Vermont Cryptocurrency Regulations
In the state of Vermont, cryptocurrency is legally categorized as property instead of currency. Under the Vermont Money Services Act (VMSA), “virtual currency” is defined as a digital representation of value that: (1) can act as a medium of exchange, a unit of account, or a store of value; (2) has an equivalent value in money or acts as a substitute for money; (3) may be centralized or decentralized; and (4) can be exchanged for money or other convertible virtual currency. Presumably, cryptocurrency tokens that satisfy these requirements will be within the scope of the VMSA’s statutory definition of “virtual currency.” In contrast, “money” is defined as a medium of exchange authorized or adopted by the United States or a foreign government. Presumably, cryptocurrency is not outside the legal definition of money under the VMSA because the United States government does not adopt it.
Furthermore, the VMSA directly lists cryptocurrency as a permissible investment under Vermont law. Specifically, the VMSA holds that “virtual currency owned by the licensee is permissible to the extent of outstanding transmission obligations received by the licensee in the identical denomination of virtual currency.” Accordingly, citizens of Vermont are legally authorized to invest in cryptocurrency under the perspective of the state government.
Although the statutory definition notes that virtual currency can be a substitute for money, cryptocurrency failed to satisfy the technical definition of money under the VMSA at the time the amendments were passed because, during its legislative process, no country authorized or adopted cryptocurrency. However, the VMSA must be revisited because a foreign country recently adopted cryptocurrency. In 2021, El Salvador’s Congress approved a proposal to make it the first country worldwide to adopt bitcoin as legal tender. Consequently, there is an argument that virtual currency should now be recognized as money under the VMSA because a foreign government adopted it as legal tender. Since a country has now authorized and adopted bitcoin, cryptocurrency may now be considered currency under the statutory definition of the VMSA.
Regardless, legislative action will need to be taken by Vermont’s legislators before cryptocurrency can officially be recognized as money under state law. Until then, there will be legal ambiguity as to whether cryptocurrency satisfies the statutory definition of money since Bitcoin is now considered legal tender in El Salvador. Despite being adopted by the national government of El Salvador, cryptocurrency will remain classified as property rather than money until the state legislature of Vermont addresses this issue through new legislation.
Vermont – BBLLCs
On May 30, 2018, the government of Vermont enacted Senate Bill 269 (SB 269). The short title of SB 269 is “An Act Related to Blockchain Business Development.” SB 269 became effective law on July 1, 2018. The Act aims to stimulate economic development in Vermont by promoting the adoption of blockchain technology. Specifically, the government of Vermont intends to attract blockchain companies to move to the state by providing a favorable legal environment. According to Vermont’s governor, Phil Scott, the law aims to create new jobs and spur economic innovation by encouraging blockchain businesses to move to the state of Vermont.
The Act is designed to promote cryptocurrency and its underlying technology, known as the blockchain. Several Vermont legislators recognize the benefits of blockchain technology because the decentralized verification ability of blockchain provides excellent security since the online ledger is immutable. In other words, the blockchain is presumably secure because once a transaction has been entered on the blockchain, it cannot be reversed or altered. According to state legislators, blockchain’s security benefits offer widespread opportunities for applying blockchain in many contexts other than just cryptocurrencies. If this hypothesis is correct, cryptocurrency may eventually permeate several industries as the novel technology becomes mainstream in commercial markets.
The Advancement of Blockchain Technology
To illustrate how blockchain could eventually permeate into other industries, one publication notes that blockchain can address issues in the healthcare industry. For example, the Health Law Handbook proposes that blockchain can improve the healthcare industry by increasing health data security, privacy, and interoperability. In other words, there is a reasonable argument that blockchain can make the health care industry more secure, more private, and more efficient by making healthcare software more interchangeable and easier to use.
Due to the benefits that blockchain offers beyond the realm of cryptocurrency, the state of Vermont is zealously advocating blockchain enterprises to operate from Vermont. To attract these companies, the Act authorizes entities to be authorized as blockchain-based limited liability companies (BBLLCs). Under the Act, limited liability companies are permitted to be designated as BBLLCs as long as they: (1) specifically elect to function as BBLLCs in their articles of organization, and (2) satisfy specific legislative requirements. Under the Act, BBLLC’s are authorized to customize their governance structures by utilizing blockchain technology. In addition, BBLLCs are permitted to implement any reasonable algorithm to validate records, requirements, processes, and procedures for conducting its operation. Consequently, BBLLCs provide a legal avenue for companies to integrate blockchain into their business models and may contribute to the emergence of cryptocurrency technology outside of the fin-tech industry.
