The Tax Risks of the $140 Billion Meme Coin Boom from the ICO Tax Evasion Case

Tax Risks in the Meme Coin Market: Examining the Risks Behind the $140 Billion Craze from ICO Cases

In 2024, as Bitcoin takes the stage in the world of finance, meme coins are also experiencing a celebration. Data shows that about 75% of meme coins were created this year, and by early December, the trading volume of meme coins increased by over 950%, with a total market capitalization exceeding $140 billion. This wave not only brings a new round of enthusiasm to the crypto market but also attracts more ordinary investors into the realm of crypto assets.

The popularity of meme coins brings to mind the ICO craze around 2017. At that time, the emergence of the ERC-20 standard significantly reduced the cost of issuing tokens, leading to a flood of projects that saw returns of hundreds and thousands of times, with billions of dollars pouring into this trend. Today, a batch of launch platforms represented by Pump.fun has made the issuance of tokens simpler and fairer, sparking a meme coin storm that continues to this day.

Although there are many technical and logical differences between ICOs and the issuance of meme coins, the tax compliance risks faced by investors and projects may be similar. During the last wave of ICO enthusiasm, many investors and project parties encountered related tax troubles. Now, with the ongoing enthusiasm for meme coins, tax compliance issues have once again become a core concern for crypto asset investors and meme coin issuers.

Let us review the Oyster case and the Bitqyck case as examples of these two ICO-related tax evasion cases, providing tax compliance considerations for cryptocurrency investors during the meme coin frenzy.

Meme coin wealth dream behind: deadly tax traps in a $140 billion market

1. Two Typical ICO Tax Evasion Cases

1.1 Oyster case: Coin sales revenue not declared, founder sentenced to four years in prison.

The Oyster Protocol platform was founded by Bruno Block (real name Amir Bruno Elmaani) in September 2017, aiming to provide decentralized data storage services. In October 2017, the platform began its ICO, issuing a token called Pearl (PRL). Oyster Protocol claims that the issuance of PRL is intended to build a win-win ecosystem, allowing both websites and users to benefit from data storage, and to achieve value exchange and incentive mechanisms through PRL. Founder Bruno Block also publicly promised that the supply of PRL would not increase after the ICO, and the smart contract would be "locked".

Through the ICO, the Oyster Protocol raised approximately $3 million in its early stages and used these funds to launch its mainnet, officially starting its data storage services. However, in October 2018, founder Bruno Block exploited a smart contract vulnerability to mint a large amount of new PRL privately and sold it on the market, causing the price of PRL to plummet, while he personally made huge profits from it.

The sharp decline in the price of PRL has drawn the attention of regulatory authorities, with relevant departments such as the U.S. Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS), and the Federal Bureau of Investigation (FBI) launching investigations. Ultimately, the SEC filed a civil lawsuit regarding the issue of defrauding investors, while the prosecutorial authorities brought criminal charges against Bruno Block for tax evasion.

In terms of tax issues, the prosecutor believes that Bruno Block not only damaged investors' trust but also violated his tax obligations on millions of dollars in cryptocurrency profits. Between 2017 and 2018, Bruno Block submitted only one tax return in 2017, stating that he earned approximately $15,000 from his "patent design" business, and did not file a tax return in 2018 nor report any income to the IRS, yet spent at least $12 million on properties, yachts, and more.

Ultimately, Oyster founder Bruno Block admitted to tax evasion in court and signed a plea agreement in April 2023, being sentenced to four years in prison for tax evasion and compensating the tax authorities approximately $5.5 million to cover the tax losses.

1.2 Bitqyck case: ICO transfer income not taxed, two founders sentenced to a total of eight years in prison.

Bitqyck is a cryptocurrency company founded by Bruce Bise and Samuel Mendez. The company first launched Bitqy coin, claiming to provide an alternative wealth opportunity for "those who missed Bitcoin," and conducted an ICO in 2016. Bitqyck promised investors that each Bitqy coin would come with 1/10 of a share of the company's common stock. However, in reality, the company shares have always been held by founders Bise and Mendez, and the promised shares and corresponding profits were never distributed to investors.

