acquisition

Mar 04 2021

IRS: Investors Don’t Need To Report Crypto Purchases With Fiat

Following feedback on its tax form for 2020, the Internal Revenue Services (IRS) has come out to clear the air on its FAQ page.

The IRS had stated in a Dec.11 tax form for US taxpayers if they had at any time in 2020 received, sold, sent, exchanged, or otherwise acquired financial interests in virtual currencies. The ambiguity of the listing had seen many taxpayers calling it a trap.

Tax Form Confuses Taxpayers

Ryan Losi, vice president of the PIASCIK tax firm, had said the tax agency was preparing a trap for taxpayers for the future.

Others like Timothy Peterson, Investment Manager at Cane Island Global Macro, had likened the question to a perjury trap asking if citizens would be held accountable if they refuse to answer.

Now the agency has come out to answer its critics, saying that the question does not apply to those who bought digital currencies with cash. Such lucky citizens are not required to tick the yes or no box that contains this question.

But, the IRS is not exactly saying that crypto investors can hide their gains from the government. According to the FAQ page, crypto owners who at one time or the other exchanged their crypto for another digital asset, short or temporarily liquidated their assets, and received free digital tokens will still need to respond to the question honestly.

Despite the agency’s best efforts, the public is still calling the reporting burden unfair.

Shehan Chandrasekara, head of the tax strategy at CoinTracker, commented on the agency’s ambiguous rule. Saying that crypto acquisition with US dollars was not supposed to be taxed, he said taxpayers are not meant to answer the question.

The IRS rules have been criticized for their opaqueness and threat to the nascent crypto industry. Some experts believe the agency needs to find a way to make dynamic taxation guidance for crypto investors, it may lead to a dearth of innovation in the industry.

Crypto Tax Firms Expanding Outside U.S

In a bid to help crypto investors out with their tax obligations, Utah-based tax compliance firm TaxBit has been working behind the scenes to develop its enterprise solutions for crypto-facing institutions.

In a Series A funding round led by Paradigm and Tiger Global, TaxBit raised over $100 million. Winklevoss Capital, the Winklevoss Twins’ investment arm, and other prominent venture capital firms participated in the funding event.

TaxBit said in an official announcement that the funds would be invested in its enterprise solutions to help crypto exchanges and businesses get optimal results on their tax obligations. It will also invest part of the funds in the United Kingdom, where it is hoping to establish a global presence.

Michael O’Connor said the company’s tailored tax and accounting software is needed in this period, given the hazy regulations concerning cryptocurrency ownership worldwide.

IRS: Investors Don’t Need To Report Crypto Purchases With Fiat

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Feb 21 2021

Real Estate Investment Platform Fundrise Explains how Long-Term Net Return Is Most Appropriate Way to Measure their Performance for Investors

Fundrise, a real estate investment platform using Reg A+ to provide access to “eREITs and eFunds,” notes that it’s hard to imagine a single person or industry who may have been left untouched by the unprecedented events of 2020 (following the COVD-19 outbreak).

Fundrise is “no different,” the company acknowledged. While it has always been one of their “deepest-held” convictions that they need to make preparations for the unpredictable as though it were “inevitable,” the events of the past year were “beyond anything we could have imagined,” Fundrise admitted.

Because of these events, 2020 proved to be the “truest test to date” of the Fundrise platform, the “durability” of the business model they’ve developed, and the overall quality of our preparation, the company noted.

They also mentioned that at the end of the day, net return (over the long term) is “arguably the most appropriate way to measure our performance for investors, and given that last year saw the worst real estate downturn in over a decade, we are once again encouraged by the resilience of the portfolio.”

The company confirmed that the net Fundrise platform return was around +7.42% for the year, in comparison with about +20.95% for the stock market (as measured by the Vanguard Total Stock Market ETF) and -4.72% for publicly-traded REITs (as measured by the Vanguard Real Estate ETF).

The Fundrise team added that although they view these results as “further validation” of their direct-to-investor, “technology-enabled,” long-term approach, a single number “feels lacking in its ability to paint a full picture of all that transpired.” They also noted that as they take this time to reflect and evaluate their work, they’re hoping that by providing transparency into their decisions and actions, their investors stay well-informed and “clear-eyed” regarding what to expect from Fundrise moving forward.

The Fundrise 2019 year-end letter to investors (Jan 16, 2020) had noted that “some may call this approach too conservative, but our belief is that the investors who have achieved consistent success spanning multiple decades tend to spend more time protecting against the downside than they do regretting the upside they may have missed.”

