Aaron Grinhaus: Debunking Digital Asset Tax Regulation

Cryptocurrency taxation and regulation are still largely misunderstood, with the prolonged absence of clear tax guidance, coupled with slow-moving regulations, heightening this issue.

But as cryptocurrency prices continue to rise in 2019, blockchain regulations have garnered attention.

Aaron Grinhaus, lawyer and blockchain consultant with Grinhaus Law Firm, spoke during the Blockchain Futurist Conference in Toronto about digital asset tax regulation and misconceptions in this area.

The Investing News Network (INN) spoke with him about how he wrote the first legal textbook on blockchain, and the three principal regulations that relate to cryptocurrencies.

Read on to find out what Grinhaus had to say. The interview has been edited for clarity and brevity.

INN: Your firm was one of the first to offer advice in the area of blockchain, and you wrote the first legal textbook on the subject. Why did blockchain interest you?

AG: Well, I actually started off in the space as an investor. I was investing in bitcoin and ether early on. Then I started to learn about smart contracts and how they are pretty much going to be the end of commercial lawyers. I thought, “I better get ahead of this before I lose my job as a result.” So I started to get more into it; I was representing a whole bunch of different kinds of clients, like bitcoin mining operations, traders and investment funds using bitcoin.

It was really interesting, and then I started to get into some consulting. I had a lot of people come to me with questions, (and) after awhile and I thought it would be easier to put a practical guide, which is the textbook, together. It’s really designed to be a practical guide. So you can pick it up before you go and hire a lawyer or accountant. The book answers most of your questions, and then you can go hire a lawyer after that.

INN: How have you seen cryptocurrency regulations change in recent years?

AG: People don’t realize there are actually three different kinds of regulation. A lot of people think of securities when they think of regulation. But there’s tax regulation, there’s securities regulation and there’s anti-money laundering (AML) regulation. Those are the three big ones when you’re dealing with crypto; governments are always afraid of people money laundering and using the proceeds of crime in the form of bitcoin.

But that’s kind of behind us now. Now that the capital markets have jumped in, the focus has been less about AML and more about securities. That’s kind of where the focus has become.

But people also forget about taxes. The biggest thing that’s funny about all three is none of them can agree on the definition of money. FINTRAC, the Canadian AML agency that regulates all the AML in Canada, it just defined digital assets as included in the definition of money. As of June of next year, you’re going to have to get a special license if you want to convey crypto across borders.

INN: Right.

AG: But the tax people and the securities people still haven’t figured it out. The securities thing defaults to a really old test — it’s almost 100 years old — called the the Howie Test, which is the definition of a security. Canada adopted that test around 1978 to 1979. So we’re dealing with really archaic rules. All the rules are there, we’re just trying to apply them to the modern day context. That’s the challenge. That’s where lawyers have a lot of fun. We get to define, we get to make these arguments now. If it turns out that … the arguments were not good, there really is no precedent. We’re setting the precedents for this, so it’s a really exciting time.

INN: Can you tell me more about cryptocurrency taxation in Canada and some common misconceptions that investors may have?

AG: In a nutshell, there’s a lot of misconceptions about how crypto is supposed to be treated. The two main things that people are worried about is if I’m a crypto trader, are my gains treated as capital gains, which are preferentially taxed — only 50 percent is taxed — or are they current income, where you declare 100 percent of your income. The tax rate is obviously much higher in Canada, it’s almost 54 percent, so people are always trying to figure this out — is it capital or is it current?

The real answer to that is you have to think about it subjectively. Were you buying it to hold it over a long period of time or were you buying it to trade for other things?

Then when you trade, it comes to problem number two, which is, “Am I engaging in a barter transaction?” Because every time you trade crypto to crypto, if you’re doing it in the course of business, that is a taxable event.

So you may not have actually cashed out on any of your crypto, but you have a tax bill of tens or hundreds or millions of dollars. I have had clients who have had to pay millions in tax because they did so many trades throughout the year. They didn’t realize any gains on those because they were just trading crypto to crypto. But each transaction, because it was in the course of business, constituted a taxable event.

INN: How does the taxation environment differ in the US?

AG: I can’t really speak to US law because I’m only licensed in Canada. But we’ve been dealing with a lot of issues around estate planning and succession because the laws and the rules there are very, very different than they are here. Largely, Canada has very favorable gift and taxation laws; in other words, they are not taxable. But in the US they have taxes on things like that.

Really one of the bigger issues in the US is the AML rules and the know your client rules around securities law. If you’re offering to the public, you don’t want to have to comply with all the regulations. But there’s some exemptions to that, one of them being the accredited investor exemption. The US is a lot more onerous than Canada.

So there are a lot more nuances between the two.

INN: Do you see a global framework coming out of this?

AG: There are regional organizations. So there’s the Canadian Securities Administrators and the Canadian securities regulators that have gotten together to try and harmonize what they do. But, obviously, BC and Ontario and Quebec are always going in different directions. For FINTRAC it’s federal, but Quebec has its own version of FINTRAC. It’s very jurisdiction specific.

INN: What are your thoughts on Facebook’s (NASDAQ:FB) Libra?

AG: Personally I just don’t think Libra is what a cryptocurrency is supposed to be. Read the Satoshi whitepaper, or look at what ethereum did or look at a few of the other projects that have become fully decentralized that are operating right now. These ones were more about freedom, they are more about flexibility and banking the unbanked.

Libra seems to be trying to go halfway. Maybe it’s not doing enough, or maybe it’s just a corporation seeing an opportunity and its trying to take advantage of the hype, which is probably what’s more likely. Facebook tried to use some of the regulatory sway, which is clearly blowing up in its face.

I think that if you’re going to have a corporation sponsoring or subsidizing a cryptocurrency, it sort of defeats the purpose of it. It’s the same as having a government do it because it will lead to centralization at some point.

INN: What is your future outlook for blockchain and cryptocurrency?

AG: Positive. I think it’s all happening. I think the technology happened before the appetite was there and then the use cases have a little catching up to do.

With files from Georgia Williams. 

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Securities Disclosure: I, Dorothy Neufeld, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.