To legally operate as a BBLLC, companies must comply with SB 269’s registration requirements. The elective requirements concern formation, operating agreements, roles of members and managers, governance, and relationship to other laws. First, entities applying for BBLLC status must state in their articles of organization that it has elected to become a BBLLC. Second, its operating agreement must include a summary of its mission and purpose.
Third, the operating agreement must outline the company policies for access and permission protocols, including: (1) whether the BBLLC’s blockchain will be fully or partially decentralized or fully or partially public or private; (2) the extent of a participant’s access to information and read and write permissions; (3) how the BBLLC will respond to system security breaches or other unauthorized actions affecting the blockchain technology’s integrity; and (4) the rights and obligations of each participant group within the BBLLC. Finally, the operating agreement must set forth voting procedures.
In addition, one reasonable presumption is that state legislators aim to incentivize blockchain companies to operate within Vermont’s borders by providing a favorable tax regime for cryptocurrency-affiliated companies. Under Vermont’s current legal framework, BBLLCs are taxed similarly to regular LLCs. According to the text of the Act, “this subchapter does not exempt a BBLLC from any other judicial, statutory, or regulatory provision of Vermont law or federal law . . . Except to the extent inconsistent with the provisions of this subchapter, the provisions of the Vermont Limited Liability Company Act govern.”
Accordingly, BBLLCs are taxed as partnerships under the state laws of Vermont law and under the federal rules of the Internal Revenue Code. However, BBLLCs are permitted to be taxed as corporations instead of partnerships under both the IRC and Vermont law if they elect to be taxed as a corporation by “checking the box.” If they do not elect to be taxed as a corporation, then the BBLLC’s taxes flow to its partners, and income will be apportioned at the partner level for income tax purposes.
Partnership or Corporate Tax
The decision to be taxed as a partnership or as a corporation is significant because it will determine whether or not taxes will pass through to individual shareholders. Generally, corporations are subject to corporate income taxes. In contrast, S corporations, LLCs, and partnerships are generally subject to state personal income taxes because they are pass-through entities. Pass-through entities, also known as flow-through entities, are legal business entities that do not pay corporate taxes because they pass all taxable income to owners, shareholders, and investors. In contrast, corporations are not pass-through entities because both the corporation and individual shareholders must pay taxes on income generated by a BBLLC. Assuming that a BBLLC wants to avoid double taxation, companies can limit their tax liability by electing to be taxed as a partnership rather than a corporation.
Vermont Corporation Tax
In Vermont, pass-through entities are especially appealing because the state has one of the highest corporate tax rates nationwide. Specifically, corporations in Vermont are taxed at a maximum marginal rate of 8.5%. In contrast, Vermont’s personal income tax rate can be as low as 3.55%. Accordingly, BBLLCs can reduce their tax liability by half as long as they elect to be taxed as a partnership instead of a corporation. Therefore, companies in Vermont are incentivized to organize their entity as a pass-through entity, which includes: (1) S-Corporations, (2) LLCs, including BBLLCs, and (3) Partnerships. By allowing blockchain companies to enlist as pass-through entities by organizing as BBLLCs, the government of Vermont intends to incentivize cryptocurrency companies to organize within the state by providing a favorable tax framework for blockchain entrepreneurs.
However, one issue raised under the new Legislation is whether the Act presents any nexus issues with out-of-state members of BBLLCs. Specifically, the Act announces that members or managers who interact with BBLLCs through several roles are not deemed to occur in Vermont because the BBLLC is organized within the state. Consequently, out-of-state members may have to pay Vermont taxes and other state taxes when their income is passed through to their respective personal income taxes, depending on where their business activities occurred. Indeed, the tax framework for multistate businesses, including what constitutes a nexus with a state for the purpose of various taxes, is highly complicated. Therefore, out-of-state members in Vermont BBLLCs should consult with tax professionals to ensure that taxes are correctly filed.
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Freeman Law represents businesses and individuals in digital currency and blockchain tax issues. Schedule a consultation, or call (214) 984-3410 to discuss your cryptocurrency and blockchain legal concerns.