Category: internet law

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business law internet law Uncategorized

Is a Bad Review Defamation? Protecting Your Business Reputation Online.

Following my previous article about online defamation, business owners frequently ask me whether they can “sue” Facebook or Yelp or Google, etc., to get a negative review removed. Or whether they can “sue” the poster for “reputation damages.” This is especially common in the trucking industry, where Carrier411 hosts a platform that allows brokers and customers to review carriers. Often times, a dispute or a misunderstanding between a carrier and a customer leads to a “report” or a bad review on Carrier411 that causes frustration and may even result in lost business.

A negative review by itself is not always defamation. To win on a defamation claim in court, you need to prove: (1) a false and defamatory statement about the plaintiff; (2) unprivileged publication to a third party; (3) fault amounting to at least negligence; and (4) actionability per se or the existence of special harm.

What does this all mean for the business owner faced with a negative review?

  • First, a successful defamation claim requires a false and defamatory statement. This is the most commonly misunderstood element, but it is absolutely critical. A negative review – even if the business owner has a different side of the story, or does not agree with it – is not actionable unless it is actually false. A statement of opinion – even if negative – is not a false statement of fact because there is no such thing as a false opinion. That is an important difference, especially in the age of social media. A person may go on your restaurant website and freely post something like “I hate the atmosphere and I did not like the food here at all.” That is not defamation, even though it is a negative review. Rather, it is a statement of opinion. A good test is to ask: how am I going to prove that the statement is false? What types of evidence will I introduce to refute the “facts” that were posted? There is no evidence that you can introduce to refute a statement of opinion – in other words, the customer’s perception of atmosphere and the food is their own. If they did not like it, then it is their opinion, and they are entitled to it. Also, the statement must be defamatory, that is injurious to your business reputation. A statement that is false, but is not negative or otherwise critical of your business is not actionable. For example, if a review says “This restaurant is located in midtown Detroit,” when in fact the restaurant is downtown, the statement is false, but not defamatory.
  • Second, there must be unprivileged publication. “Publication” just means dissemination to others – meaning third parties. Of course, if something is posted online, it is published. “Unprivileged” means that the statement is not made in the context of a protected communication, such as a legal filing with the court, a police report, or some other type of special protected communication.
  • Third, the false statement must be made with at least negligence. That simply means that the person making the statement either knows that it is false or does not bother to try to find out before publishing. Even if a person publishes a false statement about your business, they may not be liable if they consider it true based on a reasonable inquiry.
  • Fourth, there must be an element of damages. In business cases, this element is usually satisfied automatically, as damages to business reputation are considered actionable per se. However, actual damages are still critical and must be proven – otherwise you may end up recovering only nominal damages. While punitive and exemplary damages, as well as attorney fees, are available under MCL 600.2911, there are no guarantees that they will be awarded. A case is always more persuasive if there are actual damages that are proximately caused by the negative post, review, or other published statement.

Even if you can prove the four elements, there are practical factors to consider before filing a lawsuit. Are you prepared to bear significant litigation costs – thousands or even tens of thousands of dollars? Are you prepared to invest time away from your business to prove your case? Never treat litigation as an investment opportunity because no business owner makes money paying their attorney and spending time in court.

The good news is that there are other options besides litigation that you can discuss with your attorney. Often times, an informal discussion with a dissatisfied customer can solve the issue. A cease-and-desist letter can be effective as well. If the potential damages are significant, pre-suit mediation may be the most cost effective option to resolve the dispute.

One final note – in Michigan, defamation claims must be brought within a year of the event. Other states may have different deadlines, but if you think you may have a claim, talk to an attorney sooner rather than later.

Dan Artaev is an experienced business attorney who advises a number of domestic and international businesses on various topics, including defamation. Email us or call us to set up your free initial consultation.

© 2024 Artaev at Law PLLC. All rights reserved.-

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business law internet law Uncategorized

But Your Honor, He Said a Bad Thing About Me on Facebook: Business Defamation Claims in the Age of Social Media

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It is 2024 and every business has an online presence – whether through a website, on Google, or on social media. It is more important than ever for business owners to know what can and cannot be said (i.e. posted) regarding their business online. In other words, can you sue to get that negative review off of Google? Or what about that irate ex-employee that keeps posting false information to your Glassdoor page? Can an overzealous freight broker’s post against a trucker on Carrier411.com lead to a lawsuit?

In a recent Michigan case that involved Carrier411, Penguin Trucking Inc. and E.L. Hollingsworth & Co., faced off in a business defamation case. The two companies were contracted for the same job at different rates by an outside third party. However, by the time the two companies found out about the scam, Penguin Trucking had already had the freight in its possession and was unable to make a deal with E.L. Hollingsworth for them to reconcile and both deliver the freight.

Since Penguin Trucking already held the freight, they decided to enter into a deal directly with the end customer for the delivery. Shortly thereafter, an E.L Hollingsworth employee posted a scathing report on Carrier411.com, a trucking monitoring service website. The employee wrote that Penguin Trucking “held [the] load hostage,” attempted “in-transit agreement modification,” and accused them of “unethical or deceptive business practices.” In any industry, potential customers are reluctant to do business with companies that have negative reports written about them, like those written on Carrier411.com. In the trucking business, Carrier411 reviews are especially crippling and can even destroy a smaller or startup business. Penguin Trucking experienced these adverse effects first-hand when it lost out on a contract with a shipper based on the FreightGuard. In litigation, Penguin Trucking proved not only that the online statements were false, but that the loss of the shipper contract was directly linked to the Carrier411.com review. Penguin Trucking was awarded $612,400 in damages for this lawsuit.

Michigan’s laws are clear about what constitutes defamation and what does not. Most other states have similar laws that protect against false statements that damage a business’s reputation. There are four elements to a defamation claim in Michigan:

  1. A false and defamatory statement concerning the plaintiff;
  2. An unprivileged publication to a third party;
  3. Fault amounting at least to negligence on the part of the publisher; and
  4. Either special per se harm or actual damages proximately caused by the statement.

For a more in-depth look at what each element means and requires, check out my latest article about protecting your online reputation.

If someone is posting intentionally false information about your company on the Internet (including a false FreightGuard report on Carrier411) you have a right to defend your company. An experienced attorney can help with various options short of litigation, such as sending a cease-and-desist letter and negotiating a resolution on your behalf. If litigation does become necessary, we can also provide the necessary support and consultation to take your case before the proper court.

Have more questions? Contact our firm by email or call us today to set up your free initial consultation.

© 2024 Artaev at Law PLLC. All rights reserved.

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gambling law gaming law internet law sports law

Regulatory Crackdowns Are Reshaping Sports Wagering.

Regulatory uncertainty in emerging gaming markets has proven itself to be a double-edged sword. On one hand, unregulated gaming products that do not squarely fall into the definitions of “gambling” or regulated fantasy sports offer greater accessibility, innovative entertainment, and lower fees to their customers. Such products include skill-based games, play-to-earn video games, peer-to-peer social wagering, and pick’em-style fantasy sports (most prominently championed by Underdog Sports and PrizePicks). On the other hand, pick’em fantasy sports has recently been under fire, as a number of states have either outright banned pick’em fantasy sports or are currently investigating them.

Pick’em As a Popular Alternative to Traditional Fantasy

Pick’em style fantasy sports found success in appealing to the younger, more casual player. Instead of assembling a roster, managing a virtual salary cap, and engaging in time-consuming balancing of performance vs. cost, the pick’em format simply awards points based on correct predictions of a better outcome. For example, the pick’em format will ask participants to pick an over/under point total between two outcomes or which player will score more points. This simpler and more straightforward format has enjoyed rapid success due to its accessibility and entertainment factor. However, state regulators have also cracked down on the format due to its functional resemblance to proposition-style sports bets.

