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Source: TaxDAO
2024 is the year when Bitcoin enters the center of the world’s financial stage, and it is also a carnival year for meme coins.Relevant data shows that about 75% of meme coins were born this year. As of early December this year, meme coins trading increased by more than 950%, with a total market value of more than US$140 billion.The popularity of meme coins not only brings a new round of popularity to the crypto market, but also attracts more and more ordinary investors in the crypto asset field.
The meme coin craze reminds people of the ICO craze around 2017.In 2017, with the emergence of the ERC-20 standard, the cost of issuing tokens was greatly reduced, with hundreds of times and thousands of times emerging one after another, and billions of dollars pouring into the ICO boom; and this year, Pump.fun was the first to be the first to be issued.A batch of launch platforms made issuing tokens simpler and more fairer, and a meme coin storm that has continued to this day has been storm in the circle.Although there are many differences in technology, logic, etc. between ICO and the issuance of meme coins, the tax compliance risks faced by investors and projects may be similar.During the last round of ICO boom, there were no shortage of investors and projects facing ICO-related tax troubles.Nowadays, as the meme coin boom continues, tax compliance issues will once again become the core issue that crypto asset investors and meme coin issuers need to pay attention to.In this issue, FinTax will look back at the Oyster case and Bitqyck case, taking these two ICO-related tax evasion cases as examples, to provide crypto investors with cold thinking about tax compliance amid the meme coin boom.
1. Two typical cases of ICO tax evasion
1.1 Oyster case: The founder was sentenced to four years in prison after undeclared currency revenue
The Oyster Protocol platform was launched by Bruno Block (real name Amir Bruno Elmaani) in September 2017 to provide decentralized data storage services.In October 2017, Oyster Protocol began ICO, and the token issued was named Pearl (PRL).Oyster Protocol claims that PRL is issued to create a win-win ecosystem so that both websites and users can benefit from data storage, and to realize value exchange and incentive mechanisms through PRL.At the same time, founder Bruno Block also publicly promised that after the ICO, the supply of PRL will not increase and the smart contracts that create PRL will be “locked”.
Through ICO, Oyster Protocol raised about $3 million in the early stage and used this fund to launch the main network, officially launching the data storage service, turning Oyster Protocol from an idea to a usable product.But the good times didn’t last long. In October 2018, founder Bruno Block took advantage of loopholes in smart contracts to privately cast a large number of new PRLs and sold them in the market, causing the price of PRL to plummet, but Bruno Block personally made huge profits.
The price plunge in PRL has attracted the attention of regulators, with the Securities and Exchange Commission (SEC), the IRS, the FBI and other relevant departments investigating it, and the SEC has finally targeted its fraudulent investors.The issue is filed with a civil lawsuit, and the procuratorate filed a criminal lawsuit against Bruno Block on tax evasion.On tax issues, prosecutors believe that Bruno Block not only harms investors’ trust, but also violates the obligation to pay taxes on millions of dollars in cryptocurrency profits.Bruno Block filed a tax return only in 2017-2018, saying he only earned about $15,000 from the “patent design” business, and did not file a tax return in 2018, tooHe did not report any income to the IRS, but spent at least $12 million to purchase real estate, yachts, etc.
Ultimately, Oyster founder Bruno Block confessed to his tax evasion facts in court and signed a plea agreement in April 2023, sentenced to four years in prison for tax evasion and compensated the tax department about $5.5 million to fill tax losses..
1.2 Bitqyck case: ICO transfer income is not paid tax, and the two sponsors serve a total of eight years in prison
Bitqyck is a cryptocurrency company founded by Bruce Bise and Samuel Mendez.The company first launched Bitqy, claiming that “those who missed Bitcoin” offers alternative ways to get rich, and conducted an ICO in 2016.Meanwhile, Bitqyck promises investors that each Bitqycoin comes with 1/10 of Bitqyck common stock.But in fact, the company’s shares are always held by the founders Bise and Mendez, and the company has never distributed committed shares and corresponding profits to investors.Soon, Bitqyck launched a new cryptocurrency, BitqyM, saying that buying the currency would allow investors to join the “bitcoin mining business” by paying to power Bitqyck Bitcoin mining facilities in Washington State, but in fact, such miningThe facilities do not exist.Through false commitments, Bise and Mendez raised $24 million from more than 13,000 investors through Bitqyck and spent most of their funds on their personal expenses.
