Why Looming Crypto Lull Will End

Crypto will reach its potential in the next two years.

For those who may think that is a long time, remember that this burgeoning digital asset industry has percolated in the background since the first block of bitcoin was mined in 2009.

For those who may think that it is way too soon amid today’s environment, keep the faith.

Figuratively speaking, crypto 2023 is like accumulating debris in a back churn, where a creek’s flow attempts to force its way into a much larger lake. That is where crypto is right now. It is trying to make it out into the mainstream but is being held back. There is no momentum pushing it forward.

But crypto’s lull is coming to an end.

Ford Motor Company founder Henry Ford, who revolutionized the automobile industry with his assembly-line innovation, once said, “Patience and foresight are the two most important qualities in business.”

There are several reasons why today’s headlines signal a final push forward for crypto’s acceptance.

Too Difficult to Regulate Through Litigation

The Securities and Exchange Commission (“SEC”) continues to argue that it should oversee cryptocurrencies because they are securities—aside from Bitcoin—under the Howey test, which is a 1946 Supreme Court decision that is used today to determine what is an investment contract.

SEC Chair Gary Gensler said, “At the core, these (altcoin) tokens are securities because there’s a group in the middle and the public is anticipating profits based on that group,” during an interview with New York Magazine.

The SEC has turned its belief as the presumed overseer into a basis for lawsuits against significant players in the crypto space. Despite the SEC’s stance, regulation through litigation is not an appropriate method for the crypto industry.

The agency has filed 13 charges against the world’s largest crypto exchange, Binance, and its founder, Changpeng Zhao, alleging that both allowed certain U.S. residents on its exchange despite restrictions.

The SEC also has sued the world’s second-largest crypto exchange, Coinbase, alleging the platform operated as an unregistered national securities exchange and broker. The agency also alleged that at least 13 specific crypto assets that Coinbase offered were “crypto asset securities” and that its staking program counts as an investment contract for an unregistered security.

Coinbase has stated in an article on its website that it had met 30 times with the SEC during a nine-month period to set up a registration process for crypto companies. Instead of a path forward, however, the exchange said it received legal threats in the form of a Wells Notice.

At some point, most likely by the first of next year, both cases will be settled. The decisions in the Coinbase and Binance matters will help push crypto forward.

Too Difficult to Argue with Success

U.S. District Judge Analisa Torres handed crypto a memorable win in July, ruling that Ripple Labs’ XRP crypto token is not necessarily a security on face value—an opinion that counters the SEC’s stance.

The judge segmented the different sales methods involving XRP, which included programmatic sales, institutional sales and “other distributions” like employee compensation. XRP was ruled a security when it involved institutional sales that were distributed to sophisticated individuals. However, XRP was ruled not to be a security during “retail” or programmatic sales and other distributions.

Judge Torres also dismissed the agency’s interlocutory appeal, which is essentially an appeal before a final outcome. The court has set an April 24, 2024, date to decide the remaining issues regarding XRP.

But the matter may not be settled yet. Sometimes courts disagree.

In a separate securities case involving the collapsed TerraUSD, Anchor Protocol and LUNA, U.S. District Court Judge Jed Rakoff has rejected Judge Torres’ ruling, which parsed the nature of distributions.

“Howey makes no such distinction between purchasers,” said Rakoff, whose comments were published in Coindesk. “And it makes good sense that it did not. That a purchaser bought the coins directly from the defendants or, instead, in a secondary resale transaction has no impact on whether a reasonable individual would objectively view the defendant’s actions and statements as evincing a promise of profits based on their efforts.”

Crypto’s formal acceptance will most likely include notes from the highest court in the land. Do not be surprised if the U.S. Supreme Court adds an additional layer to the existing Howey test in the next two years to address Crypto’s status.

Too Difficult to Stifle Innovation

Fictional race car star Ricky Bobby, played by actor Will Ferrell in Talladega Nights, once said, “If you ain’t first, you’re last.”

That is the American ethos in a single sentence.

It is also another reason why the United States lagging, global position will change soon. After years of inaction from a nation built on innovation, the United States finds itself trailing other countries and regional blocks like Singapore, Japan and the European Union on advancing a framework that would allow crypto and digital assets to stake its place.

However, additional court wins have already started a momentum shift, which will lead to new products in the marketplace.

The D.C. Circuit Court of Appeals, for example, ruled that the SEC’s rejection of Grayscale Investments (“Grayscale”) proposed conversion of its closed-end bitcoin trust into an ETF was “arbitrary and capricious.” The three-judge panel said the agency failed to explain the difference between a futures bitcoin EFT, which it had approved, and a spot bitcoin ETF.

Grayscale’s victory will most likely have far-reaching implications that will change the financial landscape, ushering in a new asset class. Competitors such as BlackRock, Fidelity, Invesco and WisdomTree are also standing in line waiting to have their spot bitcoin ETF proposals approved by the SEC. The agency has 240 days to approve or deny applications, which means the first deadline for the earliest applicant would be January 10, 2024.

Nothing is holding the SEC back from approving all the applications, including ones for a spot Ethereum ETF, at the same time.

“The fact that SEC is actively engaging with spot bitcoin issuers on their current applications—which hasn’t ever happened before—we think a rejection is unlikely and hold a 75% chance of approval by end of this year,” said Bloomberg Senior ETF Analyst Eric Balchunas in a recent Forbes article.

To encourage even more momentum, the next bitcoin “halving,” an event that in effect cuts supply every four years, will occur in April. This event typically starts the next crypto bull run.

