合规06 二月, 2020

Valuation of cryptocurrencies and ICO tokens for tax purposes

(As published in Vol. 12, Bk. 1 of the Estate Planning & Community Property Law Journal, issued by Texas Tech University Law School)

I. BACKGROUND: WHAT IS A CRYPTOCURRENCY OR AN ICO TOKEN?
  A. What Is a Virtual Currency or Cryptocurrency?
  B. What Is Blockchain?
  C. Cryptocurrencies v. Blockchain?
  D. What Is an Initial Coin Offering? And What are Tokens?
  E. The Importance of Currencies and ICOs? 
II.  THE ROLLER COASTER OF VIRTUAL CURRENCY VALUATION
  A. Where is the Value? The Importance of the Private Key
III. DIGITAL ASSETS OF DECEDENTS & TEXAS LAW
IV. REVIEWING FEDERAL ESTATE TAX RULES FOR INTANGIBLE ASSETS
  A. Valuation of Foreign Currencies
  B. Are Cryptocurrencies or ICO Tokens Like Foreign Currencies?
  C. Limited but Inadequate IRS Valuation Guidance for Cryptocurrencies
  D. Challenges with the Valuation of Intangible Assets
  E. Valuation of Stocks and Bonds
  F. Valuing Cryptocurrency: Challenges
  G. Exchange Data Concerns
V. VALUATION AND FORKS
  A. What Is a Fork?
  B. What Is a Drop?
  C. Taxation Issues with Forks and Drops
    1. Timing and Character of Income
    2. But What If It Isn’t Income?
    3. Need for Valuation
VI. VALUATION CHALLENGES: SAME SCAMS, NEW TECHNOLOGY
  A. Pump and Dump
  B. Rollbacks, Error Correction, and Ambiguously Divisive Forks.
  C. Impact on Valuation for Estate Tax Purposes
VII.  CONCLUSION
VIII.  ADDENDUM

Cryptocurrency valuations have fluctuated wildly.1 Valuations of bitcoin were dramatically off their peaks throughout most of 2018 and into 2019. 2 This period is referred to as "Crypto-Winter."3 Recently, valuations have been rising.4 Is winter nearing its end? Will a "Crypto-Spring" emerge with coin and token valuations shooting up like budding plants?

Moreover, cryptocurrencies and initial coin offering (ICO) tokens and their markets are nascent.5 The first cryptocurrency, Bitcoin, was launched in 2009, after the last major global financial recession.6 Day to day, valuations can vary widely from one exchange to another.7 The validity of prices can be suspect due to concerns about particular exchanges or scams.8 

These factors make valuation of cryptocurrencies and ICO tokens challenging.9 And yet, appropriate valuation of these instruments is critical for a range of important reasons, including federal income, estate, and gift tax purposes.10

I. BACKGROUND: WHAT IS A CRYPTOCURRENCY OR AN ICO TOKEN?

A. What Is a Virtual Currency or Cryptocurrency?

A virtual currency or cryptocurrency is an asset that exists in digital, not physical form, and uses a cryptographic hash for security.11 In general, Bitcoin and other cryptocurrencies are decentralized digital currencies, unmanaged by a central bank or administrator.12 Instead, cryptocurrencies are typically managed almost entirely by the users who buy, sell, and trade them, rather than a national bank or government.13

B. What Is Blockchain?

A blockchain is an organized chain of electronic blocks of data, known as a distributed ledger that is shared simultaneously and publicly.14The distributed ledger relies on consensus among participants to verify agreement among users about the quality and state of the data in each block.15 A public record of all the linked blocks is maintained and updated.16 A cryptographic hash is used to verify the authenticity of each new block added to the chain.17

C. Cryptocurrencies v. Blockchain?

The close relationship between cryptocurrency and its technology (blockchain) oftentimes causes confusion.18 Cryptocurrency is a store of value that is recorded and managed in electronic data, most commonly in a distributed ledger.19Blockchain is the distribution system for a cryptocurrency; the system running the distributed ledger itself.20 A cryptocurrency is one example of content that can be stored and identified via blockchain technology.21  

The most well-known cryptocurrency, Bitcoin, has been distributed on a blockchain since 2009.22 Moreover, blockchain has been implemented into various types of data storage other than cryptocurrency.23 Several blockchain business applications and custody products have made their way to the market.24 Additionally, blockchain applications relating to clearing and settlement, payments, trade finance, identity, securitization, and syndicated loans are currently in development or already in use in the finance and banking industries.25 Author and scholar, Klaus Schwab, explains his perspective of blockchain technology in his book, The Fourth Industrial Revolution.26 In his book, Mr. Schwab states that he believes blockchain will be a key component in a new industrial revolution.27  

D. What Is an Initial Coin Offering? And What are Tokens?

An initial coin offering is a modern version of traditional stock offering, but uses electronic means to raise funds.28 Initial coin offerings (ICOs) raised substantial capital in 2017, increasing their popularity in 2018 as a powerful alternative to initial stock offerings.29 ICO funders receive "electronic instruments [that represent] a digital asset or utility" known as tokens.30 For example, utility tokens constitute rights to products or applications that have not yet been released, whereas equity tokens constitute equity in products or applications and are often "converted into a cryptocurrency at a later stage in the development of the funded venture."31  

E. The Importance of Currencies and ICOs?

There is a rise of investors—more specifically, millennials—that are comfortable relying on virtual currencies rather than on traditional currencies and investment methods.32 Additionally, as businesses continue to use ICOs as a funding mechanism, cryptocurrencies, financial derivatives, and related exchanges have increased exponentially.33 While Bitcoin remains the most recognized cryptocurrency, there are over 1,500 cryptocurrencies in the market today.34  

Some businesses are starting to take cryptocurrencies in exchange for goods and services, and financial markets are creating instruments that pay in cryptocurrency.35 At the end of 2017, Bitcoin futures began trading on the Chicago trading markets.36 Virtual currency-related pooled investments and financial derivatives are also offered.37  

Furthermore, a U.S. tax refund service, Refundo, has recently announced that they have partnered with Bitpay, a blockchain payments processor, to permit U.S. taxpayers to receive their tax refunds in Bitcoin.38  

Note that as discussed below regarding valuation, Crypto-Winter has adversely affected confidence in cryptocurrencies.39 The reactions of U.S. regulators (FinCEN, SEC, and CFTC), and incidents of fraud in cryptocurrency and ICO token marketing have also adversely affected this market.40 However, cryptocurrency investment and finance-related blockchain development actively continues.41

II. THE ROLLER COASTER OF VIRTUAL CURRENCY VALUATION

Bitcoin's valuation has experienced significant fluctuations in its rather short life.42 In May 20l0, at  inception, the value of a single Bitcoin was essentially nothing at $0.01.43 By February 2011, its value rose hundredfold by $0.99 to $1.00.44 It was not until July 2011 when the first Bitcoin bubble emerged, and the value rocketed to $31 per coin.45 Less than six months later, in December 2011, the value of a Bitcoin plummeted back to $2.46 In April 2013, the per coin valuation peaked at $260.47 Just two months later the value fell to $100 per Bitcoin.48 By November 2013 the prices rose to a high of $1,242 per coin.49  

Prices fluctuated between approximately $1,000 and $300 until March 2015, when prices bottomed out at $200 per coin.50 The tallest price spike occurred in 2017—from a low of $750 in January to a high of $17,900 in December.51 In 2018, the prices were generally on a downward trend reaching a price of $6,560 per coin in early July, and finishing the year below $4,000 per coin.52 In 2019, values have trended generally upward to around $5,300 in mid-April; a hallmark of Bitcoin's price volatility is that this 30% change in price has not been perceived as particularly quick.53 A recent article noted that Bitcoin's 457% two-year returns demonstrate much greater growth than major stock indicates.54 As of April 24, 2019, Bitcoin was valued at $5,443.14.55 The high price volatility of Bitcoin and other cryptocurrencies is attractive to investors and other market participants despite the financial risks.56 In addition to the high volatility risk of virtual currencies, it is important to note that over 800 virtual currencies are reported to be dead or have a current valuation of a penny or less.57

A. Where is the Value? The Importance of the Private Key

Cryptocurrencies and ICO tokens are intangible property.58 Ownership of an intangible cryptocurrency coin or an ICO token is controlled with two keys: a public key and a private key.59 The public key generally identifies specific coins or tokens.60 Every coin or token address has a matching private key.61 The private key proves that you are the owner of the identified coins or tokens.62 The private key is an alphanumeric password that is cryptographically determined.63 For Bitcoin, a private key is a 256-bit number.64 A 256-bit number can be represented in different ways.65 As computers became prevalent in the 1960's and 70's, an 8-bit memory system based on 8-bits (or binary numbers, each bit being a "1" or a "0") was adopted and became the standard.66 A common number system used in computer systems and technology is hexadecimal notation, which has a base of 16 rather than 10.67 Hexadecimal notation is a great way to efficiently express binary numbers.68 A 256-bit number expressed in hexadecimal notation is 64 characters long.69  

