Abstract
Crowdfunding, which is the raising of funds from small private investors for many causes, has been in competition with venture capitalists in the promotion of virtual currencies and was the primary financial donor to Ethereum. The U.S. Internal Revenue Service (IRS) has taken note that the value of virtual currencies has risen to an extraordinary degree and that a number of people have received very substantial monetary gains from their exchange. Accordingly, the IRS has ruled that such gains are taxable and subject to major penalties for the failure to pay the appropriate taxes on them. The problem is how to determine who is engaged in the transactions, whether virtual currencies constitute property or currencies, how to subpoena and gain access to information about transactions, and other issues.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsNotes
- 1.
For a discussion, see Roy J. Girasa, Cyberlaw: National and International Perspectives, Ch. 2, Prentice-Hall, 2010.
- 2.
Dong He, supra, note 24, Dong He, Karl Habermeier, Ross Leckow, Vikram Kyriakos-Saad, Hiroko Oura, Tahsin Saadi Sedik, Natalia Stetsenko, Concepcion Verdugo-Yepes, Virtual Currencies and Beyond: Initial Considerations, IMF Discussion Note SDN/16/03, Jan. 2016, at 30–31, https://www.researchgate.net/publication/298915094_Virtual_Currencies_and_Beyond_Initial_Considerations
- 3.
Jim Manning , Vega Fund: Ethereum Venture Capital Crowdfunding Platform, ETH News, March 12, 2017, https://www.ethnews.com/vega-fund-ethereum-venture-capital-crowdfunding-platform
- 4.
Massolution, 2015CF: The Crowdfunding Industry Report, http://www.crowdsourcing.org/editorial/global-crowdfunding-market-to-reach-344b-in-2015-predicts-massolutions-2015cf-industry-report/45376. See also commentary by Chance Barnett, Trends Show Crowdfunding to surpass VC in 2016, Forbes, June 9, 2015, http://www.forbes.com/sites/chancebarnett/2015/06/09/trends-show-crowdfunding-to-surpass-vc-in-2016/#18e99839444b
- 5.
Nav Athwal , Real Estate Crowdfunding: 3 Trends to Watch in 2017, Forbes, Feb. 17, 2017, https://www.forbes.com/sites/navathwal/2017/02/17/real-estate-crowdfunding-3-trends-to-watch-in-2017/#40de83b93b4b
- 6.
Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293 (1946).
- 7.
Pub.L. 112–106 enacted into law April 5, 2012.
- 8.
Section 301 of the Act states that the full title of Title III is the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012 or the Crowdfunding Act.
- 9.
15 U.S.C. §77(d).
- 10.
Securities Act of 1933, 15 U.S.C. §77(d)(a)(6).
- 11.
§4(a)(6) of the Securities Act of 1933.
- 12.
U.S. Securities and Exchange Commission, 17 C.F.R. 200, 227, 239, 240, 249, 269, 274 2016.
- 13.
Rule 17 CF.R. §230.501.
- 14.
17 C.F.R. §227.100(a)(2)(ii).
- 15.
Final Rule, §227.201(r).
- 16.
Final Rule, §227.203.
- 17.
Final Rule, §227.204.
- 18.
Final Rule, §227.205.
- 19.
Securities Act of 1934, §3(a)(4)(A).
- 20.
Securities Exchange Act of 1934, §3(a)(80). The final rule, §227.300 (a)(2) defines a funding portal as “a broker acting as an intermediary in a transaction involving the offer or sale of securities in reliance on section 4(a)(6) of the Securities Act…that does not: (i) Offer investment advice or recommendations; (ii) solicit purchases, sales or offers to but the securities displayed on its platform; (iii) Compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its platform; or (iv) Hold, manage, process, or otherwise handle investor funds or securities.”
- 21.
A “self-regulatory organization” is defined under the Securities Act of 1934, §3(a)(26) as “any national securities exchange, registered securities association, or register clearing agency.”
- 22.
Jobs Act, §302(b) which amends the Securities Act of 1933 (15 U.S.C. 77a et seq.) by adding a §4A, Requirements with Respect to Certain Small Transactions.
- 23.
Final Rule, §227.303(b).
- 24.
Id.
- 25.
Final Rule, §227.300(b).
- 26.
Final Rules, §227.301.
- 27.
