A technology company plans to raise funds by selling digital tokens. The tokens will be usable only on a platform the company has not yet built. In its marketing, the company emphasizes that the value of the tokens should increase as the company completes the platform and expands its user base.
Under the Uniform Securities Act, which statement is correct? Answer: The tokens are securities because purchasers invest in a common enterprise and expect profits from the company's efforts.
Under the Uniform Securities Act § 401, an 'investment contract'—and therefore a security—is analyzed under the SEC v. Howey test: a person invests money in a common enterprise and expects profits primarily from the efforts of others. The facts here—a pre-launch platform, a token sale to raise development funds, and marketing that stresses rising token value—satisfy that test. A utility use or blockchain technology does not automatically remove the tokens from the securities laws, and the purchasers' choice whether to use the platform does not negate the investment contract because the anticipated value depends on the company's completion and expansion of the platform. Exchange listing or SEC approval is also not a precondition for a token to be a security.
A commodity exchange-traded product obtains crude oil exposure by holding near-month futures contracts and rolling them to later months before expiration. The market is in contango: the near-month futures price is above the current spot price, and the next-month futures price is higher still.
If the futures curve remains unchanged, which outcome is most likely for the product? Answer: It will be hurt by negative roll yield because expiring contracts are sold below the deferred contracts it buys.
In contango, deferred futures contracts trade at higher prices than near-month contracts, and a near-month contract converges downward toward the spot price as expiration approaches. Because the product must sell that near-month contract and buy a more expensive deferred contract, the repeated roll creates a negative roll yield if the curve is unchanged. Closing out before expiration does not avoid this convergence loss; the contract has already declined as it approached the roll date. Selling at a premium to spot is not a gain because the contract was originally acquired at a higher futures price. The statement that maturing contracts appreciate toward spot also misstates the direction: in contango, they decline toward spot.
In 2026, a client uses bitcoin with an adjusted basis of $12,000 to buy an electric car priced at $35,000. On the purchase date, the bitcoin's fair market value is $35,000. The dealer accepts the bitcoin directly.
Which federal tax consequences result from this transaction? Answer: A $23,000 taxable gain is recognized, and the client's basis in the car is $35,000.
Digital assets are treated as property for federal income tax purposes. Exchanging bitcoin for a car is a taxable disposition, not a nontaxable like-kind exchange. The client is treated as having sold the bitcoin for its $35,000 fair market value and recognizes $35,000 − $12,000 = $23,000 of gain. The car's basis is its $35,000 purchase price, not the bitcoin's carryover basis.
An investment adviser is comparing bitcoin with a large-cap common stock for a client portfolio.
Which statement about bitcoin is correct? Answer: Bitcoin has no issuer and produces no cash flows to holders, so valuation depends on supply, demand, liquidity, and expected adoption.
Bitcoin is not an equity security and has no issuer, no management, no earnings, and no promised cash flows to holders. It is not redeemable by a sponsor, so discounted cash flow valuation is generally inapplicable. Its market value depends on supply, demand, liquidity, expected adoption, regulatory developments, and sentiment.
A client holds bitcoin in a self-hosted digital wallet and has not stored the recovery phrase anywhere. The client asks her adviser what would happen if she lost the device and had no backup.
Which of the following statements is correct? Answer: The bitcoin cannot be recovered because the private keys needed to authorize a transfer were on the lost device.
Digital asset custody: a self-hosted wallet is controlled by private keys, or by a recovery phrase from which the keys are derived. Because the device and recovery phrase are lost, no exchange, broker, or network participant can recreate the keys or sign a transfer on the client's behalf. The blockchain ledger records the unspent outputs associated with the wallet address, but the ability to transfer them requires the private key. The wallet address is a public identifier, not a private key, so providing it does not authorize a transfer. The exchange that originated the bitcoin lacks the private keys even though it has transaction records. A lost wallet address alone would not make the bitcoin unrecoverable if the private keys were available, because the keys are what authorize transfers.
- Which of the following statements regarding ownership interests in a spot bitcoin exchange-traded fund is true?
Answer: The shares represent a beneficial interest in a trust that holds bitcoin, and the shares are securities.
Spot bitcoin ETF structure. A spot bitcoin ETF is typically organized as a trust, and its shares are securities representing an undivided beneficial interest in the bitcoin held by the trust. Bitcoin itself is generally treated as a commodity rather than a security under federal securities law. Retail investors do not own specific bitcoin directly and cannot redeem ETF shares with the sponsor at net asset value; creation and redemption are conducted through authorized participants in large creation units. The statement that the shares represent a direct futures contract is incorrect because the trust holds physical bitcoin, not futures contracts.
