SOURCE: http://arstechnica.com/tech-policy/2014/03/op-ed-the-legality-of-virtual-currency/

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Op-ed: The legality of virtual currency

Attorney and former IRS-man explains 3 major regulations facing Bitcoin.

by Judd J. Baroff, Esq. Mar 30 2014, 4:00pm PDT

We’ve all heard the news: Mt. Gox is down and has declared bankruptcy. This means Bitcoin is in trouble, and in fact, this could be the end.

A quick note

For the most part, I’m going to use “Bitcoin” as the stand-in for all peer-to-peer virtual currencies (what the Financial Crimes Enforcement Network [FinCEN] calls “De-Centralized Virtual Currencies”). But anything that follows Bitcoin’s pattern of peer-to-peer transfer with no central authority is included in this analysis, including dogecoins and litecoins.Except, like always, don’t believe the hype. This is not the first series of “the end of Bitcoin” articles sprayed about the Internet. Just patrolling the cyberspace of Forbes, there’s an article in June 2011, another from the end of that year, one from 2013, and, of course, one from the day after Mt. Gox went dark. So is this the end of Bitcoin? Almost certainly not. Will governments be looking a mite closer at it now, and, perhaps—to suffer a cliché for a moment—throw the baby out with the bathwater? Quite possibly.

The heightened attention is likely bad for Bitcoin, as regulators, scared of a new industry, overreact to the perceived dangers. This could mean more, faster, and messier regulations. Sadly, as anyone following Bitcoin’s legality with moderate determination can see, the laws governing bitcoins are already shockingly disordered. This chaos is partly due to the United States government not really knowing what bitcoins are or how they work. A greater part of the confusion stems from the bifurcated nature of our regulations and criminal laws.

Let’s attempt to summarize what we know about the three types of current regulation: federal, state, and taxation. While we’ll base any judgments on the law and my experience, it’s worth noting that given the dearth of institutional prescriptions, any analysis contains some guesswork.

Decentralized virtual currency

This is defined as a type of virtual currency “(1) that has no central repository and no single administrator, and (2) that persons may obtain by their own computing or manufacturing effort.” If there was any doubt that “decentralized virtual currencies” referred to Bitcoin and its ilk, then a statment from Jennifer Shasky Calvery, director of FinCEN, puts that to rest. In it, she discusses the various new regulations as ways to avoid future Liberty Reserves and Silk Roads.First, the basics. Bitcoins are not “new”—they were first mined in 2009. They were “discovered” just over two years ago by a frantic media and, shortly thereafter, perturbed federal and state governments. Immediately, there was talk of regulation. There seemed to be three large-veined options: keep the nascent industry unregulated to see what happens, do what Finland has done and regulate bitcoins as commodities, or regulate bitcoins as currencies. For two years, the feds convulsed in exaggerated hand wringing until March of 2013, when a Federal bureau classified Bitcoin transactions as “currency transactions.”

Federal regulation

FinCEN, a bureau of the Department of the Treasury, regulates currency transactions. Its primary objective is to discover and prevent money launderers and the financiers of terrorism. As such, and simplifying for expediency what is a rather complicated mess of laws, those who “accept [peer-to-peer virtual currency] from one person and transmit it to another person” are called “exchangers,” who are classified as “money transmitters.” This definition captures those who run Bitcoin and other virtual currency exchanges but not those who mine the bitcoins or use them for personal transactions.

This means that even if you’re a college freshman running your exchange from your parents’ basement, you must register as a money services business (MS:cool: to run it legally. To operate an MSB, you must register with FinCEN and then re-register every two years or upon a material change (for example, change of address, change of name, etc.). Further, the MSB must then institute an anti-money laundering (AML) program, comply with fraud reporting requirements, and comply with requests from FinCEN or federal law enforcement if the men in dark suits come calling.

(Perhaps the above regulations seem over-burdensome to some, but the federal regulators actually covered these exchanges with a fairly light touch. New York, for example, does not seem to be so inviting.)

The exact AML requirements imposed by these regulations vary by the size and complexity of the MSB (and in general, the bigger you are, the more regulation you face). But basically, the company or person must retain records of every transaction. These records must be sufficient to verify customers’ identities “to the extent applicable” or, in other words, to the best of the MSB’s ability. This almost certainly requires recording the consumers’ user names and e-mail addresses, probably along with their IP addresses next to each transaction. However, given that FinCEN has not commented on the precise reporting requirements and no cases have yet arisen, we simply do not know exactly what records FinCEN demands an exchange to keep. Furthermore, FinCEN requires the MSB to designate a person responsible for the day-to-day compliance (including responding to any law enforcement request and filing fraud reports when applicable), plus a different person who occasionally monitors the adequacy of the AML program. Although both individuals may be employees of an MSB, the roles must be filled by at least two different people who must be “[p]rovide[d] education and/or training” on their duties and how to deliver upon them.

