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Contents Sections Pages A) Overview 3-5 B) Investor Reporting 6-8 C) Corporate Reporting 9-12 D) International Structure Reporting 13 20 E) Disclosures 20 F) Other Areas Future 21 2
Definitions: Overview o Blockchain: A distributed ledger technology initially invented to monitor and verify Bitcoin transactions. o Crypto Currencies: Digital assets or currencies that can be exchanged. Cryptograph is used for security and verification. o ICOs (Initial Coin Offering): An offering of a new crypto currency or crypto-token in exchange for cryptocurrencies [Bitcoin, Ethereum]. o Miners: Typically, individuals that verify transactions that are added to a blockchain ledger. o Exchanges: A service platform (intermediary) to trade cryptocurrencies and digital assets. o Tokens: Digital representations of currency, equity or other tangible or intangible assets. o Utility: Tokens that provide owners a right to acquire future products or services, sometimes at a discount. o Equity: Security tokens that represent ownership of an asset, e.g. stock or debt. o Fiat Currencies: Legal tender, backed by a government. 3
Overview Investors Individuals Funds Institutions Exchanges & Sellers Coinbase Coinmama Binance OKEx BitMEX Bitcoin ATMs Currencies Bitcoin Bitcoin cash Ethereum Litecoin Zcash Dash Monero BTC BCH ETH LTC ZEC DASH XMR 4
Overview ICOs: Tech s New Funding Vehicle Investors / Traders Coins Founders & Start-up Investors X X X Initial Funding Investor Wallets Start-up Inc. Currency Exchanges New Tech Platform ICO Funding Blockchain Business Platform 5
Investor Reporting IRS Notice 2014-21 o Treat as property, not currency o Taxed when sold o Capital gain: reporting on schedule D, Form 8949 o Acquisition and sale of each transaction o Tracking can be a problem o What about virtual currencies not tradeable o Conversion taxable? o Character of income capital gain short-term or long-term o Trade or business ordinary o Notice addresses only convertible virtual currencies, generally leaving tokens or currencies that are not actively traded without guidance. 6
Investor Reporting Taxable Income Mining o Miners are typically rewarded by currency for validating transactions o Generally, active income [self employment for individuals] 7
Investor Reporting Section 1031 Exchanges o Prior to 2018: Law uncertain if property is like-kind o Post 2017: Not like-kind property (Tax Cut and Jobs Act) o Only real estate o Filing for 2017? o Reporting on Form 8275 Wash sale rules - 1091 o Losses disallowed for securities o Treatment as property vs. securities? o Buying with alternative currencies, e.g. a virtual currency or tokens not traded 8
Corporate Reporting Accounting and Tax Treatment Reporting o Employers paying in crypto o Withholding still required o W2, 1099 s required [1099K: Over $20,000 in proceeds and 200 transactions per year] o Contract or payments payor liable o Books & records required 6001 Inventory o Lifo o Fifo o Specific Identification [AICPA recommendation, June 10, 2016] 9
Corporate Reporting Accounting and Tax Treatment (Cont d) Advanced Payment o Accrual [All events test] GAAP vs. Tax o Tax [Reg. 1.451-1(a)] o Rev Proc. 91-21 Deferral o Rev. Proc. 2004 34 o Full Inclusion o Deferral Election o Section 13221 of TCJA: o Guidance to come on 451(c) Mark to market election under 475 10
Corporate Reporting Incorporation Shareholders U.S. Inc. Utility token o Rev. Proc. 2014-21 o Property taxable upon disposition o Income recognition re: sale or issuance o Deferred or current income o Deposit future income o Must meet certain rules for deposits Equity Token o Property in exchange for ownership o 351 [tax-free incorporation] o 1032 [not taxable to corporation] Utility Tokens Equity Tokens 11
Corporate Reporting 83 Property U.S. Shareholders U.S. Inc. 83 for employee option plans o Must be property o Valued [ 409A] Timing o Issuance [property vs. deferred compensation] o Valuation of token o 409A requirements Impact of early sales on option pricing Sales Services ICO 12
