Portfolio Valuation for Government Engagement
Context
Although tax events across many jurisdictions have appeared opaque in regard to digital assets, the general rules on tax liability are clear in the case of an ICO, where every time a digital asset is sold, the tax liable calculated is applied to the difference between the price issued or paid for and the sale price.
Where the process becomes complicated is around how the assets are treated in regard to their characteristics. Some of these have lock-in periods, while smart contracts can have multiple complexities as to how they can be liquidated. These complications can affect the value of the assets, with the ones that have “lock-in” periods arguably being worth less than the current spot price due to their holding risk.
Appold was asked to lead a valuation process where three valuations would be undertaken on the portfolio by three independent companies, of which Appold was one. Appold was then asked to write a report to the tax authorities explaining the reasons for the valuations to create a deeper understanding for the tax authorities on a realistic valuation. This was in conjunction with working alongside legal and tax experts during the negotiation.
The outcome of the process allowed the authorities more depth and understanding of the processes taken along with the market dynamics of the asset.
The result was that the client was granted the sought-after tax liability due to a more realistic and discounted valuation, as opposed to taking the unrealistic Spot price market valuation and being unfairly burdened with a higher tax rate. This represented a saving of over $80m by putting forward a fair, transparent and clearly explained case to the relevant tax authorities.
Services
Project requirements:
Research & Analysis
Blockchain Advisory
“We have a longstanding relationship with Appold. They provide commercial and technical advisory on a highly specialist basis. We have a very positive opinion of them”
- Partner, International Law Firm
Appold Partner Comment:
Being such a young and fast-moving industry with deep complexity, tax officials generally do not have the technological depth required to fully understand the various types of smart contracts in the market. This is not a reflection on their abilities as tax officials, but the default position is to tax gains at what they feel is fair and in line with government policies. Most of the time this is the right approach but there are certain cases where those officials need to be presented with deeper insights and explanations so that they can review the situation and give a more accurate and fair view of what a capital gain should be based on.
Tax authorities have an obligation to be fair and those who owe tax must be fully transparent. As part of presenting a true valuation of the assets, we explained the details of how the valuations were reached, highlighted historical examples of other valuations and responded promptly to all data requests.
- Rob Gaskell, Partner