Regulators Have Cracked Down on Pick’em in Late 2023 and Early 2024

As of the date of this article, Arizona, Arkansas, Florida, Kansas, Maine, Michigan, Mississippi, New York, North Carolina, Virginia, and Wyoming have taken the position that pick’em fantasy sports offerings are illegal under state law. Wyoming (which legalized online sports betting in 2021) targeted leading pick’em operators PrizePicks and Underdog in July 2023 with cease-and-desist letters. High-profile regulatory actions followed in Florida, New York, and Michigan. Florida takes the position that fantasy sports have not been and are not allowed in the state. Michigan and New York have amended their daily fantasy sports administrative rules to prohibit “any contests that have the effect of mimicking betting on sports or that involve ‘prop bets’ or the effect of mimicking proposition selection.”

Other states joined the effort. California is currently in the process of investigating and opining on the legality of DFS in the state. Kansas became the latest state to issue cease-and-desist letters to at least six fantasy sports operators. Notably, despite having a well-articulated and public position on the legality of its offering, Underdog voluntarily left Kansas in September of 2023. PrizePicks continues to operate in Kansas.

After Florida targeted the three market leaders – Underdog, PrizePicks, and Betr – with cease-and-desist letters in September 2023, it appeared that the companies were eager to fight for and defend the legality of their offerings. This no longer seems to be the case and at least one operator (PrizePicks) just settled the New York State Gaming Commission’s allegations of illegal fantasy sports operations by agreeing to pay a fine of nearly $15 million and ceasing operations in New York.

While the settlement is limited to PrizePicks, its a potential blow to all the other pick’em operators, whose legal position has been that their products either operate within the boundaries of permissible fantasy sports or are not otherwise regulated by state law. As a side note, New York is unique in that the settlement with PrizePicks acknowledges the general legality of fantasy sports in New York pursuant to license. PrizePicks’ “wrongdoing” was ostensibly operating fantasy sports without a license (not that their pick’em product was per se illegal).

Novel Game Markets Remain Uncertain and Subject to Rapid Adverse Regulator Actions

In any case, the cascade of regulatory actions (and the speed with which investigations turned into cease-and-desist letters and subpoenas) highlights the uncertainty related to novel gaming products. For instance, PrizePicks operated in New York since 2019 under a “good-faith belief” (and presumably in reliance upon legal advice) that it did not need to obtain any sort of fantasy sports or other license from the state. PrizePicks likely relied on the common-sense conclusion that its offering was a game of skill and therefore unregulated under New York law. Yet PrizePicks had to essentially pay back all the revenue it made in New York and agree to exit the state.

Out of all the real-money gaming offerings in the market, skill-based real-money gaming still appears to be most accepted model. Skill-based real-money gaming involves players paying an entry fee and competing for a prize, with the outcome determined by the relative skill of the players as opposed to chance. Peer-to-peer social wagering leverages the skill-based aspect of predicting sports outcomes, but involves direct bettor-to-bettor competition as opposed to bets against the house.

While legally untested, the peer-to-peer model also appears to be more palatable to regulators, as Underdog Fantasy revised its player vs. house pick’em model to function as a peer-to-peer skill contest in Alabama, Mississippi, Tennessee, and Wyoming in response to collaboration with regulators in those states. Play-to-earn is a concept most associated with Web3.0 and video games where in-game assets have tangible out-of-game value. Interest in play-to-earn is surging, as the crypto markets recover and Bitcoin exceeds the $50,000 barrier.

As more states legalize gambling and especially sports betting, regulators are taking a closer look at potential competitors. Licensed heavyweights like DraftKings and FanDuel (and their lobbyists) are allegedly involved in bringing regulators’ attention to potential competitors, especially if those competitors are operating at higher margins due to lower regulatory costs.

A Detailed Legal Opinion is More Important Than Ever

The current regulatory environment in the United States highlights the importance of hiring experienced and knowledgable counsel as part of your team. What was permissible or at least tolerated by regulators a year ago may not be acceptable now. Further, more states are taking a position against unlicensed sports betting or fantasy products, even if those offerings are firmly grounded in sound legal arguments. Careful consideration, a legal opinion, and a detailed analysis are more important than ever to a successful launch, especially as payment processors, vendors, investors, and other third parties are going to be engaged in a lot more legal scrutiny.


The qualified and specialized attorneys at Artaev at Law PLLC know gaming law – email or call us to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, tax, or investment advice. Every situation is different and has its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2024 Artaev at Law PLLC. All rights reserved.

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business law gambling law gaming law internet law

Are Cryptocurrency Games of Skill Legal in the United States?

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Real-money games of skill are unregulated and thus legal in the majority of the United States. While there are specific best practices for launching your project, games where skill is the predominant or material factor in deciding the winner are generally not considered prohibited gambling. With the rebound of cryptocurrency markets in 2024 and a renewed interest in NFTs, is it possible to launch a skill-based game that uses cryptocurrency as opposed to fiat?

The answer is yes, but there are several caveats, warnings, and areas to be aware of. Cryptocurrency is subject to a patchwork of state-by-state regulations, as well as overlapping oversight from federal regulatory bodies including the Securities and Exchange Commission (“SEC”) and the Commodities Futures Trading Commission (“CFTC”). However, the first consideration is whether the game is regulated as “gambling” under any state or federal laws.

Games of skill vs. games of chance

First, in any real-money game of skill, the initial and primary consideration is the effect of skill vs. chance. It does not matter whether the players are competing for fiat dollars, cryptocurrency, or gold bars. State anti-gambling laws generally require the wager and receipt of “something of value” – the definition is purposefully broad to ensure anti-gambling regulations cannot simply be evaded by substituting cash for gold, tokens, or something else of value. Clearly, cryptocurrency is something of value and therefore falls within the same regulatory framework as cash games.

In-game currencies and securities regulation

Second, cryptocurrency-based games are subject to some unique considerations and developing laws.

The Securities and Exchange Commission has taken a particular interest in cryptocurrency-based projects in the United States. Initial coin offerings (or ICOs) have been on the SEC’s radar since at least 2017. ICOs were essentially a way for companies to raise funds by selling self-created crypto tokens without complying with securities registration requirements. The SEC took (and continues to take) the position that where a crypto asset (whether it is token or an NFT) meets the definition of “investment contract,” the asset is a security and is subject to the regulatory and registration requirements of the Securities Act of 1933. Companies that sell unregistered securities face stiff penalties and injunctions from the government, as well as “disgorgement,” which is just another way of returning funds to the buyers.

If your cryptocurrency skill-based game uses a widely circulating coin like BTC or ETH or SOL, then you are in a better position because the SEC generally targets the issuers (not the users) of a particular crypto asset. However, if you are planning to launch your own in-game token for players to use as an entry fee and to receive as a prize, you need to ensure that the token has sufficient non-investment utility. In other words, a company may use its own in-game currency if the in-game currency is considered a “utility token” – meaning there must be a use outside speculation and expectation to profit from the efforts of others. If there is true “utility,” the token will not be considered a “security” under the Howey test. Such an analysis is complex, multi-faceted, and requires a legal opinion from qualified counsel.

Patchwork of state-level regulations

Certain states have also enacted various laws targeting the sale and exchange of virtual assets. Some have taken a light approach – for example, Michigan has updated its criminal code to include the definitions of cryptocurrency and Distributed Ledger Technology to ensure that the criminal statutes applicable to fraud, theft, and forgery include the new technological representations of value. See MCL 750.157m(c), (f). Other states, like New York, Florida, and Minnesota, have enacted licensing schemes with respect to virtual currency business activities and updated their money transmission laws.

Moreover, states have their own sets of securities laws. Those are not necessarily preempted or superseded by federal law. In other words, even if a crypto asset is a utility token under the Howey test and is not considered a security under federal law, a state regulator may come in and enforce state-level “blue sky” laws. As just one example, the state attorneys general of Alabama, Kentucky, New Jersey, and Texas recently coordinated an unregistered sale of securities enforcement action against Slotie.com, which was selling gamified NFTs that represented virtual plots of land in a Las Vegas-style gambling metaverse.

Gaming in 2024 is full of innovative possibilities, especially as the crypto markets rebound, government regulation across the world matures, and public interest in alternative assets increases. However, there are many legal considerations to evaluate. The qualified and specialized attorneys of Artaev at Law stand ready to help with your next project.