Many physical assets, such as houses and cars, are accessed by keys.70 For physical assets, there appears to be a clear dichotomy between the asset's value and its control.71 Cars and houses can be impounded or physically seized.72 However, cryptocurrency coins and ICO tokens are composed entirely of computer code, and are completely intangible.73 As a part of a distributed ledger, there is no single central location where the code is stored.74 Instead, proof of ownership of a cryptocurrency coin or ICO token is determined solely by access to the related private key.75  

Because access to the private key entirely controls ownership, a thorny question is presented: does the crypto coin or ICO token have value or does the private key?76 Cryptocurrency-related websites stress the importance of safeguarding private keys.77 Private keys are often stored in digital "wallets" for safekeeping.78 There are different kinds of digital wallets, including "hot" and "cold" wallets.79Cold wallets are generally offline and kept secure.80 They are only connected when the private keys for the related coins or tokens are needed for sale, transfer, or otherwise.81 Of course, keeping private keys offline and secure limits access, which is the idea.82 Nevertheless, this approach does somewhat negate the speed and access benefits of digital currencies.83 Furthermore, there are cases where private keys are correctly "guessed" by computer algorithm and the key is used to scoop up and steal the related cryptocurrency coins from their owners, regardless of where the key itself is stored.84  

This issue of whether the value resides in the coin or the key has been considered, but not fully resolved in the context of the federal securities laws relating to custody.85 There is presently a lack of clarity regarding whether public blockchain networks of the type that are used for cryptocurrency coins or ICO tokens can be adequately secured to satisfy various federal securities laws and regulations relating to securities safeguarding.86  

This issue has also been addressed by legislative fiat in the context of secured transactions law in certain states.87 On February 16, 2019, Wyoming enacted legislation (the "Wyoming Digital Assets Act") that addresses the status of digital assets including cryptocurrencies, and in part provides for their treatment as general intangibles and money solely for purposes of section 9 of Wyoming's Uniform Commercial Code, effective beginning July 1, 2019.88 More importantly, the Wyoming Digital Assets Act also specifies how a security interest in a digital asset, including a cryptocurrency, can be perfected.89 This newly enacted legislation recognizes the importance of control and the related private key.90 It requires the execution of a smart contract that transfers the digital asset's private key "based on the occurrence or nonoccurrence of specified conditions."91 Other states are in the process of considering favorable digital asset legislation similar to Wyoming.92

III. DIGITAL ASSETS OF DECEDENTS & TEXAS LAW

Forty-six states have enacted legislation since 2013 addressing the ownership of digital assets of decedents.93 Texas enacted such a law in 2017.94 However, Texas law does not specifically address cryptocurrency coins, ICO tokens, or private keys.95 It is much broader and applies generally to all kinds of digital assets.96 Section 2001.002(8) of the Texas Estates Code defines a digital asset as "an electronic record in which an individual has a right or interest."97 Because this definition is so general, it does not provide helpful guidance relating to valuation.98  

IV. REVIEWING FEDERAL ESTATE TAX RULES FOR INTANGIBLE ASSETS

Federal estate taxation turns in significant part on valuation.99 Section 20.2031-1(b) of the Treasury Regulations generally provides that the value of every item includable in the decedent's estate "is its fair market value at the time of the decedent's death . . . ."100 Forced sale, uncommon, and nonpublic market prices cannot be used, and there is other relevant guidance clarifying how an item's fair market value can and cannot be determined.101

There are regulations that provide specific valuation rules for business assets, including those constituting intangible property.102 Treasury Regulation section 20.2031-2 provides valuation rules for stocks and bonds; section 20.2031-3 addresses the valuation of interests in a business; section 20.2031-4 covers notes; section 20.2031-5 provides rules for cash on hand and deposits; and section 20.2031-7 addresses annuities and certain other property interests.103 Importantly, there is inadequate guidance regarding the valuation of cryptocurrencies or ICO tokens for federal income tax and estate tax purposes.104 Existing tax law guidance on certain tax issues of limited types of cryptocurrencies is discussed below.105  

A. Valuation of Foreign Currencies

The Tax Court and the IRS have considered the issue of valuing foreign currency denominated interests for estate tax purposes.106 Similarly, in Private Letter Ruling 8927038, the Service indicated that valuation of certain Canadian dollar assets is:

. . .determined by the fair market value of the foreign currency on the date of the decedent's death. The fair market value of the foreign currency is based on the amount of United States dollars the foreign currency could have purchased in an exchange between a willing buyer and a willing seller.107

The private letter ruling further provides that "the exchange rate is determined by the commercial (or retail) exchange rate, stated in United States dollars, established by the United States financial centers on the valuation date."108  


B. Are Cryptocurrencies or ICO Tokens Like Foreign Currencies?

In 2014, the IRS issued Notice 2014-21, which provides limited guidance on certain tax issues regarding certain cryptocurrencies.109 Commentators have criticized the IRS because many important tax issues, including valuation, are not adequately addressed in the Notice.110 Moreover, the Notice does not cover all digital assets of value, merely "convertible virtual currencies" (as defined therein) that "ha[ve] an equivalent value in real currency or [act] as a substitute for real currency . . . ."111 The Notice includes Bitcoin as one example of a convertible virtual currency.112 Although Notice 2014-21 is limited in both its scope and its guidance, it explicitly provides that convertible virtual currency is treated as property, not currency for federal income tax purposes.113 Note that twenty-one U.S. legislators have written to the IRS requesting simpler and more comprehensive tax rules for cryptocurrencies.114 Legislation has been introduced to provide favorable federal income tax treatment.115 Moreover, there are no specific court decisions addressing federal income tax or estate tax issues involving cryptocurrencies.116

It does not seem appropriate to treat cryptocurrencies or ICO tokens as similar to foreign currencies for federal income or estate tax purposes in light of IRS Notice 2014-21 (which explicitly provides that convertible virtual currencies should be treated like property rather than currency) and the lack of guidance to the contrary.117  

C. Limited but Inadequate IRS Valuation Guidance for Cryptocurrencies

Notice 2014-21 does provide limited guidance regarding valuation of convertible virtual currency.118 It provides in part that:

[I]f a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied.119

This general guidance has been criticized as inadequate because the prices of convertible virtual currency can differ widely from one exchange to another; furthermore, commentators have raised concerns regarding which exchanges' valuations should be controlling.120

D. Challenges with the Valuation of Intangible Assets

Convertible virtual currencies are intangible property as a matter of property law.121 Accordingly, it should be considered whether there are existing valuation rules for intangible property that might be informative in determining valuations of cryptocurrency coins or ICO tokens.122

The courts have noted the difficulties in valuing intangible assets.123 A U.S. District Court case involving the valuation of closely held stocks, cited a non-estate tax decision which notes:

Pinpointing the issue does not in itself solve our difficulties. The valuation of an intangible asset as of a certain date is one of the most complex problems with which courts are forced to deal . . . We can derive from the substantive law only formal definitions, so broad as to leave the close questions of meaning entangled with inquiries as to the relevance and the weight of evidence. For instance, the present Revenue Code provides that all property, except inventories, shall be appraised at 'fair market value', 26 U.S.C.A. § 113(a)(1) to (22). The ambiguities of this definition of value becomes immediately apparent. What is the 'market' value is not always the 'fair' value, and vice versa. In many situations there is no market for the property in question. What test should govern then? The law tells us that fair market value is a question of fact and in determining . . . fair market value of stock in a corporation due regard should be given to the fair market value of the corporate assets on that date . . . Let us assume that this standard removes all of the confusion as to exactly 'what value' we are searching for. The appraisal of the stock in question is still fraught with difficulty. 'This is necessarily true because valuations involve economic prophecies based on a complex and highly controversial technique of inferences from the known to the unknown.'124

E. Valuation of Stocks and Bonds

Treasury Regulation section 20.2031-2 sets forth the general valuation rules for stocks and bonds.125 In general, "the mean between the highest and lowest quoted selling price on the valuation date is the fair market value per share or bond."126 This rule applies if there is a market for such stocks or bonds: (1) on a stock exchange; (2) in an over-the-counter market; or (3) otherwise.127Note that this is the average price for the day, not the closing price.128 This can be confusing for investors and other market participants that may use the closing price for other purposes.129 The federal estate tax regulations only permit the use of a daily closing price (instead of the average) under limited circumstances for certain mutual fund shares.130