Not long after, Bitqyck launched a new cryptocurrency called BitqyM coin, claiming that purchasing this coin would allow investors to participate in the "Bitcoin mining business" by paying to power Bitqyck's Bitcoin mining facility in Washington State. However, such a mining facility does not actually exist. Through these false promises, Bise and Mendez raised $24 million from over 13,000 investors, using most of the funds for personal expenses.

The SEC filed a civil lawsuit against Bitqyck for defrauding investors. In August 2019, Bitqyck acknowledged the facts and reached a civil settlement with the SEC, with the company and its two founders jointly paying approximately $10.11 million in civil penalties. The prosecution continued to bring tax evasion charges against Bitqyck: from 2016 to 2018, Bise and Mendez earned at least $9.16 million by issuing Bitqy and BitqyM but underreported their income to the IRS, resulting in over $1.6 million in tax losses; in 2018, Bitqyck earned at least $3.5 million from investors but did not file any tax returns.

Ultimately, regarding the tax issues, Bise and Mendez pleaded guilty in September and October 2021, respectively, and were each sentenced to 50 months in prison (a total of about eight years) and jointly liable for $1.6 million.

2. Detailed Explanation of the Tax Issues Involved in the Two Cases

In the cases of Oyster and Bitqyck, one of the core issues is the tax compliance of ICO revenues. In this emerging form of fundraising, some issuers obtain huge revenues through fraudulent means or other improper methods, while underreporting earnings or failing to file tax returns, leading to tax compliance issues.

2.1 How does U.S. law determine tax evasion?

In the United States, tax evasion is a felony, referring to the intentional use of illegal means to reduce tax liabilities, typically manifested through actions such as concealing income, inflating expenses, failing to report, or not paying taxes on time. According to Section 7201 of the United States Federal Tax Code, tax evasion is a federal crime, and once determined to be a tax evader, individuals may face up to 5 years in prison and fines of up to $250,000, while entities may face fines of up to $500,000, with the specific penalties depending on the amount and nature of the tax evasion.

To constitute the crime of tax evasion, the following conditions must be met: (1) a significant amount of taxes owed; (2) active tax evasion behavior has been implemented; (3) there exists a subjective intent to evade taxes. Investigations into tax evasion typically involve tracing and analyzing financial transactions, sources of income, asset flows, and so on. Especially in the field of cryptocurrency, due to its anonymity and decentralized characteristics, tax evasion is more likely to occur.

2.2 Tax-related activities in the two cases

In the United States, various aspects of an ICO may involve tax obligations, and both project parties and investors bear different tax responsibilities at different stages. The project party must comply with tax compliance requirements when raising funds in an ICO. The funds raised in an ICO can be considered as sales revenue or capital raised. For example, if the funds raised in an ICO are used to pay for company operating expenses, develop new technologies, or expand the business, then these funds should be regarded as company income and taxed accordingly.

Investors have a tax obligation after obtaining tokens through an ICO. Especially when the tokens acquired through the ICO bring rewards or airdrops, these rewards will be considered capital gains and subject to capital gains tax. In the United States, the value of airdropped and rewarded tokens is typically calculated based on their market value for tax reporting purposes. When investors hold the tokens for a period of time and then sell them, the profits obtained will also be considered capital gains for taxation.

Objectively speaking, the actions of the parties in the Oyster case and the Bitqyck case not only infringed upon the interests of investors and constituted fraud but also violated U.S. tax laws to varying degrees. However, the tax evasion in the two cases is not entirely the same.

Tax evasion in the Oyster case 2.2.1

In the Oyster case, after the PRL ICO, founder Bruno Block exploited a smart contract vulnerability to privately mint a large amount of PRL and sell it, gaining huge profits. Bruno quickly amassed wealth by selling PRL but failed to fulfill his tax obligations, violating Section 7201 of the Federal Tax Code.

