“Is he from Mars?” asked 88-year-old Wilber Van Scoik (WGV CPA), who did his first business appraisal back in 1966. He was listening to a presentation on the valuation of decentralized virtual currencies (DVCs) at the recent Southeast Chapter of Business Appraisers (SECBA) conference in Atlanta. The presenter, attorney Andrew Hinkes (Berger Singerman LLP), promised that he would try not to “break our brains” in explaining this new world that was alien to many in the audience.
Market mayhem: Bitcoin is just one of over 6,500 DVCs, or “tokens,” with an outstanding value of around $250 billion currently. IRS guidance (IRS Notice 2014-21) says that DVCs usually are property that must be recognized at fair market value using a method that is “reasonably and consistently applied.” Tokens are traded on exchanges throughout the world, so this would be your source of a value benchmark. The trouble is, the markets are highly volatile and subject to manipulation, Hinkes stressed several times. Retroactive data are also inferior, but the exchanges (almost 70 of them) are the “best we have” at this point, he said.
Hinkes advises that the first step in valuation would be to start with the assumption that there is an arm’s-length transaction. Keep in mind, however, that there may be a strong compulsion to do a trade. Then, you would decide which of the many exchanges would be the relevant market to use to estimate a mean of the highest and lowest price. How can you determine which exchange is relevant? The “reasonably and consistently applied” rule should guide you. For example, what exchanges has the client used for trading? Also, where the client is located may point to a certain exchange in that geographic area.
Another issue to consider is how much of a “miner” is the client. Bitcoin miners use powerful specialized computers that need huge amounts of electricity to operate and generate new units of cryptocurrencies. Hinkes is a miner himself, which makes him better able to practice in this area. A miner who trades DVC as an occupation would have to value it as ordinary income, while someone who does it as a hobby would use FMV.
It was a fascinating presentation that delved into the complicated weeds of DVCs, and it will be interesting to follow the developments in this area.
The April issue of Business Valuation Update will have full coverage of the SECBA conference, which was an excellent event, with topics you don’t hear about every day and a slate of top-notch speakers.
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