There is a special rule for the valuation of shares of stock in open-end investment companies (a type of mutual fund).131 In general, the valuations of shares in such companies is their public redemption price at the time of death.132 If a time of death price cannot be shown, the regulations further provide that "the last public redemption price quoted by the company for the date of death shall be presumed to be the applicable public redemption price."133

The general valuation rules for stocks and bonds include special provisions for when there are no sales on the valuation date, where the selling, bidding, or asking prices are incomplete or unavailable, or where prices do not reflect fair market value.134 Special rules are also included for pledged securities, securities subject to an option or purchase contract and stock sold ex-dividend.135  

The court in W.T. Grant Co. v. William Duggan held that valuation of stocks based on trading prices on the New York Stock Exchange on October 25, 1929, was controlling even though this date fell before "Black Tuesday" (Oct. 29, 1929), the date of the stock market crash that preceded the Great Depression.136 The Appellate Court noted the fact that the market crashed shortly after October 25th was immaterial.137 In Estate of Prentice v. Comm'r, the valuation of a large block of stock at $147 per share was based on trading prices for small lots of stock, even though there were discussions of a potential merger (as of the date of death) that ultimately resulted in payments to holders based on a valuation of $250 per share.138 Statements set forth in the decedent's will contending that the valuation of the stock should be higher than evidenced by market trading were also ignored by the Tax Court.139  

Stock in closely held corporations can present valuation challenges because of ownership by a limited number of persons, and the lack of trading.140 Revenue Ruling 59-60, 1959-1 CB 237 sets forth the general approach for valuing the stock of closely held corporations.141 In general, a factual analysis of the business and relevant financial data is necessary.142  

Although this guidance is specific to stocks and bonds, the consideration by the courts regarding whether trading prices are controlling in light of other data or subsequent market changes is particularly relevant, due in large part to the cryptocurrency valuations that occurred in 2017 and 2018 and the likelihood of recurrence given the nature of cryptocurrency markets.143  

F. Valuing Cryptocurrency: Challenges

Although valuation of intangible property can present various challenges, some of which have been addressed through tax law guidance, cryptocurrency still has its own unique set of challenges.144 Some of these challenges stem from the nature of cryptocurrency itself, some are due to specific actions taken by cryptocurrency market participants, and some have arisen due to the relatively unique regulatory environment (or lack thereof) governing cryptocurrency.145 One proposed solution to some of these challenges is that crypto-assets be first bifurcated into crypto-capital and crypto-commodities.146 Subsequent to bifurcation, different valuation models could be applied to the two asset types.147

G. Exchange Data Concerns

Many traditional equity securities are traded on established, well-regulated markets such as the NYSE or NASDAQ.148 Trading of cryptocurrencies such as Bitcoin or Ethereum are dispersed across numerous exchanges in different countries.149 This is due to a variety of factors such as: the cryptocurrency market being new, the technologists being located all over the world, and the desire of participants to find locations with low regulatory risks and costs of entry.150 Moreover, cryptocurrency can be traded directly by market participants (or with the help a facilitator) by means of a smart contract.151 This type of trading is often referred to as "atomic swaps" of cryptocurrencies.152 There are listings of specific cryptocurrencies across multiple exchanges around the world.153 Unlike the way in which non-U.S. stocks are traded by way of depositary receipts on U.S. stock exchanges, there is not a U.S. Bitcoin, a French Bitcoin, or a Korean Bitcoin with a depositary receipt traded on other countries' markets.154  

Given that the same cryptocurrency coins are traded on different exchanges, there should be a certain degree of market pricing reconciliation (subject to temporal and currency related arbitrage).155 If the market data between multiple exchanges diverges, traders seeking arbitrage gains should force a convergence, harmonizing prices, except in situations where markets are artificially closed off from the rest of the world.156  

Surprisingly, however, researchers have not yet observed such convergence in cryptocurrency valuations based on real-world trading information.157 In analyzing Bitcoin trading data from the largest eighty-one cryptocurrency exchanges, totaling $6 billion in daily trading volume, researchers have claimed that large portions of the observed trading activity appears to be wash trading, attempting to "create the appearance of activity in the market."158 Based on the researchers' methodology, as little as 5% may be actual trading .159 Some exchanges report as little as a $0.01 spread between bid and ask prices, while other larger exchanges report a spread as large as $15; logically, the larger exchange should have a much smaller spread, not a spread almost 1,500 times larger.160  

The lack of convergence in cryptocurrency valuations appear to be relatively well-known to cryptocurrency cognoscenti; it has been reported that some of these exchanges are effectively traps, faking high trading volume without going through full regulatory processes.161 While the claim can be made that this is simply an effort to entice ICOs to list ICO tokens rather than sell them directly to investors, the potential adverse impact on determining appropriate and fair market valuation generally remains.162 In general, the refrain is consistent: economic rules that apply to other intangibles still apply to cryptocurrency, and if it seems too good to be true, it probably is.163 "Better" regulated exchanges such as Binance, Kraken, Coinbase, or Gemini all demonstrate similar pricing patterns when charts are overlaid; there appears to be a real risk that exchanges showing significant pricing outliers might be artificially manipulated.164

V. VALUATION AND FORKS

Like stock, a cryptocurrency coin represents a specified economic interest in a particular cryptocurrency.165 Stock prices and valuations are affected when stock shares are transformed through transactions generally known as "corporate actions."166 Examples of corporate actions that can affect stock valuations are stock splits (and reverse splits), dividends (both cash and stock dividends), and corporate reorganizations and divisions (such as spin-offs and splits).167 Corporate actions occur for a variety of reasons, such as management of share price, business consolidations, or transformations.168 As digital assets, cryptocurrency coins and ICO tokens can also be transformed.169 Some of these transformations are commonly referred to as "forks" (hard and soft) and "drops."170 These transformations can occur for the same reasons as corporate actions.171 They can also occur for technological reasons.172 It might be desirable to update or change the digital blockchain structure of a particular cryptocurrency coin or ICO token to make it faster, hold more data, or for other technological reasons.173

A. What Is a Fork?

Each block of transaction data in a cryptocurrency's blockchain effectively links (according to rules prescribed by the chain's code protocol) to the preceding and succeeding blocks eventually linking to every other block in the chain.174 These prescribed rules are subject to updates and changes as the technology continues to develop.175 However, after a change, some aspect of the old blocks may not fit within the new rule set.176 This can create a fork, like a fork in a road, or the creation of two different potential paths: a path where post-change blocks simply follow the old rules, and another potential path where post-change blocks link based on the updated or changed rules.177 As there is no central source of authority managing Bitcoin, each participant can decide which path they want to take; each path's viability depends on both relevant trading activity and the total amount of computer power devoted to mining.178  

Forks can be "soft," where the new blocks comply with both old and new rules, or they can be "hard," resulting in more substantial changes that will render new blocks unintelligible to users running software with the old rules.179  

B. What Is a Drop?

A drop is in some ways similar and related to a fork; in other ways, it is completely different.180 Put simply, a drop is a means of distributing some amount of a new, untested Cryptocurrency B to every address on another, different blockchain (for example, Cryptocurrency A) to all holders that currently hold Cryptocurrency A, with or without warning.181 The new coin might be completely unrelated to Cryptocurrency A, and the timing of drops can be opportunistic.182 For example, a person might believe that by simply giving away their new cryptocurrency it might take off.183 That person could decide the best group to give their currency away to in order to induce proliferation (i.e., building awareness or hype).184 Cryptocurrency A and Cryptocurrency B will likely have different rules, analogous to a fork; however, a drop is not intended to be a continuation of the blockchain onto which the new coin is "dropped."185

C. Taxation Issues with Forks and Drops

As with many other aspects of cryptocurrency taxation, there are no clear governing laws or regulations which roundly answers every question about taxation of forks.186 Indeed, Notice 2014-21, the only concrete guidance, makes no mention of forks, only discussing convertible virtual currency received as payment for goods and services or in mining transactions.187 Several industry advocate groups, including the ABA Section of Taxation and the AICPA have requested further clarification.188  

1. Timing and Character of Income

The following discussion begins with the assumption that receipt of cryptocurrency in a fork or drop will likely be construed to constitute income.189 In requesting a safe harbor for hard fork taxation, the ABA Section of Taxation presented arguments both for and against hard forks as realization events.190 The primary argument "for" is rooted in the broadly liberal construction of the term "gross income" in Glenshaw Glass, which encompasses clear accessions to wealth in combination with a taxpayer's complete dominion.191 Here, a hard fork or a drop results in receipt of a new, distinct cryptocurrency, separate from that originally held.192 The original cryptocurrency also remains in existence for some measurable period of time.193  