Disclaimer: This article is not intended to be and does not constitute legal advice. It is for informative and promotional purposes only. Do not take any action or refrain from taking any action based on this guide, and always consult with a qualified professional about the circumstances of your particular case. Each set of facts is unique and different circumstances apply to each individual business.

© 2024 Artaev at Law PLLC. All rights reserved.

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business law esports gambling law gaming law internet law

How to Advertise Real-Money Gaming on Meta in 2023: A Legal Opinion is Still Required.

Meta (formerly known as Facebook) remains an attractive forum for real-money gaming companies looking to advertise their skill-based gaming apps, esports, and fantasy sports offerings. However, Meta has a strict policy that requires an application and approval before any “online gaming” ads can run. The application form is convoluted and complex, and unless you have a gambling license from a state regulator, you will need to obtain a legal opinion from an experienced gaming attorney.

Artaev at Law PLLC has provided consulting, review, and legal opinions to gaming companies since 2020. We also have experience with the Meta/Facebook onboarding and application process. Before Meta’s overhaul of the process in August 2022, the application was much simpler than it is today. The advertiser disclosed their geographic target, acknowledged the requirement for geofencing and age compliance, and submitted a legal opinion that qualified their offering as a game of skill or other type of competition that does not require a gambling license. Now, the application process requires not only a selection of the proper jurisdictions from a drop down menu, it also requires the advertiser to choose which “category” is most appropriate for their game.

For example, when choosing the United States, Meta prompts the applicant to choose the states where the game will be offered. Clicking on a state gives a choice of the types of games that Meta considers available or “allows” in that state. This sublist is inconsistent and does not provide any context as to what types of games fall into each category. For example, selecting Texas gives the advertiser a single option to choose “sweepstakes.” But Texas courts have applied the “predominant factor test” to permit real-money games where skill predominates over chance in deciding the winner. The Texas legislature’s definition of “gambling” also contains an express exemption for “bona fide contest[s] for the determination of skill.” TX Penal Code 47.01. So, while Texas state law permits skill-based games that pass the predominant factor test, Meta’s drop down menu only allows “sweepstakes.”

Gaming companies must also select the protective measures that they implement to ensure compliance with their territorial restrictions and 18+ age policies. KYC checks may also be appropriate depending on the jurisdiction, but again, this is a requirement that varies by country and region. Smaller or startup companies often struggle with navigating the various requirements, but there are qualified third party administrator solutions that offer the necessary services for gaming industry participants.

Finally, unless your company has a gambling license from a state regulator, Meta requires a legal opinion from an experienced and qualified attorney regarding the legality of the game under a particular jurisdiction’s laws. For example, if a company is offering a mobile app game of skill in the United States, the legal opinion will need to address not only the application of federal anti-gambling laws (such as the Unlawful Internet Gambling Enforcement Act and the Wire Act), but also the individual states. Each state has its own definition of “gambling,” various exceptions, and judicially-crafted test (such as the predominance or the material element test) that must be applied to the game in question. Also, the laws can change from time to time and must be addressed, such as when Virginia adopted specific legislation regarding certain physical games of skill in 2022.

Once the application and the opinion are submitted, Meta’s initial process is to check the submission for completeness (do not forget screenshots of your landing page!) and send it off for outside counsel review. The review can take as little as 2 weeks or as long as 3 months, depending on the game and the volume of submissions. Before the August 2022 reforms, if the application was rejected, there would be a specific reason and explanation. This allowed advertisers to go back to fix and resubmit their application. Currently, Meta does not give a reason for rejecting a submission. The default message is that advertising of the particular game or app is “not supported.” This is particularly frustrating when an advertiser has waited for weeks or months, just to find out their game is “not supported.” There is no clear appeal process either, and the advertiser is left to guess at how to best resubmit their application – or whether to simply try running ads without prior authorization (which risks Meta disabling the ad account and page).

Advertising on Meta can be a powerful boost to your game’s audience, but it is also a complex process that requires a legal opinion from an experienced attorney. There are many aspects to navigating the various laws in play, as well as KYC, age-gating, and geolocation requirements that are more and more prevalent across the industry. Contact Artaev at Law PLLC today to set up your initial consultation.

The qualified and specialized attorneys at Artaev at Law PLLC know gaming law – email or call us to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, tax, or investment advice. Every situation is different and has its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2023 Artaev at Law PLLC. All rights reserved.

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business law esports gambling law gaming law internet law Uncategorized

Are Play-to-Earn Video Games Legal in the United States?

Are play-to-earn games legal? The answer depends on the specifics of the game. For many gaming developers, play-to-earn is a lucrative business model in 2023 and beyond. These games let players compete against other players (PvP) or against the the game itself (PvE) to earn rewards that have real-world value. For example, players may pay real money to buy in-game currency to purchase virtual gear or real estate, but players also have the option to redeem the in-game currency for real-world money. Players can trade resources or earn the in-game currency through gathering, completing tasks or quests, or other gameplay. However, any company looking at play-to-earn should retain an experienced gaming attorney to consult on their game. It may be an attractive business model, but any real-money gaming implicates multiple legal areas, including taxes, securities law, and both state and federal-level anti-gambling prohibitions.

Earning real-world cash for virtual goods or gameplay is not a new concept. In fact, the first generation of massively-multiplayer online roleplaying games (MMOs or MMORPGs) like Ultima Online, Runescape, and Everquest had robust real-money economies for in-game items. Resource “farming” – where one would gather virtual resources and then transfer them to another player for a real-world money payment – became even more popular with World of Warcraft and the next generation of the MMOs like EVE Online. However, the developers did not officially sanction these in-game economies. Anti-RMT (real-money trading) provisions are prevalent in most end-user license agreements. Real money components in video games may be too close to gambling, which is obviously problematic. Developers are generally reluctant to assume additional liability and risk associated with any real-money economic component.

Play-to-Earn is Hot, But Rife With Legal Pitfalls.

However, it is the end of 2022, and making money playing video games is a real and viable career choice. Esports and video game tournaments are mainstream events, with their own ESPN page, multi-million dollar teams, and celebrity-status professionals. Many colleges offer esports scholarships. Casual video game tournaments (Call of Duty, FIFA, Gran Tursimo) are also a thing. For the more casual gamer, there are also real-money skill-based games (timed solitaire, bingo, etc.) available on the web or from the App Store. Daily Fantasy Sports giants like DraftKings and FanDuel also offer skilled players an opportunity to win real money by drafting the best fantasy sports teams.

There are also a number of NFT-based collectible card games, horse racing simulators (like Zed.Run), and countless other permutations of games where players are able to own in-game assets that they can sell and trade like their real-world counterparts. This sector of the gaming economy continues to grow, as the relatively low cost of cryptocurrency makes entry a lot more accessible. Many players also see the current “bear” market as a prime opportunity to enter some of these projects at low cost and potentially see significant growth in their in-game assets as the economy rebounds.

Modern play-to-earn games are simply another variation of the real-money gaming business model. Developers in this space fully embrace the concept of a virtual economy and the ability to earn real-world compensation for game play. The most prominent example is Axie Infinity (a Pokemon-type trading, collecting, and battling game), which has integrated blockchain technology (crypto and NFTs). Investors around the world, including Mark Cuban, quickly embraced the play-to-earn gaming model. Even in the times of the “crypto winter,” Axie is still worth many millions of dollars.

Advertising and Onboarding May Require a Legal Opinion.

Any real-money gaming business (including play-to-earn) needs experienced gaming counsel to guide them through various compliance issues. Advertising a real-money game on social media and getting through Apple’s approval process on the App Store requires a legal opinion that the game is truly skill-based and not illegal gambling. Is your game structured so that they are providing a service to you in exchange for compensation? Depending on the nature of your game, you may have unintended labor law obligations and even tax filing (W-2 or 1099) obligations to the IRS and state tax authorities.

Make Sure Your Game is Not Selling Securities.