Right now, my Texas intuition tells me that crypto is a lot like a nice piece of brisket in the making. Trim off the fat on top to let the smoke in and then slow-cook the rest until tender. It rewards those who are patient.

The crypto lull is coming to an end.

(Tyler W. Rutherford is an associate attorney at Pastore with expertise in regulatory compliance, contract law and corporate law. He represents a wide range of clients, including crypto and blockchain companies.)

3 Keys to Launching Legal Cryptocurrency ICO

Money is going digital.

In 2013, you could count the number of active cryptocurrency coins on both hands.

Today, there are 8,832 active coins and tokens, according to CoinMarketCap.

Launching a successful Initial Coin Offering (ICO) continues to be the main mechanism for bringing these digital assets to the marketplace. In cryptocurrency, an ICO is a crowdsourcing way to raise money for a new coin or application. Investors purchase tokens related to a product or service that are expected to increase in value based on demand. However, in many cases, several types of cryptocurrency may offer some form of utility, but they don’t always offer an ownership share in the organization or a portion of revenue, which is a key difference between ICOs and initial public offerings (IPOs) for stock equities.

The timing of the offerings is another important difference. For ICOs, they occur in the beginning when a coin is publicly launched. For IPOs, they tend to happen once the company is established and looking to expand by diluting ownership.

Since 2019, $19 billion has been raised through ICOs, while only $969 million has been raised through equity crowdfunding, according to research from CB Insights. The inclusive nature of the offerings has made them popular worldwide. For example, anyone with a digital wallet can participate in an ICO and the market is open around the clock in every time zone, which has made it easier to build large investor followings.

To increase the odds of launching a successful ICO, your coin will need to be set up for success. Here is a checklist of essential items:

Cryptocurrency Attorney Insight #1: Legal Assistance

The first must-have is legal advice from a trusted lawyer with crypto and blockchain experience.

As a member of the Connecticut Crypto Forum, which Pastore LLC has sponsored since last May, we have helped cryptocurrency and blockchain startups succeed, while others have struggled because they were not savvy about regulation.

Your attorney will need to assess whether your ICO is promoting coins that are deemed securities by the SEC. Market professionals may be promoting the sale of coins without determining if securities law is applicable to the digital assets, which could result in a violation of the Securities Exchange of 1934.

The Howey test will help you understand the legal nature of crypto at your ICO.

In 1946, the U.S. Securities and Exchange Commission (SEC) v. W.J. Howey Co. created the basis for specific factors that separate a security from a commodity. In the decision, which involved citrus grove buyers, the investors only needed to supply capital to the arrangement, while all the other details were managed by others. This point underscores the basic tenets of an investment contract. The four factors include 1) an investment, 2) a common enterprise, 3) a profit expectation and 4) generated from the work of third-party participants.

Cryptocurrency Attorney Insight #2: Marketing Expertise

A whitepaper is a crucial document that spells out a looming problem and positions the coin as the solution. Biographies are also important. In the beginning, startups are only ideas, while the team members are the product that investors want to support.

The blockchain architecture should be disclosed and key topics, including energy consumption, interoperability and scalability, should be addressed for investors. The tokenomics of the coin, which includes supply and demand issues, should also be included in the document. What is the total supply? The current supply? Will coins be “burned” or permanently removed from circulation? These questions should be addressed.

The whitepaper should include a roadmap, which includes important dates and milestones, in addition to the amount of money raised and its intended use.

Web company Dev Technosys estimates that cryptocurrency companies should budget 10% to 20% of their funding target to support its marketing program.

As part of the outreach program, a website is an important part of the puzzle. It’s the center of your brand’s online universe. Cryptocurrency organizations tend to opt for a clean, simple one-page site that scrolls down to company news, industry awards and affiliations, as well as the roadmap and background of team members.

Cryptocurrency Attorney Insight #3: Technical Experience

There are several technical aspects a cryptocurrency team must consider to improve its chances of a successful ICO.

First, a security audit for your soon-to-be launched crypto coins leverages code analysis that discovers problems in the applications. This exercise needs to be part of your pre-launch process and stated in the marketing materials to build confidence among investors.

An emphasis on blockchain development, however, cannot be understated. Development is about maintaining the platform by managing various usages such as distributed applications, smart contracts and digital currencies. As a reference point, Ethereum may have the highest number of developers with 5,758. Since Bitcoin was established in 2009, it is estimated that there are more than 23,000 developers in the field today.

And the most crucial, make-or-break, technical endeavor? Getting your coin on an exchange. The exchange listing creates many “abilities” for cryptocurrency coins, ranging from credibility, visibility and accessibility for investors. Of course, price stability is one of the biggest benefits.

Bottom line, considering any potential legal ramifications of your cryptocurrency coins first and foremost will create an environment for a successful ICO—and productive venture.

(Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8455 or jpastore@pastore.net.)

The Howey Test: Would Your Crypto Offering Pass or Fail?

Before you launch your next crypto token, you should see if you can pass the test.

It is not the smell test with investment bankers.

The Howey test will help you understand if your crypto is one of many digital securities which would present more legal responsibilities, such as disclosure and registration requirements.

The U.S. Securities and Exchange Commission (SEC) v. W.J. Howey Co. was a 1946 Supreme Court decision about citrus grove buyers in Florida. The Howey Company sold citrus groves to investors who leased the land back to Howey. The company’s employees managed the groves and sold the fruit on behalf of the investors. Both the company and the investors profited from the venture.