International Structure Reporting CFCs Prior to 2018 U.S. Shareholders CFC Controlled foreign corporations (CFC) if ownership equity > 50% by U.S. shareholders Income deferred until remitted to U.S. Deemed dividend to shareholders for Subpart F income or investment in U.S. property [ 954, 956] Sales Services ICO Trade or business 13
International Structure Reporting ICO Foreign Structures Alt. (1) Alt. (2) Parallel Structure Hold Co Hold Co Shareholders * OPCO Inc. CFC OPCO Inc. Foreign Co Token Sale Income * May be same investors or new investors 14
International Structure Reporting Foreign Derived Intangible Income * Post 2017 Shareholders U.S. Inc. 100-37.5% 62.5 x 21.0% = 13.125% Income FDII deduction Net tax rate Must meet definition: Sold or used outside U.S. Sales Services ICO * Tax Cut and Jobs Act Sale, lease, license, exchange, disposition of property for foreign use Services not located in U.S. 15
International Structure Reporting Post 2017 CFCs: Global Intangible Low-Taxed Income applies to aggregate CFC income [GILTI] U.S. Shareholders CFC $100 Income $100 Income CFC No change to definition Income deemed distributed under new GILTI regime Applies to aggregate CFC income in excess of 10% of depreciable tangible property Exception Elect to treat as a U.S. corporation Sales Services ICO 16
International Structure Reporting U.S. Corporate Ownership 50% GILTI Deduction U.S. Shareholders Favors corporate ownership in U.S. 50% GILTI deduction U.S. Inc. CFC $100-50 Deduction [Decreases to 37.5 in 2026] 50 Net income x 21.0% New tax rate = 10.5% Sales Services ICO Note Risk of income allocation to U.S. under 482, 864, 882 Regulations State taxation 17
International Structure Reporting Transition Tax Risk for U.S. investors re: income earned offshore as of 12/31/2017 ( 965) U.S. Shareholders Foreign Corp A U.S. Inc. Foreign Corp B o Applies to shareholders as defined in 951(b) to pay tax o Calculate consolidated foreign E & P as of 12/31/2017, or 11/02/2017 o Tax on undistributed E & P o Cash and cash equivalents 15.5% * o Residual 8% o Deferral election 8 year period o Initial tax due April 15, 2018 * Higher rates for individuals 18
International Structure Reporting Transfer Pricing Investors Arms length contract with U.S. company to avoid income allocation 482 transfer pricing 367(d) implications Valuation of intangibles U.S. Inc. Differs from valuation under 409A IP transfer Foreign Corporation Token Sales 19
International Structure Reporting ICO Foreign Jurisdictions Investors U.S. Inc. Foreign Corporation Countries Switzerland Singapore Malta Liechtenstein Cayman Gibraltar Treaty Yes No Yes No No No 20
Disclosures FBAR Reporting o Financial interest: probably not if in U.S. o Held in a foreign broker or financial institution: yes o Digital wallet: no, unless foreign o Coinbase: U.S. account o Foreign exchange transactions: can be if trading/converting on foreign exchange fact based FATCA Reporting Form 8938 o Foreign stocks and securities: NA to typical situations o Foreign exchanges: form indicates exchange so best to report 21
Other Areas - Future OVDP Reporting (Main program expires September 28, 2018) Goods and Services Taxation VAT Securities arena GDPR (Global Data Protection Regulations, effective May 25, 2018) State tax Client acceptance process 22
International Tax Considerations for Coin Offerings April 5, 2018 Initial offerings of virtual currencies are proliferating, and they present a host of domestic and international tax issues. The core principles of U.S. taxation of cryptocurrencies were spelled out in IRS Notice 2014-21, which established that cryptocurrency is treated as property and not as currency, domestic or foreign. Consequently, if a business issues tokens, whatever it receives in return generally will be taxable to the issuer unless the transaction is not taxable under another operative tax provision. In some situations, though, the income from the offering could be deferred. Similarly, trading tokens also will generate gain or loss. In short, the notice only defines a cryptocurrency for U.S. tax purposes as property and not currency. It does not provide operative tax treatment. It is common to use a foreign-based cloud company to raise capital through initial coin offerings (ICOs) because of the virtual nature of the technology employed, but this assumes that the substance and ownership