Another potential pitfall is with the Securities and Exchange Commission (“SEC”). When designing your game and reward system, you must make sure that you are not inadvertently marketing a security and violating federal law. Securities are not just traditional stocks and bonds. An “investment contract” is also a regulated security and broadly includes any scheme where individuals pay money with the expectation that their money will be invested and they will earn a return. In the cryptocurrency world, initial coin offerings (“ICOs”) face heavy SEC scrutiny, especially after several high-profile cryptocurrencies turned out to be pyramid schemes.

The “investment contract” analysis is highly specialized and requires a thorough legal opinion. Each game is different, the laws are quickly changing in this area, and regulatory agencies are especially sensitive to crypto-related businesses in light of the numerous 2022 failings, bankruptcies, and rug pulls – with FTX being only the most recent example.

Beware Tax and Other Regulations If Your Game Uses Cryptocurrency or Other Blockchain Tech.

Speaking of crypto, if you are utilizing cryptocurrencies, tokens, NFTs, or other blockchain technologies as part of your game, there are more legal issues in play. Tax reporting and tracking are essential because the IRS considers cryptocurrencies to be property subject to capital gains tax. Does the game involve any crypto staking? If so, is your company now considered a bank subject to the FDIC’s jurisdiction? Are you involved in the business of money transmission and required to be licensed in each state where you do business?

Despite the slow regulatory change in this area and continued lack of centralized regulation, this area remains in the public eye and something of continued interest to regulators.

The bottom line is whatever your game and whether you are a veteran or just starting out, an experienced gaming attorney is a necessary asset to your business team.

Contact Artaev at Law PLLC to set up your initial consultation. We are Michigan’s gaming law firm and we specialize in the unique concerns that you may encounter as a game developer.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, tax, or investment advice. Every situation is different and has its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2021 Artaev at Law PLLC. All rights reserved.

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business law gambling law gaming law internet law

How to Advertise Real-Money Skill Games on Facebook in 2022: A Legal Opinion is Necessary.

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In August 2022, Facebook updated its real-money gaming and gambling advertising application process. The updated form streamlined some of the required information and still requires a legal opinion from a law firm. Additionally, Facebook requires details about protective measures like geo-location and KYC and detailed geographic targeting information, including states or territories being targeted. Skill-based gaming that awards real-money prizes is not considered gambling in a majority of the United States – but that conclusion requires a state-by-state legal analysis, as each state’s anti-gambling laws are different. Further, the laws change frequently in response to innovations like fantasy sports, legalization of online gambling, and the latest skill-based gaming tables.

Facebook considers all types of real-money gaming “restricted” content, meaning that Facebook must expressly approve your ad before it runs. Whether it is full-scale online casino gambling, poker, fantasy sports, or pure skill prize contests, the requirements are the same:

  • Ads that promote online gambling, and gaming where anything of monetary value (including cash or digital/virtual currencies, e.g. bitcoin) is required to play and anything of monetary value forms part of the prize, are only allowed with our prior written permission. This includes games where purchases are required to continue game play and/or provide advantage in winning prizes, in cases where the prize is of monetary value. Authorized advertisers must follow all applicable laws, including targeting their ads in accordance with legal requirements. At a minimum, ads may not be targeted to people under 18 years of age.

Clicking on “Apply for Permission” takes you to the recently updated Online Real Money Gaming Onboarding Application Form. Advertisers are asked to submit their ID numbers, ad account numbers, the name of their business, and to select whether they are an “operator,” “aggregator/affiliate,” or an “agent/intermediary.”

Facebook then asks the applicant to submit the URLs they are seeking to advertise. This is a particularly important part of the review process, as the review team and Facebook’s lawyers will closely look at the website to ensure legal compliance.

Next, the applicant must select the specific “protective measures” that they implement to gate access to their product:

  • Geo-blocking (gating) of the URL
  • Age-gating of the URL
  • Address verification software or process
  • KYC checks
  • Local cell phone number
  • National tax ID number
  • Any other measures, which must be specified

Applicants are then asked to select the country or countries that they targeting. Note that Facebook’s new rules allow only the following 36 countries to be targeted:

  • Australia, Austria, Belgium, Brazil, Bulgaria, Canada, Columbia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, India, Ireland, Italy, Japan, Kenya, Mexico, Netherlands, Nigeria, Norway, Peru, Poland, Portugal, Romania, Serbia, Slovakia, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States.

Selecting a country is not enough. Applicants must then select the specific states or territories they are targeting. For example, selecting the United States requires the applicant to select the states in which they plan to advertise. Selecting some of the European or South American countries requires information about the specific type of gaming or gambling to be promoted.

The next question is “Do you require a gambling license?” If no, the advertiser is required to submit “a reasoned legal memo by a law firm attesting to the legality of the advertised gambling/gaming without a need for a license.” If you need such a legal opinion, contact Artaev at Law, as we have analyzed a number of skill-based games and have been providing “where is it legal” opinions to Facebook (and other platforms) since 2020.

What goes into a legal opinion? At a minimum, the legal opinion will set forth a legal analysis of each state’s applicable laws and regulations (including case law) that support skill-based gaming in that state. The legal opinion should also address the applicable federal statutes and explain why they do not prohibit the game in question. Also, the legal opinion needs to explain the particular game’s mechanisms, why the outcome is not determined by chance, and how the various laws apply or not apply to the game in question.

A lot depends on the specifics of your game – for example, is the game more like fantasy sports or a pure skill contest? Also, even the bigger companies in the skill-based gaming industry disagree on the states where their games are permitted. Many states are currently addressing unlicensed skill-based gaming and regulations are constantly changing. For example, Michigan recently passed comprehensive online casino legislation and in the course of enacting the sweeping gambling laws, Michigan also included licensing requirements for skill-based real-money games.

Facebook remains a powerful advertising medium. Access to that medium is not free nor easy, especially if you are advertising a “restricted” product like skill-based real-money gaming. Ultimately, Facebook and its legal teams determine what ads meet its advertising policies. To minimize the review time and increase your chances of an approval, contact the experienced gaming attorneys at Artaev at Law PLLC.

Have more questions? Do you need help getting your app through the Facebook review process? Contact Dan Artaev today by emailing dan@artaevatlaw.com.

Disclaimer: This guide is not intended to be and does not constitute legal advice. It is for informative and promotional purposes only. Do not take any action or refrain from taking any action based on this guide, and always consult with a qualified professional about the circumstances of your particular case. Each set of facts is unique and different circumstances apply to each individual business.

© 2022 Artaev at Law PLLC. All rights reserved.

Categories
business law internet law

Stablecoins 101: What Are They, How Are They Taxed, and Can I Use Them In My Business?

Cryptocurrency has significant business utility, especially in international transactions. Companies can exchange funds directly, without wiring fees or banking delays, and easily convert their native currencies into crypto and vice-versa using a mobile phone. However, traditional cryptocurrencies like Bitcoin and Ethereum are extremely volatile and their exchange values can easily fluctuate 10-20% or more in a matter of days or even hours. Market supply and demand forces determine the prices of these most popular cryptocurrencies and their value is particularly sensitive to various external factors. Events like China’s crypto clampdown, significant buys or sells by capital investors, or even Elon Musk’s tweets can crash the market or send the price of crypto soaring. Obviously, price volatility makes businesses and consumers reluctant to adopt these cryptocurrencies for day-to-day transactions. Price volatility translates into purchasing power uncertainty, which in turn devalues the currency.

Stablecoins are cryptocurrencies that try to solve the volatility problem. They do so by pegging their price to the price of another asset (such as the U.S. Dollar or an ounce of gold). For example, the USD Coin (USDC) can be acquired and sold for U.S. Dollars on a 1 to 1 ratio. USDC is actually backed by existing dollar reserves, meaning that each USDC has a real-world dollar counterpart held by regulated financial institutions. USDC reserves are also periodically verified by a third party (but not audited).

