Crypto Tax Lawyers 5 Things to Consider Before Hiring | Oberheiden P.C.

Introduction: The IRS, Taxpayers, and Cryptocurrencies or virtual currencies

The Internal Revenue Service (“IRS”) issued its first guidance on cryptocurrencies— “virtual currencies”—in 2014, taking the position that crypto transactions are reportable income and should be treated as “property” for federal income tax purposes. Despite this and subsequent guidance, taxpayers experience significant difficulty in accurately reporting their crypto or virtual currency transactions on their income tax returns. The IRS has responded by increasing its internal investigations for tax evasion and filing false returns. The IRS takes the position that crypto income is one of the primary reasons for unreported income in the United States. As a result, these IRS investigations have led to increased IRS fines and penalties against both individuals and entities.

The IRS also partners with other federal agencies in cases where U.S. investors and capital markets are harmed or at risk (SEC) or where criminal activity is suspected (DOJ or FBI). To protect yourself and other crypto clients, and perform careful due diligence, it is important to be cognizant of certain factors when choosing a lawyer and law firm. This article, written by the Blockchain Attorneys and Consultants at Oberheiden, P.C., expands upon these points.

“Whether you are charged with tax evasion, crypto securities fraud, misrepresentation, and so on, or whether you need comprehensive tax advice, retaining a crypto tax lawyer to assist you can be very challenging. Cryptocurrencies and blockchain technology are still novel areas of the law. When choosing a crypto tax lawyer, you must ask detailed questions to your lawyer about how existing federal law implicates your specific case.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.

5 Points of Consideration Regarding Crypto Tax Lawyers

Hiring a lawyer and law firm knowledgeable in a combination of cryptocurrencies, blockchain technology and securities, income tax, and other taxes, as well as banking laws, can be difficult. When embarking on such a mission, keep in mind the following five points:

1. The IRS´s position on taxing crypto activity remains an uncertain state; therefore, your crypto tax lawyer should be able to understand and guide you through such uncertainty.

The first thing to keep in mind about crypto is that it remains in an uncertain state, despite various SEC guidance or IRS guidance issued ç. Federal agencies do not have a single, uniform approach to regulating cryptos, and not every lawyer possesses a comprehensive understanding of how cryptos fit within the U.S. legal and tax systems. Make sure that your crypto tax lawyer is experienced in this novel area. You can accomplish this by asking specific questions about your case and how your lawyer plans to address them. Do not merely ask whether you are compliant and whether the lawyer can assure you of this. Ask if your crypto lawyer can help you launch an ICO by structuring your token offering as a utility token, thus avoiding SEC registration, or ask if your crypto lawyer can help you with reporting crypto income both at the time coins are mined and then at the time coins are sold or transferred. A crypto tax lawyer should understand the different reporting obligations under these scenarios and should be able to explain them to you. Some law firms have CPAs who are knowledgeable in cryptocurrencies and current federal agency positions on cryptos and blockchain technology. It is often very beneficial to retain a law firm with crypto CPAs since tax law is the area most implicated by cryptocurrency transactions. Lastly, because this is an uncertain area, your crypto tax lawyer should tell you current federal agency interpretations of federal law to cryptocurrencies.

2. Federal agencies are utilizing already-existing federal laws to regulate cryptocurrency transactions; as a result, your lawyer must be knowledgeable in both securities laws and tax laws.

It is crucial to understand that the current federal approach to crypto transactions involves using already-existing federal laws and applying them to various crypto and crypto-related transactions. This means that your lawyer should be especially experienced and knowledgeable in the two most implicated areas of law: securities laws and tax law. Securities law is often implicated when dealing with launching an ICO and whether the issuer may have registration obligations. The SEC has released a framework of how and when SEC registration applies to coins or tokens and in what cases such coin or token is a “security.” Additionally, tax matters are implicated when dealing with annual income tax filing and when to recognize income from ICO proceeds, airdrops, mining, crypto income, and so on. Issues such as ordinary versus capital treatment of crypto transactions and the differences between the two are factors that your crypto tax lawyer should be able to explain to you.

3. While crypto transactions easily impact securities and tax laws, they may also implicate investment adviser laws, anti-money laundering legislation, and other federal provisions; your crypto tax lawyer should give you a holistic overview.

In addition to the obvious tax issues affecting cryptocurrencies such as ordinary versus capital treatment, deductions for mining businesses, hobbies versus business income, ICO income, and so on, cryptocurrencies also implicate other areas of law. For instance, your crypto transactions or offerings may implicate securities laws and be deemed “securities.” If so, you may have initial registration obligations and subsequent disclosure and reporting obligations with the SEC. Further, if your business engages in certain money transmitting services such as transferring cryptos from your wallet to third party wallets at the request of other parties, you may also be considered a money transmitter and therefore be subject to the Bank Secrecy Act (“BSA”) and various FinCEN rules. This would include developing a comprehensive compliance program, maintaining AML/KYC policies, implementing training within your company, and having annual testing or audits of your business. Further, if individuals in your business are giving out investment advice, there may also be registration obligations under the Investment Advisers Act. Your crypto tax lawyer should provide you with a detailed overview of your potential obligations in all these areas.

4. There is no standard or consistent federal “crypto legislation;” your crypto tax lawyer should clearly understand and explain this fact to you.

Your crypto tax lawyer should be upfront with you. This includes explaining the inevitable fact that there is no standard crypto federal legislation out there. Various agencies such as the IRS have elaborated on crypto treatment such as by publishing IRS FAQ series, but cryptocurrencies still represent a consistently regulated area. Understand this clearly. Also, be on the lookout for lawyers who claim to know everything about cryptos—all laws, regulations, guidance, and so on. Presently, there is no such thing as federal “crypto laws and regulations.” Everything is done based on already existing federal statutes. A good crypto tax lawyer should be able to assess your case and explain to you how current federal provisions may implicate your cryptocurrency-related case.

5. Cryptocurrency regulation and public acceptance of cryptocurrencies are constantly evolving; make sure your lawyer is open minded; dedicated to learning new, critical laws; and supportive of novel technologies.

If your lawyer is not supportive of blockchain technology and cryptocurrencies, it would be hard for them to fight for your case. Assess your lawyer´s passion and dedication for your case by asking about their position on cryptocurrencies. Are they supportive of new technology? Do they own cryptocurrencies? Such questions are important when you are considering a massive, time-consuming project involving cryptocurrency and blockchain technology and need a lawyer who is committed to devoting many hours to this area to help you. Open-mindedness and dedication are also important if you find yourself in the middle of a federal investigation. You will need a lawyer who can craft creative arguments in your defense and, therefore, a lawyer who is flexible and positive when it comes to cryptocurrencies.

Conclusion

Be prepared when hiring a crypto tax lawyer. Cryptocurrencies are growing in popularity and are not going away any time soon. We can expect an increase in crypto trades and transactions as well as law firms offering crypto tax services. When seeking to retain a crypto tax lawyer, make sure your lawyer is knowledgeable about how current laws apply to cryptocurrencies and can explain federal agency views, trends, and developments concerning cryptos and blockchain technology. This will help ensure your projects are compliant and reduce your risk of exposure to a federal investigation.