, 03:58:26 PM
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There are Barter Rules with the IRS also, you pay tax when you convert the bitcoin into gold for example.
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September 27, 2013, 12:47:16 AM
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It would be interesting to find citations for either of these, if you have seen them.

We do have guidance from FinCEN on registration fees, but haven't reviewed anything much from them on taxation (which would likely come from IRS instead).



Bitcoins are not transactable until converted to cash with regards to taxation.

That is an interpretation based on the guidelines set forth by the Canada Revenue Agency in April.

I assume a barter transaction is taxable but the conversion to fiat is where the tax is applied not in the bitcoin transaction itself.

Excellent, thank you for this and for the CRA citations.   CRA and FinCEN don't cover the same ground, but they do have a border.  Smiley

I've had some tax advice that runs counter to your barter interpretation, essentially that the unit of account in the transaction for purposes of taxation is going to be the taxed currency value (fiat value) of the bartered good.  And also that you can run into some trouble with having a highly valued account offshore and not reporting it (even if that value is virtual and unrealized).

There are a lot of folks that will say "just don't pay taxes", but when you have a lot to lose and much of that is not highly portable, it is less of a choice.  Paying exactly the right amount of tax and not any more than that is the other way to play, and finding methods along the way to minimize the tax burden by paying close attention to the things that the government wants me to do that I also agree with doing.

For example, buying massive solar power generation effectively reduced by tax burden to almost nothing more than once.  The government likes this because they are spending too much on protecting access to foreign energy (militarily), and it increases the resiliency of the energy infrastructure so if more was made here they might be able to do less fighting overseas and feel safer at home.

Less military, less carbon, lower cost energy for me, AND lower taxes... that was a win for all of us. For any of you miners with high energy bills, the US Federal tax "encouragement" is available until 2016, but there is no cap on the credit and it can be carried forward.
http://www.gosolarcalifornia.ca.gov/consumers/taxcredits.php

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September 27, 2013, 05:47:56 AM
 #10

It would be interesting to find citations for either of these, if you have seen them.

We do have guidance from FinCEN on registration fees, but haven't reviewed anything much from them on taxation (which would likely come from IRS instead).



Bitcoins are not transactable until converted to cash with regards to taxation.

That is an interpretation based on the guidelines set forth by the Canada Revenue Agency in April.

I assume a barter transaction is taxable but the conversion to fiat is where the tax is applied not in the bitcoin transaction itself.

Excellent, thank you for this and for the CRA citations.   CRA and FinCEN don't cover the same ground, but they do have a border.  Smiley

I've had some tax advice that runs counter to your barter interpretation, essentially that the unit of account in the transaction for purposes of taxation is going to be the taxed currency value (fiat value) of the bartered good.  And also that you can run into some trouble with having a highly valued account offshore and not reporting it (even if that value is virtual and unrealized).

There are a lot of folks that will say "just don't pay taxes", but when you have a lot to lose and much of that is not highly portable, it is less of a choice.  Paying exactly the right amount of tax and not any more than that is the other way to play, and finding methods along the way to minimize the tax burden by paying close attention to the things that the government wants me to do that I also agree with doing.

For example, buying massive solar power generation effectively reduced by tax burden to almost nothing more than once.  The government likes this because they are spending too much on protecting access to foreign energy (militarily), and it increases the resiliency of the energy infrastructure so if more was made here they might be able to do less fighting overseas and feel safer at home.

Less military, less carbon, lower cost energy for me, AND lower taxes... that was a win for all of us. For any of you miners with high energy bills, the US Federal tax "encouragement" is available until 2016, but there is no cap on the credit and it can be carried forward.
http://www.gosolarcalifornia.ca.gov/consumers/taxcredits.php

Thanks for the response it is very possible that the IRS and FINCEN, will interpret the rules differently than the CRA, as they are different beasts even with the shared border between them.

From my rough recollection of US laws, the closest application I can think of is taxation of worldwide income.
Canada has the same laws and did it differently, however it is a possibility that American regulators interpret their laws regarding tax havens as being the same as holding bitcoin. Bitcoin could be treated as a digital worldwide currency and may fit the purpose and scope of the rules.

Tax avoidance is a perfectly fair game and tax evasion is not, the question is how do you comply with the rules, when we have ambiguity on what lines to tax revenue under.

In Canada we have a TFSA (Tax Free Savings Account)
The money you put into the account up to $5000 dollars per year is not taxable, as you already paid the taxes from that money and any gains made in the TFSA are not included as taxable gains if you withdraw the money. ($5500 effective 2013 due to inflation)
http://www.tfsa.gc.ca/
Investment income earned in a TFSA is tax-free.
Withdrawals from a TFSA are tax-free.

The opposite of a TFSA is an RRSP (Registered Retirement Savings Plan) which gives you a tax deduction for putting money in and a tax liability for taking money out which is why it is used to promote people saving money for retirement.
http://en.wikipedia.org/wiki/Registered_Retirement_Savings_Plan

If we treat bitcoin as an investment similar to the TFSA then it is effectively a tax shelter.

The problem with the fiat value of a product is that not all products have a universal price, some items have depreciation value like cars and computers.

With Bitcoin the exchange rate at which you buy the bitcoins and the present value of bitcoins are different things entirely. If I bought 100 bitcoins at 50 dollars and then bought 10,000 dollars worth of products using those bitcoins it would be a barter transaction, but if I sold them for cash it would be a capital gain according to Canadian law.

If we assume American law uses the fiat value at the time of purchase then we end up with the original problem that the burden of proof is on the user if you do not report it and would require meticulous efforts by the government to track everyone doing it.

With the example above if you bought $5000 dollars worth of goods and kept the rest as bitcoin, then you could effectively delay capital gains and barter costs until you convert them back to cash or goods for an indefinite duration.
Bitcoin in this case makes an effective tax haven until you withdraw it into fiat.
This would be a fair example of tax avoidance as you are deciding when to convert bitcoins into fiat.

In my opinion it is more likely that the US will customize new laws to specify rules regarding bitcoins like Canada, than treat it as worldwide income, but that is purely speculative on my part.
http://business.financialpost.com/2012/07/03/an-unnecessary-overreaching-of-u-s-tax-law-into-canada/


Currently waiting on Havelocks announcement which is due next Thursday it may reveal the current legal status of Canadian Virtual exchanges based on the advice they receive from their lawyers.
Hopefully it will also clarify some of the rules regarding Canada and Bitcoin securities listed on their exchanges as well.

For now the US ambiguities will remain be the same, until burnsides posts the reasons for closing down BTCT.
Havelocks announcement in Canada and Burnsides future announcement should enable us to see the differences between Canadian and American laws rules and regulations in relation to virtual securities.  


Hello everyone, just an update on Havleock Investments and the ongoing legal uncertainty in the bitcoin world.
We are still working with our legal team to get our affairs in order and have been told we will have information with which to move forward next week.  We'll be letting everyone know on Thursday October 3rd.
To all the fund managers who have contacted us inquiring about listing, we thank you for your interest and will be able to give some definite answers next Thursday.
Thanks for your time.

Looking forward to an interesting week Smiley
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