When cryptocurrency income is recognized for tax purposes is critical because the value of cryptocurrency must be determined at such time. Given cryptocurrency's notable price volatility, determining the appropriate valuation at the time of recognition is vital.194 Recognition of income under Glenshaw Glass occurs at the time the taxpayer has complete dominion over something.195 Complete dominion can be a difficult concept as applied to cryptocurrency, in contrast to more traditional assets such as those of "found property."196 For example, in one revenue ruling, a taxpayer who worked as a book reviewer received numerous unsolicited books in hopes he would review them.197 Under Section 61(a) and the attendant regulations, when the book reviewer took control of the books to donate them to charity, he realized income in the amount of the value of the books.198

Note that timing concerns unique to cryptocurrency and the way it is held inform these considerations.199 Coins that are being held by an exchange on a customer's behalf (as opposed to an exchange merely facilitating transfers for a holder) may result in the delay or prevention of a holder's ability to access the new property received in the fork.200 For example, a particular cryptocurrency exchange may not have in place the technology to allow its customers access to new coins until several months after the fork or drop occurs.201 Contrast this delayed access to holders via exchanges with immediate access for those who hold coins directly.202 Furthermore, a holder with their own electronic wallet who never upgrades their software may never actually notice the new coins or may unintentionally "destroy" them.203  

Returning to the holder of a cryptocurrency prior to a hard fork event, it seems most in line with the found property cases to attribute income to the point in time where the holder of the forked cryptocurrency exercises dominion and control over the new cryptocurrency.204 Unfortunately, this presents an entirely separate set of practical and technological problems, particularly for custodial technological systems that may balk at each individual receiving a "distribution" on a discrete day (and with discrete, differing valuations).205 Conceptually, recognition of income on different dates for different holders (that would likely be based on different valuations) creates practical determination challenges.206

2. But What If It Isn't Income?

One argument against immediate realization of income from forked cryptocurrency is based on authority concerning pregnant racehorses and cattle.207 Much as the animals in the cases always hold the "potential" to give birth to offspring, cryptocurrencies always have the potential to fork, resulting in new, separate assets.208 Therefore, a hard fork would instead result in immediate valuation and allocation of the forked cryptocurrency's basis between the old and new, according to fair market value.209  

However, upon closer examination, the analogy breaks down.210 The racehorses and cattle in the cited revenue ruling and case were pregnant at the time of the purchase and there were market prices for pregnant horses and cattle that were taken into the value of the unborn foal; indeed, the theoretical value of the offspring was, in effect, "priced into" the transaction.211 Cryptocurrency holders generally aren't typically aware of potential future forks at the time they acquire their cryptocurrency.212 Although it could be argued that all future events (such as forks and drops) are priced into existing coins, this has clearly not been true with regard to stocks or bonds.213 The Black-Scholes option pricing model (for which Fischer Black and Myron Scholes were awarded the Nobel Prize) does not take into account the impact of dividends and stock mergers on valuation, which had adverse practical consequences on Black and Scholes early use of the pricing model in their own trading activities.214  

3. Need for Valuation

Despite a lack of clearly governing law or regulation regarding taxation of forks and drops, the ability to value newly received cryptocurrency in a fork or drop is crucial.215 Proper valuation is important whether the receipt of cryptocurrencies is considered taxable or nontaxable.216 If receipt is deemed to be taxable, the value of the coins is considered taxable income.217 If the receipt is determined to be nontaxable, valuation is necessary in order to determine proper basis allocation between the old and new cryptocurrency (to the extent a basis allocation can be justified under the tax law).218  

VI. VALUATION CHALLENGES: SAME SCAMS, NEW TECHNOLOGY

A. Pump and Dump

The pump and dump scandal is one of the oldest types of market manipulation—and indeed a classic example can be found in the "Radio Pool" investors who organized their buying and selling amongst each other to drive up the price of Radio Corp. of America stock from $100 per share to $500 per share prior to the 1929 market crash.219 While practices like these led to the '33 and '34 Federal Securities Acts and much more intensive regulation of the securities markets, market manipulation still presents a substantial danger to investors and obfuscates attempts to accurately value intangible assets.220  

Many of these traditional securities valuation concerns, as applicable to cryptocurrency and ICO tokens, were addressed by SEC Chairman Jay Clayton in a 2017 public statement.221 When considering attempting to trade or value any new asset type, questions must be asked about the status of regulations to protect investors (and whether those regulations are being complied with).222 Furthermore, it is important to determine if the markets for the asset are fair, if the prices are or can be manipulated, if there is sufficient liquidity, and if there are other risks of loss not present in traditional asset types (such as related to data hacking).223  

The prescience of this warning has been borne out by a variety of subsequent SEC enforcement actions.224 One such action targeted the use of celebrities such as DJ Khaled and Floyd Mayweather Jr. to promote the Centra Tech ICO.225 The action alleged both men had failed to disclose payments they received for such promotion; following the action, they each agreed to multi-year bans on securities promotions and paid disgorgement, penalties, and interest without admitting or denying the allegations.226  

Other traditional deceitful practices have also made their way into the cryptocurrency arena.227 CabbageTech presents a particularly good example; CabbageTech, known as Coin Drop Markets, offered supposed real-time virtual currency trading advice in exchange for payment of money or virtual currencies.228 Unfortunately, no such advice was ever offered, and the funds were misappropriated.229 Instead of the Wall Street offices he claimed, the proprietor used social media and other online tools from a basement in Staten Island to carry out his schemes.230  

These types of distortive practices can have an impact on the valuation of cryptocurrency markets as a whole.231 Bad actors targeting main street investors can artificially depress interest in a wide range of intangible investment assets and adversely affect related trading activity, which has the effect of lowering prices.232 Distortive "boiler room" style practices can affect valuations in well-regulated, mature and liquid markets; for instance, during 2017 and 2018 the markets for cryptocurrency were particularly vulnerable to these practices.233 Intervening actions by the SEC and CFTC have improved public perception regarding the level of regulation of cryptocurrencies and their exchanges, helping to prevent future bad actors.234

B. Rollbacks, Error Correction, and Ambiguously Divisive Forks

One consequence of storing cryptocurrency trading records in a distributed fashion using a blockchain rather than centralized in a traditional recordkeeping mechanism is that, once recorded, transactions should be immutable.235 Regardless of whether a transaction has an unintended destination address, whether through mistake or misdirection, once it has been added to the main blockchain, it is supposed to be set in stone.236 What should happen, then, if a large portion of a single cryptocurrency is illicitly diverted, either through a flaw in the blockchain's programming or large-scale misdirection?237 This could easily destroy the overall value of that cryptocurrency, including the coins that have not been misappropriated (yet).238  

In the event of a programming flaw or potential exploit, the code must be corrected.239 An additional change, however, could theoretically revert the illicit trades in the blockchain to the point in time (the last block of data) prior to the exploit.240 In a traditional system, with a centralized arbiter of authority, the centralized authority is likely to make the decision to reverse those bad actions.241 However, a blockchain lacks a centralized arbiter of authority; in fact, in many cases a given blockchain project might even lack a centralized team of dedicated developers.242 One team of developers might choose to implement a hard fork and reverse the trades, while another team of developers might merely fix the potential programming flaw or exploit on a go-forward basis.243 Which blockchain holds the original cryptocurrency, particularly if most of the community favors reversing the bad actions?244  

Ethereum underwent a similar event with respect to DAO tokens on its blockchain; Ethereum is designed to provide a sort of substrate on which to build distributed applications.245 A coding flaw allowed a bad actor to make off with approximately $40 million worth of Ether.246 Developers implemented a hard fork to fix the problem and return the funds.247 Some in the community, however, did not agree with reversing past transactions, no matter the cause for the reversion, and maintained what they call the original blockchain under the name Ethereum Classic.248 In situations where a hard fork is undertaken for error correction, but where a significant community maintains the previously existing blockchain, the question of which coin is "new" and which coin is "existing" becomes almost a philosophical one.249  

After the problem was discovered, Ethereum prices plummeted from around $21 per Ether to around $12 per Ether.250 Immediately after the hard fork splitting the two, at the end of July 2016, the price of new Ethereum fluctuated around $12 to $15 per Ether, while the price of Ethereum Classic remained below $1 per Ether.251 At their peaks, Ethereum Classic topped $45, while new Ethereum briefly maxed out at over $1300.252  

Investors, then, would much prefer Ethereum Classic to be the new coin.253 After all, it would represent a much smaller immediate accession to wealth.254 More abstractly, much of the community chose to interact with new Ethereum and not Ethereum Classic, in accordance with the hard fork reversion and cryptocurrency exchanges which kept the tickers the same.255 Furthermore, trading prices suggest the community seemed to value Ethereum Classic much less than old or new Ethereum; new Ethereum maintained trading prices at much the same level as Ethereum prior to the hard fork.256 On the other hand, Ethereum Classic represented a rejection of the changes new Ethereum made to old Ethereum, and almost certainly had objectively fewer intrinsic changes made to its code.257 