For a business of two or more people, this division of labor is straightforward. For exchanges operated by one person alone, hiring a lawyer or someone trained in regulatory schemes may be necessary. Happily, the monitoring portion of the requirement is not onerous, and assuming your exchange is moderately lucrative, it shouldn’t be too plunderous either. Still, I can see the programmers moonlighting as Milton Friedman cringe. To say that regulation is better than fraud feels removed to those who deal in Bitcoin honestly.

One part of the requirements demands having a system in place that either prevents frauds like money-laundering from happening or reports the possible money-laundering soon after it happens. This is what I call the “reporting requirement.” To fulfill it, the MSB must report any transaction of at least $2,000 that it “knows, suspects, or has reason to suspect” is entangled with illegality. This involves ferreting out such unusual occurrences as two people trading bitcoins for other money on the same day, perhaps at a lower than usual price, or perhaps in the exact same amounts again and again.

I’m going to try to preempt two objections that I often receive from my clients. First, I’m told that no user on my clients’ exchanges knows whom he’s exchanging money with. If not, the argument goes, then the chance for money-laundering trades would be next to, or in fact entirely, nil. If there is no way for users X and Y to know that they’re trading with each other, then the chances of X selling five batches of four bitcoins to Y in a 24-hour period are not worth considering.

Yet that’s not the only way money laundering works. User X might want to launder $100,000. He might therefore break the transaction into $5,000 batches and exchange them for bitcoins, dogecoins, and litecoins at different times throughout the same day. The MSB must report this, too. Happily, given that the MSB already tracks each transaction as part and parcel with its AML program, there will be only a little extra energy expended to search for such patterns within the behavior of the MSB’s customers. That’s the comfort I can offer MSBs or potential MSBs; these transactions are already recorded and easy to follow.

The second objection, brought up by those who run exchanges of virtual currencies alone, is rather trickier to handle. Those who run exchanges without physical currency strenuously argue that virtual currencies are a money system all on their own. They’re not measured in US dollars, so there’s no way to determine what a trade’s value is at the exact moment of its trade. This is true in any exchange of currency where the exchange rate alters throughout the day. But banks have complied with these laws (and other more stringent ones) for decades.

It’s all about the daily averages. For more mainstream currencies, like the Yen or the Euro, the average daily exchange rate-to-dollar is easy to find; the New York Stock Exchange keeps daily averages. For bitcoins, it’s a little more difficult. Checking out a site like bigterminal, it’s clear that the exchange rate between bitcoins (BTC) and US dollars (USD) depends on the exchange at which one trades them. So if an MSB’s exchange trades dollars with bitcoins, the answer is easy; the MSB will use its own daily average. If it only trades in virtual currencies, then we’re back into territory in which I have to shrug and say, “Well, no one really knows. Sorry.” Like always, there are guesses, and mine would be that the MSBs should compare the Bitcoin sold with sites that aggregate the BTC to USD average daily exchange rates of various popular exchanges. Alternatively, you could choose a single exchange on which you would base all of your transactions. Be warned, though, that changing your benchmark site once picked will cause regulators, alive or dead, to raise an eyebrow.

Happily, that covers the federal regulations, and from here the regulations become simpler, if much more uncertain.

State regulations

The problem with summaries of state regulations is that there is no way to capture all 50 states briefly. Summarizing all of the 50 states’ regulations is exactly like summarizing the regulations of 50 countries. Worse, most states haven’t even mentioned virtual currency specifically, so we’re working with regulations that are ill-designed for a new medium. Even before Mt. Gox disappeared or declared bankruptcy, the one state that has mentioned virtual currency, New York, said that it would prefer to squash the industry than suffer the slightest illegality. I’ll attempt to summarize only the different types of requirements set out by the states and give a handful of examples.

Most states impose four broad constraints before a person can even become a money transmitter: an application fee, fingerprint and other biographical information requirements, a pre-file meeting or call with a state agency that regulates money transmitters, and a surety bond (a set and reserved amount of money, usually secured by a bank, that guarantees a minimum payout against otherwise uncovered liabilities). Not all states demand each, and the exact nature of the requirements under these broad categories varies considerably among jurisdictions.

