encrypted with the payment required for
decryption.
One of the primary ways to obtain
bitcoins is to purchase them on
exchanges, but these exchanges are often
unstable themselves with catastrophic
results. Failures such as the Mt. Gox
exchange based in Japan and the Cryptsy
exchange based in Florida are two such
examples which caused account holders
to lose millions of dollars worth of coins.
Consumer protection concerns gave rise to
new regulatory efforts.
applicable money transfer laws by the
U.S. federal and state governments, as
well as other nations. Internationally, a
number of countries have embraced the
free use of digital currency while other
countries, such as China and Russia, have
discouraged it. Other nations such as
Venezuela banned it entirely.
In the U.S., digital currencies such as
bitcoin are legal and used for a variety of
legal transactions. Due to the small cost in
processing transactions, companies such
as Microsoft, Overstock.com, Expedia.com,
Gyft, Bloomberg.com and Dell computers
accept bitcoins as payment.
As a store of value, the people or
companies transferring bitcoins are often
treated as money transmitters by U.S.
regulators. The U.S. federal government
requires those who commercially sell
digital currencies to comply with the
know-your-client and anti-money
laundering regulations of the FinCEN and
the Treasury Department.
State regulation varies wildly, ranging
from the lack of any money transmitter
statutes in states such as Montana and
New Mexico, to the New York State
Department of Banking and Finance
"BitLicense" requiring developers and
transmitters of virtual currencies (but not
merchants accepting them as payment)
to register, obtain approval, maintain
bonds and closely follow prescribed
procedures, all at significant cost. In July
2017, New Hampshire exempted virtual
currency traders from money transmitter
guidelines and regulations of the issuance
of new digital currencies known as "initial
coin offerings" (ICOs). The Treasury
Department and state regulators have in a
number of states arrested and prosecuted
individuals and companies selling bitcoins
for failure to comply with federal or state
money transmission laws.
currency of any particular country, bitcoin
and other digital currencies have been
classified by the Internal Revenue Service
(IRS) as capital assets that qualify for
capital gains tax rates if held in the long-
term. The tax basis in bitcoins is the cash
purchase price. Fair market value (FMV) is
considered and the prevalence of numerous
exchanges allows the determination of
FMV in U.S. dollars to be relatively easy.
As with similar assets, taxable gain or
loss in dollars received on the sale is
considered. Gain can be long-term if
owned for 12 or more months and wash sale
rules apply for assets with a similar nature
repurchased within 30 days. Bitcoin is
treated no differently than an investment in
any other asset such as his share of stock
and no taxes due on the investment as it
increases the value until the investment is
actually sold in U.S. dollars or other official
currency. Many digital currency exchanges
help users maintain the complicated
records needed to track the basis of their
digital currency investments.
becoming a necessary part of the average
attorney's legal practice. Its rise in use
for payment and as an investment creates
estate planning problems. Estate planning
clients should disclose in great detail
to their attorneys the locations of their
digital assets, as well as the location of
their private keys, whether in the form of
a computer program or a hard copy known
as a "paper wallet." Wills with provisions
from the Uniform Fiduciary Access to
Digital Assets Act can allow fiduciaries,
personal representatives and trustees
to access and control digital currency.
Exchanges and other custodians of Bitcoin
provide a fiduciary with records of the
digital assets and access to such accounts.
Digital currencies also create
opportunities for debtors, divorcees and
others who hide assets. It is important
that in the course of discovery, litigants
serve interrogatories and requests tailored
to virtual currencies. For example,
demands should include references to
disclosure of digital currencies and virtual
currencies including, but not limited to,
bitcoin. The requests should also identify
any exchanges that have been used to
purchase bitcoins in the past.
Bankruptcy and Uniform Commercial
Code issues have also been presented by
merchants who accept bitcoin. If bitcoin
is neither money nor a deposit account,
it may be considered to fall within the
category of "general intangibles" which
is defined as personal property not falling
in any other category. Article 9 security
interests may potentially attach bitcoins,
even after they are transferred, to buyers
in the ordinary course of business when
the secured party perfected its security
interest by filing a financing statement.
by the Nebraska Ethics Advisory Panel,
the Code of Professional Conduct allows
attorneys to accept digital currencies
such as bitcoins as payment for legal
services so long as the fee charged
remains reasonable under Neb. Ct. R.
Prof. Cond. § 3-501.5(a) and volatility
risk is mitigated.
form of payment internationally. The
unique features of digital currencies
and blockchain technology create new
problems and the need for additional
awareness by any attorney dealing with
finances in a modern age.
Jacob Burns Institute for Advanced Legal Studies,
Faculty Research Paper 458 (August 2015)