So which cryptocurrency was received, Ethereum or Ethereum Classic, and which cryptocurrency retained a user's initial tax basis from purchase before the fork?258 Depending on the answer, the amount of gain represented by the receipt of new cryptocurrency would be drastically different.259 Indeed, the question of whether a user who simply changed their software to transact with new Ethereum and never interacted with the Ethereum Classic blockchain at all ever exercised sufficient dominion and control to represent an accession to wealth is by no means settled.260  

In the Ethereum example, it is relatively easy to make the argument that new Ethereum represents a continuation of the Ethereum project and that Ethereum Classic is the new coin representing a rebellious outgrowth.261 Other examples though, are not anywhere near as clear-cut.262 Bitcoin Cash, a hard-forked outgrowth of the original Bitcoin blockchain, recently underwent an extremely contentious hard fork that split the chain into two distinctly differing directions, Bitcoin ABC and Bitcoin SV.263 Some argue that the level of uncertainty created by this split caused reverberations affecting values throughout the entire cryptocurrency market.264  

Which cryptocurrency was the continuation of the original chain and which was the forked outgrowth depended, at the moment of the fork, almost entirely on viewpoint.265 After the dust had begun to settle, commentators noted that Bitcoin ABC appeared to have more support than Bitcoin SV.266 At least one major exchange, Coinbase, allowed users to access Bitcoin ABC immediately, but took nearly three months to allow users to withdraw their Bitcoin SV.267 As of February 2019, Coinbase still did not support Bitcoin SV trading.268 Given that cryptocurrency values fluctuate based on user participation, and that participation seems to be self-reinforcing, it is not difficult to conclude that exchanges throwing their weight behind one side of a hard fork can influence participation and value.269

C. Impact on Valuation for Estate Tax Purposes

It is unclear whether these scandals will be considered relevant to addressing challenges to the valuation of cryptocurrency coins or ICO tokens that end up before the courts.270 It should be noted that the Second Circuit was unpersuaded that the market crash occurring on Black Tuesday at the start of the Great Depression should have an impact on the valuation of stock just a few days beforehand.271 It seems that practitioners will need to clearly distinguish and demonstrate why market trading prices should be ignored or modified in certain cases.272  

VII. CONCLUSION

Cryptocurrency coins and ICO tokens are a new type of digital asset.273 Because they are also traded on new types of exchanges and there is little or uncertain regulation of trading and pricing activity, there is limited and inadequate guidance regarding their valuation for tax purposes.274 In most cases, it will be necessary to consider the issues by way of analogy to existing valuation guidance under federal estate tax law.275 Moreover, the value of their related private keys and the consequences of forks and drops on both valuation and taxation are significant.276 Laws and regulatory guidance are critically needed to provide certainty and consistency.277 The technological details must be understood by practitioners at some level of detail to understand the valuation challenges and likely results.278 Additionally, scams and other market developments that are adversely affecting the ability to obtain clear valuations must be considered.279 It is hoped that additional developments and guidance are forthcoming that will be relevant in determining the fair value of cryptocurrency coins and ICO tokens for tax purposes.280  

VIII. ADDENDUM

Following the initial draft of this article in July, 2019, the IRS released substantive new guidance, on October 9, 2019, in the form of a revenue ruling and an accompanying Frequently Asked Questions (FAQ).281 The revenue ruling focuses on whether a taxpayer receives gross income in a hard fork (and, if so, when such income should be valued).282 The FAQ elaborates on these questions of valuation, as well as addressing numerous other issues ranging in complexity and including but not limited to receipt or payment of virtual currency in exchange for services, basic gain and loss principles, tax lot relief methods, certain information reporting considerations, and specific applications of the rules governing taxation of gifts and charitable contributions.283  

Under the guidance, generally, where a taxpayer receives units of a new cryptocurrency as a result of a hard fork followed by an airdrop, the receipt is a taxable accession to wealth under section 61 of the Internal Revenue Code.284 The ruling notes that such accessions to wealth are included in gross income when a taxpayer attains complete dominion over the asset.285 For cryptocurrencies held directly, this is specified as generally when the distribution is recorded on the distributed ledger.286 For cryptocurrencies held in a third party wallet, this is instead specified as when the taxpayer acquires the ability to dispose of the cryptocurrency.287 Note that under the guidance, different parties receiving the same hard fork linked distribution might receive the distribution at different times (and thus presumably at different values).288  

The FAQ released contemporaneously with the revenue ruling provides specific guidance on how to value cryptocurrency received in a variety of situations. 289 If the cryptocurrency is received in a transaction facilitated by a cryptocurrency exchange, then the fair market value is the amount recorded by the exchange in U.S. dollars.290 For off-chain transactions facilitated by exchanges, the fair market value is the amount the cryptocurrency was trading for on the exchange at the time the transaction would have been recorded.291  

In direct peer-to-peer transactions without a facilitating exchange (e.g., atomic swaps), the taxpayer must establish an accurate representation of the value; the guidance notes the IRS will accept use of a blockchain explorer analyzing worldwide indices and calculating the value at the date and time of the transaction (or, for off-chain transactions, the time the transaction would have been recorded).292 If a taxpayer receives cryptocurrency that isn't publicly traded or doesn't have published values in exchange for property or services, the fair market value is equal to the fair market value of the property or services exchanged in the transaction.293  

Despite practitioner desire for formal guidance with respect to cryptocurrency taxation, both the revenue ruling and the FAQ present relatively novel questions of procedural posture. The revenue ruling was issued without an effective date. Commentators have noted this implies retrospective as well as prospective application, which generally falls in line with the usual interpretation of revenue rulings as statements of existing IRS position rather than an attempt to articulate new regulatory guidance. Although an FAQ has no formal precedential value, the guidance here is instructive concerning the IRS's position with respect to various issues left unclear concerning cryptocurrency up to this point.


 