In response, the SEC filed a civil lawsuit against Bitqyck’s party for fraudulent investors.In August 2019, Bitqyck’s party acknowledged the facts and reached a civil settlement with it. Bitqyck and the two founders jointly paid a civil fine of approximately US$10.11 million to the SEC.The procuratorate continued to file tax evasion charges against Bitqyck’s side: from 2016 to 2018, Bise and Mendez earned at least $9.16 million by issuing Bitqy and Bitqy, but underreported relevant income to the IRS, resulting in more than $1.6 million in total by issuing Bitqy and Bitqy.tax losses; in 2018, Bitqyck earned at least $3.5 million from investors without filing any tax returns.
In the end, in response to tax issues, Bise and Mendez pleaded guilty in September and October 2021, and both sentenced to 50 months in prison for tax evasion (the two of them totaled about eight years), and each bear joint and several liability of $1.6 million..
2. Detailed explanation of the tax issues involved in the two cases
In the Oyster and Bitqyck cases, one of the core issues is the tax compliance issue of ICO revenue.In the emerging form of ICO, some issuers obtain huge income by fraudulent investors or other improper means, but underreport income or fail to make tax returns, which in turn has caused tax compliance issues.
2.1 How does US law judge tax evasion?
In the United States, tax evasion is a felony, which refers to intentionally taking illegal means to reduce taxes payable, which is usually manifested as concealing income, false reporting of expenditures, failure to declare or failure to pay taxes on time.According to Article 7201 of the Federal Tax Code (26 U.S.C. §7201), tax evasion is a federal crime. Once convicted of being a tax evader, an individual may face up to five years in prison and a fine of up to $250,000. The unit willYou may face a fine of up to $500,000, depending on the amount and nature of the tax evasion.
Under Article 7201, the crime of tax evasion must be met: (1) A large amount of tax payment is owed; (2) Active tax evasion is committed; (3) Subjective intention of tax evasion.Surveys on tax evasion usually involve the traceability and analysis of financial transactions, income sources, asset flows, etc.Especially in the cryptocurrency field, tax evasion is more likely to occur due to its anonymity and decentralized characteristics.
2.2 Tax-related behaviors in both cases
In the United States, all aspects of ICO may involve tax obligations, and project parties and investors assume different tax responsibilities at different stages.On the one hand, the project party must comply with tax compliance requirements when raising funds from ICO.The funds raised by the ICO can be regarded as sales revenue or capital raising.For example, if the funds raised by the ICO are used to pay for the company’s operating expenses, develop new technologies or expand business, then these funds should be regarded as company revenue and taxes are required to be paid in accordance with the law.On the other hand, investors also have tax obligations after obtaining tokens through ICO.Especially when investors receive tokens through ICOs bring rewards or airdrops (Airdrops), these rewards will be considered capital gains and require capital gains tax.In the United States, the value of airdrops and reward tokens is usually calculated and taxed according to their market value.When an investor holds the tokens for a period of time, the profits obtained by selling these tokens will also be considered as capital gains and taxed.
Objectively speaking, whether from the Oyster case or the Bitqyck case, the behavior of the parties not only infringes on the interests of investors and constitutes fraud, but also violates the provisions of the US tax laws to varying degrees. Of course, the tax evasion behavior in the two cases is different.The article will analyze in detail.
2.2.1 Tax evasion in the Oyster case
Specifically for the Oyster case, after PRL conducted ICO, Bruno Block, founder of Oyster Protocol platform, took advantage of the smart contract vulnerability and privately created a large number of PRLs and sold them, obtaining huge profits from it.Bruno quickly accumulated wealth through the sale of PRL, but failed to fulfill its relevant obligations on tax payment.This behavior violates the relevant provisions of Article 7201 of the Federal Tax Code.
