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DePIN Networks and Utility Tokens: Legal Considerations for the Physical Applications of Blockchain Technology.

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Imagine creating a product that sells data, such as a mapping or telecommunications service. These are capital-intensive businesses with immense startup costs. Barriers to entry may seem insurmountable – after all, if you wanted to compete with Verizon or AT&T, the cost and availability of cell phone towers alone would be cost-prohibitive. Same with competing against Google Maps or Apple. It is essentially impossible for a startup to compete with companies that are effectively public utilities.

How is DePIN useful and what are some examples?

Enter decentralization. While currently associated with largely speculative financial transactions and niche non-fungible token (NFT) projects, decentralized/permissionless networks have great potential to expand beyond the merely virtual and into the physical space. The Helium communications network and Hivemapper’s mapping data services are just two great examples. Helium crowdsources its network by leasing physical space to install its smaller, lower-powered antennae. Instead of 400-foot massive, high-watt cell towers, the network runs on hundreds or even thousands of densely distributed smaller transmitters. Helium’s own cryptocurrency (HNT) comes in as a rewards system – for installing an antenna, passing proof of service tests, and increased use of the particular location, the landlord earns Helium tokens (HNT) (or associated IOT or MOBILE tokens), which can then be sold or exchanged on the open market. Locations that are used more frequently earn more tokens, incentivizing the optimal location and operation through economics principles.

Hivemapper works in a similar manner, but with road mapping. Hivemapper sells its proprietary dashcams, which users can buy, install, and use to collect data from their vehicles, which is then uploaded in exchange for HONEY tokens. Like HNT, HONEY can be sold or traded on an exchange. The benefit to Hivemapper is that it essentially collects data in exchange for self-created tokens and sells dashcamps on top. Hivemapper does not invest in significant infrastructure, like Google’s mapping cars or their specialized cameras. Hivemapper instead recruits – and decentralizes – the process for collecting road data that would otherwise be cost prohibitive. As an additional efficiency, this results in more up-to-date road data, as it is collected from more sources than a single Google Maps car that drives through a particular route on an infrequent basis.

This application (and benefits) of decentralization and crowdsourcing to data collection and aggregation, as well as other physical applications are significant. For example, a company could use a decentralized token incentive structure to collect environmental or weather data, which then could be sold to private parties for development purposes, aid in agriculture, and otherwise create significant inexpensive, up-to-date data aggregation. Social science applications abound, as a company could incentivize information gathering and consensus-based verification with a properly-designed token system.

DePIN must still comply with existing physical and financial regulations.

While novel, DePINs must still fit into the existing physical and financial regulatory schemes. For example, Helium’s network must comport with FCC standards on communications devices, radio frequencies, transmission power, and other administrative matters. Further, the fact that companies like Hivemapper and Helium essentially create their own currency, must also fit into existing securities and money transmission laws, both on a federal and state-by-state level. Companies cannot simply raise funds through initial coin offerings and bypass normal securities regulations. If selling tokens, companies must engage in Security Token Offerings (or STOs), which are conducted similar to private placements and disclosed on Form D with the Securities and Exchange Commission. Otherwise, companies may structure their tokens as “utility” tokens, which means that consumption (and not investment or speculation) must be the primary motivation for the purchase. For instance, if users who earned the HONEY token could consume that token and use it to pay for a Hivemapper premium subscription (giving themselves access to premium map and road condition content for example), the HONEY token would likely be classified as a “utility” token and not fall into the “investment contract” designation under the Howey test.

How do utility tokens fit into the DePIN economy?

A “utility” token with non-investment or consumptive utility is essential to a DePIN ecosystem. However, this is also problematic, as essentially the company must not only pay out a token like HNT in exchange for data and bandwidth, but also accept HNT as payment for tangible services. From a company perspective, the tangible services cost fiat dollars – capital and labor cannot be purchased for a manufactured token. Further, the price of a token like HNT is hardly stable. HNT currently trades at about $6.60 to HNT. In November 2021, HNT traded for over $50 per HNT. Unstable token prices limit the consumptive use of cryptocurrencies and tokens, making them more suitable for long-term holding or short-term speculation. Further, it is tempting for a startup to simply issue tokens to raise capital – under the guise of a future consumptive use or simply the “this will go up in value as we expand” argument. This reality defeats the non-investment utility argument and renders tokens susceptible to classification as unregistered securities.

