Cryptocurrencies Are Subject to Tax and Securities Laws?
Posted on 08/02/2019 at 09:21 AM by John Lande
Many people view cryptocurrencies as a highly disruptive technology destined to change the economy as we know it. What they will disrupt, however, remains to be seen. In the meantime, at least a couple of federal regulators—SEC and IRS—do not see much of anything new about cryptocurrencies, and are working to apply existing statutes and regulations to cryptocurrencies.
This blog has previously covered SEC decisions which clearly and consistently concluded existing exchange and securities laws apply to certain initial coin offerings (“ICOs”), cryptocurrencies, and cryptocurrency exchanges. This blog also covered efforts by the IRS to obtain records from Coinbase, a cryptocurrency exchange, regarding cryptocurrency transactions of U.S. citizens.
Recently, many people have reported receiving letters from the IRS reminding them of the IRS’s position regarding the taxation of Bitcoin, and other cryptocurrencies. The IRS views cryptocurrencies as intangible property, like patents, life insurance, and other securities. The notice the IRS sent to taxpayers is likely targeted at users whose information the IRS obtained from Coinbase. The IRS has previously indicated that proper taxation of cryptocurrency transactions is a high enforcement priority. There have also been reports that the IRS is in the process of developing criminal cases related to cryptocurrency transactions.
At the same time, the SEC recently filed a lawsuit in the United States District Court for the Southern District of New York against Kik Interactive, Inc. (“Kik”). Kik is a Canadian company that operates a mobile messaging application known as Kik Messenger. According to the SEC, Kik’s application had some initial success, but required a significant injection of new capital to continue development. Faced with few options for additional capital, Kik decided to offer a cryptocurrency called Kin. Kik started marketing Kin as a cryptocurrency that could be used to buy goods and services within the “Kin ecosystem,” which was under development.
Starting in May 2017, Kik began selling Kin to investors. The agreements with purchasers promised Kin tokens in the future, and allowed investors to purchase Kin at a discount under simple agreements for future tokens (“SAFT”). Kik raised approximately $49 million through the SAFT agreements. After Kik offered Kin for sale to the public, it raised approximately $55 million from U.S. based investors. According to the SEC, at no point during the marketing or sale of Kin could Kin be used to purchase any goods or services. Kik also told investors that Kin could be traded on cryptocurrency exchanges.
The SEC has been clear that it views certain cryptocurrencies as investment contracts, which are regulated as securities by existing securities laws. The SEC Kik lawsuit was filed on June 4, 2019, and Kik has until September 3, 2019 to file an answer or move to dismiss the lawsuit. Many will no doubt watch the progress of the case closely to learn how federal courts view the SEC’s claims.
In the meantime, proponents and developers of new technologies related to cryptocurrencies should examine whether existing statutes and regulations apply to their businesses and technologies. If they do not, then regulators may come along to disrupt the disruptors.
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