There are other stablecoins as well, for example Tether, Binance USD, TrueUSD, DAI, and more. Like USDC, some are tied 1 to 1 to U.S. Dollar reserves. Others are backed by commodities like gold, silver, or oil. The price of a commodity-backed stablecoin is tied to the market price of a commodity unit, like an ounce of gold. There are also stablecoins that attempt stability through overcollateralization using other cryptocurrencies. Finally, there are algorithmic stablecoins that automatically adjust the cryptcurrency’s supply to keep its market price within certain parameters.

Stablecoins are however still cryptocurrency. Even if the stablecoin has a pegged 1 to 1 exchange ratio with the U.S. Dollar, it is not the same as cash. For tax and regulatory purposes, the IRS treats all cryptocurrency as intangible property subject to capital gains tax. They may be subject to separate state-level regulation as well.

Paying for goods and services in stablecoin is a taxable event because the IRS treats it like a sale or exchange of an asset, which is subject to capital gains tax. Technically, if the stablecoin is pegged to the dollar at a 1 to 1 ratio, the capital gain is 0 and there is no tax owed. But the transaction must still be recorded and reported, just like if you were buying and selling a stock at zero net gain/loss. Otherwise, you risk attracting an IRS audit to determine whether you underreprted taxable income. Buying stablecoin for cash and holding it is a non-taxable event.

Receiving stablecoin in exchange for goods and services is a taxable event. It is not much different than receiving payment in fiat currency, which is income subject to tax. The fair market value of the cryptocurrency as of the date of receipt determines its value for income reporting purposes. With stablecoin, it is easy to calculate because of the 1 to 1 ratio. Receiving 500 USDC is the equivalent of receiving $500 cash. However, spending the 500 USDC is not the same as spending $500 cash – rather, the transaction is considered a liquidation of property (subject to capital gains). Again, if the value of the stablecoin is pegged to the dollar, you are not going to have capital gains. But you must still keep records and record the transaction. If you are using a stablecoin that is pegged to an asset like gold, its price will fluctuate and you may record a capital gain or loss.

Converting other cryptocurrencies into stablecoin and vice-versa is also a taxable event. The sale of the crypto is an asset disposition that is subject to capital gains tax even if the transaction is an exchange of one currency to another. Similarly, using stablecoin to purchase other cryptocurrencies is a sale of the stablecoin that must be reported as income, even if the the capital gain is $0.

Stablecoins are still risky and unregulated. Not all stablecoins are created equal and it is a mistake to think that “stablecoin” means there is no risk involved. The LUNA/TERRA debacle is a good example because TERRA was supposedly a “stablecoin” pegged 1 to 1 to the U.S. dollar, yet it was pegged algorithmically (meaning artificially without any actual assets or fiat currencies backing it). An algorithm that no one really understands is not the same backing as fiat in a vault or money market securities or corporate bonds or commodities portfolios. The bottom line is that without a uniform definition of “stablecoin,” users should at a minimum know what “stabilizes” the value of the purported “stablecoin.”

There are other hurdles to using stablecoins in day-to-day business operations. As cryptocurrency, they are still subject to government regulation. For instance, it is illegal under federal labor law to pay workers in anything other than U.S. Dollars. On the international scene, China recently tightened anti-crypto regulations, prohibiting financial institutions from providing crypto exchange services, which presumably includes stablecoins. At the same time, China is rolling out its “digital yuan,” which is a sovereign-backed virtual currency. United States regulators have also expressed interest in the “digital dollar,” in part to improve financial services access to unbanked or underbanked communities. Additionally, all cryptocurrency transactions are still subject to exchange fees imposed by the intermediaries, and there may be delays or additional processing costs associated with converting stablecoin into fiat currency. Widespread adoption by merchants and the public is a must for stablecoins to develop practical utility – but right now, holding a wallet full of stablecoin is not the most practical or liquid solution for most businesses. Nor does a 1 to 1 dollar stablecoin provide any investment upside and in fact periodically loses value due to inflation.

Finally, there are at least 36 different stablecoins available for purchase via most popular exchanges. It is unknown which stablecoin (if any) will enjoy widespread adoption and popularity sufficient to result in real utility for businesses. Further, stablecoins are not truly decentralized because a central entity is holding the collateral, which in turn must be audited or otherwise verified. If a holding entity starts issuing stablecoins that are not actually collateralized, this would cause hyperinflation and essentially render the stablecoin worthless.

Stablecoin certainly holds a lot of promise for business use, but only solves the problem of volatility. Reduced volatility comes at a cost of a centralized authority and reintroduces trust into the cryptocurrency equation. At the same time, sovereign-issued digital currencies are on the horizon and may very well dispel the need for and demand for stablecoin.

Want to know more? Contact Dan Artaev by email or call or text to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, investment, or tax advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2021 Artaev at Law PLLC. All rights reserved.

Categories
intellectual property internet law

NFTs: Investing in Virtual Real Estate and Other Digital Assets.

Disclaimer: This article is not investment advice, tax advice, or legal advice. It is for informational and promotional purposes only. Do not take any action (including investments) until you have consulted with a professional about your specific situation.

I have previously written about investing in cryptocurrencies through a self-directed retirement portfolio and about using them in day-to-day business transactions. There is no doubt that crypto and blockchain technology is here to stay. As evidence of this, the U.S. government will increase reporting of and tax enforcement for cryptocurrency transactions, which are currently treated like property for tax purposes, but not the same as stocks or securities. Increasing regulation and taxation certainly indicate how much the technology is being used and adopted across the world.

What about NFTs or non-fungible tokens? There was a lot of buzz in early 2021 about NFTs after Christie’s auctioned off a digital-only artwork for $69 million and suddenly everyone from Nike, to Hasbro, to Cervelo (a racing bike manufacturer) was selling digital-only versions of their collectibles or attaching NFTs to physical world assets. The hype has since subsided, at least from the mainstream media sources. However, spend enough time on the various social media platforms, and NFT proponents (sellers) will be quick to offer “virtual estates,” “one-of-kind avatars,” “priceless digital art,” and various other exotic and futuristic-sounding assets. Often, you will be directed to an auction site where you will have to place bids on the NFT, sometimes even using a native cryptocurrency or token like MANA or SAND.

Suppose you got caught up one night, cashed out your 401k, and bought $100,000 worth of NFTs – a virtual castle in Decentraland, some art tapestries to decorate, and a digital collection of Luka Doncic basketball cards. The next morning at breakfast you have to explain to your spouse – NFTs? WTF did you just buy? Read on.

  1. NFTs as personal or business investments.

Before investing in anything, it is generally a good idea to understand exactly what you are buying. NFTs are digital representations of unique items based on the Ethereum blockchain. When you buy an NFT, you basically just bought computer code. The simplest description of blockchain is that it is a decentralized public ledger or database. Data is entered into a block – in the case of an NFT, it is specific code that signifies the “object” and its owner – and then that data becomes part of the public ledger that is replicated and stored across a vast, decentralized computer network. An NFT can have a real world counterpart, but it does not have to. As will be discussed below, an NFT can be sold together with or separate from the work’s copyright. The “non-fungible” aspect of the token means it is unique and not interchangeable with other items. Traditional fiat currency is inherently fungible because a dollar bill is interchangeable with other dollar bills. Cryptocurrency is also fungible – one Bitcoin is the same as another and has the same value. On the other hand, an original Monet, your grandmother’s jewelry, or even a pair of Nike shoes are all non-fungible because they are unique.

One big difference between NFTs and cryptocurrency is liquidity. One of the reasons why crypto is so popular right now is accessibility. Exchanges like Coinbase make it easy for anyone to buy and sell cryptocurrency right from their phone, while keeping records, and facilitating exchange of almost any cryptocurrency. Whether you want to cash out into fiat dollars to cash out or exchange cryptocurrencies for other cryptocurrencies, you can do it on your phone or computer in a very simple and quick process. NFTs are not as liquid – to sell one you have to find a willing buyer and negotiate a price. For example, OpenSea is a large marketplace for NFTs, allowing listings at auction, fixed price, or declining price settings. The market determines the price of NFTs, meaning supply and demand. In the NFT market, there may be only a couple of willing buyer and sellers, which is quite different from the millions who buy and sell cryptocurrencies every day. Also, tthe Securities and Exchange Commission does not regulate NFTs or most cryptocurrencies at this time. While a company selling stock or bonds on the open market must follow filing and disclosure requirements to ensure a transparent public offering, crypto and NFTs offerors do not. Proceed with caution.