Fundrise confirmed that they began the year in “awe” of a stock market that “seemed further and further disconnected from reality and concerned about what we felt was a general bubble forming across many different asset classes.” That’s why they’ve focused their attention on reminding investors of “what they could expect in the event of a sudden market downturn, as well as building out investment strategies” that they think are sustainable through “substantial near-term headwinds as a result of having strong long-term fundamentals.”

The Fundrise market report, published on February 12, 2021, noted:

“Similar to the stock market, the real estate industry was experiencing a K-shaped recovery where some asset classes, such as suburban apartments and industrial logistics facilities, were actually seeing increased demand due to the impact of the virus, as well as improved financing due to lower overall interest rates. Meanwhile, urban apartments, retail centers, office buildings, and hotels were all struggling to survive dramatic decreases in demand.”

The report continued:

“Unlike the stock market, distressed real estate assets were not ‘repricing’ — in other words they were not available for purchase at 30% less than their previous price. In fact, given that such assets would likely be priced lower by the market, most were not being offered for sale at all. Instead, as is logical, they were being held onto by their owners in a state of limbo as lenders and banks offered temporary forbearance.”

The report added that when faced with “fewer overall opportunities,” and in many instances assets that “arguably had yet to price in the impact of the pandemic on their operations, we chose to remain patient.” Fundrise also mentioned that they “generally held onto cash instead of deploying into overpriced assets,” and when they did actually engage in transactions, they mainly focused their acquisition efforts on those “same strategies” that they felt were well-positioned to “succeed over the long-term, regardless of near-term pricing inefficiency.”

While the 7.42% return recorded last year represents the weighted average performance of around 150,000 unique Fundrise investor accounts (as one figure), it “fails to capture the nuance of both what drove those returns, and how those returns were distributed across our increasingly large and diverse investor base,” the company explained.

They clarified:

“Our managed funds, which together make up the Fundrise portfolio, ended the year with approximately $265 million of cash on hand, which represents approximately 20% of the roughly $1.3 billion of collective equity. And while much of that is to be invested over the coming months (we ended the year with more than $350 million of deals under contract and expected to close during the first half of 2021), holding that amount of cash does serve to lower returns in the short run.”

The Fundrise report added:

“Although not representative or indicative of any actual or potential net performance for our investors, if one were to calculate the same income and appreciation earned from our real estate investments last year against a denominator which approximates historical cash levels, it would yield a hypothetical return much closer to our historical average platform performance.”

Fundrise notes that much of this success may be due to them consistently maintaining a “disciplined value” investment approach, led by their “most active strategy” of investing in affordably priced apartment communities in “growing cities throughout the Sunbelt.”

The Fundrise team concluded:

“In this coming decade, we believe that the application of technology will be transformative to real estate, one of the last old-line sectors still largely undisrupted. As a company built on the synthesis of real estate and technology, we believe we are uniquely positioned to help bring about that change, transforming operating costs, leveraging data more effectively, and challenging status quo practices — all for the benefit of our investors.”

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Feb 08 2021

Malaysia’s Kenanga Buys Stake in Crypto Exchange Tokenize

Malaysia’s largest independent financial services company, Kenanga Investment Bank Berhad, wants to add cryptocurrencies to its investment portfolio. To do this, the firm is going through the acquisition route.

Purchasing Stock in Licensed DAX

In a Feb 8 media release, Kenanga confirmed that it has reached agreements with Tokenize Technology to purchase a 19% equity share in its exchange arm, Tokenize Exchange. The funding round was completed through Kenanga’s private equity firm, Kenanga Private Equity Sdn Bhd.

Tokenize Xchange is one of the three licensed Digital Assets Exchanges (DAX) by the Securities Commission (SC) Malaysia. Tokenize Xchange is the second-largest DAX in Malaysia by traded market share. It is an online exchange that lets customers trade on popular digital assets like Bitcoin (BTC) and Ethereum (ETH) predominantly.

Speaking on the auspicious occasion, Datuk Chai Wai Leong, group managing director of Kenanga Investment Bank said:

“Our curiosity in digital property goes past Bitcoin and different generally traded cryptocurrencies. We consider that the know-how behind digital property may be very highly effective and the emergence of digital property sooner or later is inevitable.”

His counterpart Hong Qi Yu and CEO of Tokenize Malaysia also spoke concerning the merger, praising the experience of Kenanga and how it could help them grow their operations in Malaysia.

Before the recent dabble in cryptocurrencies with Tokenize Technology, Kenanga Investment Bank went into partnership with Japan’s e-commerce company Rakuten in 2017. The joint-venture birthed Rakuten Trade, which is an online stock trading platform operating in Malaysia. It also went into a partnership with Merchantrade Asia which saw it launch Kenanga Money; Malaysia’s first stockbroker e-wallet.