Companies have attempted to address these issues through use of associated tokens (IOT and MOBILE are directly earned by Helium network or hotspot hosts, the burn-and-mint protocol, use of “data credits” or “map credits,” and various fees. For example, Filecoin, a decentralized file handling platform, collects base fees for storage deals, batch fees for adding storage capacity, overestimation fees that related to optimized gas usage (gas being the cost of transacting the cryptocurrency), and penalty fees collected from those who do not provide storage as promised. Those who want to store data using Filecoin pay fees in FIL. FIL is also the reward paid out to those who provide storage or retrieval services on the Filecoin network.

What are specific legal challenges facing DePIN projects?

While innovative, DePIN businesses face an uncertain regulatory landscape, particularly in the United States. At a minimum, a business considering DePIN should consider the following:

  1. Physical regulatory considerations – are there zoning laws, telecommunications regulations, licensing requirements, or other physical considerations that affect my business?
  2. Legal liability – what are my obligations to the persons who contribute to my network or project? Are they contractors or employees? Are there any insurance or liability risks that I need to cover through contracts or terms of use?
  3. Financial legality – is my token really a “utility” token for consumptive non-investment use? How is my token created? How is it used? Is that use supportable under the current regulatory framework and the Howey test?

Some commentators predict that DePIN will be the next big thing in crypto and lead to mass adoption of decentralized blockchains in day-to-day business and life. The benefits are easy to see: lower costs, greater accessibility, crowdsourced reliability, security. However, there are also many complex legal regulatory considerations. Contact the experienced attorneys at Artaev at Law PLLC for a consultation about your next big project.

Disclaimer: This article 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.

© 2024 Artaev at Law PLLC. All rights reserved.

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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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Are NFT Collectible Card Games Legal in the United States?

NFT collectible card games are generally legal within the United States, provided that developers and players comply with several key laws. Specifically, these games implicate securities regulations, anti-gambling laws, and tax issues. NFT collectible card games are a natural Web 3.0 extension of over-the-board card games like Magic: The Gathering and have drawn a lot of attention, including from Reddit co-founder Alex Ohanian. These games leverage Non-Fungible Tokens (NFTs) to create scarce and valuable digital cards that players can collect, trade, and use in gameplay. The idea is similar to play-to-earn games that attach real-world value to in-game digital assets. While lucrative from a business standpoint and fun to play, these games create potential legal issues for both players and developers alike.

Gameplay

Before analyzing where NFT collectible card games fit within a legal framework, one must first understand the games themselves. The basic concept is that players purchase or otherwise acquire packs of random cards (with preset rarity distributions) that can be used to play a board/table-top game and also have collector and secondary market value. NFT or “digital” collectible card games are based on the same concept – players purchase or “mint” a pack of cards that they can use to play a game, collect for their own enjoyment, or trade or sell on the secondary market. Of course, the NFT cards do not have a physical component and exist only on the particular blockchain. Integrating NFTs ensures immutable value to these assets, same as physical cards in the old-school table-top games.

Here is a brief overview of a few of the most popular NFT collectible card games:

  1. Gods Unchained

Theme: Gods Unchained is a strategic card game set in a mythological universe. Players become powerful gods battling for supremacy.

Rules: Players start by choosing a god, each with its unique powers and abilities. Next, they build a deck of 30 cards consisting of creatures, spells, and weapons. The game proceeds in turn-based rounds. Each player uses their cards to attack the opponent’s god, defend their own god, or manipulate the game board. The objective is to reduce the opponent’s god’s life points to zero. Gods Unchained utilizes the Ethereum blockchain to mint its cards as NFTs. Players can then trade or sell in various marketplaces.