2. What are the legal implications of this “wild west” of NFTs?

NFT investors face two areas of legal issues: copyright law and tax law. Copyright law protects the creator’s rights in computer code, as well as art, music, and other creative works. Tax law is involved whenever you buy, sell, or invest in anything.

A. Copyright.

NFT ownership is not copyright ownership.

When buying or investing in an NFT, it is absolutely essential to understand what it is you are buying – in other word, what “bundle of rights” are you getting in exchange for your cash? In the physical world, when you buy an asset like a painting or a car, you are at least getting the physical thing. In the all-digital world of NFTs, it gets a little bit complex.

Under U.S. copyright law, the creator of art, music, movie, or other creative work owns the copyright, which attaches at the moment of creation. Transferring the physical object alone does not necessarily transfer the copyright with it – a written agreement transferring copyright is required to separate the creator from the copyright. In other words, the physical work and the copyright to that work are distinct and separate. NFTs are no different – the fact that the work is digital or consists of computer code does not matter. There is still the ownership of the original work (piece of code) and the copyright to that work. Do not assume that you are buying the copyright to the NFT when you purchase it on an online auction site unless there is a specific agreement to assign the copyright to the buyer.

If you bought an NFT without the copyright, you essentially bought a unique piece of computer code that you cannot display, duplicate, or republish without the original creator’s permission. You need the copyright to reproduce, copy, license, and otherwise do pretty much anything with the NFT. Creating derivative works based on the NFT likewise requires the copyright. In short, know what you are actually buying, as copyright gets particularly complex in the digital world. An attorney may be needed to review the agreements, especially if the transaction involves a substantial sum of money.

B. Tax.

The IRS issued guidance as far back as 2014 that cryptocurrency is taxed like property and subject to capital gains tax. But there has been no guidance on taxing NFTs. Because NFTs and cryptocurrency rely on the same underlying blockchain technology, it is likely that NFTs will also be taxed like property and subject to capital gains tax. That means if you buy an NFT for U.S. Dollars, you do not pay tax on that transaction (unless a state decides to enact a sales tax on digital assets). But when you sell that NFT in exchange for cash or cryptocurrency, or trade it for another NFT, you have a taxable event. Any “gain” will be treated as reportable taxable income.

It can get especially complex if you involve cryptocurrency in the transaction. Some NFTs can only be purchased in exchange for a specific token – for example, virtual real estate in Decentraland can be purchased only for MANA tokens, which are an Ethereum token. The price of the MANA token fluctuates, just like the price of BTC or ETH or DOGE. If you pay cash for MANA, that transaction is not taxable. But then when you exchange MANA for an NFT, you are “selling” the MANA, taking a capital gain or loss, and then acquiring the NFT at the market price, which establishes the NFT’s cost basis for future transactions. When you sell the NFT for cash, you have a capital gain based on the difference between the cost basis and the sale price. But if you trade the NFT for another NFT or for Bitcoin, you again have a double tax event because you are selling “property” (subject to capital gain at the time of exchange) and acquiring “property” (subject to capital gains at the time of subsequent sale or exchange) at the same time. This is why good record keeping is an absolute must and is especially critical if you are engaging in a large number of transactions.

All of this assumes that NFTs will be taxed like cryptocurrency. But it is possible that NFTs will be taxed differently based on what the NFT represents. Will the sale of digital land be treated as a sale of physical real estate? All of a sudden state transfer taxes may come into play. Will the sale of digital art or collectibles be treated the same as physical art of collectibles and subject to special tax rates? There are many unanswered questions at this time, but as the IRS zeroes in on crypto and blockchain assets as sources of tax revenue, there will certainly be regulation and litigation on this subject.

3. Future applications for NFTs beyond collectibles and investments.

One of the most fascinating things about NFTs and blockchain tech in general is unlimited potential. The decentralization and immutability aspects are extremely potent in a number of applications. For example, in the business setting, smart contracts that automatically enforce performance and payment can eliminate many costs and inefficiencies related to international trade. Escrow accounts and associated fees may very well be a thing of the past. If performance under a contract can be reduced to code and automated, costly contract disputes can be avoided.

Blockchain can also be used in software licenses as well as licenses for other intellectual property. Concert or other event tickets are another application. Corporate governance and shareholder meetings can be accomplished through blockchain – for example, a corporation could issue a token for each share and then ask its shareholders to vote by transferring the voting tokens to a specific address. The transparency and security of the blockchain are especially valuable in this context. Some commentators have even suggested blockchain as a way to secure and democratize political elections. With a publicly-verified chain, election fraud would virtually be eliminated and election results would become indisputable.

Whatever the future holds, blockchain is exciting technology. As with all emerging technologies, the law is an a state of flux. Government regulators are playing catch up to address the application of existing law to new tech and to propagate new laws to address emerging problems. If you are investing in NFTs or using blockchain in your business, contact an experienced attorney to answer your questions and ensure that you are being proactive with your regulatory and tax obligations.

Contact Dan Artaev by email or call or text to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, investment, or tax advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2021 Artaev at Law PLLC. All rights reserved.

Categories
business law internet law

Ask the Crypto Tax Lawyer: Is Staking Income Taxable?

Yes, staking income – just like most other types of income – is taxable. However, the question is when? When you receive the staking reward? Or only when you sell or exchange the newly- obtained tokens? Under the first, more conservative approach, the token is actually taxed twice – once as ordinary income at the time of receipt and the second time at the capital gains tax rate when it is sold or exchanged. Under the second, more aggressive approach, the token is not taxed upon receipt and not subject to tax until it is sold or exchanged. The second approach also allows token holders to take advantage of more favorable long-term capital gains tax rates by holding the staking rewards longer than a year.

How is Staking Different From Interest?

What is staking? It is an arrangement to “lock up” or “stake” a portion of an owner’s crypto tokens in a staking pool in return for additional cryptocurrency over time. The return is often expressed as a percentage. This makes staking seem very similar to an interest rate paid on a certificate of deposit or savings account. Indeed, on Coinbase, staking rewards are expressed in terms of an APY (annual percentage yield) and the term “interest earned” is used synonymously with staking. Unlike proof-of-work mining, which validates new transactions through solving complex algorithms, staking is more energy efficient and environmentally-friendly. Staking allows network participants to nominate their coins to be used as validators and to guarantee the legitimacy of new transactions on the blockchain. In return for validating a new block, the owner receives new tokens; if the transactions validated are later found to be illegitimate, the validator may lose tokens through a process called “slashing.”

Although it may seem like interest income, staking income may not be taxed the same way. The IRS has not taken a definitive position on this question even as the deadline to file 2021 taxes approaches. One of the reasons may be because of pending litigation in Jarrett v. IRS. In 2019, Josh and Jessica Jarrett sued the IRS for a refund on taxes paid on staking income, arguing that cryptocurrency received for staking should not be. Recently, the IRS appeared to concede that staking income is not taxable at inception and agreed to issue the Jarretts a refund. However, the taxpayers rejected the IRS’s offer – instead, opting to push the Tax Court to make a definitive ruling on the issue and create binding precedent. In response, the IRS has asked the Tax Court to dismiss the case in light of the plaintiffs having obtained full relief and the absence of a “case or controversy” for the Tax Court to decide.

The Conservative Approach – Staking Rewards Are Taxed Twice

Intuitively, it may seem that income from staking should be treated the same as interest/dividend income from a savings account, which is incurred when the bank pays it out. In the crypto context, the IRS has taken a position since 2014 that with mining, the fair market value of the virtual currency as of the date of receipt is includible in gross income. Arguably, staking income is sufficiently similar to interest earned or mining to be treated the same. Depending on the terms of the staking arrangement or agreement, the cryptocurrency or token contributed is restricted much in the same way that cash in a certificate of deposit is locked in until maturity.