However, there is something special about Bruno Block’s behavior in this case because he also had the act of casting Pearl before selling it.It goes without saying whether the capital gains tax should be paid for the proceeds of the sale of tokens, and it is still unclear whether the IRS should tax the act of casting tokens.In this regard, some people believe that both casting tokens and mining create new digital assets through calculations, so the income from casting tokens should also be taxed.Some views believe that casting tokens are similar to the mining process, creating new digital assets through calculations and therefore should be taxed.FinTax believes that whether the casting income needs to be taxed should depend on the market liquidity of the token.When the token market has not yet formed liquidity, the token value of the casting is difficult to determine, and the income cannot be clearly calculated; but if the market already has a certain liquidity, these tokens have market value, and the income from the casting should be regarded as taxable income.
2.2.2 Tax evasion in the Bitqyck case
Unlike the Oyster case, tax evasion in the Bitqyck case involves illegal transfers of false commitments to investors and raise funds.After successfully raising funds through the ICO, Bitqyck founders Bise and Mendez did not fulfill their investment returns as planned, but instead used most of the funds to personal expenses.This kind of capital transfer behavior is essentially equivalent to converting investor funds into personal income, and is not used for project development or the realization of investor interests.Unlike the direct sales of tokens during the ICO process, the key tax issue in the Bitqyck case lies in the illegal transfer of funds raised by ICO and the unreported income.
According to the relevant provisions of the US Internal Revenue Code, both legal and illegal income are included in taxable income.The U.S. Supreme Court also confirmed the rule in James v. United States (1961).U.S. citizens must report illegal income as income when submitting their annual tax returns, but such taxpayers usually do not report such income because reporting of illegal income may trigger investigations into their illegal actions by relevant departments.However, Bise and Mendez failed to report illegal income transferred from the funds raised from the ICO as income as required, which directly violated the relevant provisions of the tax law and ultimately bear criminal liability for this.
3. Tips and suggestions from FinTax
With the popularity of meme coins, many people in the crypto industry have gained huge returns from it.However, as the previous ICO tax evasion cases show, in the meme currency market where wealth myths are every day, we need not only pay attention to technological innovation and market opportunities, but also to the important matter of tax compliance.
First,Understand the tax liability for issuing meme coins and avoid legal risks.Although issuing meme coins does not directly obtain income through financing funds like ICOs, when the tokens purchased by meme coins appreciate in the early stage, they should still pay tax on the relevant capital gains when sold.At the same time, although everyone can issue meme coins anonymously on the chain, this still does not mean that issuers can avoid tax audits.The best way to avoid tax laws is to comply with tax laws rather than seeking more effective means of anonymity on-chain.
second,Pay attention to the meme currency trading process to ensure transparent transaction records.Because the meme currency market is more speculative and various new projects are emerging, investors may conduct meme currency transactions very frequently, and a large number of transaction records are followed.Crypto asset investors need to keep detailed records of a series of transactions, especially using professional crypto asset management and tax declaration software to ensure that all transactions, transfers and profits are traceable and correct when reporting taxes.tax statutory, thereby avoiding potential tax disputes.
third,Follow up on tax law updates and cooperate with professional tax professionals.The tax system for crypto assets in various countries is still in its infancy and there will be regular adjustments, and key changes may directly affect the actual tax burden.Therefore, both meme coins should pay close attention to the tax law dynamics of their country, and should seek the opinions of professional tax personnel when necessary to assist themselves in making the best tax decisions.
In short, the meme currency market, which has reached US$140 billion, has a huge wealth effect, but these wealth is also accompanied by a new round of legal challenges and compliance risks.Both issuers and investors need to fully understand the relevant tax risks, remain cautious and keen in the turbulent market, and reduce unnecessary risks and losses.
