Cryptocurrency: Vermont Considers Tax, SEC Talks Enforcement

Manatt, Phelps & Phillips, LLP

Manatt, Phelps & Phillips, LLP

In cryptocurrency news, the Vermont legislature is considering a bill that would create a tax on digital currency transactions, while the Securities and Exchange Commission (SEC) released a statement on enforcement actions.

What happened

Further legitimizing digital currency, a state senator from Vermont has proposed a bill that would tax each transaction of cryptocurrency by companies in the state.

Pursuant to S.269, a digital currency LLC would remit to Vermont “in the form of its digital currency a transaction tax equivalent to $0.01, at the then current exchange rate for the currency with the U.S. dollar, per transaction for: (1) each unit of currency mined or otherwise created; and (2) each sale or other transfer of one or more units of currency.”

A covered entity would have to maintain a physical presence in the state or “conduct some or all of its activity within this State, or both” in order to be taxed, and would be exempt from all other applicable taxes.

Sen. Alison Clarkson (D-Woodstock), who sponsored the measure, told Bloomberg Tax it is intended to help “build Vermont’s fluency in financial technologies, to unleash 21st century opportunities in our state,” while providing “a regulatory framework in which cryptocurrency can thrive, which would be supported by a light transactional tax.”

The bill also proposed multiple studies in the area of fintech, from a review of the e-residency program established in Estonia (for consideration of potentially adopting of a comparable program in Vermont) to a study of the potential application of blockchain technology to the provision of insurance and e-banking in the state.

In addition, S.269 would provide $25,000 for a fintech summit hosted by the state in collaboration with local universities to “explore legal and regulatory mechanisms to promote the adoption of financial technology in State government” as well as “opportunities to promote financial technology and economic development in the private sector, including in the areas of banking, insurance, retail and service businesses, and cryptocurrency providers and proponents.”

If enacted, the bill—which is currently pending in the Committee on Economic Development, Housing and General Affairs—would take effect July 1.

The proposed legislation is not Vermont’s first foray into fintech; it follows on the heels of a 2016 measure that established the evidentiary standards to determine the authenticity of records using blockchain technology (and permitted it to be used as evidence in court). A second law was passed by the state in 2017 that allows money transmitters to hold digital currencies as a form of “permissible investment,” albeit “only to the extent of outstanding transmission obligations received by the licensee in the identical denomination of virtual currency.”

In other cryptocurrency news, the enforcement directors of the SEC and the Commodity Futures Trading Commission (CFTC) released a joint statement regarding virtual currency enforcement actions.

“When market participants engage in fraud under the guise of offering digital instruments—whether characterized as virtual currencies, coins, tokens, or the like—the SEC and the CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws,” SEC Co-Enforcement Directors Stephanie Avakian and Steven Peikin and CFTC Enforcement Director James McDonald said. “The Divisions of Enforcement for the SEC and CFTC will continue to address violations and bring actions to stop and prevent fraud in the offer and sale of digital instruments.”

To read S.269, click here.

To read the SEC’s statement, click here.

Why it matters

Sen. Clarkson’s bill is believed to be the first to impose a transaction tax on digital currency transactions. The proposal was not met with universal support, as the Chamber of Digital Commerce spoke out against the proposed legislation. “We wouldn’t want to see these transactions be taxed,” Amy Kim, global policy director and general counsel for the group, told Bloomberg Tax. “I think you see some states taking a restrictive approach, while others are looking to help foster the industry in their states.” Meanwhile, the federal regulators made clear that enforcement actions will follow fraud, regardless of the form of currency. This is only the most recent in a slew of developments, with the SEC noticeably dialing up the enforcement rhetoric with respect to cryptocurrency offerings and secondary trading. We expect this focus to continue throughout the year, with major enforcement cases expected in both the origination and secondary trading side as the SEC and CFTC strive to stay ahead of the curve in crypto and deter fraud.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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