Lukka Exceeds Billion-Dollar Milestone in Latest Fundraise
Lukka closed their Series E investment round of $110 million, valuing the company at more than $1.3 billion. This round comes after closing their Series D round just nine months ago.
Lukka’s Brief User Guide on Crypto Taxes
Updated March 2022
2021 has seen unprecedented volumes of digital assets transactions. From cryptocurrency purchases and sales to a myriad of Decentralized Finance (“DeFi”) undertakings, non-fungible tokens (“NFTs”) minting, and trading, all while merchants began to accept payments in crypto. However, as digital assets continue gaining wider recognition and acceptance, it is important to not lose sight of the tax implications from these investments and sales, otherwise, investors would be stuck with a huge tax bill when filing their returns.
A lot of ink has been spilled discussing digital asset taxes, from the most basic ones to the really nitty-gritty complex tax issues and transactions. This blog provides some important notes on what taxpayers should keep in mind when reviewing their 2021 investment and trading activities. For a deeper dive on many of these topics, some thorough and helpful articles can be found here:
General Principles of Taxing Digital Assets
In 2014, the Internal Revenue Service (“IRS”) issued Notice 2014-21, which stated that cryptocurrency should be treated as property, as opposed to a currency (i.e., euros or USD). This principle generally, but not always, applies to digital assets across the board.
Absence of tax guidance and diversity of transactions in the digital asset ecosystem often complicate matters. While the IRS has subsequently issued some limited guidance, it still is not part of the formal Internal Revenue Code and the Regulations. This leaves tax advisers and taxpayers alike relying on the existing framework to analyze their activities and compute tax liability.
Taxable and Tax-Free Transactions
Not every interaction with a digital asset would give rise to taxes. Let’s first look at some examples of transactions that would trigger taxation. Note that neither this list nor any other examples outlined below, are exhaustive by any means and are meant to be used for illustrative purposes only.
- Trading digital assets for fiat currency (i.e., USD), regardless of whether the fiat is then subsequently withdrawn from the wallet/exchange or not.
- Trading one digital asset for another. This includes trading cryptocurrencies (e.g., BTC for ETH) as well as buying and selling NFTs for crypto.
- Receiving tokens as a result of hard forks and airdrops. Such tokens would be subject to tax based on the fair market value at the time of the receipt, assuming the taxpayer has “dominion and control” over the asset, i.e., is able to transfer, sell, exchange or otherwise dispose of the asset.
- Receiving mining, staking, liquidity pool and farming rewards, are taxable based on the fair market value at the time of the receipt, with the same dominion and control doctrine applied here.
- Buying goods and services with crypto (although individual investors should exercise caution here since personal losses incurred may not be deductible).
- Losing one’s borrower collateral in a forced liquidation.
And here are some examples of tax-free transactions:
- Purchasing cryptocurrency or an NFT with fiat currency.
- Holding digital assets (even if the value goes up exponentially, no tax is due until the asset is disposed of).
- Moving digital assets between wallets and exchanges.
- Gifting digital assets or receiving them as a gift (provided the total value of such a gift is below the annual gift tax exclusion, $16,000 in 2022). It is important to note that the recipient of the gift would inherit the giftor’s cost basis and holding period.
- Inheriting digital assets (although if the value of the estate exceeds $12.06 million in 2022, then such assets may be subject to estate taxes). Similarly to stocks, the inherited digital assets would get the cost basis step up to the fair market value on the day of death.
- Making a charitable contribution (although there are certain reporting requirements that must be adhered to, depending on the size of the donation).
There is a great deal of uncertainty with respect to the treatment of many DeFi activities. An argument can be made for both tax-free and taxable treatments in a number of instances, including, but not limited by, the following:
- Wrapping tokens (e.g., ETH for wETH) to allow additional functionality
- Contributions to and withdrawals from liquidity pools
- Bridging multichain assets from one blockchain to another
- Participating in liquid staking offerings
Income Character
Because digital assets are treated as property, they are considered to be capital assets. Some of the key issues to consider here are as follows:
- Disposition of capital assets gives rise to a capital gain or a capital loss (as opposed to ordinary income).
- Gains realized on assets held over one year are eligible for the preferential long-term capital gain treatment and are taxed at lower rates than short-term capital gains (for individuals).
- Gains realized on assets held for less than a year are taxed as short-term capital gains at the same rate as the ordinary income (i.e., wages, interest, dividends).
- The IRS permits for a variety of the lot relief methodologies, namely first-in first-out (“FIFO”), last-in first-out (“LIFO”), highest-in first-out (“HIFO”), and specific ID (taxpayer specifically identifies the lots they wish to dispose of). This means that if taxpayers have acquired and disposed of multiple units (or lots) of a given cryptocurrency, they need to take a comprehensive look at their overall portfolio and make a strategic decision with respect to the lot matching methodology they wish to employ. Given the general volatility of crypto, the results derived under each method can vary significantly. It is worth noting that the average cost basis method is likely not permitted for digital assets.