- An investor who has held Bitcoin for 14 months converts Bitcoin with a tax basis of $20,000 into Ethereum when the Bitcoin has a fair market value of $75,000. No cash changes hands and the investor is not a dealer in digital assets. Which statement is correct for federal income tax purposes?
Answer: A $55,000 long-term capital gain is recognized because the conversion is a taxable disposition, and the Ethereum basis is $75,000.
IRC §§ 1001 and 1031. Bitcoin is property for federal tax purposes, and an exchange of one digital asset for another is a sale or exchange of the original asset. The $55,000 gain ($75,000 fair market value minus $20,000 basis) is long-term because the Bitcoin was held more than one year, and the Ethereum takes a basis equal to its fair market value at receipt. Section 1031 like-kind treatment no longer applies to personal property such as virtual currency; virtual currency is a capital asset in the hands of an investor, not ordinary income; the new asset's basis is not a carryover basis.
A client buys one crude oil futures contract on a commodities exchange. Each contract represents 1,000 barrels. The entry price is $70 per barrel, the initial margin deposit is $9,000, and the maintenance margin is $6,000. By the end of the trading day, the futures settlement price is $66.50 per barrel. The client has no other positions.
How much must the client deposit after the close to continue holding the position? Answer: $3,500, the amount needed to restore the account to the initial margin level
Futures accounts are marked to market daily. The loss is 1,000 × ($70.00 − $66.50) = $3,500, reducing equity from $9,000 to $5,500. Because $5,500 is below the $6,000 maintenance margin, the broker requires a deposit to restore the account to the initial margin level, so the required deposit is $3,500. Depositing $500 would only return the account to the maintenance minimum, not to the initial margin, and the $6,000 and $9,000 figures overstate the amount needed.
- An investor buys an exchange-traded note (ETN) that tracks an index of front-month crude oil futures contracts. The oil futures market is in contango for the entire holding period. Which statement best describes the investor's return relative to the spot price change of crude oil?
Answer: The ETN should underperform the spot price change because rolling contracts in contango produces negative roll yield and the investor bears the issuer's credit risk.
Commodity ETN mechanics. An ETN is an unsecured debt obligation whose return is tied to an index, not direct ownership of the commodity. In contango, nearby futures trade below later-dated futures, so rolling expiring contracts into deferred contracts buys at higher prices and creates negative roll yield; the ETN therefore tends to underperform the spot price change, and the investor also bears the issuer's credit risk. The matching-spot statements ignore roll yield and incorrectly treat the ETN as direct commodity ownership; contango creates negative, not positive, roll yield; commodity ETNs settle in cash, not by physical delivery.
An investor wants professionally managed exposure to a diversified group of commodity futures markets and is willing to accept partnership tax reporting.
Which investment vehicle is most consistent with these preferences? Answer: A commodity pool organized as a limited partnership, operated by a commodity pool operator, reporting the investor's share on Schedule K-1.
A commodity pool is a pooled vehicle, typically a limited partnership, that trades futures and other commodity interests under a commodity pool operator. It provides professional futures management and reports each investor's allocable share of income, gains, losses, deductions, and credits on Schedule K-1. A physically backed commodity ETP is passive and does not provide active futures management, a commodity grantor trust is also passive, and a closed-end fund of commodity producers provides equity exposure rather than direct futures exposure.
A taxpayer in the 32% ordinary income tax bracket sells physical silver bullion held for 14 months and realizes a $40,000 gain. Assume the net investment income tax does not apply.
What is the federal income tax on this gain? Answer: $11,200, because silver bullion is treated as a collectible taxed at the 28% rate
For federal income tax purposes, investment metals such as silver bullion are treated as collectibles. Gain from a collectible held longer than one year is taxed at the 28% collectibles rate rather than at the usual 15% or 20% long-term capital gains rates or at ordinary income rates. Here, 28% × $40,000 = $11,200.
- A company offers digital tokens to the public and uses the proceeds to build a software platform. Token purchasers have no voting or profit-sharing rights, but the tokens can be resold on digital asset exchanges and are expected to increase in value if the platform is successful. Under federal securities law, which statement is true?
Answer: The tokens are securities under the Howey test because purchasers expect profits from the company's efforts in developing the platform.
SEC v. W.J. Howey Co. An investment contract exists when a person invests money in a common enterprise and expects profits from the efforts of others. A digital token can be a security under this test even if it also has a consumptive use and even if it carries no voting or profit-sharing rights; the promoter's ongoing efforts and the purchasers' expectation of profit are decisive. The CFTC regulates certain digital assets as commodities, but a token that meets the Howey test is also subject to the securities laws, so CFTC regulation is not exclusive.
