Blockchain Technology and Digital Currency

Major Cryptocurrency Trading Prices (US$s)

Source: CryptoCompare

Blockchain technology is a rapidly evolving industry with the potential to reshape the manner in which corporations, governments, and individuals record and exchange information.

Blockchains are a type of distributed ledger in which new information is introduced into a database via “mining”, a cryptographic securing of groups of data known as “blocks”.

Cryptocurrencies (or virtual currencies) are the digital assets that incentivize maintenance of the blockchain, acting as a financial reward to the entities that ultimately mine new blocks of the blockchain.  The most prominent cryptocurrencies are Bitcoin, Ether (Ethereum), Ripple, EOS, Stellar, and Litecoin.

In particular, the Ethereum blockchain, a protocol-level blockchain, offers unique capabilities that allow for the creation of decentralized applications (dApps). These dApps integrate with the Ethereum blockchain via “smart contracts”, a programming language native Ethereum. Each dApp is capable of having its own token, which facilities the transfer of utility amongst its users and incentivizes maintenance of the dApp-specific distributed ledger. These tokens are often sold via simple agreements for future tokens (SAFTs), private sales, and public sales, all of which can have tax implications for participating parties, per the US Internal Revenue Service (IRS).

In addition, a number of organizations are pursuing development of their own protocols.  Much like Ethereum, these protocols are designed to support dApp functionality.

Teknos Associates has extensive experience working with high-profile companies specializing in the blockchain and digital currency industries, and brings a unique understanding of the various tax implications associated with these events.