The investors only needed to supply capital to the arrangement, while others took care of all the other details. An investment contract is what you get when your transaction passes the Howey test.

Of course, this concept impacts things beyond citrus fruit. It is also applicable to the cryptocurrency market. In fact, there are four factors to consider which separate a security from a commodity:

  • An investment
  • A common enterprise
  • A profit expectation
  • Generated from the work of third-parties

In the U.S., the SEC has deemed bitcoin not to be a security. The issuer, an anonymous Satoshi Nakamoto, released all 21 million tokens at once as part of a contract. None of the tokens went to him or a company treasury. When the tokens were released, they had no value, and when they gained value, Nakamoto did not receive any benefit.

In effect, he removed any possible connection between “common enterprise” from the other factors, which disqualifies the venture as a security under the Howey test.

SEC Chair Gary Gensler said, “at the core, these (altcoin) tokens are securities because there’s a group in the middle and the public is anticipating profits based on that group,” during an interview with New York Magazine.

However, Rostin Behnam, the chairman of the Commodity Futures Trading Commission (CFTC), said Bitcoin is not the only commodity. He called another crypto coin—Ethereum—a commodity during a hearing before the Senate Agriculture Committee. In fact, Ethereum has been listed on CFTC exchanges for some time.

An interagency council comprised of state and federal banking officials, as well as commodity, securities and consumer protection groups, agreed in a report that there is not a comprehensive regulatory framework for digital assets. Hence, the reason for differing stances within the industry.

Right now, asset classification dictates how digital assets are regulated. If it is a payment, then it falls under the purview of Money Services Business and the Office of the Comptroller of the Currency. Likewise, CFTC oversees commodities, and the SEC has jurisdiction over securities.

Recently, the SEC has filed a complaint against Binance and Coinbase, alleging that they are selling unregistered securities. The complaint mentioned several coins that could be viewed as securities: Polygon, Cardano and Solana. Soon after the announcement, Robinhood—another crypto exchange—delisted the three mentioned coins.

Binance.US has decided to become a crypto-only exchange, ending US dollar deposits and withdrawals. The SEC wants a federal judge to freeze the exchange’s assets, including $2.2 billion in crypto and $377 million held in dollars.

Either the Coinbase case or the Binance case could make its way to the U.S. Supreme Court, which could in effect create the path for industry regulation with its ruling. As part of a possible outcome, the High Court could also rewrite the Howey test or revise it in relation to digital assets.

At the 2023 Global Exchange and Fintech Conference, Gensler said congressional action is not needed because the laws are already on the books. “Not liking the law, not liking the rules is different than not hearing it or not getting it,” he said. However, this view fails to recognize that the current regulatory framework is not black and white for investors and institutional players.

Under federal securities laws, a company must register with the SEC before offering or selling securities. As part of the registration process, an issuer must disclose financial statements that have been audited by a public accounting firm. These documents provide important information that helps investors make informed decisions about their investments.

As the digital financial assets space grows, more large corporations can be found with crypto on their balance sheets. A 2022 Deloitte Global Corporate Treasury Survey found that 40% of interviewed finance executives said they have already implemented blockchain or they are considering it.

In the short term, issuers will need to work with a law firm with expertise in crypto and digital currencies to navigate the impact of the courtroom rulings and the subsequent new era of regulation on their business.

Make sure your company will be able to pass the test in the evolving legal landscape.

(Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8455 or jpastore@pastore.net.)

S.D.N.Y. Issues Ruling Regarding Cryptocurrency Regulation – The Ripple Effect

The U.S. District Court for the Southern District of New York recently issued a significant ruling regarding cryptocurrency regulation. In 2020, the U.S. Securities and Exchange Commission (the “SEC”) sued Ripple and two executives concerning Ripple’s XRP token and the sale thereof. The SEC alleged the XRP token was an unregistered security; thus, their sales of the XRP token amounted to illegal sales of securities. In response, Ripple argued that XRP was not a security. Judge Torres ruled that Ripple’s sales of XRP to institutional investors constituted an illegal sale of securities. However, the token was not considered a security when it was sold on digital asset exchanges to the general public. The distinction, according to the judge, depended on whether the buyers knew that their money could fund Ripple’s operations and result in the generation of potential profits. Certain elements of the case are still undecided, such as whether the two executives aided and abetted the illegal sales and can therefore be held responsible. However, there is already discussion emerging on this ruling, which may impact the SEC’s ongoing case against Coinbase, and within 24 hours following the ruling, XRP’s price increased by nearly 100%.


To read more:




4 Legal Insights: How to Fund a Crypto Startup

The most recent cryptocurrency winter has ended, and the next bullish cycle has begun.

But not everything has been forgotten.

The government may attempt to regulate this burgeoning industry through the courts, as more tokens, exchanges and venture capital firms fail to pass muster. The short list of collapses in 2022—BlockFi, Three Arrows Capital, Celsius Network, TerraUSD/Luna and FTX—has sent chills through the most thrill-seeking investors.

As a member of the Connecticut Crypto Forum, which Pastore LLC has sponsored since last May, I have watched cryptocurrency startups succeed, while others have struggled.

On the surface, funding seems to be a big obstacle. However, garnering the needed financial support for a cryptocurrency startup is more of a series of actions than a single event—especially during these challenging times.

So, are you looking to fund a cryptocurrency startup? Let’s start with a summation: Don’t go out too early.

Now, here are four more insights to improve your chances for success:

Business Law Insight: Leverage A Big Problem

The problem with having a solution is that you first need a problem.