  1. Splinterlands

Theme: Splinterlands is a fantasy-themed card game. Players summon creatures and cast spells to outwit their opponents in fast-paced battles.

Rules: First, players build a deck by choosing a Summoner and selecting a set of monsters from their card collection. Each card has unique abilities, attack and health points, and mana cost. During a match, players have a limited amount of mana, which they use to summon monsters and cast spells. Players compete in automated combat rounds, trying to defeat the opponent’s team of monsters. As with other NFT collectible card games, players can trade, rent, or sell the various NFT cards to other players.

  1. Skyweaver

Theme: Skyweaver is set in a rich, cosmic universe. Players engage in strategic battles using cards representing creatures, spells, and enchantments.

Rules: In Skyweaver, players initially assemble a deck of 20 cards from a diverse pool of over 500 unique cards. The game categorizes cards into various prisms, each with its unique playstyle and strategy. Players take turns playing cards from their hand. They use their hero’s mana to cast spells, summon creatures, and attach enchantments to other cards. The objective is to reduce the opponent’s hero’s life points to zero. Skyweaver mints cards as NFTs on the Ethereum blockchain, and players can buy, sell, or trade the NFTs on various platforms.

Other popular NFT Collectible card games include:

  • CryptoSpells
  • Dark Country
  • ChainGuardians
  • Sorare
  • Axie Infinity (Card-Battler)
  • Relentless (formerly known as Zombie Battleground)
  • War Riders
  • CryptoAssault
  • Ether Legends
  • Force of Will (FoW) NFT

Legality of NFT Collectible Card Games

Are these games are legal? NFTs, cryptocurrency, and blockchain technology in general have all attracted significant legal scrutiny. So, are NFT collectible card games legal within the United States? Short answer: it depends.

  1. Are the NFTs used in these collectible card games unregistered securities? I have previously written on the topic of whether play-to-earn games really just sell unregistered securities and it is certainly possible depending on how the particular game is structured. The Securities and Exchange Commission applies the 4-prong Howey investment contract test to any novel NFT/cryptocurrency offering, which is a balancing analysis that asks whether a particular scheme is (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profit, and (4) with the profits derived from the efforts of others. Generally, NFTs that represent digital assets like art, collectible cards, or virtual real estate do not qualify as securities under U.S. law, but this very question is currently being decided in private litigation between the holders of NBA Top Shots digital trading cards and their creator, Dapper Labs. Recently, a federal court denied Dapper Labs’s motion to dismiss, setting the stage for an in-depth court battle to determine the status of the NFTs under federal securities laws.
  2. Is an NFT collectible card game gambling? The question of whether trading cards and collectible cards are “gambling for kids” has been litigated since at least the 1980s when baseball card manufacturers had to defend against allegations of their purported use of gambling mechanics to sell their products. Courts have consistently held that plaintiffs get what they paid for – baseball cards – and suffer no damages from their “disappointment” in failing to get an ultra-rare chase card. More recent cases involving video game loot boxes suggest that the answer may depend on whether the NFTs are considered “things of value” under state gambling laws. In general, gambling is defined as risking something of value on an uncertain outcome to win a prize. A game where players wager real money or valuable NFTs on game outcomes could be subject to state and federal gambling regulations. To avoid a gambling classification, game developers should ensure that their games focus on strategy and skill-based gaming, and that players earn value through skill, rather than chance.
  3. Additionally, what are the tax implications of purchasing and selling NFT collectible card game assets? The IRS has indicated that it will apply a “look-through analysis” in determining how an NFT will be treated for tax purposes. In essence, the IRS is looking beyond the non-fungible token itself and considering the nature of the digital asset it represents. Consequently, the IRS may classify NFT cards as collectibles, which are subject to a higher capital gains tax rate than other property types. Aside from these tax implications for the players themselves, investors and NFT creators must also consider other tax implications of minting and obtaining NFTs.

