![FinCEN says it’s not money
• 2013 Guidance
– In contrast to real currency, “virtual” currency is a
medium of exchange…[that] does not have legal
tender status in any jurisdiction.
• More of a payment system than a currency](https://image.slidesharecdn.com/blockchaintechnologybitcoinbeyond-171203211228/85/Blockchain-technology-bitcoin-beyond-6-320.jpg)
Blockchain technology bitcoin & beyond
- 1. Blockchain Technology Bitcoin & Beyond Pittsburgh Association of Financial Professionals Judith Herron MBA, CPA November 16, 2017
- 2. Why are We Even Talking About Crypto? • Significant funds are moving into digital currencies – Coinmarketcap.com tracks 1,185 currencies – Bitcoin remains dominant, but alt-coin use is robust https://coinmarketcap.com/
- 3. Bitcoin 101 • Bitcoin was designed as an electronic payment system based on a mathematical proof. – It’s created digitally using computing power in a distributed network. • The network processes transactions made with virtual currency for a fee. • Bitcoin stores details of every transaction in the network in a general ledger called the blockchain.
- 4. Bitcoin Utility • Bitcoin trades capacity for security – Significant computing power required for transaction authentication limits transaction processing speed • Estimates are Bitcoin now is at a limit of about 7 transactions per second • Visa runs about 20,000 transactions per second – Once transaction capacity is full a free market is created for processing time • Average transaction fee in August $8.90
- 5. Crypto as an Asset Class? • 110 hedge funds hold more than $2B to invest in Crypto – In December of 2016 there were 26 • CME Group says it will start offering Bitcoin futures by year end – Company says it will impose trading halts to limit price volatility
- 6. FinCEN says it’s not money • 2013 Guidance – In contrast to real currency, “virtual” currency is a medium of exchange…[that] does not have legal tender status in any jurisdiction. • More of a payment system than a currency
- 7. IRS see Crypto Currency as Property • When you purchase crypto you establish your basis. – When you redeem those coins to purchase something else, the difference between your basis and the redemption value is income • Most cases capital gains tax rates apply
- 8. FASB • Businesses that utilize crypto have no specific guidance. – FASB has agreed to perform pre-agenda research on accounting for digital currency • Potential treatments include – Inventory – Intangible assets
- 9. From Virtual to Reality • Get paid in bitcoin? – You need a W2 in USD • Mining Bitcoin? – Recording the value as income on the date is awarded on the blockchain. You can deduct costs for tax purposes. Subject to SE Tax.
- 10. IRS Enforcement • Paying with Bitcoin? – Calculate your basis and sale price on each transaction • IRS Getting Engaged – 802 Coinbase users reported capital gains on 2015 tax returns • IRS is asking for account info for 14K customers – Current action eliminates transactions below $20K
- 11. Crypto Taxable Event? • The Hard Fork – Bitcoin Cash broke away from Bitcoin in August • Do you have to pay tax on that virtual change?
- 12. Blockchain
- 13. • Virtual currency transactions use Blockchain technology to ensure each transaction is recorded correctly. – Participants create a secure digital signature with a public and private key (Identity) – The transaction is released to a network for authentication. • The authentication process is difficult and requires significant computing power. Blockchain
- 14. Blockchain Utility • Distributed database – Records are verified directly. Each update flows to the network. • Peer-to-Peer – No centralized location for information – Each node has an identity • Records are permanent – Entered transactions cannot be altered, are chronologically ordered, and available to all on the network • Transactions can be programs – Users can set up algorithms and rules that automatically trigger transactions between nodes
- 15. Smart Contracts • Ethereum is a virtual currency structured to allow an embedded contract – Mostly used now for ICOs • Solution is still very power intensive. Relies on proof of work consensus model for update. Proof of stake model is next step. – Other approaches to this are in the market. Differences in processing time can be significant.
- 16. Initial Coin Offerings • Coindesk says $2.3B has gone into ICOs in the last six months – Organization sells digital tokens for purpose of obtaining funding • Digital representation of a set of rights – Right to access a network or software app – Right to redeem for a unit of currency or goods – Rights to receive a share of future earnings
- 17. What Is Legit? • Regulatory scrutiny is ongoing and escalating – Are these securities?
- 18. Blockchain Implementation • October 2017 – BNP Paribas & accounting firm EY develop pilot program for bank’s treasury function – MasterCard expands access to their blockchain APIs to speed cross border transactions – Deloitte 2017 customer survey • 28% of companies have invested $5MM or more in Blockchain • 25% of respondents expect to invest more than $5MM in Blockchain in the next calendar year
- 19. How Does this Work? • AICPA 2016 survey – 4% of financial professionals surveyed said they were knowledgeable about Blockchain and what it can do
- 20. How to Prepare • Two-thirds of CEOs surveyed say Blockchain will play a significant role in the company within 5 years
- 21. • HBR – “The Truth About Blockchain” • https://hbr.org/2017/01/the-truth-about-blockchain – Patterns of disruption regarding foundational technology • TCP/IP Technology – foundational to the Internet • Key variables for business use – Novelty – Complexity Evolution vs. Revolution
- 23. SUMMARY – Virtual Currency • Use of Virtual Currencies has expanded to the point where it’s important to be aware how they work. – Tax implications – Asset allocation – Regulatory changes
- 24. SUMMARY - Blockchain • Understanding the evolving Blockchain ecosystem is an important tool in maintaining an effective finance function. • Developing decision tools to evaluate the risks and opportunities of new Blockchain technologies is a good first step.
- 25. Questions
Editor's Notes
- #12: There are really two choices, and neither one of the choices are particularly appealing," said Woodin. The first choice is to assign each new coin an arbitrary value to use as its cost basis. This could potentially be done by taking a weighted average of, for example, bitcoin cash's trading value in futures markets just before the August fork, or by assigning it a value proportional to that of a full bitcoin. Any increase in the price after the cryptocurrency's inception and before the end of the year would then be subject to capital gains tax. The other possibility is to assign the new coin an arbitrary value of zero and then pay the capital gains tax on the full value whenever the disposition of the coin occurs (when they are exchanged for other crypto assets or for fiat currency). The latter approach would seem to match up with the IRS' thinking on other types of second-generation assets, explained Markwood, noting the situation could be similar to that of a farmer who owns a cow that gives birth to a calf or a landowner who discovers gold on his property. Importantly, in both cases, the creation or discovery of the new asset would not necessarily trigger a taxable event. But when the assets are sold off, the full value of the disposition would be deemed taxable income. While the latter approach may sound more appealing to bitcoin owners because it allows them to effectively kick the can until they sell an asset, it's unclear whether or not that applies to cryptocurrencies.