- Transaction fees do not get lost. Instead, they increase the cost basis of the purchased asset and decrease the sales proceeds.
- Generally, individual taxpayers are permitted to net capital gains and capital losses. If there is an excess capital loss, then up to $3,000 can be used to offset the ordinary income.
However, not every interaction with digital assets would give rise to capital gains. For example, where a taxpayer receives airdrops, staking, or mining rewards, the IRS considers such rewards to be of ordinary character. Lost or stolen crypto would generally result in a capital loss (potentially unavailable to the individual investors) but abandonment of a scam coin would have the ordinary character. An NFT sold by an investor would result in a capital gain or loss, but an NFT sold by a digital arts dealer would yield ordinary income.
Conclusion
As the digital asset ecosystem continues to evolve, so will the complexity of transactions. This blog highlights just a few examples, at a high level, and those watching tax rules change should note that the speed of the evolution of the assets will far surpass the speed of updated, relevant tax guidance.
As tax season ramps up, taxpayers need to ensure that comprehensive records of all transactions are readily available, the transactions are appropriately classified (either as capital or ordinary income), and any relevant limitations are considered for the more complex or controversial transactions.
The biggest names in finance trust Lukka products to solve the back end challenge of valuing assets accurately, and reliably enough to stand up to an audit. Learn more about ways you can track valuation throughout the year and especially during tax season.
The information contained in this bulletin provides only a general overview of current tax issues related to staking and shall in no event be construed as the rendering of professional advice or services. As such, the information provided in this bulletin should not be used as a substitute for consultation with professional advisors. Before making any decision or taking any action regarding your digital currencies or the tax treatment thereof, you should always consult with an appropriate, licensed tax, accounting, or other professional. To the fullest extent permitted by law, in no event will Lukka, Inc. (including its related entities, owners, agents, directors, officers, advisors, or employees) be liable to any reader of this bulletin or anyone else for any direct, indirect, or consequential loss or loss of profit arising from the use of this bulletin, its contents, its omissions, reliance on the information contained within it, or on opinions communicated in relation thereto or otherwise arising in connection therewith.
CEO of Lukka, Robert Materazzi, appears on the Crypto 101 Podcast
Lukka’s CEO, Robert Materazzi, recently discussed how Lukka is becoming the crucial backbone of crypto on the Crypto 101 podcast. Robert and host Bryce Paul discussed the complexities crypto native companies and traditional finance face when interacting in the crypto ecosystem.
The pair covered the specific data difficulties businesses face when trading digital assets, including crypto. Robert explained the need for accurate, complete data and how Lukka offers software solutions to organize data securely and accurately.
Robert also spoke to the changing regulatory and risk landscape businesses need to consider when managing risk, especially as digital assets face further scrutiny from governing bodies. He outlined the critical role regulators and standard setters face in supporting innovation and shaping the ecosystem’s future.
When Robert was asked what he sees as one of the biggest challenges for the industry moving forward, he highlighted the need for businesses entering the crypto ecosystem to educate themselves on how the space is changing. For businesses and consumers who want to learn more about crypto, Lukka Library is a content database filled with resources authored by some of the industry’s foremost thought leaders on crypto tax, regulation, and other foundational subjects.
To listen to the full podcast follow the link below:
Lukka’s Head of Accounting Solutions, Suzanne Morsfield, on the Valuation of Crypto Assets
Lukka’s Head of Accounting Solutions, Suzanne Morsfield, spoke at the World Continuous Auditing and Reporting Conference with Robert Hertz, a Lukka advisor and former Chairman of the Financial Accounting Board, about valuation of cryptocurrencies.
The two explored the accounting and valuation challenges presented by assets in the crypto ecosystem. Suzanne noted that aspects of traditional accounting like market close, standard ticker symbols, and regulation are absent from the crypto ecosystem, adding complexity to accounting processes. Robert noted the accounting challenges that stem from inaction by standard-setting boards considering how to address crypto, and how attuned the accounting community is to anticipated formal guidance.
Both experts explained how Lukka addresses these challenges using Lukka Prime. Suzanne covered how the Lukka Prime methodology identifies the principal market, and identifies a fair value-based exit price to accurately value every asset. To learn more about Lukka Prime and its methodology, read Lukka’s whitepaper on the subject.
Lukka’s CEO, Robert Materazzi, on the Building the Future Podcast
On November 17th, 2021 Robert Materazzi, the CEO of Lukka, appeared virtually on the Building the Future Podcast to speak on crypto adoption.
The show addressed the evolution of the crypto ecosystem as it is accepted as more “mainstream.” Robert addressed how tokenization of different asset classes will increase global accessibility, stating that “we are just on the cusp of what is going to change global commerce.”