Securities laws, anti-gambling regulations, and tax issues are all implicated in the rapidly evolving market of NFT collectible card games and digital gaming in general. Legal compliance is critical to not only avoid regulatory actions or tax penalties, but to also secure credible investors, banking, payment, and other technological partnerships.

The qualified and specialized attorneys at Artaev at Law PLLC know gaming and blockchain 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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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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Do Play-To-Earn Games Sell Unregistered Securities?

Play-to-earn game developers that sell in-game currency tokens or NFTs to their players may be inadvertently selling unregistered securities. Offering unregistered securities is illegal and the Securities and Exchange Commission (“SEC”) may prosecute developers and obtain injunctions, civil penalties, and orders to refund all investor funds (disgorgement). Further, the investors themselves can sue developers (including as a class action) for securities laws violations, all of which can be financially devastating. Securities laws are a major factor to consider, but there are other applicable laws and regulations that determine whether a play-to-earn game is legal. Accordingly, it is absolutely critical to consult with an attorney specializing in play-to-earn and obtain a legal opinion regarding legal compliance before offering and selling any fungible or non-fungible tokens.

What do securities laws have to do with gaming?

Securities are traditionally associated with stocks and bonds traded on various exchanges. However, “securities” is actually a much broader term and includes virtually anything that a company sells to raise funds, whether to the general public or to a select group of high net worth individuals in a private placement. In the play-to-earn context, either the in-game currency token or the game asset NFT can be considered securities. Crypto/blockchain/NFT regulation is still at the early stages, but the SEC has taken an active enforcement role in pursuing fraud and illegal token offerings in the digital assets market.

Not all tokens or digital assets are securities. The uses a four-prong analysis called the Howey test to determine whether an offering is a security. More precisely, courts apply the Howey test and examine whether something is an “investment contract,” which is a type of security. The United States Supreme Court created the test in SEC v. WJ Howey, 328 U.S. 293 (1946), when it determined that a company selling shares in an orange grove farming operation was actually selling unregistered securities. If a token does not qualify as a security under the Howey test, it is generally considered a “utility token” and may be sold without the constraints of securities laws (but may still be subject to other regulations).

How do securities laws apply to gaming tokens or NFTs?

An “investment contract” has four elements: (1) an investment of money; (2) in a common enterprise; (3) with the expectation of profit; (4) derived from the efforts of others. With digital assets, the SEC generally assumes the first two prongs are met. Most, if not all, play-to-earn tokens involve an investment of money (either fiat currency or cryptocurrency with value) in a common enterprise (i.e. the game project). Thus, whether an offering is an exempt “utility token” or an unregistered security depends on whether the purchasers are led to expect profit derived from the efforts of others. In other words, does the purchased token function as a passive investment that pays dividends?

Of course, this is a very fact-specific inquiry. The SEC’s Strategic Hub for Innovation and Financial Technology (“FinHub”) has a rather complex set of guidelines and guideposts for the analysis, called the “Framework for Investment Contract Analysis of Digital Assets.” The SEC also relies on the DAO Report, which was a 2017 investigation of the Swiss-based DAO Project that explains the SEC’s application of Howey to digital assets.

In general, the determining factor is how the tokens are used. Do players actively use the NFTs they acquire to play the game and earn rewards? For example, an owner must manually enter the racehorse NFTs in Zed.Run (a hugely popular play-to-earn horse racing game) into various races, deciding on the best course type and distance suited to that particular “racehorse.” If the NFTs “wins,” the owner wins a prize, just like in real-life horse racing. Axie Infinity is another example of where players must actively manage their NFTs and “battle” them before earning rewards. Active in-game management likely negates both the third and forth prongs of Howey, as players purchase the tokens for in-game use and any rewards are not from the efforts of others – they come directly from the efforts of the player/owner. The same logic applies to in-game currencies that can be used to acquire in-game assets, pay entry fees, upgrade NFTs, and for other purposes. Simply put, while the in-game currency may certainly fluctuate in value on the secondary market, it is not a passive investment vehicle. It is an active “utility” component of a play-to-earn game.

Do staking and lending features affect the securities analysis under Howey?