The Aggressive Approach – Staking Rewards Are Only Taxed When Sold or Exchanged

However, the counter-argument (and the taxpayer’s position in the Jarrett case) is that the tokens received as a staking reward have no value until they are sold or exchanged. In that sense, they are like manufactured product that may have value when created, but is not taxed until it is sold. The product has a market value when created, but the IRS does not impose a tax on it at the time of creation.

Further, fiat currency has tangible value when received – an interest payment of $25 has worth and buying power at the time of receipt. It does not need to be sold or exchanged to have value. Conversely, 100 Tezos tokens (at issue in the Jarrett case) have no buying power or value until and unless they are exchanged into fiat, traded for another currency, or used to pay for services. Yes, if you pay for services with cryptocurrency, you are taxed on any difference between the basis and the fair market value of services received. According to the IRS, if you buy 100 Tezos for $1 (a basis of $100) and then exchange those same 100 Tezos for $300 worth of legal services, you just realized a $200 taxable gain. Proponents of the more aggressive Jarrett approach argue that cryptocurrency or tokens received as staking rewards are more analogous to a manufactured product than fiat currency interest or dividends.

The Issue Remains Unsettled

To complicate the issue further, the IRS’s offer to refund the Jarretts’ tax and settle the litigation seems like a tacit endorsement of the second, more aggressive approach. Arguably, the IRS is conceding the issue and admitting staking income is only subject to income tax when sold or exchanged. However, this position is directly at odds with the IRS’s guidance on tokens received from mining. The IRS’s Notice 2014-21 on virtual currency taxation states that “when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.”

While the issue remains unresolved, taxpayers should consult with their legal and financial advisors on the correct approach for them. The conservative approach risks including too much in your gross income. The aggressive approach risks underpayment penalties in the future if the IRS does issue guidance and takes the same position on staking as it has on mining. But in any case, keep an eye on the Jarrett case, as the Tax Court may rule on this very question in the near future.


Contact Dan Artaev by email or call or text to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, investment, or tax advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2022 Artaev at Law PLLC. All rights reserved.

Categories
business law gaming law intellectual property internet law trademarks

Do I need a Metaverse Trademark?

Luxury goods company Gucci recently bought a plot of LAND in the Sandbox Game, an Ethereum-based play-to-earn game. This LAND is a virtual real estate plot (in the form of an NFT or non-fungible token) where Gucci plans to sell in-game clothing and collectibles. As futuristic as this seems, Gucci is not the only major company looking to get into the Web3.0 space. Walmart, McDonalds, Panera, Victoria’s Secret, Nike, and L’Oréal are just a few of the big players that recently filed trademarks specifically to protect their intellectual property in the Metaverse.

Nike has become particularly active. The company created a Nikeland experience in the popular Roblox game world (along with companies like Vans, Chipotle, and Hyundai, which also have staked out territory on Roblox). Nike also recently acquired RTFKT, a studio that specializes in NFT development and in January 2022, Nike announced the formation of Nike Digital Studios to create and deliver Metaverse and blockchain-based user experiences. Additionally, Nike has filed for dozens of trademarks to protect its virtual brand, including the use of its name and logo in online art, virtual goods, video games, and avatars. With a multi-billion dollar company like Nike trademarking dozens of its NFTs, many game developers, NFT collectors, traders, crypto bros, and others wonder whether they, too, should file for trademark protection within the Metaverse for their brand.

Do Gaming Developers Need Trademark Protection?

Absolutely. Games, gaming, and software in general are highly-competitive industries. Unfortunately, there is not much stopping a third party from copying your design and profiting off of it. This can create – not only marketplace confusion – but irreparable damage and dilution of your valuable brand. This can happen to companies big and small. Additionally, if you fail to trademark your game, brand, logo, catchphrase, etc., your competitor can come in, copy your brand, and then accuse you of violating their rights. While it is possible to file for retroactive trademark protection and win eventually, the easiest (and cheapest) protection is filing a trademark right away.

Do I Need to Trademark my NFT?

Yes. It is essential for you to trademark your NFT in order to protect it from copycats. The United States is a first-to-use country, which means your NFT will already have some automatic protections after minting. However, it would be very tough protecting your unregistered “common law” trademark in the worldwide NFT marketplace. Additionally, it would be very difficult to defend an unregistered NFT trademark in any sort of legal dispute should a third party copy your idea. Filing a trademark with the USPTO ensures validity and protection within all fifty states.

Trademarking your NFT creates a brand identity that is uniquely yours. Trademarking a unique slogan, logo, or design can be a valuable marketing tool for you going forward and add tremendous value to your project. After all, intellectual property rights are what you actually own when it comes to non-physical property like NFTs (and software or computer code in general).

Copyright is another important intellectual property right for NFT owners, users, buyers, and sellers. For example, it is critical to ask what rights you are actually buying when purchasing an NFT? Is there an agreement to transfer the copyright? A license? Nothing at all? Lack of clarity in the NFT transfer process can and will lead to litigation, more so as NFTs become more and more widespread.

How Do I Protect my NFT Internationally?

You can protect your NFT internationally, provided that you also apply for international registration during your initial trademark filing. Under the Madrid Protocol (which is an international treaty for the uniform protection and registration of trademarks), a registration through the USPTO can also be registered in other countries with a single application.

What is a benefit of international registration? International registration allows you to use a foreign country’s laws and judicial resources to enforce your mark in that country. A USPTO registration still allows enforcement through a U.S. based court, even if the infringer is in a foreign country. However, even if you prevail, you might not be able to enforce the U.S. court’s judgment abroad. An international trademark registration opens up a number of other enforcement options. If you are interested in international trademark registration, this is something to discuss at your initial consultation.

What Types of Things Should I Trademark?

Here is a non-exhaustive list of items that could potentially qualify for trademark protection:

  • Avatars
  • Logos
  • Game Name or Gaming Development Company’s Name
  • NFTs
  • Virtual Goods (avatar skins, digital art, etc.)
  • Color Schemes
  • Particular Sounds (The coin grab ding from the classic Mario Brothers game comes to mind here.)
  • Slogans

What Cannot be Trademarked?

The United States Patent and Trademark Office (USPTO) has a set of guidelines that lists some of the following reasons for trademark rejection:

  • Likelihood of Confusion – If you create a game called GranD Turismo 7, you could not trademark that name because people could confuse it with Gran Turismo 7, the newest addition to PlayStation’s highest selling video game franchise. Sony owns the trademark to protect against competitors who seek to profit off of its name recognition by creating a similarly named game. Thus, you cannot trademark GranD Turismo 7.
  • Merely Descriptive and/or Intentionally Misleading – For example, you can’t trademark the words “fun and entertaining.” Even though your game is both fun and entertaining, these only describe the game itself and don’t necessarily make your game unique, so you can’t trademark them. Likewise, the USPTO will reject your trademark if it is intentionally misleading. For example, if your game’s name is “Play with Cryptocurrency,” but the game does not play with cryptocurrency, the USPTO reviewer could consider this game name intentionally misleading and deny your trademark.
  • Primarily a Surname – For example, Smith’s Play-to-Earn Game is primarily a last name (and merely descriptive) would not be suitable for a trademark.

How do I file a trademark for my game or NFT?

Whether you’re filing a trademark for an NFT, a digital avatar, a slogan, or your business name, Artaev at Law has the professional expertise to help you do it right. Artaev at Law, together with the specialized trademark attorneys at Mighty Marks, now offers a fixed fee, all-inclusive trademark service. Contact Dan Artaev at dan@artaevatlaw.com for additional information.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, investment, or tax advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional. Any link to or reference to any specific project is not an endorsement of or validation of that project and is for solely informational purposes.

Categories
business law internet law

Ask the Crypto Tax Lawyer: What’s New for ’22?