But most federal money transmitters will qualify as money transmitters for state purposes. New York is an exception; it has said that it will propagate rules specific to virtual currency transactions, and when those rules are promulgated, will provide exchangers with a roadmap. As far as we can tell, most other states apply their money transmitter statutes on Bitcoin in the meantime, as three men in Florida recently discovered. Florida’s statute prohibited exchanges of currency by non-licensed money transmitters of a value more than $300 but less than $20,000 in any 12-month period. It also prohibited the exchange of currency in the value of more than $10,000 in any single transaction or series of related transactions.

This is a good example of the variability of the different jurisdictions. Some other examples: in Delaware, you must have net worth of at least $100,000 to be a money transmitter. In Wyoming, you need a surety bond of at least two-and-a-half times the amount of any “outstanding payment,” though no less than $10,000 and no more than $500,000. California, too, has a surety bond requirement, although its minimum requirement is $250,000, and its maximum requirement is $7,000,000.

As for filing fees and biographical information, Colorado demands $7,600 in registration fees as well as in-depth biographical checks and fingerprinting. Meanwhile, Connecticut requests just under $2,000 in filing fees and considerably less biographical information, with no fingerprinting requirement.

But not all states are so stringent. Operating under much lower ceilings, Nevada requires a bond of $10,000 and about $700 in fees. Utah requires $50,000 for a surety bond but only $100 in fees and next to no background requirements. And while Arizona has a money transmitter statute, its definition of “money” excludes virtual currencies. So at least for now, the state seems to leave bitcoins unregulated.

This short section really comes down to: what will states do over the upcoming months and years? I refer to my recurring motto: no one knows. Hopefully, New York will set a precedent by minimizing the requirements for surety bonds and assets. Exactly how is a money transmitter supposed to proceed? Like always, ask an attorney for your specific situation.

Taxation

Business taxation is very confusing, and there are literally hundreds of sections that alter the basic “tax posture” (a technical term meaning the arrangement of tax liabilities, exemptions, and deductions) of a business. As with other regulations, taxation is bifurcated into federal and state. Unlike other regulations, state taxes can usually offset federal liabilities, so these regulatory spheres are closely tied. We’ll focus on the federal regime.

Until recently, the IRS had no decision on how to tax virtual currencies. Tax professionals debated over which type of assets the IRS would consider virtual currencies—capital assets (like stocks), collectible assets (like gold), or currencies (like dollars). On March 25, 2014, the IRS finally spoke up. “Convertible” virtual currencies are treated as capital assets for tax purposes.

We’ll get to what “convertible” means, but the first thing to say is that this is very good news. “Character” (the nature of an asset, which determines the rate at which income derived from that asset is taxed) is the most vital part of tax strategy. Lawyers around the world burn a lot of midnight oil trying to get deals structured to give their clients gains from capital assets. Here, the IRS has saved us all that work.

Character determines the rate at which all of your income will be taxed (to get mildly political, this is why Mitt Romney endured a lower tax rate than your uncle who works construction). And character for property is broken into two types: “long-term capital gains” (assets that were held for one year or longer before being sold), assessed at a maximum rate of 23.8 percent, and “short-term capital gains,” assessed at “ordinary income” rate (the percentage one pays on wages), which has a maximum rate of 39.6 percent.

To get concrete, let’s say that Mike buys a bitcoin for $500 and sells it a week later for $700. Simultaneously, he sells a bitcoin (for $700) that he bought back in 2011 for $30. He would have a taxable gain on both exchanges. For the bitcoin he just bought last week, he would have a $200 gain, which would be short-term capital gains. This would be simply added to his salary or any other ordinary income he recognized that year. The bitcoin he bought back in 2011, for $30, would give him a $670 gain that would be considered long-term capital gains. It would be taxed at (a maximum of) 23.8 percent.

It’s not just exchanges for cash that trigger tax liabilities when dealing with property, however. Exchanges of property for goods or services (for example, I trade you a book for painting my room or a movie for making me a sandwich) are taxable transfers. If there are no other pieces of property or cash in the transaction, anything exchanged is assumed to be of equal value. For example, if Mike buys a painting for $1,000 and later exchanges it for the painting of his house (which would normally cost him, say, $10,000), he has gained on the exchange of that property and owes taxes on $9,000. Likewise, if Mike bought a bitcoin for $200 and later uses it to pay his website designer (for a job normally costing $500), then he would receive a $300 gain.

This works both ways, of course. If Mike bought a bitcoin for $800 and later gave it in exchange for services normally costing $600, he would recognize a loss of $200. This illustrates the need to keep meticulous records so Mike knows his tax liability at the end of the year. It even includes (the IRS points out) someone who simply mines bitcoins for his or her own use.