As play-to-earn games become more sophisticated, so does the analysis. Many games now offer “staking” – which rewards players with in-game currency for parking their tokens or removing them from circulation for a set period of time. Additionally, NFT renting and lending are becoming more common, where owners let third parties to borrow their NFTs, actively use them within a game, and in return, receive a share of any winnings. The staking and lending mechanisms effectively enable passive income for token owners. Passive income is a hallmark of a security under the Howey test.

Play-to-earn games are a rapidly growing sector of the overall crypto and NFT market. It is critical for developers to ensure legal compliance, not only to protect themselves and their companies from crippling lawsuits, but to also make their product attractive to potential investors. In 2022, a comprehensive legal analysis of the play-to-earn project is a must-have for any pitch deck. Note that even if the token or NFT is not a security under federal law, state level “Blue Sky laws” may apply. Additionally, a token or NFT may be regulated as a commodity or under money transmission laws. In other words, the securities analysis is only part of a full legal evaluation.

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.

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Does Your NFT or Play-to-Earn Project Need Terms of Service?

Yes. In fact, well-drafted Terms of Service are critical to a successful blockchain business. Terms of Service (also known as terms and conditions, T+C, or TOS) are essentially a contract between you and your users that set out the terms on which they are allowed to use your product, interact with your game, buy your NFTs, or otherwise participate in the community. Importantly, the Terms will contain dispute resolution provisions, including mandatory arbitration and class action waivers. Properly drafted waivers and disclaimers are a business’s strongest defense against so-called “disappointed investors” and overzealous plaintiffs’ lawyers.

As the blockchain industry is currently in a “bear market,” there are a lot “disappointed investors” looking for someone to blame for their losses. Where lots of people lose money, litigation soon follows. For example, high-profile cryptocurrencies have collapsed – LUNA’s value went to zero overnight and its sister “stablecoin” TERRA is trading near zero despite being touted as pegged 1:1 to the U.S. dollar. Voyager Digital filed for Chapter 11 bankruptcy protection in July 2022, tanking its native VGX token. Celsius froze transactions (including withdrawals) in June 2022 and followed up with its own Chapter 11 filing in July 2022. Days before the Celsius bankruptcy filing, a high-profile investor filed a lawsuit against the company (and its affiliates) accusing them of fraud and running a Ponzi scheme. The same law firm is also spearheading a class action lawsuit on behalf of Solana (cryptocurrency) holders against its founder and associated companies, claiming that Solana is in fact an unregistered security and its sale to the public violates Section 12 of the federal Securities Act.

Even though a failed project or business is not enough for a cause of action by itself, the bevy of lawsuits claiming “fraud” are certainly enough for developers to take notice. As any business owner, blockchain developers must weigh risk and potential economic exposure, especially when it comes to launching a product in the largely unregulated blockchain space. Luckily, with the help of an experienced and knowledgable attorney, developers can leverage well-established contract law and “clickwrap/browsewrap” concepts to ensure maximum control and protection.

How can I use an arbitration clause to my advantage?

A mandatory arbitration clause is not a magic shield – it does not eliminate liability for selling unregistered securities for example. It does not eliminate liability for fraud. However, it makes the dispute resolution process more predictable, more efficient, private, and even potentially less expensive than litigation. Arbitration is a dispute resolution process conducted by a third party neutral (or a panel of neutrals) who act as the fact-finders and decision-makers in a dispute, much like a court. Arbitration decisions are binding and enforceable the same as a court order – the Federal Arbitration Act ensures that an arbitration decision can be taken to a court and transformed into a judgment. However, there is no jury, the parties can engage neutrals with specialized knowledge, and cost and outcomes are generally more predicable and manageable.

Back in 1989, the United States Supreme Court confirmed that a contract can compel investors to arbitrate their Section 12 securities claims against the broker or seller. In Rodriguez v. Shearson, 490 U.S. 477 (1989), the Court determined that an arbitration clause was enforceable because federal law generally favored arbitration and an arbitration clause did not limit the rights of injured parties under the Securities Act. Rather, the arbitration clause was construed as a forum or venue selection clause and procedural, rather than a substantive limitation on an injured party’s rights.

