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This Is How Texas Governs Bitcoin in Business Transactions

While cryptocurrencies and blockchain are still in their infancies, Texas Bitcoin, or “virtual currency” regulations have been deemed “friendly” by crypto insiders.

The Bitcoin Market Journal observes the Lone Star State “has issued memorandums indicating that no money transmitter’s license will be needed to sell altcoins in the state.” Furthermore, the state doesn’t require Texas-based Bitcoin companies to carry a money transmitter’s license when running a custodial exchange for its in-state customers.

Like the federal government, Texas does not recognize Bitcoin as legal money, but rather a taxable commodity. However, it can be used on a transactional basis as it was last September when a Texas brokerage firm closed its first purchase on Bitcoin.

In the following article, we’ll discuss some of the guidance that is available. Let’s start the exchange!

Texas Bitcoin Regulatory Positions

So far, there is limited activity surrounding virtual currencies and, thusly, limited guidance. What we do have comes from Banking Commissioner Charles G. Cooper in an April 3, 2014 memorandum.

Cooper writes that virtual currencies have “raised novel questions in relation to money transmission and currency exchange.” Cooper’s memorandum “seeks only to establish the regulatory treatment of virtual currencies under existing statutory definitions” of the Texas Money Services Act, Texas Finance Code Chapter 151.

Most of the guidance covers cryptocurrency businesses that conduct money transmission. Cooper says that such businesses “must comply with all applicable licensing provisions” of 151 and of Title 7, Texas Administrative Code, Chapter 33. He also highlights these considerations:

  • Minimum net worth requirement under Finance Code §151.307 is $500,000 with a potential increase at the Commissioner’s discretion to a maximum of $1 million based on the factors set out in §151.307(b)
  • License holder cannot include virtual currency assets in calculations for permissible investments under §151.309.
  • Pursuant to Finance Code §151.203(a)(3), applicants handling virtual currencies as money transmitters “must submit a current third party security audit of their relevant computer systems,” Cooper writes, adding that the “new technological paradigm created by cryptocurrencies has brought with it new risks for the consumer” and it is “incumbent on a license applicant to demonstrate that all virtual currency is secure” while they’re in control of it.

The Federal Laws

For further regulatory guidance on Bitcoin, the Internal Revenue Service has issued a few additional factors aside from their take that Bitcoin and other cryptocurrencies are not legal tender. They are as follows:

  • Bitcoin for services rendered is taxed as income.
  • It must be reported on IRS Form 1099 and can be subject to self-employment tax.
  • Taxes on capital gains do apply as they would on stocks, bonds, and mutual funds.

Proceed with Caution

While there is nothing that bans you or your business from dealing in Bitcoin transactions, do be aware that it is not protected as a sovereign currency. That means the source of Bitcoin as well as the channel transmitting it should be toughly scrutinized before entering into any agreements.

If you have questions about the legal ramifications of using Bitcoin in the state of Texas, John Teakell is happy to help. He has more than 25 years of experience in areas of white collar and computer law. Reach out via email, phone, or online submission, or stop by his office at 2911 Turtle Creek Blvd., Suite 300 today.

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