1. Benjamin Pirus, What Crypto Winter? $10B in Blockchain Revenue Expected by 2023, FORBES, (Aug. 28, 2019), https://www.forbes.com/sites/benjaminpirus/2019/08/28/what-crypto-winter-10b-inblockchain-revenue-expected-by-2023/#19ecb711747aa [perma.cc/4FB7-2X57].
2. Id.
3. Id.
4. Id.
5. A brief history on Bitcoin & Cryptocurrencies, LEDGER A CADEMY , (Oct. 23, 2019) https://www.ledger.com/academy/crypto/a-brief-history-on-bitcoin-cryptocurrencies/ [perma.cc//P9RF-AXQN]; see Rommel Johnson, et. al, The Valuation of Crypto-assets, ERNST & Y OUNG LLP (UK) (2019), https://www.ey.com/Publication/vwLUAssets/ey-the-valuation-of-crypto-assets/$File/ey-the-valuationof-crypto-assets.pdf [perma.cc/VE9W-3AQY].
6. See L.S., Who is Satoshi Nakamoto?, THE E CONOMIST , (Nov. 2, 2015), https://www.economist.com/the-economist-explains/2015/11/02/who-is-satoshi-nakamoto [perma.cc/5E8W-6EC3].
7. See generally Johnson, supra note 5 (discussing generally the volatility of cryptocurrency valuation and different valuation approaches).
8. Id.
9. Id.
10. Id.
11. See Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, B ITCOIN P ROJECT, https://bitcoin.org/bitcoin.pdf [perma.cc/8L32-43FJ] (last visited Sep. 24, 2019).
12. Id.
13. Id.
14. Id.
15. Id.
16. Id.
17. Making sense of bitcoin, cryptocurrency, and blockchain, PRICEWATERHOUSECOOPERS, https://www.pwc.com/us/en/industries/financial-services/fintech/bitcoin-blockchain-cryptocurrency.html [perma.cc/3HAV-NJKQ] (last visited October 28, 2019).
18. Id.
19. Id.
20. Id.
21. Id.
22. Id.
23. Id.
24. See Nikhilesh De, Coinbase Rolls Out Crypto Custody Product for Institutions, COINDESK (May 15, 2018), https://www.coindesk.com/coinbase-rolls-out-crypto-custody-product-for-institutions [perma.cc/2UBY-NZJH] (both Coinbase and Prime Trust have announced they have custody products aimed at aiding cryptocurrency adoption).
25. See Martin Arnold, Five Ways Banks Are Using Blockchain, FINANCIAL TIMES (Oct. 16, 2017), https://www.ft.com/content/615b3bd8-97a9-11e7-a652-cde3f882dd7b [perma.cc/3MCZ-VXG5].
26. See KLAUS S CHWAB , THE F OURTH I NDUSTRIAL R EVOLUTION (World Economic Forum 2016).
27. See Id.
28. Seegenerally Ameer Rosic, What is An Initial Coin Offering? Raising Millions in Seconds, BLOCKGEEKS (Feb. 21, 2019), https://blockgeeks.com/guides/initial-coin-offering/ [perma.cc/H4NKKECP] (explaining the basics of ICOs).
29. See Id.
30. Id.
31. Id.; see generally, Josiah Wilmoth, The Difference Between Utility Tokens and Equity Tokens, STRATEGICCOIN.COM, https://strategiccoin.com/difference-utility-tokens-equity-tokens [perma.cc/6DJXZ53M] (last visited Dec. 25, 2019) (providing a more in depth discussion regarding utility tokens and equity tokens).
32. What Banks Need to Know, WOLTERSKLUWERS (Jan. 15, 2019), www.wolterskluwers.com/article/virtual-currencies-what-banks-need-to-know.aspx [perma.cc/N7FR-VQH6].
33. Id.
34. Id.
35. Id.
36. Id.
37. Id.
38. See Yogita Khatri, US Income Tax Payers Can Now Get Refunds in Bitcoin, COINDESK (May 1, 2019), https://www.coindesk.com/us-income-tax-payers-can-now-get-refunds-in-bitcoin [perma.cc/H7K9-Z9Y4].
39. See discussion infra Part II.
40. See Virtual Currencies: What Banks Need to Know, supra note 32.
41. Id.
42. See Billy Bambrough, No One Actually Knows What Bitcoin Will Do Next, FORBES (June 13, 2019), https://www.forbes.com/sites/billybambrough/2019/06/13/whats-moving-bitcoin-markets-andprices-not-much-it-seems/#691cfe7158c1 [perma.cc/2SUN-UD6U].
43. SeeVirtual Currencies: What Banks Need to Know, supra note 32; Bitcoin Price (BTC), COINDESK , https://www.coindesk.com/price/bitcoin [perma.cc/J4BC-JCBK] (last visited Sept. 20, 2019).
44. Virtual Currencies: What Banks Need to Know, supra note 32; Bitcoin Price, supra note 43.
45. Virtual Currencies: What Banks Need to Know, supra note 32; Bitcoin Price, supra note 43.
46. Virtual Currencies: What Banks Need to Know, supra note 32; Bitcoin Price, supra note 43.
47. Virtual Currencies: What Banks Need to Know, supra note 32; Bitcoin Price, supra note 43.
48. Virtual Currencies: What Banks Need to Know, supra note 32; Bitcoin Price, supra note 43.
49. Virtual Currencies: What Banks Need to Know, supra note 32; Bitcoin Price, supra note 43.
50. Virtual Currencies: What Banks Need to Know, supra note 32; Bitcoin Price, supra note 43.
51. Virtual Currencies: What Banks Need to Know, supra note 32; Bitcoin Price, supra note 43.
52. Virtual Currencies: What Banks Need to Know, supra note 32; Bitcoin Price, supra note 43.
53. Virtual Currencies: What Banks Need to Know, supra note 32; Bitcoin Price, supra note 43.
54. See Gerelyn Terzo, Bitcoin's Mesmerizing 457% Two-Year Returns Leave the Dow in the Dust, YAHOO F INANCE (Apr. 25, 2019), https://finance.yahoo.com/news/bitcoin-mesmerizing-457-two-returns-203008181.html [perma.cc/UU77-2M5X]; Bitcoin Price, supra note 43.
55. Virtual Currencies: What Banks Need to Know, supra note 32.
56. Id.
57. Id.; see Arjun Kharpal, Over 800 cryptocurrencies are now dead as bitcoin is 70 percent off its record high, CNBC TECH (July 2, 2018), https://www.cnbc.com/2018/07/02/over-800-cryptocurrenciesare-now-dead-as-bitcoin-feels-pressure.html [perma.cc/VFS9-ZT2Q].
58. See George Daniel & Amanda Green, Accounting for Crypto-assets, E RNST & Y OUNG G LOBAL LTD., (2018), https://www.ey.com/Publications/vwLUAssets/EY-IFRS-Accounting-for-crypto-assets/$File/EY-IFRS-Accounting-for-crypto-assets.pdf [perma.cc/D9M8-ZEMV].
59. See Jake Frankenfeld, Private Key, INVESTOPEDIA (July 30, 2018), https://www.investopedia.com/terms/p/private-key.asp [perma.cc/MQ2U-6MVV].
60. Id.
61. Id.
62. Id.
63. Id.
64. SeePrivate Key, BITCOIN WIKI, https://en.bitcoin.it/wiki/Private_key [perma-cc/W7FP-P8UL] (last visited on Oct. 28, 2019).
65. See Nika Savas, Why do we use hexadecimal?, MEDIUM (Sep. 23, 2016), https://medium.com/@savas/why-do-we-use-hexadecimal-d6d80b56f026 [perma.cc/ZMM9-MJUT].
66. See Id.
67. See Id.
68. See Id.
69. See Perfect Passwords, https://www.grc.com/passwords.htm [perma.cc/9DPG-H7AG] (last visited Nov. 6, 2019).
70. See Jamie Redman, How to Prove Ownership with a Bitcoin Cash Address and Digital Signature, BITCOIN (May 18, 2019), http://news.bitcoin.com/how-to-prove-ownership-with-a-bitcoincash-address-and-digital-signature/ [perma.cc/FEN3-68JX].
71. See Id.
72. See Id.
73. See id.
74. See Id.
75. See Id.
76. See Blake Neuman, Crypto 101: Storing Your Cryptocurrency, CASA BLOG, https://blog.keys.casa/crypto-101-storing-your-cryptocurrency [perma.cc/WMC5-E5ME] (last visited Oct. 23, 2019).
77. See Id.
78. See Id.
79. The Difference Between Hot and Cold Wallets in the Digital Currency World, COTI NETWORK MEDIUM (Jan. 11, 2018), https://medium.com/cotinetwork/the-difference-between-hot-and-cold-walletsin-the-digital-currency-world-1aa6f957ddd1 [perma.cc/2SY7-3RJG].
80. Id.
81. Id.
82. Id.
83. See Id.; Rhys Skellern, Keep Your Private Keys Safe—Why It's so Important to Store Them Offline, ECOMI NETWORK MEDIUM (Sept. 20, 2019), https://medium.com/ecomi/keep-your-private-keyssafe-why-its-so-important-to-store-them-offline-8a85d946a3b2 [perma.cc/39DD-ZEG7].
84. See Elena Lacey, A 'Blockchain Bandit' Is Guessing Private Keys and Scoring Millions, WIRED (Apr. 23, 2019), https://www.wired.com/story/blockchain-bandit-ethereum-weak-private-keys/ [perma.cc/CQ5M-JMG2].
85. See Andrew Shipe, Custody of Blockchain Securities Under the Federal Securities Laws, 21FINTECH LAW REP. 4, 5 (July/Aug. 2018).
86. See Id.
