By Anayat Durrani
Bitcoin. Ethereum. Dogecoin. Tether. Cryptocurrencies are making a major comeback. After coming out of a rocky pandemic and with a more certain future for investments on the horizon, industry insiders believe 2021 will be a big year for cryptocurrencies. There are multiple ways to invest in the digitally mined money, including investing in Opportunity Zones.
“While the OZ Program was not designed with cryptocurrencies in mind, due to the dramatic increase in the utilization of ever-expanding number of cryptocurrencies as well as the billions of dollars directed into cryptocurrency investments, a growing number of OZ investors are exploring ways to layer crypto into their OZ funds,” says Blake Christian, Partner, at Holthouse Carlin & Van Trigt LLP.
Christian says over the last year, a growing number of crypto millionaires have generated significant short-term and long-term crypto gains and are looking for ways to reduce their taxes. Those who bought cryptocurrency cheap and sold it high may be faced with a capital gains tax bill, but can use those gains to invest in real estate.
“The OZ Program offers a very effective solution to defer their gains and allows the investor to diversify into real estate or an operating business – often these investors are interested in tech, blockchain, crypto or cannabis,” says Christian.
The role of cryptocurrency in the Opportunity Zone space
However, Matthew E. Rappaport, Esq., LL.M., Falcon Rappaport & Berkman PLLC says cryptocurrencies and opportunity zones are not a natural match.
“There are tax problems with investing crypto itself into an OZ vehicle, and there are problems with QOFs and QOZBs holding crypto,” Rappaport says. “You can at least sell crypto and invest the gains in a QOF, as long as the gains are capital.”
Christian says a majority of crypto investors are interested in re-investing their gains into additional cryptocurrencies but that could bring some challenges, though it is possible.“Challenges include mixed investment treatment when crypto is invested into a QOF, and there is little daylight in the compliance rules for OZ entities to hold crypto,” says Rappaport.
For example, Christian says up to 10% of the QOF’s balance can be invested into Non-Qualified Opportunity Zone Business Property, which can include crypto.
“At the QOZB level there is an added limitation as a result of a 5% Non-Qualified Financial Property (NQFP) rule that limits investment into cash, marketable securities and notes with maturities in excess of 18 months,” says Christian.
Grey areas about crypto in the Opportunity Zone regulation
Christian says there’s some grey area in the final OZ regulations regarding whether crypto is included in the definition of NQFP and he says some OZ advisors believe that the 5% limit may not apply to crypto and a QOZB might be able to hold as much as 30% crypto under the 70%/30% testing.
He says another is a short-term rule that may allow for an even greater percentage during the 31-55 month Working Capital Safe Harbor period. He says there are differing opinions on whether the 5% NQFP limit is turned off during the Working Capital Safe Harbor Period.
“If it is, then during the 31-55 month period the QOZB might be able to invest 100% of its funds into crypto during the full WCSH period. The IRS has casually commented that the regulations might not accurately reflect the intent of Treasury and Congress and the 5% may be applicable during all periods,” says Christian.
He says his firm has received more frequent inquiries about how crypto can be matched with OZ investing and that they are working on a few crypto mining businesses, solar/crypto combinations, and even crypto ATM businesses.
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