So, start there.

Bitcoin serves as an alternative payment system free of government control where people can send money over the internet. Ethereum created a place in a new financial ecosystem as a platform for programmatic contracts and applications. Besides being digital assets, they both have something else in common: The entire world is their market.

When developing a solution for a problem, you must think big and make sure it’s scalable. The target market must be worth 10s of millions in revenue per year. If it generates $250,000 annually, you will go nowhere.

The cryptocurrency idea may solve a problem for title insurance in real estate. It’s a two trillion-dollar industry. Maybe it solves a record-keeping issue in health care. That’s another enormous potential market.

Because people buy the story before they buy the stuff, articulating the problem and the solution in a succinct, meaningful way will monetize your effort.

Business Law Insight: Produce A+ Documents

Producing top-notch documents should put you on the short list with potential investors. Your lawyer will write this one with help from the company’s leadership team.

A private placement memorandum (PPM) is not necessarily required depending on the nature of the offering, but it’s essential. Unlike a business plan that serves as a marketing document, the PPM is straight to the point. It is a legal document that informs investors of securities for sale. Several key aspects are addressed in the document, such as a description of the securities, risk factors, biographies on the management team, financial statements and, perhaps, important contracts.

This document will go a long way towards attracting a network of cryptocurrency investors. You definitely don’t go out to the marketplace in general because it is not amenable to crypto-type investments and general solicitation may run afoul of the securities exemption you are relying on. You will need a group of savvy investors who understand and have experience with digital assets—not a scattershot approach in the marketplace.

Business Law Insight: Build A Credible Team

In the beginning, investors don’t buy ideas. They purchase a team.

Ideas are only worth something if they can be executed. So, choose wisely.

Build a team of professionals who understand the cryptocurrency space and who can leverage relationships within the industry. This type of network, albeit small at inception, will provide instant credibility for your startup.

Next, create a strong compliance program with legitimate personnel. Start with a chief financial officer or controller with cryptocurrency experience, as well as anti-money laundering expertise. Leverage established credentials, such as ALMA, CPA, CFA, to guide the selection process.

To create more oversight, select qualified board members with experience in finance and controls, as well as regulation to name a few areas. Make them part of governance by empowering them to manage the compliance committee and audit committee. If you are raising money domestically, they will ensure you don’t stray into offshore associations that could taint the enterprise.

Business Law Insight: Convince A Bank

You need an investment bank on your side. In fact, you can’t raise real money without one. You are beyond friends and family now.

Keep in mind that an investment bank with a well-regarded broker dealer business unit will conduct due diligence on your startup. To pass the test, your financial house needs to be in order.

Let’s begin with the basics, such as bylaws and resolutions. There is the certificate of incorporation or the certificate of formation if it’s a limited liability corporation. Don’t forget the operating agreement, including business-partner assignments, a business plan and a financial forecast.

The next phase includes your financials. To be more specific, timely financial statements are required because anything less begs for more questions and suspicion. Accountants need to be part of this mix—and an attorney with cryptocurrency experience to bring everything together.

(Christopher Kelly is an attorney at Pastore who has practiced corporate, transactional, fund employment and banking law for more than 30 years at sophisticated levels. He has worked on complex transactions aggregating in value of more than $10 billion, involving private stock and debt offerings, mergers and acquisitions and assets deals.)


How to Use Specific Allocation Cost Basis to Manage Capital Gains Taxes on Cryptocurrency Gains

The cryptocurrency reporting rules have changed but compliance requirements have not been made any clearer. The recent changes in the tax reporting requirements have left crypto platforms, brokers, and traders with minimal guidance and exposed buyers and sellers to a potential tax trap.

This note illustrates a process by which taxpayers who engage in virtual currency transactions can properly report their taxable gains or losses, even in the absence of revised guidance from the IRS. This process, properly deployed, will save many taxpayers who sell cryptocurrency during the tax year substantial amounts of money in federal taxes.

Section 80603 of the Infrastructure Investment and Jobs Act, P.L. 117-58 (signed into law November 15, 2021) amends both Section 6045 and 6045A of the Internal Revenue Code to accomplish three significant changes in the tax law related to returns of brokers regarding digital assets:

  • Brings digital assets under the broker reporting requirements by:
    • Adding to the definition of “broker” for purposes of information reporting “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Code §6045(c)(1)(D)(effective for returns required to be filed and statements required to be furnished after December 31, 2023) and
    • At §6045(g)(3)(B)(iv), adding digital assets to the scope of covered securities for purposes of Code §6045(g)(2)(a). This addition has the effect of requiring the newly-expanded population of persons treated as brokers under the tax law to report the capital gains and losses of persons disposing of digital assets on Form 1099-B. Reg. §1.6045-1(d)(2)
  • Defines a digital asset as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology” and includes an exception deferring to other and further definitions as may be promulgated by the Treasury. §6045(g)(4)

Cryptocurrency exchanges, such as Binance, Coinbase Exchange, Kraken, KuCoin, and OKX are now explicitly required to provide information reporting on Form 1099-B. However, the IRS has recognized that the existing reporting regulations do not contemplate virtual currency and so, in Announcement 2023-2 (December 23, 2022), the Service relieved brokers from the new reporting requirements pending issuance of final regulations under the new law. Taxpayers, however, remain responsible for reporting the proceeds of the virtual currency dispositions.