Another significant advantage of arbitration is that it eliminates conflicting state laws or decisions. The Federal Arbitration Act preempts state laws and court decisions that disfavor arbitration. Further, the Terms of Service will have a choice of law provision, as well as a choice of forum where disputes are to be resolved. This allows developers to exercise more control over disputes over their services, as well as deprives “disappointed investors” of the opportunity to forum shop and abuse procedural tools to increase cost and pressure on the business.

Do class action waivers really work?

Class actions are another potentially devastating consequence of disappointed investors. Section 12 claims may be brought as class actions and there are many examples. However, provided a class action waiver does impair substantive rights, it will likely be enforceable in the securities context. Section 14 of the Securities Act states that “Any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this title [15 USCS §§ 77a et seq.] or of the rules and regulations of the Commission shall be void.” In Rodriguez, the Supreme Court interpreted this provision to preclude substantive remedy waivers (such as damage caps), but to permit procedural provisions like arbitration clauses. Arguably, a class action waiver is a procedural mechanism and will be enforced the same as an arbitration clause.

In a more recent case, AT&T Mobility LLC v. Concepcion, 563 US 333 (2011), the Supreme Court confirmed that class action waivers as part of arbitration agreements were enforceable. The Court explained that parties are free to agree to procedures for their dispute resolution processes, including limiting with whom a dispute will be arbitrated. The Court reiterated the goals of efficiency and specialization that arbitration provides, concluding that arbitration promotes those goals, permits for individualized (rather than class basis) dispute resolution, and the Federal Arbitration Act favors such individualized dispute resolution, especially in a highly-technical field.

From a practical perspective, even if a court ultimately rejects arbitration and class action waivers, they raise the bar for a successful lawsuit and provide the developer with an opportunity to file a motion to dismiss. An early motion to dismiss may also dispose of some of the plaintiffs’ substantive arguments. In any case, increased procedural hurdles disincentivize overzealous plaintiffs’ lawyers, increase the opportunities for settlement, increase predictability, and reduce the chances of an outlier jury verdict.

Remember that well-drafted Terms of Service are not a shield for wrongdoers and will not prevent liability where it is warranted. However, they do offer some protection against “disappointed investor” lawsuits and give developers substantial control over disputes that may otherwise result in potentially devastating class actions and jury awards.

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 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 gaming law internet law

Ask the Crypto Tax Lawyer: Are Play-to-Earn Games Taxable?

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.

At the end of 2021, Ubisoft announced its plans to add NFTs (Non-fungible Tokens) into Ghost Recon: Breakpoint. Players’ in-game weapons, vehicles, and other rewards will be tradable and sellable on a secondary market, adding a real-world value component to the game. Ubisoft will become the first mainstream videogame developer to incorporate NFTs into its video games, although other A-list developers like SquareEnix are also planning to transcend the virtual and real worlds through blockchain technology.

Ubisoft follows in the wake of some popular Play-to-Earn (P2E) games like the global sensation Axie Infinity. According to a January Business Insider article describing the P2E crypto gaming model, Axie Infinity increased the value of its native AXS cryptocurrency (an Ethereum token) by a staggering 18,000% in 2021. Metaverse platforms that promise fully functional virtual worlds in the near future like Decentraland and Sandbox also saw explosive growth. For example, Decentraland’s native MANA token increased in value by 4000%. The main draw of these virtual worlds is that they allow users all over the world to earn cryptocurrency and NFTs that tradable for mainstream crypto or fiat money. Obviously, the returns and growth potential have captured the attention of many.

However, real world earnings mean real world taxes. As crypto and NFT earnings become more and more mainstream, more tax payers will have to consider the tax implications of cryptocurrency. The IRS considers cryptocurrency to be property, which is subject to capital gains tax similar to stocks or bonds. While the IRS has had guidance on cryptocurrency transactions since 2014, NFTs are a much more recent phenomenon without official guidance. Which then creates a number of questions for P2E players about how their winnings are reported and taxed.