Final Rule, §227.302(b).
- 28.
Final Rule, §227.302(c).
- 29.
Final Rule, §227.302(d).
- 30.
17 CFR §240.15c2-4.
- 31.
Final Rule, §227.302(e)(f).
- 32.
Final Rule, §227.401.
- 33.
Final Rule, §227.402.
- 34.
Final Rule, §227.304(a)(c).
- 35.
Final Rule, §227.304(b).
- 36.
Final Rule, §227.404.
- 37.
Final Rule, §227.501.
- 38.
Final Rule, §227.503.
- 39.
Platform is defined as “a program or application accessible via the Internet or other similar electronic communication medium through which a registered broker or a registered funding portal acts as an intermediary in a transaction involving the offer or sale of securities in reliance on section 4(a)(6) of the Securities Act” (15 U.S.C. 77d(a)(6), Final Rule §227.300 (4)).
- 40.
Martin Zwilling , Will These 5 Models of Crowdfunding Replace Angel and VC Investors, Entrepreneur, Feb. 3, 2015, www.entrepreneur.com/article/242767
- 41.
A “public benefit corporation” is a relatively new type of business corporation formed for the purpose of creating a “general public benefit” in addition to business purposes. A general public benefit” is one that has a “material positive impact on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation.” “Specific public benefit” purposes include, but are not limited to: “(1) providing low-income or underserved individuals or communities with beneficial products or services; (2) promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; (3) preserving the environment; (4) improving human health; (5) promoting the arts, sciences or advancement of knowledge; (6) increasing the flow of capital to entities with a public benefit purpose; and (7) the accomplishment of any other particular benefit for society or the environment.” In New York it is governed by Article 17 of the New York Business Corporation Law. The purposes may be found in New York BCL §1702(e). http://www.dos.ny.gov/corps/benefit_corporation_formation.html. Approximately 20 states recognize public benefit corporations including Delaware, California, and New York.
- 42.
- 43.
For an excellent review for crowdfunding participants in making their selection of a crowdfunding platform to invest in together with a colorful diagram of possible choices, see Eric Markowitz, 22 Crowdfunding Sites (and How To Choose Yours!), http://www.inc.com/magazine/201306/eric-markowitz/how-to-choose-a-crowdfunder.html
- 44.
Pace Crowd Funding, https://crowdfunding.pace.edu/
- 45.
- 46.
Markowitz, supra, note 44.
- 47.
FTC v. Chevalier , No. 3:15-cv-01029 (D.C. Or., June 10, 2015).
- 48.
15 U.S.C. §45(a).
- 49.
U.S. Federal Trade Commission, Crowdfunding Project Creator Settles FTC Charges of Deception, https://www.ftc.gov/news-events/press-releases/2015/06/crowdfunding-project-creator-settles-ftc-charges-deception
- 50.
FTC v. Chevalier , supra, note 48.
- 51.
U.S. Internal Revenue Service, Letter. No. 2016-0036, March 30, 2016, https://www.irs.gov/pub/irs-wd/16-0036.pdf
- 52.
U.S. Internal Revenue Service, IRS Virtual Currency Guidance: Virtual Currency is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply, March 24, 2014, Notice 2014-21, https://www.irs.gov/newsroom/irs-virtual-currency-guidance
- 53.
Id.
- 54.
Jose Andre Roman , Bitcoin: Assessing the Tax Implications Associated with the IRS’s Notice Deeming Virtual Currency Property, 34 Developments in Banking Law, 2014–2015, at 451, 454–456, http://www.bu.edu/rbfl/files/2015/07/Roman.pdf
- 55.
Elizabeth E. Lambert , The Internal Revenue Service and Bitcoin: A Taxing Relationship, 35 Virginia L Rev., No. 1, Summer, 2015, https://www.jmls.edu/academics/taxeb/pdf/lambert.pdf
- 56.
Scott A. Wiseman , Property or Currency? The Tax Dilemma Behind Bitcoin, 2 Utah L Rev. 417–440 at 430–436, https://dc.law.utah.edu/ulr/vol2016/iss2/5/
- 57.
David Klasing , Virtual Currency and Section 1031- A Retraction and New Position, Sept. 1, 2017, https://klasing-associates.com/virtual-currency-section-1031-retraction-new-position/
- 58.