Taxpayers must report the nature and magnitude of their gains and losses on dispositions of digital assets whether or not any exchange or platform reports their transactions. This leaves responsibility for accurate recordkeeping squarely, and exclusively, on the taxpayer disposing of the assets. Indeed, decentralized finance exchanges such as Idex and dYdX, which do not collect Know Your Customer information (See, 31 CFR 1023.220), and self-custody traders, which do not provide information reporting, have no present role in tax reporting.

On whatever form — 1099-B, 1099-K, or no reporting form at all  —  a taxpayer receives regarding information reported to the IRS about the proceeds from the disposition of digital assets, that information must be translated into its tax effects via Form 8949, then to Schedule D, and, ultimately, to Form 1040. This reporting array provides to the IRS information describing the assets, the dates of acquisition and disposition, basis calculation, and the resulting gain or loss from each asset disposition. It also serves to characterize the resulting gain or loss as ordinary or capital and, if capital, as either long or short term. See, Code §1222; Reg. §§1.6045-1(d)(2)(i) and (ii).  Capital gains, calculated using the netting rules of §1222(11), are, generally, taxed at more favorable rates than ordinary income. Code §§1(h)(1) and (j)(5).

Gains on the disposition of capital assets, including covered securities, are calculated by subtracting the cost or other basis of the property from the net amount realized from its disposition. See, Reg. §1.1011-1. This amount is reported by the exchange or broker on Form 1099-B and, in turn, by the taxpayer on Form 8949.

This two-step process includes a mathematical trap for the unwary, which the IRS tacitly acknowledges in its virtual currency FAQs released October 9, 2019 (IR-2019-167). These FAQs largely reflect the two methods of basis allocation provided in the regulations that are available to a taxpayer who sells less than their entire position in a virtual currency account. However, because the regulations (Reg. §§1.6045-1(d)(2)(i) and (ii)) were promulgated prior to the explicit addition of digital assets to the statutory information reporting scheme by Section 80603 of P.L. 117-58, the Service has issued this interim guidance to remind such taxpayers that their basis reporting for digital assets may be accomplished in either of two ways:

  • Identification of the specific units of virtual currency that were sold. Such specific identification must include

(1) the date and time each unit was acquired

(2) the taxpayer’s basis and the fair market value of each unit at the time it was acquired

(3) the date and time each unit was sold, exchanged, or otherwise disposed of, and

(4) the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit or

  • If the taxpayer does not identify specific units of virtual currency, the units are deemed to have been sold, exchanged, or otherwise disposed of in chronological order beginning with the earliest unit of the virtual currency purchased or acquired; that is, on a first in, first out (FIFO) basis

FAQs 40 and 41.

Recall that Form 1099-B, when used by crypto exchanges and brokers for reporting sales of less than a taxpayer’s entire position, reports in Box 1(e) only the summary figure of cost or other basis, without specifying how that basis is calculated. The regulations and the FAQs prescribe that the FIFO method is the default basis reporting calculation in the absence of information adequate to support allocation of basis to specific units of digital currency.

Form 1099-B is, however, not the end of the taxpayer’s analysis. This is important because Form 8949, generally required to be filed with the return of a taxpayer who has sold capital assets (now, including digital assets) during the tax year, enables the taxpayer to correct the basis reported on Form 1099-B.  Brokers and exchanges will, as a rule, simply report out capital gain on a FIFO basis, potentially leaving inattentive taxpayers with a larger tax bill than they would have with proper figuring.


Here is how capital gains tax exposure can be unnecessarily inflated for a seller of digital assets who does not liquidate his or her entire position during the year.

The comparison may be illustrated with these pricing data from a popular digital currency over a recent period where a hypothetical taxpayer invested in a single unit of the asset each calendar month at its then-prevailing price.

Comparison of Capital Gains Tax on Sale of Virtual Currency Positions Using FIFO and Specific Information Basis Allocation

Comparison of Long Term Capital Gain Tax Using FIFO and Specific Identification Methods of Basis Allocation

A taxpayer who partially liquidates a digital currency position, then, should make strategic use of the Form 8949, whether or not the taxpayer receives an information statement from a broker or exchange. Note that for each transaction type for which Part I, Box (A), (B), or (C), or Part II, Box (D), (E), or (F) is checked, a separate Form 8949 must be filed.

The taxpayer should complete the appropriate part of the form (Part I for Short Term Capital Assets, Part II for Long Term Capital Assets) and enter in column (e) the appropriate basis allocation. If the taxpayer elects to use the Specific Identification method for a partially liquidated position, he or she should be prepared to document the claim with

  • The date and time each unit was acquired;
  • The basis and fair market value of each unit at the time acquired;
  • The date and time each unit was sold, exchanged or otherwise disposed of;
  • The fair market value of each unit when disposed of; and
  • The amount of money or the value of property received for each unit

FAQ 39.

In circumstances where the allocated basis of the liquidated asset varies from the amount stated in Box 1(e) on the Form 1099-B or other information statement, the taxpayer should enter Code B in column (f) and enter the amount by which the stated basis is being adjusted on the Form 8949. The current amount of gain or loss should then be entered in column (h).