Robert also noted that consumer demand is driving traditional financial institutions into crypto. As larger traditional players, like State Street and the S&P Dow Jones Indices, support that demand, other businesses are bound to follow furthering mass adoption.
For businesses and consumers searching for insight into the crypto ecosystem, Lukka Library is a content database filled with articles, educational resources, and position papers from some of the industry’s foremost thought leaders on crypto tax, regulation, and other foundational subjects.
To listen to the full podcast follow the link below:
Accounting Today recognizes Lukka’s CEO as one of the Top 100 Most Influential People in Accounting
Accounting Today has named Robert Materazzi, CEO of Lukka, as one of 2021’s Top 100 Most Influential People in Accounting. This annual list recognizes the thought leaders and change-makers who are shaping the future of accounting.
As accounting firms expand services around cryptocurrencies and crypto assets, reliable reporting and compliance tools are essential. More and more, respected financial institutions are partnering with Lukka to support crypto asset services.
Recently, CPA.com partnered with Lukka to bring cryptotax solutions to the profession because of the firm’s secure, trusted tools. Likewise numerous other major financial industry participants such as State Street and S&P have looked to Lukka for its leading solutions for pricing and reporting on crypto assets.
To learn more about our recent articles and the crypto ecosystem check out Lukka Library, a content database filled with articles, educational resources, and position papers from some of the industry’s foremost thought leaders on crypto tax, regulation, and many other subjects.
Lukka partners with ROKiT Venturi Racing
New York, New York — November 4th, 2021 — Lukka, the leading enterprise crypto asset data and software provider, announced today that they have entered into a partnership with ROKiT Venturi Racing as the Monegasque team takes on the 2022 FIA Formula E World Championship. This partnership includes prominent Lukka logo placement on team uniforms, driver race overalls, and the all-electric racing cars. In addition, Lukka will provide data optimization services to ROKiT Venturi Racing with a goal aimed at improving race operations and performance.
ROKiT Venturi Racing is based in Monaco and led by Team Principal Susie Wolff, former professional racing driver and the first female team principal in Formula E history. The team has been part of the FIA Formula E World Championship since its inception, building a long-lasting legacy as the first manufacturer to join the series in December 2013. Formula E teams utilize sensors that record large data sets to help the teams make informed decisions. Both ROKiT Venturi Racing and Lukka are data-focused teams with shared cultural synergies promoting global innovation, sustainability, and equality in their respective industries, making this partnership a natural fit.
Lukka will be an Official Partner of ROKiT Venturi Racing for the 2022 season. In addition to logo placement, the two companies will produce co-branded content to help grow awareness of Lukka’s brand to a new, global audience as well as help promote one of the leading teams in the fastest growing motorsport in the world.
“Formula E is rapidly growing and is incredibly exciting, but after we met Susie and the ROKiT Venturi team, it was very clear that we had a lot more in common than just an appreciation for racing and data – we are also aligned in our mission, values, and goals,” said Robert Materazzi, CEO of Lukka. “Susie’s strong leadership was obvious when we met – she has an appreciation for the importance of the team culture and has formed ROKiT Venturi to have a focus on data, strong values, and to have a competitive mindset that seeks a challenge. This reminded me of Lukka – we couldn’t be more excited to begin this partnership.”
Susie Wolff, ROKiT Venturi Racing Team Principal, said, “Lukka has broken ground within the crypto data space, and we have seen how they relish the opportunity to disrupt traditional industries, challenge the status quo, and ultimately try to change the way we live for the better. As an electric racing team promoting sustainable mobility, we’re no strangers to the power and impact of industry disruption. We’re proud to welcome Lukka to the team, and I have no doubt that their team of engineers and data scientists will bring valuable support to our performance both on and off the track.”
About Lukka
Founded in 2014, Lukka serves the largest crypto asset institutions with middle and back-office data & software solutions. Lukka solves the very unique complexities of crypto (and blockchain) data for businesses so that they can adopt digital assets into their businesses. Its customers include Crypto Asset Exchanges and Trading Desks, CPA and Accounting Firms, Funds, Fund Administrators, Fund Auditors, Financial Auditors, Miners, Protocols, individuals, and any business that interacts with crypto transactions. Lukka’s products are created with institutional standards, such as AICPA Service and Organization Controls (SOC), which focus on data quality, financial calculation accuracy, and completeness, and managing technology risk. Lukka is a global company currently headquartered in New York City. For information about Lukka, visit https://lukka.tech/.
About ROKiT Venturi Racing
ROKiT Venturi Racing has been part of the FIA Formula E World Championship since the very beginning, building a long-lasting legacy as the first manufacturer to join the category in December 2013. In June 2018, the Monegasque marque took its next significant step with the appointment of Susie Wolff MBE as Team Principal. Wolff immediately tackled the challenge of taking Venturi to the next level by strengthening and optimizing the team’s operations in an ever-competitive championship.