Michaela Ross , Bitcoin, Cryptocurrency Trades Face New Liability in Tax Bill, Bloomberg Law Big Law Business, Dec. 20, 2017, https://biglawbusiness.com/bitcoin-cryptocurrency-trades-face-new-liability-in-tax-bill/
- 59.
Rick Barlin , Bitcoin: Rise of Virtual Currency and its Downfalls: IRS Regulations and Other Drawbacks For Bitcoin, The CPA Journal, Oct. 2, 2017, https://www.cpajournal.com/
- 60.
Id.
- 61.
Troy K. Lewis , Comments on Notice 2014–21: Virtual Currency Guidance, AICPA Letter, June 10, 2016, https://www.scribd.com/doc/315796895/AICPA-Comments-on-Notice-2014-21-Virtual-Currency-Guidance
- 62.
U.S. Internal Revenue Service, Summary of FATCA Reporting for U.S. Taxpayers, https://www.irs.gov/businesses/corporations/summary-of-fatca-reporting-for-us-taxpayers
- 63.
Pub.L. 111–147, 124 Stat. 71, enacted March 18, 2010, H.R. 2847.
- 64.
Elizabeth M. Valentine , IRS, Will You Spare Some Change? Defining Virtual Currency for the FATCA. 50 Valparaiso U. L. Rev. 863–911 at 865, Sp. 2016.
- 65.
U.S. v. Coinbase , No. 17-cv-01431-JSC (D.C.N.D.Ca. Nov. 28, 2017).
- 66.
John Doe, No. 3:a16-CV-06658-JSC (N.D. Ca. Nov. 17, 2016). For a commentary, see Robert W. Wood, IRS Hunts Bitcoin User Identities With Software In Tax Enforcement Push, Forbes, Aug. 24, 2017, https://www.forbes.com/sites/robertwood/2017/08/24/irs-hunts-Bitcoin-user-identities-with-software-in-tax-enforcement-push/#534172159cd0
- 67.
Joseph Cox , IRS Now Has a Tool to Unmask Bitcoin Tax Cheats, The Daily Beast, Aug. 22, 2017, https://www.thedailybeast.com/irs-now-has-a-tool-to-unmask-Bitcoin-tax-cheats
- 68.
Id.
- 69.
Joel Rosenblatt , Coinbase Likely to Lose Fight to Block IRS Customer Probe, Bloomberg, Nov. 9, 2017, https://www.bloomberg.com/news/articles/2017-11-10/coinbase-likely-to-lose-bid-to-block-irs-probe-of-customer-gains
- 70.
A copy of the contract may be found at https://assets.documentcloud.org/documents/3935924/IRS-Chainalysis-Contract.pdf
- 71.
Jeff John Roberts , The IRS Has Special Software to Find Bitcoin Tax Cheats, Fortune, Aug. 22, 2017, http://fortune.com/2017/08/22/irs-tax-cheats-bitcoin-chainalysis/
- 72.
H.R. 59 and H.R. 3210.
- 73.
Jaren Polis , Creating tax parity for cryptocurrencies, Press Releases, Sept. 7, 2017, https://polis.house.gov/news/documentsingle.aspx?DocumentID=398438
- 74.
Homeland Security Assessment of Terrorist Use of Virtual currency Act (An Act to direct the Under Secretary of Homeland Security for Intelligence and Analysis to develop and disseminate a threat assessment regarding terrorist use of virtual currency), H.R. 2433, https://www.comgress.gov/bill/115th-congress/house-bill/2433/text
- 75.
Simon Jenner , Blockchain: The Digital Tax Function’s Leading-Edge Technology?, Tax Notes International, at 1087–1089, Dec. 11, 2017, https://www.taxnotes.com/document-list/tax-topics/tax-policy
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 2018 The Author(s)
About this chapter
Cite this chapter
Girasa, R. (2018). Crowdfunding and the Taxation of Virtual Currencies. In: Regulation of Cryptocurrencies and Blockchain Technologies. Palgrave Studies in Financial Services Technology. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-78509-7_7
Download citation
DOI: https://doi.org/10.1007/978-3-319-78509-7_7
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-319-78508-0
Online ISBN: 978-3-319-78509-7
eBook Packages: Economics and FinanceEconomics and Finance (R0)