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Kathleen R Semanski

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Kathleen Semanski is an associate in the Tax Department. She counsels corporate, private equity, investment fund and REIT clients in connection with domestic and cross-border financings, debt restructurings, taxable and tax-free mergers and acquisitions (inbound and outbound), securities offerings, fund formations, joint ventures and other transactions.  Katie also advises on structuring for inbound and outbound investments, tax treaties, anti-deferral regimes, and issues related to tax withholding and information reporting.  Katie is a regular contributor to the Proskauer Tax Talks blog where she has written about developments in the taxation of cryptocurrency transactions, among other topics.

Katie earned her L.L.M. in taxation from NYU School of Law and her J.D. from UCLA School of Law, where she completed a specialization in business law & taxation and was a recipient of the Bruce I. Hochman Award for Excellence in the Study of Tax Law.  Katie currently serves on the Pro Bono Initiatives Committee at Proskauer and has worked on a number of immigration, voting rights, and criminal justice-related projects.

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In this first of (we hope) many posts on the interesting and myriad tax issues arising in the world of cryptocurrency and blockchain technology, we focus on the very basic U.S. federal income tax consequences of cryptocurrency transactions.  The following is a very high-level discussion of the consequences generally applicable to U.S. individual holders of cryptocurrencies, and will not be applicable to all taxpayers depending on their particular situation.

Is it property or is it money?

While it might seem an academic question, the distinction between property and currency is the key to the U.S. federal income taxation of cryptocurrencies.  Gain on nonfunctional foreign currency exchanges (i.e., currencies other than the main currency used by a trade or business) is generally ordinary income, and therefore taxable under current law at marginal rates up to 39.6% (or 43.4%, factoring in the net investment income tax).  In contrast, gain or loss on the sale of property can constitute either ordinary or capital income, depending on whether the property sold is or is not a capital asset.  If a capital asset, the reduced long-term capital gains rate (up to 23.8% under current law, including the net investment income tax) could apply if the asset sold was held for more than one year.

Yesterday afternoon, the House of Representatives passed the Tax Cuts and Jobs Act (H.R. 1) (the “House bill”). The House bill is identical to the draft bill approved by the House Ways and Means Committee on November 10. Late last night the Senate Finance Committee approved its own conceptual version of the Tax Cuts and Jobs Act. An initial, descriptive version of the Senate Finance Committee bill (for which actual statutory text is still forthcoming) prepared by the Joint Committee on Taxation (the “JCT”) was released on Thursday, November 9. The Senate Finance Committee subsequently revised the bill significantly, as reflected in the JCT descriptions of the modifications released on Tuesday, November 12, and a further amendment[1] released late last night (as modified, the “modified Senate bill” and generally, the “Senate bill”). The modified Senate bill varies in certain important respects from the House’s bill.

The modified Senate bill introduces significant changes to the Senate bill released last week. Perhaps most significantly, the modified Senate bill would repeal the provision of the Affordable Care Act (ACA) requiring individuals without minimum health coverage to make “shared responsibility payments” (commonly referred to as the “individual mandate”). The modified Senate bill also provides for most changes to individual taxation to sunset after December 31, 2025, including the repeal of the individual AMT, the reduced rate for pass-through entities, the reductions in ordinary income tax rates and brackets, the repeal of itemized deductions, the increased standard deduction, and the expanded exemption for estate and generation-skipping transfer taxes. Notably, the reduced corporate rate cut of 20% (reduced from 35%) effective in 2019 would be permanent.

We have outlined below some of the significant changes in the latest draft of the Senate bill, and summarized the key differences between the modified Senate bill and the House bill. Because the Senate has not yet released legislative text, this summary is based only on the JCT’s descriptions of the Senate Finance Committee’s bill (in its original and modified form) and the November 16 amendment (as published on the Senate Finance Committee website).

On June 7, 2017, ministers and high-level officials of 68 jurisdictions convened to formally sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), originally published on November 24, 2016 (the “Multilateral Instrument,” or “MLI”). The Multilateral Instrument is the product of ongoing efforts by the Organisation for Economic Co-operation and Development (“OECD”) to prevent perceived abuse by certain taxpayers and improve coordination between taxing authorities, including through enhanced dispute resolution. The Multilateral Instrument was designed as a mechanism for implementing widespread treaty reform and coordination within the existing network of bilateral double tax treaties – without requiring separate bilateral negotiations between each pair of contracting jurisdictions. (For more background, please see our prior blog post on the MLI here.) The June 7 event was an important intermediate step towards the effectiveness of the MLI, and is a major step forward in providing multinational coordination to the historically bespoke bilateral tax treaty network.

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “Convention”) was released by the Organisation for Economic Co-operation and Development (“OECD”) on November 24, 2016. The Convention is the latest in an ongoing series of releases related to the OECD/G20 Project addressing Base Erosion and Profit Shifting (the “BEPS Project”), which is a major and continuing effort described as “aiming to realign taxation with economic substance and value creation, while preventing double taxation.”[1]  The Convention is the result of multilateral negotiation by over 100 member states (including the United States and the United Kingdom) and observers. While the Convention will not come into force at all until five countries have formally ratified the Convention, once in force the Convention will come into effect for an existing income tax treaty after both contracting parties to that treaty have signed the Convention and any other required home-country ratification processes are completed. The Convention is accompanied by a detailed explanatory statement describing its provisions. The OECD announced that a signing ceremony for the Convention will be held in June of 2017, although a list of expected signatories has not yet been released.

Continue reading for further background on the Convention and a discussion of issues relating to the Convention’s interaction with existing tax treaties, substantive highlights and timetable for implementation. A complete version of the Convention, and the explanatory statement, are linked here and also can be found on the OECD website, http://www.oecd.org. If you would like to discuss any details of the Convention or its impact on multinational enterprises, please contact any of the authors listed here or any member of the Proskauer Tax Department whom you usually consult on these matters.