Tax Issues in the Meme Coin Market: Compliance Risks from the ICO Case

2024 witnessed the rise of Bitcoin on the global financial stage, while also being the year of the meme coin frenzy. Data shows that approximately 75% of meme coins were born this year, and by early December, meme coin trading increased by over 950%, with a total market value exceeding 140 billion USD. This wave not only brought a new round of excitement to the crypto market but also attracted more ordinary investors into the cryptocurrency asset space.

The meme coin craze brings to mind the ICO boom around 2017. At that time, the emergence of the ERC-20 standard significantly reduced the cost of issuing tokens, leading to a plethora of hundredfold and thousandfold projects, with billions of dollars flooding into the ICO market. This year, launch platforms like Pump.fun have made issuing tokens simpler and fairer, sparking an ongoing meme coin storm. Although ICOs and meme coins differ technically and logically, the tax compliance risks faced by investors and projects may be similar.

In the previous ICO boom, many investors and project parties encountered tax issues related to ICOs. As the meme coin craze continues, tax compliance has again become a core issue that crypto asset investors and meme coin issuers need to pay attention to. This article will review the Oyster case and the Bitqyck case, two tax evasion cases related to ICOs, to provide crypto investors with insights on tax compliance during the meme coin craze.

Two Typical ICO Tax Evasion Cases

Oyster case: Coin sales income unreported, founder sentenced to four years in prison.

The Oyster Protocol platform was initiated by Bruno Block in September 2017, aiming to provide decentralized data storage services. In October 2017, the platform conducted an ICO, issuing a token named Pearl (PRL). The founder promised that the supply of PRL would not increase after the ICO and that the smart contract would be "locked".

Through the ICO, Oyster Protocol raised approximately $3 million and achieved its mainnet launch. However, in October 2018, the founder exploited a vulnerability in the smart contract to privately mint a large amount of new PRL and sell it on the market, causing the price of PRL to plummet, while the individual reaped huge profits.

This incident has sparked an investigation by regulatory authorities. Regarding tax issues, prosecutors believe that Bruno Block not only undermined investor trust but also violated tax obligations. Between 2017 and 2018, he reported only about $15,000 in income in 2017, and did not file a tax return in 2018, yet spent at least $12 million on purchasing properties, yachts, and more.

Finally, Bruno Block admitted to tax evasion and was sentenced to four years in prison in April 2023, and he compensated the tax authorities about 5.5 million dollars.

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

Bitqyck was founded by Bruce Bise and Samuel Mendez, initially launching Bitqy coin, claiming to provide an alternative wealth opportunity for "those who missed out on Bitcoin," and conducted an ICO in 2016. The company promised that each Bitqy coin would come with 1/10 of a share of the company's common stock, but in reality, the promised shares and profits were never allocated.

Subsequently, Bitqyck launched BitqyM coin, claiming that purchasing this coin would allow participation in "Bitcoin mining operations," but in reality, there were no related facilities. Through these false promises, Bise and Mendez raised 24 million dollars from over 13,000 investors, most of which was used for personal expenses.

In addition to defrauding investors, Bitqyck also faces tax evasion charges. From 2016 to 2018, Bise and Mendez earned at least $9.16 million by issuing Bitqy and BitqyM, but underreported related income to the tax authorities, resulting in over $1.6 million in tax losses. In 2018, Bitqyck earned at least $3.5 million from investors but did not submit any tax returns.

Ultimately, Bise and Mendez pleaded guilty in September and October 2021, respectively, and were each sentenced to 50 months in prison for tax evasion, with joint liability of $1.6 million.

Detailed Explanation of the Tax Issues Involved in the Two Cases

One of the core issues in the cases of Oyster and Bitqyck is the tax compliance of ICO revenues. Some issuers obtained large revenues through fraudulent means against investors or other improper methods, yet underreported earnings or failed to file tax returns, leading to tax compliance issues.

How does US 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 concealing income, inflating expenses, failing to report, or not paying taxes on time. According to Section 7201 of the U.S. Federal Tax Code, tax evasion is a federal crime, and individuals may face up to 5 years of imprisonment and a fine of up to $250,000, while entities may face a fine of up to $500,000.

The elements constituting the crime of tax evasion include: ( failing to pay a large amount of tax; ) engaging in active tax evasion behavior; ( having subjective intent to evade taxes. Investigations into tax evasion typically involve tracing and analyzing financial transactions, sources of income, and asset flows. In the field of cryptocurrency, due to its anonymity and decentralized characteristics, tax evasion is more likely to occur.

) tax-related activities in the two cases

In the United States, various aspects of an ICO may involve tax obligations. Project teams must comply with tax compliance requirements when raising funds through an ICO, and the funds raised in the ICO can be considered sales revenue or capital fundraising. Investors also have tax obligations after obtaining tokens through the ICO, especially when receiving rewards or airdrops, which will be regarded as capital gains and subject to capital gains tax.

(# Tax evasion in the Oyster case

In the Oyster case, founder Bruno Block exploited a smart contract vulnerability to privately mint a large amount of PRL and sell it, obtaining huge profits while failing to fulfill tax obligations, thereby violating Section 7201 of the Federal Tax Code.

There is currently no conclusion on whether minting tokens should be taxed. Some argue that minting tokens is similar to mining and should be taxed. However, whether the income from minting is taxable should depend on the market liquidity of the tokens. If the market has a certain level of liquidity, these tokens will have market value, and the income from minting should be considered taxable income.

)# Tax evasion behavior of the Bitqyck case

The tax evasion behavior in the Bitqyck case involves false promises to investors and the illegal transfer of raised funds. The founders used most of the ICO funds for personal expenses, essentially equivalent to converting investor funds into personal income.

According to U.S. law, both legal and illegal income are considered taxable income. The founders of the Bitqyck case failed to report the illegal income transferred from the ICO fundraising as income, directly violating tax regulations.

Suggestions for Participants in the Meme Coin Market

With the explosive growth of the meme coin market, many industry professionals have reaped huge returns. However, as evidenced by the ICO tax evasion cases, in this market filled with wealth myths, we need to pay attention not only to technological innovation and market opportunities but also to the importance of tax Compliance.

1. Understand the tax responsibilities of issuing meme coins to avoid legal risks. Although issuing meme coins is different from directly fundraising via an ICO, capital gains tax should still be paid when the tokens appreciate and are sold. While meme coins can be issued anonymously on the blockchain, this does not mean that tax audits can be evaded. Compliance with tax laws is the best way to avoid risks.

2. 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, trading can be very frequent. Investors should keep detailed transaction records and use professional cryptocurrency asset management and tax reporting software to ensure that all purchases, sales, transfers, and profits are traceable, avoiding potential tax disputes.

3. Keep up with tax law dynamics and collaborate with professional tax advisors. The tax law systems regarding crypto assets in various countries are still in the early stages and may undergo frequent adjustments. Investors and issuers of meme coins should pay close attention to the tax law dynamics in their respective countries and seek the advice of professional tax advisors when necessary to make optimal tax decisions.

In summary, although the meme coin market has a huge wealth effect, it is also accompanied by a new round of legal challenges and compliance risks. Participants need to fully recognize the relevant tax risks and remain cautious and alert in the complex and ever-changing market to reduce unnecessary risks and losses.