The total amounts on Line 2 in Parts I and II of Form 8949 should then be transferred to Schedule D as follows:

  • If Part I, Box A is checked, transfer the amount in Part I, line 2 to line 1b of Schedule D
  • If Part I Box B is checked, transfer the amount in Part I, line 2 to line 2 of Schedule D
  • If Part I, Box C is checked, transfer the amount it Part I, line 2 to line 3 of Schedule D
  • If Part II, Box D is checked, transfer the amount in Part II, line 2 to line 8b of Schedule D
  • If Part II, Box E is checked, transfer the amount in Part II, line 2 to line 9 of Schedule D
  • If Part II, Box F is checked, transfer the amount in Part II, line 2 to line 10 of Schedule D

In conclusion, the responsibility of accurate capital gains reporting for digital asset transfers remains in the hands of the taxpayer. Because of the present gap between the statutory information reporting requirements and the associated regulations and forms, taxpayers must pay particular attention to how they elect and calculate basis in transactions that both were and were not reported to them or, in some circumstances, to the IRS, and whether such transactions affected long term or short-term capital assets. While taxpayers may, in most cases, benefit significantly from the Specific Identification method of basis allocation, they should be cautioned to invoke it only when they can meet the prescribed documentation to support that method. Otherwise, the default FIFO allocation should be used.

This note illustrates general principles only and is not intended as tax or legal advice. The reader is cautioned to discuss his or her specific circumstances with a qualified professional before taking any action.

3 Ways Crypto Prepares for Looming Regulation

Uncle Sam is taking “internet money” seriously.

As a result, elected officials are spending more time talking about crypto.

Do you know what that means? Regulation will follow the buzz.

In an interview with Yahoo!, U.S. Rep. Jim Himes (D-Conn.) characterized the current crypto climate as a showdown with Securities Exchange Commission Chairman Gary Gensler: “We’re sort of in a vapor lock around this issue of the registration of entities, exchanges, etcetera with Gary Gensler at the SEC saying, ‘I don’t need more statute. I’ve got all the law I need. What I need is for people to comply.’ And, of course, many people are saying, ‘Well, we don’t agree with that, and we are not going to comply’. So that suggests we are going to need to figure out whether additional statute is necessary, and Gary Gensler is wrong or whether Gary Gensler just needs to do a lot more enforcement to get people to see his point of view, that they should be registering under existing law.”

To make things more interesting, former SEC Chair Jay Clayton disagrees with Gensler’s stance, asking the agency to provide guidance on the custody of tokenized assets. In an op-ed piece, Clayton said the SEC should take the next step and present guidelines for crypto assets.

In the meantime, Gensler has embraced regulation through enforcement. He firmly believes the existing security laws on the books are fine for crypto.

So, what’s the play?

Here are three moves that will help small/midsize crypto companies prepare for looming regulation:

Register With The SEC

There remains a cavalier mindset about crypto. And that needs to change.

Crypto is not like going outside and throwing the frisbee, even though there is social media chatter about “going to the moon.” It is not fun and games; Crypto is an actual financial asset that has value. The notion that crypto is a novel, foreign idea wrapped in technology needs to give way to reality.

To protect your company, now is the time to register with the SEC. Long-awaited regulation for cryptocurrency is on the horizon. It is better to prepare now to fit into the current scheme than sit on the sidelines.

Do not wait for the government’s final verdict. Err on the side of caution. It is better to fill out more paperwork and “over-comply” than wait one year later to have the Securities Exchange Commission come knocking. When the agency files a complaint against your company, your reputation could take a hit—along with a hefty legal bill.

Eliminate ‘Dirty’ Money

Part of crypto’s allure is its anonymity, which could make it a prime vehicle for fraudulent activity that includes funding for terrorism. The government will soon introduce regulations that strongly encourage crypto companies to have anti-money laundering programs in place.

No matter how small your company is, you will need to have a designated compliance officer on the payroll. This person can perform other duties, but they must have the title. They also must maintain written policies and procedures. The anti-money laundering plan should be well thought out and detailed, not a two-page report. Ideally, your compliance officer would have the proper credentials, such as the ALMA designation, and appropriate experience. Each organization involved in a chain of transactions involving “dirty money” is accountable.

Sens. Elizabeth Warren (D-Mass.) and Roger Marshall (R-Kan.) have introduced The Digital Asset Anti-Money Laundering Act of 2022, which extends the Bank Secrecy Act. The objective is to subject crypto companies to the same rules as banks and broker-dealers. The bill would address a gap with digital wallets and prohibit financial institutions from transacting with forms of technology that enhances anonymity. Last summer, the currency-mixer Tornado Cash was sanctioned by the U.S. Department of Treasury, alleging money laundering activity with North Korea.

Add A Layer of Governance

Governance is a big part of compliance.

Board members can play a pivotal role. You will need seasoned professionals in many areas, ranging from marketing to technology. Make sure you have board members with deep experience in finance, compliance and internal controls.

Know Your Customer (“KYC”) is a process that identifies your customers and their activities. From a corporate level, do you have the entity’s EIN, articles of incorporation and financial statements? For individual investors, should you recommend a volatile asset to an investor in her 90s? What’s the rest of the story? What are the procedures to address these situations?

Back in 2019, the Commodities Futures Trading Commission, Financial Crimes Enforcement Network and SEC classified crypto exchanges as money service businesses (MSBs), which means they must follow the Bank Secrecy Act of 1970, as well as the anti-money laundering and KYC rules.

While your staff manages the day-to-day operations, your board members can still be part of the mix. Give them oversight of key committees, such as risk and compliance, to provide another layer of review, which would protect the firm.

(Tyler Rutherford is an associate attorney at Pastore with expertise in regulatory compliance, contract law and corporate law. He represents a wide range of clients, including crypto and blockchain companies.)