Do I owe taxes on my play-to-earn winnings?

Absolutely. Because play-to-earn games allow users to earn cryptocurrency or NFTs, which then can be exchanged for fiat currency (e.g. U.S. Dollars), these earnings are considered income. In general, real world earnings mean real world taxes; however, the way your earnings are taxed will depend on several different variables.

To understand how the IRS will tax play-to-earn gains, you must first apply a few basics:

Are all P2E earnings the same?

No. Although both cryptocurrency and NFTs exist on the blockchain, they are two very different things and have different tax implications. Non-fungible tokens or NFTs are unique digital-only objects or unique digital versions of real-world objects. This is basically computer code. Mostly associated with collectibles and art, NFTs use blockchain technology like cryptocurrency but can represent almost anything, including virtual real estate, in-game vehicles or weapons, and personalized avatars. In the case of Ubisoft’s Ghost Recon, the “in-game earnings” will be in the form of NFTs. Similarly, the Pokémon-like Axie creatures that players acquire in Axie Infinity are also NFTs. These in-game items are pieces of unique computer code stored on the blockchain. These NFTs can later be exchanged for other NFTs or cryptocurrency.

Cryptocurrency, however, is not a unique collectible, but rather, a virtual currency. The IRS, in its Frequently Asked Questions on Virtual Currency Transactions, defines crypto as a type of virtual currency or “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.” Play to Earn games like Axie Infinity will commonly use crypto. In fact, Axie Infinity, much like Decentraland (which is more of a general attempt at a metaverse, rather than a stand-alone game), developed its own crypto token (AXS). AXS is tradable and exhcnagable into more mainstream currencies like Bitcoin or Ethereum (which are easily convertible into fiat), giving them value – not only within the game sphere itself – but also within the real world.

How do P2E gamers make money?

To fully understand taxes, it is first important to understand the basics of the P2E economy. Play-to-earn games give players an opportunity to win both cryptocurrency and NFTs by playing a game. Most often, the game will use its own native token as an in-game currency. The in-game currency and NFTs have value on the secondary trading market. To use Axie Infinity as an example, a player can earn value in several different ways:

  • First, a player acquires NFTs known as SLPs (Smooth Love Potions) through monster battles, player versus player fights, or by completing daily missions and quests. The player can then exchange those potions for cryptocurrency or even cash by selling them on an NFT exchange or DEX.
  • Second, a player can use SLPs to breed rare magical creatures (NFTs) known as Axie. Depending on the Axie’s traits and characteristics, an Axie NFT can fetch $200 or more on the secondary market.
  • Third, a player can stake AXS tokens in exchange for a particular return rate. Staking with crypto tokens is akin to holding money in a certificate of deposit (albeit, much riskier).
  • Finally, the game may award tokens or NFTs via airdrops. Airdrops are giveaways that the game may send its players as part of random promotions or in return for doing specific tasks.

What (and how) the game pays the player determines the type of taxes that particular player will owe. Is the income in the form on an NFT? Tokens? Staking income? An airdrop?

Are there taxes on tokens?

Whether it is called a token, cryptocurrency, or virtual currency, a native game token is taxed like intangible property and is subject to capital gains tax. The IRS has had a consistent position on this since at least 2014. When you purchase cryptocurrency or tokens with fiat currency (e.g. U.S. Dollars) you do not pay tax on the transaction. So if you buy AXS directly for USD, this is not a taxable transaction. However, if you buy AXS for ETH or BTC or another cryptocurrency, stablecoin, or token, you have incurred capital gains because the IRS considers you to have sold cryptocurrency you have traded – even if the transaction is a direct exchange.

If you earn crypto tokens as a part of a Play-to-Earn game, the value of such crypto is taxable as ordinary income. Likewise, when you sell crypto tokens on an exchange, you are taxed on the gain (if any) just like you would be if you sold a stock or investment real estate. Again, when you exchange one cryptocurrency for another (for example, you buy AXS with stablecoin) the exchange is taxable. Accordingly, it is critical to keep accurate and clear records of every transaction involving cryptocurrency, regardless of gain or loss.