Ahead of Formula E’s sixth season, Venturi partnered with Mercedes-Benz and, on the eve of the season-opening round in Diriyah, announced a three-year title relationship with global telecommunications innovators, ROKiT, who entrusted the team to expand its investment portfolio in motorsport’s premier all-electric and only carbon neutral racing series. In December 2020, an investment group led by Scott Swid and José M Aznar took over ownership of the team.
With five podium finishes, two victories, and the Vice-World Driver’s Championship with Edoardo Mortara in Season 7 (2021), Monaco’s only racing team celebrated it’s best season to date, entering Season 8 with arguably the strongest driver line-up on the grid with former World Champion, Lucas di Grassi joining Mortara.
For rights-free imagery and further information, please subscribe to the official ROKiT Venturi Racing media site here.
For interview requests, please contact Liz Brooks, Head of Media & Communications: [email protected].
For more information, please visit https://lukka.tech/formula-e/
Lukka Named “Fund Services Partnership of the Year” by Global Custodian
Global Custodian hosted the 32nd Biannual Industry Leaders Awards on November 18th, 2021, in New York. The awards recognize leaders in Hedge Fund Administration, Mutual Fund Administration, Private Equity Fund Administration, Exchange-Traded Fund Administration and Prime Brokerage.
Lukka is honored to have accepted “Fund Services Partnership of the Year” by Global Custodian at the Industry Leaders Awards. The award was presented to Lukka and State Street for their partnership, announced earlier this year.
Lukka continues to enable State Street to leverage its product suite, which includes a proprietary middle and back office data management solution, purpose-built for blockchain and crypto asset data, as well as Lukka Reference Data, and Lukka Prime Pricing Data. This will enable State Street to consume crypto assets that are comingled within a private client’s traditional alternative investments portfolios.
Click here for a complete list of winners.
Proposed Treasury Guidance: Compliance with Crypto Asset Industry Sanctions
Author: Olya Veramchuk, Director of Tax Solutions in Tax & Regulatory Affairs
“Sanctions Compliance Guidance for the Virtual Currency Industry” was published on October 15 by the Office of Foreign Assets Control (“OFAC”) of the US Department of the Treasury. OFAC, which generally administers and enforces economic and trade sanctions based on US foreign policy and national security goals, started focusing on the crypto asset industry with the intention to protect the US financial system from bad actors. The most recent sanctions were levied in 2021 on a Russian crypto exchange, which was found to facilitate ransomware transactions. In 2020, OFAC designated two Chinese nationals involved in a money-laundering scheme.
The key highlights from the most recent guidance include the following:
- U.S. persons, including members of the virtual currency industry, are responsible for ensuring they do not engage in unauthorized transactions or dealings with sanctioned persons or jurisdictions.
- A risk-based approach to sanctions compliance should be used as no one-size-fits-all solution exists. This means that “all companies in the virtual currency industry, including technology companies, exchanges, administrators, miners, and wallet providers, as well as more traditional financial institutions that may have exposure to virtual currencies or their service providers, are encouraged to develop, implement, and routinely update, a tailored, risk-based sanctions compliance program.”
- OFAC recommends that cryptocurrency companies can strengthen their internal controls by incorporating geolocation tools and IP address blocking controls, including VPN usage, “to identify and prevent IP addresses that originate in sanctioned jurisdictions from accessing a company’s website and services for activity that is prohibited by OFAC’s regulations.”
- Thorough KYC procedures should be applied “during onboarding and throughout the lifecycle of the customer relationship and use such information to conduct due diligence sufficient to mitigate potential sanctions-related risk.” Additional due diligence is recommended for high-risk customers, including leveraging the information collected in adherence with existing anti-money laundering obligations.
- Training of staff as well as regular testing and auditing of the existing procedures is highly recommended.
Divi Crypto Podcast: Building Institutional Solutions with Robert Materazzi
Lukka’s CEO, Robert Materazzi, appeared on the Divi Crypto podcast to discuss building institutional solutions for the crypto ecosystem.
Robert discussed the importance of institutional-grade software and data products as the ecosystem evolves and traditional financial institutions continue to adopt crypto assets. He emphasized the need for the further standardization of crypto data for both traditional finance and crypto-native businesses.
Robert also spoke to some of Lukka’s most recent partnerships, including the support of fund administration services for State Street’s new digital asset unit, State Street Digital with Lukka Enterprise Data Management and S&P Dow Jones Indices newest Cryptocurrency Indices, for which Lukka provides fair market value pricing data in the form of Lukka Prime Pricing Data.
To listen to the full podcast click the link below:
https://podcasts.apple.com/us/podcast/building-institutional-solutions-with-robert-materazzi/id1476856904?i=1000536976710