87. David Olarinoye, Digital Assets Now Legally Recognized as Property in Wyoming State, INVEST IN BLOCKCHAIN (Feb. 16, 2019), https://www.investinblockchain.com/digital-assets-legally-recognizedproperty-wyoming/ [perma.cc/2JDN-U9X2] (last visited Sept. 20, 2019); Kristin Alford, Digital Assets a General Intangible under Wyoming's UCC, NCS (Apr. 12, 2019), https://www.ncscredit.com/educationcenter/blog/digital-assets-general-intangible-ucc/ [perma.cc/TA7W-FLJN].
88. WYO. STAT. ANN. § 34-29-102 (West 2019).
89. See Id. § 34-29-103.
90. See Id.
91. See Id. § 34-29-103(e)(i)(B).
92. See Alford, supra note 87.
93. See Access to Digital Assets of Decedents, NCSL (May 23, 2019), http://www.ncsl.org/research/telecommunications-and-information-technology/access-to-digital-assets-of-decedents.aspx [perma.cc/534D-NNCY].
94. See TEX. EST. CODE ANN. §§ 2001.002–.232.
95. See Id.
96. See Id.
97. See Id. § 2001.002(8).
98. See Id.
99. Treas. Reg. § 20.2031-1(b) (1976).
100. See Id.
101. See Id.
102. See Treas. Reg. §§ 20.2031-2–2031-7 (2011).
103. Id.
104. See Letter from Annette Nellen, CPA, CGMA, Esq., Chair, AICPA Tax Executive Committee, to the I.R.S. (May 30, 2018) (letter can be found at: https://www.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/20180530-aicpa-comment-letter-on-notice-2014-21-virtual-currency.pdf [perma.cc/7FTP-R64W]).
105. See discussion supra Part IV.
106. See Christine Lane, Gene Magidenko & Hogan Lovells, The U.S. Federal Taxation of Bitcoins and Other Convertible Virtual Currencies, SEC. ON TAX'N (2014), http://www.fedbar.org/Image-Library/Sections-and-Divisions/Tax/summer2014.pdf [perma.cc/HV8V-9MSH].
107. I.R.S. Priv. Ltr. Rul. 8927038 (July 7, 1998) (citing American Home Prods. Corp. v. U.S 601 F.2d 540 (Ct. Cl. 1979) (involving in part the valuation of British Pounds Sterling in support of this statement. Pursuant to section 6110 (j)(3) of the International Revenue Code, private letter rulings cannot be used or relied upon as precedent)).
108. Id.
109. See I.R.S. Notice 2014-21, 2014-16 I.R.B. 938 (Mar. 26, 2014); see also Stevie D. Conlon, Anna Vayser, & Robert Schwaba, Taxation of Bitcoin, Its Progeny, and Derivatives: Coin Ex Machina, TAX NOTES (2018) (discussing the various tax issues that arise with certain cryptocurrencies).
110. See I.R.S. Notice 2014-21, 2014-16 I.R.B. 938; See Mike Orcutt, How the hell are cryptocurrency holder supposed to file their taxes?, MIT TECH REV.  (Apr. 16, 2019), https://www.technologyreview.com/s/613315/how-the-hell-are-cryptocurrency-holders-supposed-to-file-their-taxes/ [perma.cc/8QLK-EDRZ].
111. I.R.S. Notice 2014-21, 2014-16 I.R.B. 938.
112. Id.
113. Id.
114. Id.
115. H.R. 2144, 116th Cong. (2019).
116. See Mordecai Lerer, The Taxation of Cryptocurrency Virtual Transactions Bring Real Life Tax Implications, THE CPA J. (Jan. 2019), https://www.cpajournal.com/2019/01/24/the-taxation-ofcryptocurrency/ [perma.cc/8PCP-MBAS] (explaining that questions regarding cryptocurrencies remain unanswered).
117. See Virtual Currencies: What Banks Need to Know, supra note 32; I.R.S. Notice 2014-21, 2014–16 I.R.B. 938.
118. See Sahel Ahyaie Assar, Insight: Taxation of Cryptocurrencies—In Anticipation of the IRS's Call—Part 2, BIG L. BUS . (Sept. 13, 2019), https://biglawbusiness.com/insight-8 [perma.cc/L39A-PSTL].
119. I.R.S. Notice 2014-21, 2014-16 I.R.B. 938.
120. See Nellen, supra note 104.
121. See American Institute of CPAs, Updated Comments on Notice 2014-21: Virtual Currency Guidance, at page 5 (June 10, 2016) https://www.aicpa.org/Advocacy/Tax/DownloadableDocuments/AICPA-Comment-Letter-on-Notice-2014-21-Virtual-Currency-6-10-16.pdf [perma.cc/L39A-PSTL]; A.B.A. Section of Taxation, Comments on Notice 2014-21, at 3 (Mar. 24, 2015) https://www.americanbar.org/content/dam/aba/administrative/taxation/policy/032415comments.authcheckdam.pdf [perma.cc/L7M7-UW57].
122. See generally Id. (noting valuation difficulties with cryptocurrency and suggesting pre-existing
tax regulations available as remedies).
123. See, e.g., South Carolina Nat'l Bank v. McLeod, 256 F. Supp. 913, 916 (D.S.C. 1966).
124. See Id. (citing Ames v. O'Malley, 91 F. Supp. 463, 463–64, (D. Neb. 1950), aff'd 197 F.2d 256
(8th Cir. 1952)).
125. Treas. Reg. § 20.2031-2 (2006).
126. Id. § 20.20131-2(b)(1).
127. See South Pacific Co. v. U.S., 110 F. Supp. 637 (1953); I.R.S. Priv. Ltr. Rul. 7511171700A (Nov. 17, 1975).
128. See South Pacific Co., 110 F. Supp. at 638; I.R.S. Priv. Ltr. Rul. 7511171700A.
129. See South Pacific Co., 110 F. Supp. at 638; I.R.S. Priv. Ltr. Rul. 7511171700A
130. See Treas. Reg. § 20.2031-8(b)(1).
131. Id.
132. Id.
133. Id.
134. Id. §§ 20.2031-2(b)(1), (d)–(f).
135. Id. §§ 20.2031-2(g)–(i).
136. See W.T. Grant Co. v. Duggan, 94 F.2d 859, 861 (2nd Cir. 1938).
137. Id.
138. See In re Estate of Prentice v. Comm'r, 15 TCM 14 (1956).
139. Id.
140. Rev. Rul. 59-60, 1959-1 C.B. 237 (1959) (as detailed in Sec. 2.03).
141. See Id.
142. See Id.
143. See Id.; Virtual Currencies: What Banks Need to Know, supra note 32; Bitcoin Price, supra note 43.
144. See Virtual Currencies: What Banks Need to Know, supra note 32.
145. Id.
146. Chris Burniske, Value Capture and Quantification: Cryptocapital vs. Cryptocommodities, PLACEHOLDER . VC (Apr. 26, 2019), https://www.placeholder.vc/blog/2019/4/26/value-capture-andquantification-cryptocapital-vs-cryptocommodities [perma.cc/5HWL-E7TM].
147. Id.
148. See David R. Harper, Getting to Know the Stock Exchanges (June 25, 2019) https://www.investopedia.com/articles/basics/04/092404.asp [perma.cc/S5NR-LHAL].
149. Justin Cook, Richard Cohen, & Jason Denisenko, Initial Coin Offerings: A comparative overview of securities regulatory environments in the US, UK and Asia Pacific, GLOBAL LEGAL INSIGHTS – BLOCKCHAIN & CRYPTOCURRENCY REGULATION (1st ed. 2019).
150. See Id.
151. See Id.
152. See id; What Are Atomic Swaps? The Most Comprehensive Guide Ever, https://blockgeeks.com/guides/atomic-swaps/ [perma.cc/9N7C-7CE8] (last visited October 29, 2019).
153. See Cook et al., supra note 149.
154. See Id.
155. See Id.
156. See id
157. Kate Rooney, Majority of bitcoin trading is a hoax, new study finds, CNBC (Mar. 22, 2019), https://www.cnbc.com/2019/03/22/majority-of-bitcoin-trading-is-a-hoax-new-study-finds.htm [perma.cc/R7YF-NWUJ].
158. Id.
159. Id.
160. Id.
161. Id.
162. David Hundeyin, Most of Bitcoin's Trading Volume is FAKE: Time to Wake the F*** Up?, CNN.com (Mar. 24, 2019), https://www.cnn.com/most-of-bitcoins-trading-volume-is-fake-time-to-wakethe-f-up [perma.cc/8WFW-4NK3].
163. Id.
164. Id.
165. See Jake Frankfield, Cryptocurrency, INVESTOPEDIA (Feb. 12, 2019), https://investopedia.com/terms/c/cryptocurrency.asp [perma.cc/4HVU-D6DK].
166. See Reem Heakal, What are Corporate Actions?, I NVESTOPEDIA (Jan. 25, 2019), https://www.investopedia.com/articles/03/081303.asp [perma.cc/P64P-8PB4].
167. Id.
168. See James Chen, Corporate Action, INVESTOPEDIA (June 16, 2019), https://www.investopedia.com/terms/c/corporateaction.asp [perma.cc/X4QT-YSBM].
169. Nathan Reiff, Cryptocurrency Forks v. Airdrops: What's the Difference?, INVESTOPEDIA (July 3, 2018), https://www.investopedia.com/tech/cryptocurrency-forks-vs-airdrops-whats-difference/ [perma.cc/LBR4-BN24].
170. See Id.
171. See Id.
172. See Id.
173. Arjun Kharpal, Everything You Need to Know About the Blockchain, CNBC (June 18, 2018), https://www.cnbc.com/2018/06/18blockchain-what-is-it-and-how-does-it-work.html [perma.cc/N32HHGU8].
174. See id.
175. See Id.
176. See Id.
177. See Id.
178. See Conlon et. al., supra note 109.
179. Id.
180. Harsh Agrawal, Airdrops in Cryptocurrencies: Everything a Beginner Needs to Know, COIN SUTRA (Oct. 13, 2018), https://coinsutra.com/what-is-airdrop/ [perma.cc/J7F9-CSGQ].