No further details were released concerning the partnership.

SC Malaysia Toughens Regulatory Framework

Following the recent boom in crypto-focused businesses, a lot of financial institutions are paying closer attention to the crypto space. With its increased popularity, it has drawn the focus of governments and their respective financial regulatory agencies to the nascent market which is what the Securities Commission of Malaysia set out to do with a revisit of its crypto framework.

The SC Malaysia released revised guidelines on digital asset custodians and initial exchange offerings (IEOs) in October 2020 saying the amended framework is looking to encourage “responsible innovation in the digital asset space.” The new framework aims to address the issues of money laundering and terrorist financing of which crypto assets have been associated with recently by world governments.

Malaysia’s Kenanga Buys Stake in Crypto Exchange Tokenize

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Feb 02 2021

How Tax Authorities Should Treat Cryptocurrency Staking Rewards

Let me start with a confession: I am not smart enough to be a tax lawyer, certainly not a US tax lawyer. The intricacies of the US tax code defy my brain’s attempts to systematize a coherent taxonomy. The tax code is too complex and varied for me, even though I have spent my nearly 30-year career untangling the complicated schemes of the federal securities laws and financial services regulatory regimes. And on top of the rules themselves, there are interpretations and lore that compound the difficulty.

Fortunately, there are people like Abe Sutherland, the author of numerous articles on one very particular area of US tax law: the treatment of cryptocurrency staking rewards created on public, permissionless blockchain platforms that use a proof of stake consensus mechanism (described in more detail below). Most recently, he put together a primer on the question as a way to introduce more people to the correct analysis.

Abe thinks this issue is easy because the cryptocurrency tokens created through staking, what he calls “reward tokens”, are new property deserving the same treatment as crops grown from seeds, livestock born on the farm, newly mined precious metals, novels, or songs newly written, newly manufactured items, and the idea for a new financial instrument. As the primer notes:

“New property . . . is never immediate income to its first owner.” Rather, “[n]ew property gives rise to taxable income when it is sold, not when it is created.”

I quickly grasped this concept because it made sense with my understanding of how proof of stake consensus works on these blockchain platforms. An alternative to proof of work consensus used in the original Bitcoin blockchain, proof of stake is the means by which the system and certain of its participants agree on updates to the blockchain. Put another way, it is how the database gets updated with new information.

At its core, proof of stake requires numerous tokenholders to “lock” the native system tokens they hold into the platform for the ability to take turns adding the blocks of data that build the blockchain and update its database. The tokens are “locked” by posting them into the platform’s staking application (part of its programming) that freezes the tokens so they cannot be transferred until removed from the application. The locked tokens form the tokenholder’s “stake,” which the staking application then evaluates in accordance with its programming to determine when the particular tokenholder takes their turn at validating a block (that is, adding the information to the blockchain database).

The exact methodology used to pick how stakers take turns doing validation is not significant to the tax analysis because for the new property tax analysis it must be true that the validator’s act of forming the latest block simultaneously creates one or more new native system tokens. These new tokens indicate to everyone that the block has been added to the blockchain and incentivize tokenholders to conduct the important activities of staking tokens and forming blocks in order to secure the network. That security is achieved by adding new blocks that make the chain too long for an attacker to duplicate with incorrect or manipulated data. Having lots of staking tokenholders also results in the distribution and decentralization of the network that are required for security and immutability. The stakers’ job is critical to the survival and integrity of the platform, which in turn is why the forming of a new block results in the creation of new native system tokens.

In addition to the intuitive “new property” analysis, Abe’s primer discusses several other reasons for taxing staking rewards upon sale rather than upon acquisition.

“To simplify, . . . [t]he practical problems involve the administration of the income tax and the costs of compliance [and t]he economic problem arises from the overstatement of gain – and resulting overtaxation . . ..”

The primer then explains the practical problems by laying out in detail how difficult or impossible it would be to know when a reward token was created by a staker for purposes of establishing the time at which it would have to be valued under a tax scheme that treated reward tokens as compensation. Even without the timing question, there are questions about what data source(s) would establish the value. The primer provides examples of these points utilizing the Tezos, Cosmos and Ethereum 2.0 blockchains. Both of these problems are solved by taxing reward tokens at the time of sale, when both the correct moment and valuation are easily ascertainable.