Now we come back to the caveat about “convertible” virtual currency. These rules only apply to convertible virtual currencies (like Bitcoin) that “[have] an equivalent value in real currency or that act as a substitute for real currency.” Bitcoins, dogecoins, litecoins, and all of the proliferated virtual currencies you find on exchanges are likely to count among convertible virtual currencies. The test will be case by case, and it will turn on whether you can exchange them for “real” money or use them to purchase goods or services. On one end, we know it includes bitcoins, dogecoins, and litecoins. On the other end, it almost certainly excludes such virtual currencies as the internal money of Second Life (which, as far as I understand, cannot be moved outside the system to pay for real-world goods).

That’s the world as it now looks, and it’s a much clearer vision than even a week ago.

Conclusion

If any of this sounds disconcerting, take comfort in the fact that it disconcerts others, too (see here, here, and here). About a week ago, Jamie Dimon of J.P. Morgan Chase travelled to the New York State panel on bitcoins to voice his contempt for virtual currencies everywhere, saying they were useful only for illegality. And many more people worry that Bitcoin removes the middleman—oddly, these people usually are, like Dimon himself, the middlemen—whom they see as enforcers of safety and customer care.

This has regulators even more concerned and reluctant to promulgate regulation, fearing that if they’re too limp, they will support money laundering, another Silk Road, or a Mt. Gox. Until they act, however, they’re creating exactly the Wild West environment they fear and are further stoking those fears. So if you have any specific questions, ask an attorney. And in the meantime, let’s hope the regulators don’t, as Jamie Dimon and many banks hope, strangle this baby in its crib.

See also:
 
Is Atheism a Religion?
http://creation.com/atheism-a-religion

1. Just like in the Internal Revenue Code, the term “United States” is ONLY defined in its GEOGRAPHICAL sense but the GEOGRAPHICAL sense is not the only sense. The OTHER sense is the GOVERNMENT as a legal person.

1.1 There is no way provided to distinguish the GEOGRAPHICAL use and the GOVERNMENT use in all the cases we have identified.

1.2 The Great IRS Hoax, Section 5.2.13 talks about the meaning and history of United States in the Internal Revenue Code.
http://famguardian.org/Publications/GreatIRSHoax/GreatIRSHoax.htm

1.3 All statutory terms are limited to territory over which Congress has EXCLUSIVE GENERAL jurisdiction. All of the statuses indicted in the statutes (including those in 8 USC 1401 and 1408) STOP at the border to federal territory and do not apply within states of the Union.  I cannot have a status in a place that I am not civilly domiciled, and especially a status that I do NOT consent to and to which rights and obligations attach.  Otherwise, the Declaration of Independence is violated because I am subjected to obligations that I didn’t consent to and am a slave.  This is proven in:

Your Exclusive Right to Declare and Establish Your Civil Status, Form #13.008

DIRECT LINK: http://sedm.org/Forms/13-SelfFamilyChurchGovnce/RightToDeclStatus.pdf

FORMS PAGE: http://sedm.org/Forms/FormIndex.htm

1.4 As the U.S. Supreme Court said, all law is prima facie territorial and confined to the territory of the specific state. The states of the Union are NOT “territory” as defined, and therefore, all of the civil statuses found in Title 8 of the U.S. code do not extend into or relate to anyone civilly domiciled in a constitutional state, regardless of what the definition of “United States” is and whether it is GEOGRAPHICAL or GOVERNMENT sense.

“It is a well established principle of law that all federal regulation applies only within the territorial jurisdiction of the United States unless a contrary intent appears.”

[Foley Brothers, Inc. v. Filardo, 336 U.S. 281 (1949)]

“The laws of Congress in respect to those matters [outside of Constitutionally delegated powers] do not extend into the territorial limits of the states, but have force only in the District of Columbia, and other places that are within the exclusive jurisdiction of the national government.”)

[Caha v. U.S., 152 U.S. 211 (1894)]

“There is a canon of legislative construction which teaches Congress that, unless a contrary intent appears [legislation] is meant to apply only within the territorial jurisdiction of the United States.”)

[U.S. v. Spelar, 338 U.S. 217 at 222.]

1.5 40 USC 3111 and 3112 say that jurisdiction does not exist within a state except on land ceded to the national government. Hence, no matter what the geographical definitions are, they do not include anything other than federal territory.

1.6 The term “United States” as used in 8 USC 1401 within “national and citizen of the United States” does not invoke the GEOGRAPHIC sense and hence, must be presumed to be the GOVERNMENT sense, where “citizen” is a public officer in the government.