Opportunity for U.S. Backed Digital Currency

Cryptocurrency (“Crypto”) is an easily accessible digital asset used for financial transactions.[1] Crypto has become a source of payment on virtual platforms and utilizes blockchain technology.[2] While digital transactions eliminate the need for intermediaries such as banks, credit card companies, or third-party payment processors, it is an unregulated and volatile field.[3] The recent events with FTX highlight this issue.

The use of Crypto rose globally at an unprecedented rate during the COVID-19 pandemic.[4] Developing countries in particular accounted for 15 of the top 20 economies in 2021 using Crypto.[5] One of the most notable countries attempting to adopt Crypto is El Salvador. In 2021, El Salvador became the first country in the world to recognize Bitcoin as legal tender.[6] As such, El Salvador attempted to turn an impoverished area around the Conchagua volcano into a Bitcoin City.[7] The President of El Salvador, Nayib Bukele, hoped to create a futuristic metropolis from Crypto using the Conchagua volcano as a geothermal plant.[8] Unfortunately, President Bukele invested $100 million of government funds into Bitcoin when prices peaked, which led to a further debt crisis in El Salvador. One of the issues El Salvador and other developing countries have run into with the use of Crypto as legal tender is the volatility of the market. Since 2021, Bitcoin has dropped 61%, and El Salvador is likely to default on its debts in the next few years due to the dramatic drop in value.[9] The price of Crypto is open to fluctuation, fraud, and tax evasion due to the lack of regulation and backing by a central bank or government.[10]

One solution that has been proposed to bring stability to the Crypto market is a Central Bank Digital Currency (“CBDC”), which is a digital token, similar to Crypto, issued by a central bank. In the United States, the digital form of the token would be the equivalent of the U.S. dollar.[11] President Biden and the Federal Reserve are evaluating the creation of a U.S. CBDC and how it would work alongside the existing form of physical currency.[12]

The benefits of a U.S.-issued CBDC include privacy-protected digital currency, improvements to cross-border payments, and support to the U.S. dollar’s international role.[13] A U.S. CBDC would offer access to digital money that is free from credit and liquidity risks, unlike money held in a traditional bank.[14] Currently, Federal Reserve notes are the only central bank money available to the public. The use of a CBDC would provide a cheaper, faster form of transferring money and bring people who do not have bank accounts into the financial market.[15]

The dollar is the world’s most widely used currency for payments and investment.[16] A CBDC would expand the U.S. economy by creating a financial market with the global use of a CBDC.[17] Recently, China introduced its own CBDC, which may decrease the demand for the U.S. dollar abroad. The creation of a U.S. CBDC would allow competition on a global scale with China and other countries that have developed a digital currency backed by their central bank.[18]

Despite the benefits to the U.S. consumer and the global financial system, a U.S. CBDC has several issues. Many Americans actively use and prefer cash.[19] Additionally, there are privacy issues with digital currency. A Federal Reserve-backed CBDC system would allow the central bank to see every user transaction.[20] Additionally, banks have questioned the legal authority of the Federal Reserve to issue a digital currency without authorization from Congress.[21]

The White House, the Office of Science and Technology Policy, and the National Science Foundation continue to work on the National Digital Assets Research and Development Agenda.[22] The Executive Branch has placed a high priority on advancing research concerning Crypto and how it could provide financial inclusion and equity to Americans.[23]  While the benefits of a U.S. CBDC are plentiful, there are many moving parts to the initiation of a central bank backed digital currency in the United States. However, even with the lack of regulation and its volatile nature, Crypto is not going away. Crypto provides businesses and consumers with easily transferable, convenient, less expensive means of transferring money.[24] A U.S. backed stable coin may provide such stability. Clearly, the U.S. would not want the European Union or another Western power to issue such a coin and undermine the U.S. leadership in global currencies.


[1] Molly Mastantuono, Cryptocurrency 101: A Guide to Digital Dollars (Dec. 17, 2021), https://www.bentley.edu/news/cryptocurrency-101-guide-digital-dollars.

[2] Id.

[3] Id.

[4] UN trade body calls for halting cryptocurrency rise in developing countries, United Nations (Aug. 10, 2022), https://news.un.org/en/story/2022/08/1124362.

[5] Id.

[6] Joe Hernandez, El Salvador Just Became The First Country To Accept Bitcoin As Legal Tender, NPR (Sept. 7, 2021), https://www.npr.org/2021/09/07/1034838909/bitcoin-el-salvador-legal-tender-official-currency-cryptocurrency.

[7] Zeke Faux, El Salvador’s $300 Million Bitcoin ‘Revolution’ Is Failing Miserably (Nov. 4, 2022), https://www.bloomberg.com/news/features/2022-11-04/el-salvador-s-bitcoin-revolution-is-failing-badly.

[8] Id.

[9] Id.

[10] UN trade body calls for halting cryptocurrency rise in developing countries, supra note 4.

[11] Dr. Alondra Nelson, Alexander Macgillivray, Nik Marda, Technical Possibilities for a U.S. Central Bank Digital Currency (Sept. 16, 2022), https://www.whitehouse.gov/ostp/news-updates/2022/09/16/technical-possibilities-for-a-u-s-central-bank-digital-currency/.

[12] Money and Payments: The U.S. Dollar in the Age of Digital Transformation, Board of Governors of the Federal Reserve System (Jan. 2022), https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf.

[13] Money and Payments: The U.S. Dollar in the Age of Digital Transformation, supra note 12.

[14] Id.