2022 is a marquee year for anyone who took got involved in cryptocurrency during the 2021 market boom. The start of the new year means the start of tax preparation season and many individuals and companies are working to understand the tax treatment and implications of digital asset investments. In 2021, the IRS and the Department of Treasury announced increased efforts to track cryptocurrency transactions and enforce the perceived underpayment of tax in the crypto world. However, the government’s guidance has been limited. There are many uncertainties and questions in this evolving area of law. Read on for a summary of the key issues:

Cryptocurrencies Are Taxed As Property Subject to the Capital Gains Tax.

In the ever-changing world of crypto, one thing has stayed the same (since at least 2014): Cryptocurrency is property subject to the capital gains tax. In its FAQ guidelines, the IRS addresses a number of situations (such a hard forks and airdrops) to explain its position on basis and gain/loss calculation. If you received, sold, exchanged, or otherwise disposed of “any financial interest in any virtual currency,” the IRS requires you to disclose this on the first page of the 1040. If you check “yes,” expect to file a 1040 Schedule D (“Capital Gains and Losses”) and an 8949 supplement.

What does this mean in practice?

  • If you bought cryptocurrency in 2021 for cash and are holding it (or HODLING), there is no transaction subject to capital gains and nothing to report.
  • If you sold cryptocurrency for cash, traded crypto for another crypto, used crypto to buy an NFT, or paid someone for goods or services using crypto, you have a reportable capital gains transaction. The “gain” is the difference between the initial value (basis) and the sale value. If the period between acquisition and sale is less than a year, the short-term rate applies, which treats the gain as ordinary income. If the period is more than a year, the long-term rate applies and is either 0%, 15%, or 20% depending on your annual income level.
  • Exchanging crypto for other crypto (for example, you exchange BTC for ETH) is also subject to capital gains tax. The IRS treats the exchange as if you sold BTC for cash and used that cash to buy ETH. That means that any “gain” you realize on the sale of BTC is reportable and taxable, even if you use 100% of your proceeds to buy another cryptocurrency.
  • If you use crypto to buy an NFT or pay for some other goods or services, the IRS treats the transaction as if you sold the crypto for cash (incurring a capital gain) and then used the cash to buy the NFT or pay for the other goods/services.
  • What if my corporation or LLCs bought, sold, or exchanged virtual currency or digital assets? There is no guidance to suggest that business entities are treated any different. Record and report crypto and other digital asset transactions like you would physical property or assets.
  • Best practice remains to record all of your cryptocurrency transactions in a spreadsheet or accounting software, including the type of asset, the basis price, the date, and any gain/loss (as well as transaction fees). Alternatively, bigger exchanges like Coinbase make reports available to their customers and integrate with several popular crypto tax reporting platforms.

The IRS Has Not Issued Guidance on Taxing NFTs, Utility Tokens, Security Tokens, or Any Other Types of Digital Assets.

What about NFTs? Or utility tokens that you may have bought and sold as part of a play-to-earn game? Or security tokens (STOs) that becoming a corporate financing alternative for high-tech startups? The IRS has not issued guidance or taken a position on any of these particular instruments. In its FAQ, the IRS defines “virtual currency” as follows:

 Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange.  Some virtual currencies are convertible, which means that they have an equivalent value in real currency or act as a substitute for real currency.  The IRS uses the term “virtual currency” in these FAQs to describe the various types of convertible virtual currency that are used as a medium of exchange, such as digital currency and cryptocurrency.   Regardless of the label applied, if a particular asset has the characteristics of virtual currency, it will be treated as virtual currency for Federal income tax purposes. 

https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions

Although this definition gives some guidance on the IRS’s position, it is still not clear whether NFTs and non-cryptocurrency tokens are “virtual currency.” For instance, NFTs (non-fungible tokens), represent a wide range of things. They can be art or basketball trading cards, but also can be virtual metaverse real estate or video game magical items. Some commentators have suggested that NFTs will be taxed at the 28% “collectibles” tax rate – but that hypothesis presupposes that all NFTs are “collectibles,” which is simply not true for all NFTs. At the same time, the IRS’s definition of “virtual currency” appears to require the asset to be used as a “medium of exchange,” which is also not true of all NFTs. At this time, the NFT tax analysis is best done on a case-by-case basis, with a careful evaluation of what the NFT represents and how the real-world equivalent would be taxed.

Utility tokens are digital tokens that have non-investment uses (or utility) and fall outside of the federal definition of “security.” Play-to-earn video games (like Axie Infinity and its imitators) use native digital tokens for in-game currency and rewards, but the tokens can also be bought and sold on a secondary market. These tokens are more in line with the IRS’s “virtual currency” definition – and while the IRS has not expressly opined that utility tokens are property subject to capital gains tax, they most likely are. In other words, keep records and be prepared to report your sales and exchanges at tax time.

Security tokens (security token offerings are called STOs) are the digital equivalent of traditional corporate financing instruments like SAFE notes or seed round equity. However, the IRS does not consider STOs (or any other tokens) as stock or securities, even if the Securities and Exchange Commission (“SEC”) does. In other words, you sell or buy a security token, you must do so either as a registered security or one that meets an exemption (for example under Regulation A+, D, or S). However, neither the investor nor the selling company gets to claim any sort of tax benefit from the “security” token – because the IRS likely treats it as property and not securities. This means that when you invest in a security token (even one that is registered with the IRS), the tax breaks or advantages that apply to the purchase and sale of stock do not apply.

The Wash Sale Rule Still Does Not Apply to Cryptocurrency, But Might Apply Next Year.

There is a silver lining to the fact that cryptocurrency (or other tokens) are not considered “securities” for the purposes of tax law. The wash sale rule does not apply to crypto and allows for loss harvesting to offset capital gains (and even up to $3,000 of ordinary income.) For example, right now crypto markets are down from their highs and many investors may be showing a loss. If you sell at a loss and buy the asset back immediately, you can claim the “loss” on the sale on your taxes. The wash sale rule – which is applicable to securities – requires a 30 days period before repurchasing the same or substantially the same security.

Congress is aware of and is working on closing this so-called “loophole,” but right now the wash sale rule likely does not apply. It is unclear whether you will be able to claim a loss on 2022 returns if you sell at a loss in 2022, but as of the date of this article, crypto investors can still take advantage of loss harvesting opportunities.

The 2021 Infrastructure Bill Has Not Killed Cryptocurrency.

In the summer and fall of 2021, there was a lot of concern in the cryptocurrency community over certain reporting requirements that Congress wanted to impose on cryptocurrency market participants. Although much of the “hype” was overblown, the main issues were with the new reporting requirements, the definition of “broker,” and how the reporting requirements would affect miners and other participants who are not in the direct sales business.

President Biden signed the Infrastructure Investment and Jobs Act on November 15, 2021, and needless to say, the U.S. cryptocurrency markets are very much alive and functioning. The Act extended the $10,000 cash reporting requirements to “digital assets” transactions, meaning that businesses that receive more than $10,000 in cryptocurrency have to file a Form 8300 with the IRS. The form requires the disclosure of the payor and payee’s name, address, Tax ID, and other information.

The new reporting requirement will not take effect until 2024. By then, expect the IRS and the Treasury Department to develop regulations and provide guidance to market participants, so stay tuned for future developments in this area. It is likely that the scope of the regulations will be limited, as $10,000+ crypto and NFT transactions are much more common than cash transactions, and (unlike cash) also may take place without the parties ever even seeing each other or meeting.

Additional regulation of digital assets in the U.S. is to be expected given their popularity and increasingly prominent role in the economy. However, the U.S. is not about to “outlaw” cryptocurrency, NFTs, token, or any other digital assets. The blockchain tech market is alive and well, but with better defined taxation and regulation may even become more mainstream.

The bottom line is that cryptocurrency markets and derivative digital assets are here to stay. Regulation is constantly evolving and there are many uncertainties for investors and companies working in this emerging market in 2022. Professional legal guidance is always a good idea.

Want to know more? Contact Dan Artaev by email or call or text to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, investment, or tax advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

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