of intellectual property (IP) meets existing transfer pricing rules without disrupting the company s overall global business strategy. Outlined below are some of the key U.S. tax considerations in connection with a foreign-based ICO. Tax reform. H.R. 1, commonly known as the Tax Cuts and Jobs Act (TCJA), brings a lower U.S. corporate rate of 21 percent, which might make U.S. holding companies quite attractive in many situations. However, the ability to defer both federal and state tax with a foreign structure still provides many planning opportunities, but it requires careful navigation as tax reform evolves and many questions continue to be answered. Technology transfer. If the new company will employ substantial proprietary IP, including technology related to the cryptocurrency itself, transferring that technology to a foreign affiliate could create significant tax consequences for the U.S. transferor. 23
International Tax Considerations for Coin Offerings April 5, 2018 (Continued) Foreign company U.S. source income. If the foreign affiliate operates in the U.S. (if, say, some or all of the actual business activities and IP development occur in the U.S.), then the foreign affiliate will be subject to U.S. federal and state taxation. To be respected as a foreign taxpayer and to avoid being taxed in the U.S., a foreign affiliate needs to have substance in the foreign jurisdiction and very limited activity in the U.S. At a minimum, a foreign affiliate s contracts and agreements must be conducted and executed outside of the U.S. to avoid creating a taxable presence in the U.S. Transfer pricing. If the ICO requires substantial U.S. activities or services of U.S. officers and directors, there almost certainly will be a need to form a separate U.S. company to perform any domestic activities that are required in order to avoid taxable presence. The U.S. company engaging in these activities must be remunerated at arm s-length prices under appropriately executed agreements between the domestic company and the foreign company. Potential for deemed dividend. The U.S. maintains a set of complex anti-abuse rules commonly known as Subpart F. Subpart F applies only to a controlled foreign corporation (CFC), which is a foreign corporation more than 50 percent owned by five or fewer 10 percent U.S. shareholders. Under the Subpart F rules, income realized from certain activity or from the sale of products both sourced and sold for use or consumption outside the foreign company s host country may be treated as a dividend taxed to any U.S. shareholder at ordinary rates. The ICO and activity of the foreign affiliate must be arranged in a way that does not trigger Subpart F income. Furthermore, the TCJA has initiated several new anti-abuse provisions on foreign-based income that CFCs must navigate as well. Foreign jurisdictions. Careful review of the foreign jurisdiction s local law is needed to ensure both the tax and regulatory environment are consistent with expectations. Conclusion The preceding tax considerations are not an exhaustive list of the issues. As always, the only clear imperative when dealing with tax issues related to international structuring is to proceed with experienced tax advisers. 24
Presenters Brian Rowbotham, Partner Tax 1.415.536.7005 Brian.Rowbotham@crowe.com Mr. Rowbotham has over 35 years experience advising U.S. and multinational clients on inbound and outbound transactions. His clients include individuals and companies, public and private, in technology, social media, real estate, and private equity funds. He is also active with global wealth and tax structure planning. His previous firm, Rowbotham International, combined with Crowe LLP in November 2017. Sergei Mytko, Managing Director International Tax 1.818.325.8459 Sergei.Mytko@crowe.com Mr. Mytko has more than 20 years of experience in advising global clients on all aspects of international taxation, including post-merger integration, structuring for cross-border mergers and acquisitions, international tax reporting and compliance, and planning with respect to supply chain management, intellectual property, subpart F, and cross-border financing transactions. 25
Smart decisions. Lasting values. TM 26