Bruno Block's actions are unique because he engaged in minting Pearl before selling it. It goes without saying that capital gains tax should be paid on the proceeds from the sale of tokens, but whether the act of minting tokens is taxable is still inconclusive. Some argue that minting tokens is similar to mining, as both involve creating new digital assets through computation, and therefore should also be subject to taxation. Whether the income from minting is taxable should depend on the market liquidity of the tokens. When there is no liquidity in the token market, the value of the minted tokens is difficult to determine, making it impossible to clearly calculate the income; however, if the market has a certain level of liquidity, these tokens possess market value, and the income from minting should be considered taxable income.

2.2.2 Bitqyck's tax evasion activities

The tax evasion behavior in the Bitqyck case involves false promises to investors and the illegal transfer of raised funds. After successfully raising funds through the ICO, Bitqyck's founders Bise and Mendez failed to fulfill the promised investment returns, instead using most of the funds for personal expenses. This behavior of fund transfer is essentially equivalent to converting investors' funds into personal income, without being used for project development or fulfilling investor interests. The key tax issues in the Bitqyck case revolve around the illegal transfer of funds raised through the ICO and unreported income.

According to relevant provisions of the U.S. Internal Revenue Code, both legal and illegal income are included in taxable income. The U.S. Supreme Court also confirmed this rule in the case of James v. United States (1961). U.S. citizens must report illegal earnings as income when filing their annual tax returns, but these taxpayers often do not report such income because reporting illegal income may trigger investigations by relevant authorities into their illegal activities. Bise and Mendez failed to report illegal income transferred from funds raised through the ICO as required, directly violating relevant tax laws, and ultimately faced criminal liability for this.

3. Tips and Suggestions

With the popularity of meme coins, many individuals in the cryptocurrency industry have gained huge returns. However, as indicated by previous ICO tax evasion cases, in the meme coin market, we not only need to focus on technological innovation and market opportunities, but we should also pay attention to the important matter of tax compliance.

First, understand the tax responsibilities of issuing meme coins to avoid legal risks. Although issuing meme coins does not directly generate profits through fundraising like an ICO, the issuer and early investors of meme coins should still pay capital gains tax when selling their tokens after appreciation. While anyone can anonymously issue meme coins on the blockchain, this does not mean that the issuer can evade tax audits. The best way to avoid tax law risks is to comply with tax laws rather than seek more effective means of on-chain anonymity.

Second, pay attention to the trading process of meme coins and ensure that transaction records are transparent. Due to the speculative nature of the meme coin market, new projects are constantly emerging, and investors' meme coin transactions can be very frequent, leading to a multitude of transaction records. Cryptocurrency investors need to keep detailed records of a series of transactions, especially by using professional cryptocurrency asset management and tax reporting software, to ensure that all buying, selling, transferring, and profiting are traceable, and to properly classify them according to tax laws during tax reporting, thereby avoiding potential tax disputes.

Third, keep up with the dynamics of tax laws and collaborate with professional tax advisors. The tax law systems concerning crypto assets in various countries are still in their infancy and are subject to frequent adjustments, with key changes potentially having a direct impact on actual tax burdens. Therefore, investors and issuers of meme币 should maintain a high level of awareness regarding the tax law dynamics in their respective countries, and seek the advice of professional tax advisors when necessary to assist in making optimal tax decisions.

In short, the meme coin market, which has reached as high as 140 billion dollars, has a huge wealth effect, but these

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BrokenDAOvip
· 07-31 18:54
Another round of speculative traps dominated by human nature
View OriginalReply0
StopLossMastervip
· 07-31 11:37
It's that season again when the suckers are played for suckers!
View OriginalReply0
Ser_Liquidatedvip
· 07-29 06:05
Vomited again, it's a repeat of 2017.
View OriginalReply0
DefiVeteranvip
· 07-29 05:55
play people for suckers and run, what are you copying~
View OriginalReply0
PonziDetectorvip
· 07-29 05:54
It's the same old trick as back then, just that the suckers have changed batch.
View OriginalReply0
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