1.7 The whole point of Title 8 is confuse state citizens with federal citizens and to thereby usurp jurisdiction over them. A citizen of the District of Columbia is certainly within the meaning of 8 USC 1401. All you do by trying to confuse THAT citizen with a state citizen is engage in the Stockholm syndrome and facilitate identity theft of otherwise sovereign state citizens by thieves in the District of Criminals.

2. Agreed.

3. Agreed. Don’t know how it can be proved.

4. Agreed

5. The regulations for title 8 and spread all over. The list in the parallel table of authorities provides the list of regulations pertaining to specific sections, but does not break each statute section down to specific regulations. That is your job. Yes, it means you have to look in multiple titles of the regulations for each specific section and it can be time consuming. No, we don’t publish procedures on how to find CFR regulations that pertain to specific sections other than what you have discovered, which is the ONLY method we know of.

6. We are using Microsoft Visio for all out diagrams.

Rich Man Poor Man

http://www.youtube.com/watch?v=kPSTzD52ufY

The Privilege Class
http://www.youtube.com/watch?v=WvgxiV0Kx-Y

1. There is a reg at 26 CFR 1.6012-1(b ) making “nonresident alien INDIVIDUALS” liable to make a return. Peymon Mottahedeh’s $50000 challenge to produce a law making people liable is bogus because this regulation.
 

26 C.F.R. § 1.6012-1 Individuals required to make returns of income.
Title 26 – Internal Revenue

Title 26: Internal Revenue
PART 1—INCOME TAXES
tax returns or statements

(b ) Return of nonresident alien individual—

(1) Requirement of return—

(i) In general.

Except as otherwise provided in subparagraph (2) of this paragraph, every nonresident alien individual (other than one treated as a resident under section 6013 (g) or (h)) who is engaged in trade or business in the United States at any time during the taxable year or who has income which is subject to taxation under subtitle A of the Code shall make a return on Form 1040NR. For this purpose it is immaterial that the gross income for the taxable year is less than the minimum amount specified in section 6012(a) for making a return. Thus, a nonresident alien individual who is engaged in a trade or business in the United States at any time during the taxable year is required to file a return on Form 1040 NR even though (a) he has no income which is effectively connected with the conduct of a trade or business in the United States, (b ) he has no income from sources within the United States, or (c) his income is exempt from income tax by reason of an income tax convention or any section of the Code. However, if the nonresident alien individual has no gross income for the taxable year, he is not required to complete the return schedules but must attach a statement to the return indicating the nature of any exclusions claimed and the amount of such exclusions to the extent such amounts are readily determinable.

SOURCE: http://law.justia.com/cfr/title26/26-13.0.1.1.1.0.4.29.html

2. There is no regulation or statute referring to PRIVATE NON-individuals or NON-persons.

3. The underlying code is not positive law, it doesn’t create evidence of a duty to do anything. See 1 U.S.C. 204

4. The ability to regulate private rights and private property is repugnant to the constitution and therefore beyond the control of government. Hence, the ONLY thing uncle can tax is PUBLIC property. And it must be public BEFORE they can institute any enforcement action against it.

5. Even if a duty was lawfully imposed upon NON-individuals and NON-persons (26 USC 6671(b ) and 7343), the burden of proof would be upon the government as moving party to prove that:
5.1 The party against whom the duty was being enforced was engaged in public office and therefore subject to the extraterritorial special jurisdiction of the pagan beast under Federal Rule of Civil Procedure 17(b ).
5.2 The earnings subject to tax were consensually donated to a public use, public purpose, and public office and therefore subject to the jurisdiction of the Article 4, Section 3, Clause 2 FRANCHISE district court. This would require WRITTEN signed document officially performing the donation. Otherwise, the property is conclusively presumed to be EXCLUSIVELY private, protected by the constitution, and thus beyond the jurisdiction of the national government.
5.3 The activity subject to tax was conducted on federal territory subject to federal territorial law.
 
By “NON-individuals” and “NON-persons” we mean EXCLUSIVELY private HUMAN BEINGS and not artificial entities who are beyond the civil legislative reach of Congress.  See:
 
Why Your Government is Either a Thief or You are a Public Officer for Income tax Purposes, Form #05.008
DIRECT LINK: http://sedm.org/Forms/05-MemLaw/WhyThiefOrPubOfficer.pdf (OFFSITE LINK)

Milgram Experiment

A study in what makes people turn evil.

http://en.wikipedia.org/wiki/Milgram_experiment