[15] Andrew Ackerman, What is a Central Bank Digital Currency and Should the U.S. Issue it? (May 26, 2022), https://www.wsj.com/articles/should-the-u-s-issue-a-digital-dollar-which-could-compete-with-crypto-assets-11646921329.

[16] Money and Payments: The U.S. Dollar in the Age of Digital Transformation, supra note 12.

[17] Id.

[18] Boucher, supra note 16.

[19] Andrew Ackerman, Fed Launches Review of Possible Central Bank Digital Currency (Jan. 20, 2022), https://www.wsj.com/articles/fed-launches-review-of-possible-central-bank-digital-currency-11642706158

[20] Id.

[21] Id.

[22] Money and Payments: The U.S. Dollar in the Age of Digital Transformation, supra note 12.

[23] Id.

[24] Shobhit Seth, What is a Central Bank Digital Currency (CBDC)?, Mar. 9, 2022, https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp.

Pastore’s Managing Partner Leads Discussion with Congressman Jim Himes

On September 23, the Connecticut Crypto Forum (the “Forum”) held an event at the University of Connecticut at Stamford. The Forum connects large and sophisticated capital pools with leading players and thinkers across the crypto, defi and Web 3.0 markets to strengthen investor knowledge, understanding and skill. Pastore LLC is proudly a Founder and Sponsor of the Connecticut Crypto Forum. The Forum’s September 23 event was an invite-only session.

In the first half of the event, a panel of speakers discussed the current maturity of the crypto and blockchain markets.  The panel addressed the current challenges facing the evolving asset class and concluded that crypto/blockchain assets are still “metaphorically” in their teenage years. The asset class still is characterized by volatility. Moreover, the panelists noted the time of hyper valuation of projects in the industry is over. What follows now is a time of acquisitions. Many companies and projects will likely fail, but the ones with worthwhile technology that lack sufficient cashflows to continue operation will likely be consolidated within larger players and ultimately be poised to make the industry more efficient. However, the panelists agreed that the industry’s best days are ahead of it.

During the second half of the event, Pastore LLC’s Managing Partner, Christopher Kelly, led a discussion with Congressman Jim Himes, an emerging leader in the crypto/blockchain industry on Capitol Hill. Congressman Himes noted the significant attention that crypto and blockchain assets have received in Congress. He noted that he is working with other members of Congress on legislation concerning the industry.

When a member of the crowd asked what should businesses do considering the lack of legal and regulatory clarity surrounding crypto assets, Mr. Kelly gave a poignant response: Don’t be afraid, be transparent and work with counsel to navigate the murky regulatory waters. Pastore, as a thought leader in the field, is positioned to help businesses and individuals plan a path forward despite the uncertainty.


New York State Department of Financial Services Issues Consent Order Against Robinhood Crypto, LLC

As interest in cryptocurrencies (“crypto”) continues to rise, businesses and investors are left wondering what regulations they must follow. While a broad regulatory framework is still nonexistent for the crypto industry, the New York State Department of Financial Services (“DFS”) recently imposed a $30 million fine on Robinhood Crypto, LLC (“Robinhood”), a wholly-owned crypto trading unit of Robinhood Markets Incorporated, for failing to comply with New York anti-money laundering (“AML”) and cybersecurity regulations.[1] This is the first time DFS has taken enforcement action against a crypto company. In making the announcement, the Superintendent of DFS, Adrienne Harris, stated, “[a]ll virtual currency companies licensed in New York State are subject to the same anti-money laundering, consumer protection, and cybersecurity regulations as traditional financial services companies.”[2] Superintendent Harris made it clear that while this may be the first such action against a crypto company, it will not be the last.[3] DFS expects crypto companies to invest in compliance programs like traditional financial institutions.

In the DFS Consent Order, DFS took issue with several aspects of Robinhood’s compliance program[4] Specifically, Robinhood failed to devote sufficient funds and resources to its compliance program,[5] its Chief Compliance Officer lacked “commensurate experience to oversee a compliance program such as [Robinhood’s]” and did not participate adequately in the implementation of Robinhood’s automate software compliance program, [6] and Robinhood overly relied on the compliance program of its parent and affiliate despite those compliance programs were not compliant with New York State’s regulations.[7] Moreover, Robinhood failed to adequately evaluate “potentially suspicious transactions in order to determine whether a [Suspicious Activity Report] should be filed.”[8] DFS noted that as of October 26, 2020, Robinhood had a backlog of 4,378 potentially suspicious transaction alerts.[9]

While Robinhood may have had a compliance program on paper, DFS made it clear that it is focused on the execution of such programs. One thing is clear: the DFS Consent Order indicates that regulatory and enforcement agencies are starting to take action against the crypto industry. Common sense, sound legal advice, and diligence will help any business or investor navigate this market as state and federal agencies begin to enforce traditional financial services regulations on the industry.

[1] In the Matter of Robinhood Crypto, LLC, Dep’t of Fin. Servs. (Aug. 1, 2022), https://www.dfs.ny.gov/system/files/documents/2022/08/ea20220801_robinhood.pdf.

[2] DFS Superintendent Harris Announces $30 Million Penalty on Robinhood Crypto for Significant Anti-Money Laundering, Cybersecurity & Consumer Protection Violations, Dep’t of Fin. Servs., https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202208021 (last visited Sept. 19, 2022).

[3] Id.

[4] Id.

[5] Id. at ¶¶ 36-41.

[6] Id. at ¶ 36.

[7] Id. at ¶ 6.

[8] Id. at ¶ 37.

[9] Id.