The economic problem of overstatement of economic gain stems from the fact that reward tokens do not represent a commensurate increase in the staker’s percentage of all outstanding tokens. Reward tokens increase the overall token supply and are typically distributed pro rata to all stakers. They, therefore, are not the equivalent of an outsized benefit to the staker who created any particular reward, as one would expect from “compensation.” As such, the economic benefit to the creating staker is not a payment or income but just a prorated portion of the overall system inflation.

With the analytical framework, practicalities and economic realities supporting his conclusion, Abe continues his quest to make sure everyone understands these issues and sees the proper tax treatment. With his pleasant demeanor, simple explanation, and dogged determination, the Proof of Stake Alliance (“POSA”), which sponsors his work, has an effective advocate.

Abe certainly took this scared taxpayer and made me understand. Perhaps 2021 will be the year that tax authorities agree with him.

Disclosure: POSA is the leading policy and advocacy organization for proof of stake blockchain networks. I joined POSA’s Board of Directors effective January 1, 2021, but Abe and I have been discussing his analysis for a good part of 2020.

Lee A. Schneider is General Counsel at Block.one, one of the world’s largest blockchain companies and creator of the EOSIO blockchain protocol. In that role, Schneider is responsible for various aspects of the legal function as well as the company’s government affairs initiatives. He joined Block.one after leading the blockchain, Fintech, and broker-dealer practices at two major international firms. Lee has been recognized as one of the leading voices in blockchain-related regulation and compliance and has played a role in structuring several of the largest and most successful blockchain-related projects. Schneider co-hosts the Appetite for Disruption podcast with Troy Paredes and is the contributing editor for the Chambers and Partners Fintech Practice Guide. He is the contributing editor of the Chambers and Partners 2019 Fintech Practice Guide. All views expressed are in his personal capacity and reflect only his personal views and not those of Troy, Chambers, or block.one or its directors, officers or employees. His views do not constitute legal, investment or any other type of advice.

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Jan 31 2021

Fintech Firm Plaid Introduces Deposit Switch to Automate and Streamline Account Funding

Ashley Cornall, Product Manager at Fintech firm Plaid, notes that more financial platforms and services now exist than ever before to assist users with taking control of their financial wellbeing.

But it might still be quite challenging for consumers to direct where their payroll funds go when choosing services that best meet their financial requirements. Cornall explains in a blog post that changing where direct deposits go is “usually a manual and time-consuming process for both financial institutions and end-users.”

For instance, in order to transition income to a new banking service provider, many customers have to fill out a bank-provided form to collect their new account information, and then need to bring that particular form to their employer. She adds that when using a paper-based process, there’s usually “little to no clarity around when their paycheck will start flowing to the new account, which can leave the user feeling anxious and perplexed.”

Cornall points out that for financial services providers or institutions, “high-friction onboarding experiences can lead to user drop-off and inactive accounts—and can ultimately prevent banks from becoming a user’s primary financial institution.” The team at Plaid believes that there’s “significant opportunity” that exists for “expanded innovation that leads to better user outcomes.” Plaid can help by developing the Fintech infrastructure that aims to bridge the gap between financial institutions and payroll information, beginning with direct deposits.

Cornall confirmed:

“[Plaid] is excited to announce … Deposit Switch, a new product, currently in beta, that makes it faster and easier for users to establish or change the destination of their paychecks. By automating direct deposit account funding, banks can optimize their account funding flows, and ultimately increase customer lifetime value.”

As mentioned in the update, Deposit Switch from Plaid has been “optimized for conversion and coverage.” It provides instant and fallback methods for users that are setting up recurring account funding.

The Plaid team added:

“Our proprietary instant switch method connects a user’s payroll or employer account directly through Plaid Link. Instant account funding is available for employees at large and small companies, as well as gig economy workers. For users unable to utilize our instant switch method, we’re building a fallback method. Users will be able to ask Plaid to contact their employer on their behalf to update their direct deposits – no forms required.”

Liran Zelkha, CTO, Lili, which offers banking services for freelancers (like no-fee early access to wages with direct deposit), said that Fintech has “given people more choices to find what works best for their specific money management needs.”

Zelkha also noted that Plaid Deposit Switch is helping his company with streamlining the account funding process, which will “give customers a better experience and should also benefit our customer acquisition and retention.”

Ben Doyle, Co-Founder, Yotta, remarked:

“Yotta helps customers develop better financial habits by making it easy and fun to build and grow their savings. Working with Plaid, we’ve made it faster and easier for customers to take the first step by establishing and funding their accounts with direct deposit. Yotta also integrates with Plaid Exchange, so customers can securely use their Yotta account with other fintech apps for digital payments, financial planning, investments and more. Fintech is the new normal for most Americans and Plaid helps Yotta meet customers where they are.”

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