181. See Id.
182. See Id.
183. See Id.
184. See Id.
185. See Id.
186. See Conlon, et al., supra note 109.
187. See I.R.S. Notice 2014-21, 2014-16 I.R.B. 938 (Mar. 26, 2014).
188. See Comments on Notice 2014-21, supra note 121; Comments on Notice 2014-21: Virtual Currency Guidance, supra note 121.
189. See discussion infra Section V.C.1.
190. Karen L. Hawkins, Chair, ABA Section of Taxation, Tax Treatment of Cryptocurrency Hard Forks for Taxable Year 2017 (Mar. 29, 2018).
191. Id. (citing Comm'r v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955)) (noting that the letter also presents an argument distinguishing the proposition in Eisner v. Macomber, 252 U.S. 189, 207 (1920), that realization represents a key part of the concept of income).
192. See Id.
193. See Id.
194. See Id.
195. See Id.
196. See Id.
197. Rev. Rul. 70-498, 1970-2 C.B. 6.
198. Id.
199. See Hawkins, supra note 190.
200. See Id.
201. See Id.
202. See Conlon, et al., supra note 109.
203. Id. (citing Jordan Pearson, People Are Losing Bitcoin Cash by Accidentally Sending It to Bitcoin Addresses, MOTHERBOARD (Sept. 12, 2017), https://motherboard.vice.com/en_us/article/j55ywg/peopleare-losing-bitcoin-cash-by-accidentally-sending-it-to-bitcoin-addresses [perma.cc/F3NJ-CKTM]).
204. Conlon, et al., supra note 109, at 1016; see Rev. Rul. 70-498, 1970-2 C.B.6.
205. Conlon, et al., supra note 109, at 1017.
206. See Id. at 1010–11.
207. Id. at 1004; see Rev. Rul. 86-24, 1986-1C.B. 80; see also Gamble v. Comm'r, 68 T.C. 800 (1977).
208. Conlon, et al., supra note 109, at 1014.
209. See Hawkins, supra note 190 at 10.
210. Conlon, et al., supra note 109.
211. See, e.g., Rev. Rul. 86-24, 1986-1 CB 80, (Jan. 1, 1986); see also Gamble, 68 T.C. at 801.
212. Conlon, et al., supra note 109.
213. See Ronald J. Gilson & Reiner H. Kraakman, The Mechanics of Market Efficiency, 40 VA. L. R EV . 549 (1984) (discussing the dangers of using future events to determine prices in the market).
214. See, e.g., Shobhit Seth, Circumventing the Limitations of Black-Scholes, INVESTOPEDIA, https://www.investopedia.com/articles/active-trading/041015/how-circumvent-limitations-blackscholesmodel.asp [perma.cc/6NGU-22CQ] (last modified Feb. 16, 2018).
215. See Conlon, et al., supra note 109, at 1016.
216. See Id. at 1016–17.
217. See Id. at 1010.
218. See Id. at 1021.
219. Jacob Harper, The Most Famous Pump and Dump Stocks in Wall Street History, EQUITIES (Nov. 13, 2013), https://www.equities.com/news/the-most-famous-pump-and-dump-stocks-in-wall-streethistory [perma.cc/RX52-W5FF].
220. Id.
221. Jay Clayton, Statement on Cryptocurrencies and Initial Coin Offerings, SEC (Dec. 11, 2017), https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11 [perma.cc/2S9X-7R65].
222. Id.
223. Id.
224. Sec. Exch. Comm'n 2018–268, Two Celebrities Charged with Unlawfully Touting Coin Offerings, SEC (Nov. 29, 2018), https://www.sec.gov/news/press-release/2018-268 [perma.cc/P8ZXRNRN].
225. See Id.
226. See Id.
227. See Commodity Futures Trading Comm'n 7774-18, CFTC Wins Trial Against Virtual Currency Fraudster, CFTC (Aug. 24, 2018), https://www.cftc.giv/pressroom/pressreleases/7774-18 [perma.cc/YGC6-43AZ].
228. See Id.
229. See Id.
230. See Id.
231. See Kate Rooney, Crime Still Plagues Cryptocurrencies, as $1.7 Billion was Stolen from Investors Last Year, CNBC: BITCOIN (Jan. 29, 2019, 3:41 PM), https://www.cnbc.com/2019/01/29/crimestill-plagues-cryptocurrencies-as-1point7-billion-was-stolen-last-year-.html [perma.cc/6HS4-LD98].
232. See Id.
233. See Id.; see also Rachel McIntosh, The Oldest Trick in the Book: Why Crypto 'Boiler Room Scams' are so Effective, FINANCE M AGNATES : CRYPTOCURRENCY (Sept. 21, 2018), https://www. financemagnates.com/cryptocurrency/news/the-oldest-trick-in-the-book-why-crypto-boiler-room-scamsare-so-effective-in-the/ [perma.cc/62F4-JML9].
234. See McIntosh, supra note 233.
235. See Darryn Pollack, The Immutable And Unhackable Blockchain Still Falling To Cryptocurrency Wild West, FORBES (Mar. 20, 2019), https://www.forbes.com/sites/darrynpollack/2019/03/20/theimmutable-and-unhackable-blockchain-still-falling-prey-to-cryptocurrency-wild-west#19f6017b1d61 [perma.cc/D6HA-RC72].
236. See Id.
237. See Id.
238. See Id.
239. SeeBisade Asolo, Blockchain Soft Fork & Hard Fork Explained, MYCRYPTOPEDIA (Nov. 1, 2018), https://www.mycryptopedia.com/hard-fork-soft-fork-explained/ [perma.cc/BYU5-HTSM].
240. See Id.
241. See Nolan Bauerle, What is the Difference Between a Blockchain and a Database?, COINDESK, https://www.coindesk.com/information/what-is-the-difference-blockchain-and-database [perma.cc/46QB-E56A].
242. See Asolo, supra note 239.
243. See Id.
244. See Nathan Reiff, A History of Bitcoin Hard Forks, INVESTOPEDIA (June 25, 2019), https://www.investopedia.com/cryptocurrency-4427699 [perma.cc/U2RM-UWTF].
245. See Conlon, et al., If a Crypto Tree Falls in a Digital Forest, Can It Give Rise to Tax Evasion?, 6 TAX NOTES 161 (Nov. 5, 2018) (discussing DAO tokens specifically).
246. SeeId.
247. See Michael del Castillo, Ethereum Executes Blockchain Hard Fork to Return DAO Funds, COIN DESK (July 20, 2016), https://www.coindesk.com/ethereum-executes-blockchain-hard-fork-returndao-investor-funds [perma.cc/VJ3J-KFSA].
248. What Is Ethereum Classic?, BLOCKGEEKS (2017), https://blockgeeks.com/guides/what-isethereum-classic/ [perma/cc/7PK9-T74M].
249. See Id.
250. Top 100 Cryptocurrencies by Market Capitalization, COIN MARKET CAP , http://www.coinmarketcap.com [perma.cc/87QM-QD54] (last visited Sept. 22, 2019).
251. Id.
252. Id.
253. See Ameer Rosic, What is Ethereum Classic? Ethereum vs Ethereum Classic, BLOCKGEEKS https://blockgeeks.com/guides/what-is-ethereum-classic/ [perma.cc/K39Y-BGSS] (last visited Sept. 24, 2019).
254. See Id.
255. See Id.
256. See Id.
257. See Id.
258. See Id.
259. SeeId.
260. SeeId.
261. See Romain Dillet, Coinbase users can now withdraw Bitcoin SV following BCH fork, TECHCRUNCH (Feb. 15, 2019), https://techcrunch.com/2019/02/15/coinbase-users-can-now-withdrawbitcoin-sv-following-bch-fork/ [perma.cc/EKZV-547Z].
262. SeeId.
263. SeeId.
264. Id.
265. Id.
266. Id.
267. Id.
268. Id.
269. Id.
270. Supra Part VI.A & B.
271. Supra Part IV.E.
272. Supra Part IV.E.
273. Supra Part II.
274. Supra Part V.
275. Supra Part V.
276. Supra Part V.
277. Supra Part V.
278. Supra Part VI.
279. Supra Part VI.
280. Supra Part VI.
281. Rev. Rul. 2019-24; see Frequently Asked Questions on Virtual Currency Transactions, https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currencytransacitions [perma.cc/99AW-ZC4N] (last visited Nov. 6, 2019).
282. SeeId.
283. SeeId. (making note that this article focuses primarily on valuation, our analysis in this addendum will focus on those sections of the guidance).
284. See Rev. Rul. 2019-24 at 2 (nothing that the revenue ruling also provides definitions of hard fork and airdrop that may or may not diverge from the way these terms are used by cryptocurrency enthusiasts and technologists).
285. See Comm'r v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).
286. See Rev. Rul. 2019-24 at 2.
287. Id.
288. Id. at 3.
289. See Frequently Asked Questions on Virtual Currency Transactions, supra note 281.
290. Id. at Q25.
291. Id.
292. Id. at Q26.
293. Id. at Q27.

Vice President, Tax & Regulatory Counsel: Investment Compliance; U.S. Advisory Services

Stevie D. Conlon, vice president, tax and regulatory counsel for Wolters Kluwer leads the firm’s U.S. Advisory Services group and Investment Compliance Solutions.