How are NFTs taxed?

The IRS has not issued definitive guidance on how NFTs will be taxed, but most experts agree that NFTs will probably be considered property like cryptocurrency and be subject to capital gains tax. When applying this framework, NFT investing generally involves three different taxable events:

  • The Purchase of a NFT with Crytpocurrency. Play-to-Earn games often require a buy-in. Axie Infinity, for example, requires players to buy three Axies to start, which currently costs around $1,500. If you “buy-in” with cryptocurrency like ETH, the IRS will consider you having sold the ETH and have earned income equal to the difference between your purchase value and sale value. The acquisition of the NFT itself is not taxable for the buyer – but, is taxable for the seller as income.
  • The Sale of the NFT in exchange for Crypto. Selling an NFT creates a taxable capital gain or loss equal to the difference between purchase and sale price. Simply put, if you bought an NFT for $1,500 and sold it for $2,000, you incurred a $500 gain. If you bought the NFT for $1,500, but sold it for a $1,000, you have a $500 loss that you can use to reduce your other capital gains or even your ordinary income up to a certain amount.
  • The Exchange of the Crypto proceeds for U.S. Dollars or other fiat currency. Like the sale and purchase of NFTs, the exchange of a cryptocurrency into USD or other fiat currency will also trigger a taxable capital gain or loss depending on the difference between the original purchase price of the cryptocurrency (or token) and the price at the time of its sale.

Currently, there are no tax exemptions or safe-harbor periods that allow traders avoid capital gains tax on exchange type transactions.

Are NFT investors taxed differently than NFT creators?

Yes. Let’s say you’ve found a way to farm massive amounts of SLP (Smooth Love Potions) in Axie; these are NFTs. The initial creation or the minting of the NFT is not a taxable event. However, the sale of the NFT is taxable. However, in this case, since you are the creator and also the seller, and you technically “did the work” to earn the NFT, the IRS will likely consider the proceeds from your NFT sale ordinary income for tax purposes.

Is staking taxable?

Yes. Sure, my staked sheep in Wolf Game owe a 20% tax to wolves on all sheered WOOL; everyone knows that. But do I also have to pay WOOL taxes to the US government? Yes. Many taxpayers currently consider staking the same as crypto mining income, which means they will owe taxes on the fair market value of the WOOL the moment they receive the WOOL in their wallet – not just when they sell it.

The IRS is currently in litigation regarding this issue. The question being considered is whether the cryptocurrency or token has taxable value at the time of minting ( in my case “shearing”) or whether it should be taxed only upon sale of the WOOL – similar to the way traditional manufacturing companies operate. (For example, factory owners don’t pay income tax on a manufactured table, even though that manufactured table holds value, until the table sells.) This is one of the many unanswered questions in the blockchain sphere that regulators are catching up to answer.

Are Airdrops Taxable?

Yes, generally airdrops are considered ordinary income based on the fair market value of the drop at the time you get it. As with everything else, crypto-related, be sure to keep detailed records of all your crypto transactions to make sure that you account for them properly.

So, Do I Owe US Taxes on My Earnings from Play to Earn Games?

Yes. Real world earnings mean real world taxes. Whether you earn NFTs, native tokens, or Bitcoin, those assets have value and therefore subject to income tax. You, as the taxpayer, are still obligated to report income just like you would be if the game paid you in stock. As always, it is important to consult a crypto tax expert to see how the specifics of your situation apply to current IRS guidelines.

Further reading:

https://artaevatlaw.com/2021/10/05/play-to-earn-games-legal/
Is Playing Video Games for Real Money Legal? It May Depend on the Game.
Ask the Crypto Tax Lawyer: What Are the Tax Implications of Cryptocurrency and NFT Investing?
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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.

© 2022 Artaev at Law PLLC. All rights reserved.

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