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A Little Bit More on Bitcoin

A Little Bit More on Bitcoin

In following up on the IRS’s position of taxation on convertible virtual currency earlier this year (a previous Withum on Wall Street post “IRS is Catching Up With Modern Technology: The Taxation of Bitcoin,” New York State hopes to be one of the first jurisdictions to approve and regulate licenses for Bitcoin trading and virtual currency business use.

On July 17, 2014, New York Department of Financial Services announced, for public comment, the proposed codes, rules and regulations that would require Bitcoin businesses to apply for licenses and comply with New York State laws and regulations.

According to the press release, these “BitLicenses” are required for the business use of the following activities: “receiving or transmitting virtual currency on behalf of customers; securing, storing, or maintaining custody or control of such virtual currency on the behalf of customers; performing retail conversion services, including the conversion or exchange of regular currency or other value to and from virtual currency; buying and selling virtual currency as a customer business (as distinct from personal use); or controlling, administering, or issuing a virtual currency.”

To be in compliance with the proposed framework there are several key requirements to be in compliance, including:

  • Safeguarding consumer assets;
  • Virtual currency receipts of all transactions;
  • Written consumer complaint policies;
  • Consumer disclosures on risks associated with virtual currencies;
  • Anti-Money Laundering compliance;
  • Cyber security protection program;
  • Designation of qualified chief information security officer;
  • Independent license compliance examinations by third parties;
  • Maintain books and records of all virtual currency transactions;
  • Audit reports and financial statements disclosure requirements;
  • Capital requirements;
  • Designation of compliance officers to monitor internal compliance;
  • Business continuity and disaster recovery plan;
  • Notification of emergencies or disruption in operations to the New York Department of Financial Services; and
  • Transitional period for those already engaging in virtual currency activity.

The proposed framework states that each licensee must provide audited financial statements and related reports disclosing certain information about the Licensee’s financial position. Each licensee must also submit quarterly financial statements within 45 days following the close of each fiscal quarter. These quarterly financial statements must include the following: statement of financial condition, including complete balance sheet, income or profit and loss statement, statement of retained earnings, statement of net liquid assets, statement of net worth, statement of cash flows and statement of change in equity ownership; a statement demonstrating compliance; financial projections and strategic business plans; list of all off-balance sheet items; chart of accounts, including description of each account; and a report of permissible investments held.

Each firm must also submit audited annual financial statements, prepared in accordance with generally accepted accounting principles, together with an opinion of an independent certified public accountant and an evaluation by such accountant of the accounting procedures and internal controls of the firm within 120 days of its fiscal year end. According the proposed framework, the annual statements must include:

  1. A statement of management’s responsibilities for preparing the Licensee’s annual financial statements, establishing and maintaining adequate internal controls and procedures for financial reporting, and complying with all applicable laws, rules, and regulations;
  2. An assessment by management of the Licensee’s compliance with such applicable laws, rules, and regulations during the fiscal year covered by the financial statements, including management’s conclusion as to whether the Licensee has complied with those laws, rules, and regulations during such period; and
  3. A certification of the financial statements by an officer or director of the Licensee attesting to the truth and correctness of those statements.

The above summarized BitLicenses, have been issued for public comment and to see the exact language, please visit http://www.dfs.ny.gov/.

Need More Information?

If you have any questions about the taxation of Bitcoin or on how this will impact a potential audit, please discuss with your regular Withum contact or a member of the Withum Financial Services Group.

The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.

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