The bailment framework

IRS FAQ A81 states that transferring virtual currency from one wallet to another wallet that you own does not constitute a sale, exchange, or disposition. The client retains an independent full private-key backup; withdrawal whitelisting prevents routing to unapproved addresses. Wrapping moves the client's own property between operational wrappers under fiduciary management — a self-transfer, not a disposition. This is the strongest published IRS guidance directly supporting non-taxable treatment.

No statute, regulation, revenue ruling, or case law declares wrapping taxable. IRS Notice 2024-57 deferred broker reporting for wrapping and unwrapping pending further study, and the deferral has been extended. The IRS has had every opportunity to classify wrapping as taxable and has not done so.

Gregory v. Helvering, 293 U.S. 465 (1935): tax treatment follows economic substance, not legal form. The client's economic exposure to Bitcoin is unchanged. The wrapped token is pegged 1:1, redeemable 1:1. Beneficial ownership is retained. The form changed; the substance did not.

Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955): income requires an "accession to wealth, clearly realized." Zero change in net economic position equals zero accession equals no realization event.

The client deposited BTC into a discretionary managed account. Wrapping was our operational implementation decision — not a client-directed exchange. The advisory relationship is a bailment: the client delivers property to the adviser for management, and ownership never transfers. The five structural elements above are present and documented.

Cottage Savings Ass'n v. Commissioner, 499 U.S. 554 (1991): realization requires an exchange of "materially different" legal entitlements. Wrapped BTC is pegged 1:1, redeemable 1:1, with the same economic rights as the underlying — not materially different. Cottage Savings involved mortgage participations with genuinely different obligors and risk profiles. Wrapped BTC is not that.

IRC §1015 carryover basis exists to defer built-in gain until genuine realization. IRC §1223(2) preserves holding period when no disposition occurs. Treating wrapping as taxable would reset the holding period — potentially converting long-term capital gain into short-term and roughly doubling the rate. The basis-continuity policy embedded in §1015 and §1223 supports the position that wrapping is not a realization event.

Veda letter to the SEC and CFTC (March 23, 2026)

Veda Tech Labs proposed that non-custodial smart-contract vault architectures satisfy the qualified-custody requirements of Advisers Act Rule 206(4)-2 and CFTC segregation regulations 1.20 and 4.20 when seven structural guardrails are met. The letter is SEC- and CFTC-facing — no tax analysis. But four of its structural characterizations track the bailment argument almost word-for-word.

• Receipt token as bailment receipt. Section III.A describes the receipt token as a cryptographic instrument representing the client's proportionate claim against the vault's underlying assets, redeemable upon presentation to the smart contract. Textbook bailment language.
• No balance-sheet intermediation. Section III.B states that client assets in a qualifying vault are never on any vault participant's balance sheet and no vault participant holds a proprietary interest. If no participant holds a proprietary interest, there is no counterparty to whom ownership could transfer.
• Non-transferable receipt tokens. Footnote 12 states that the receipt token cannot be moved to any other wallet by the vault owner; the only action available is redemption back to the authorized wallet. This directly supports the Cottage Savings "not materially different" argument — the token is a redemption instrument, not a tradeable asset.
• SMA analogy. Section VI compares vaults to separately managed accounts. We agree. A portfolio manager moving stocks between custodial accounts within an SMA does not trigger a tax event for the client. Neither should a vault deposit within a discretionary managed account.

SEC staff statement on Covered User Interface Providers (April 13, 2026)

The SEC Division of Trading and Markets issued a staff statement addressing Exchange Act §15 broker-dealer registration for "Covered User Interface Providers" — interfaces that assist users transacting on blockchain protocols using the user's self-custodial wallet. The staff set out twelve conditions under which they will not object to operating without broker-dealer registration. Three premises in the statement are tax-relevant.

• Self-custodial wallet as architectural prerequisite. Footnote 6 defines the self-custodial wallet as one where neither the wallet provider nor the associated interface has custody of, or access to, the user's encrypted or decrypted private key. This is the same structural fact our framework documents: the client holds the key; we hold scoped execution authority; we have no independent path to move assets to an unapproved destination.
• No discretion, no recommendation, no order-taking. Section II expressly excludes the carve-out from interface providers that make investment recommendations or take or route orders. The staff drew a clean line between interface activity and advisory activity. We sit on the advisory side of that line — the interface activity our clients route through is the carve-out addressee — but the same self-custody premise applies to our scoped execution role.
• Fee-neutrality and disclosure. The staff conditioned non-objection on fixed or flat fees that are product-, route-, venue-, and counterparty-agnostic; neutral sort and filter tools; no commentary preferring one execution route; and a nine-prong disclosure set. Our compensation is AUM-based advisory fees only — no protocol-level economic interest, no routing-linked compensation. That removes the factual predicate for any "disguised exchange for consideration" counter-argument.

The staff statement is weaker authority than the Veda letter for tax purposes — it is staff guidance rather than a Commission rule, expressly limited to Exchange Act §15, and treated as withdrawn five years from the publication date absent Commission action. Its value is cumulative. It is a second federal framework, from a different Division on a different statute, describing the same self-custodial / non-possession structure we rely on.