Tax Traps in the Meme Coin Market: Risks in the $140 Billion Emerging Sector from ICO Cases

In 2024, as Bitcoin ascends to the world financial stage, the meme coin market is also experiencing unprecedented prosperity. Data shows that approximately 75% of meme coins were born this year, and by early December, meme coin trading has increased by over 950%, with a total market capitalization exceeding $140 billion. This wave of enthusiasm not only brings new vitality to the crypto market but also attracts more ordinary investors into the realm of crypto assets.

The rise of meme coins brings to mind the ICO boom around 2017. At that time, the emergence of the ERC-20 standard greatly lowered the threshold for issuing tokens, resulting in numerous projects that saw hundreds or thousands of times in returns, attracting billions of dollars. This year, launch platforms represented by Pump.fun have made issuing tokens even simpler and fairer, leading to the ongoing meme coin frenzy. Although ICOs and meme coins differ in technology and logic, the tax compliance risks faced by investors and projects may be similar.

During the last ICO boom, many investors and project parties encountered tax-related troubles. Now, with the ongoing meme coin craze, tax compliance issues have once again become a focus for cryptocurrency investors and meme coin issuers. This article will provide tax compliance reflections for participants in the meme coin craze by reviewing the Oyster case and the Bitqyck case, which are two tax evasion cases related to ICOs.

1. Review of ICO Tax Evasion Cases

1.1 Oyster case: Unreported coin sales income, 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 conducted an ICO and issued the Pearl (PRL) token. Oyster Protocol promises to create a win-win ecosystem through PRL, allowing websites and users to benefit from data storage. Bruno Block also publicly promised that he would not increase the supply of PRL after the ICO.

Through an ICO, the Oyster Protocol raised approximately $3 million and achieved its mainnet launch. However, in October 2018, Bruno Block exploited a smart contract vulnerability to mint a large amount of PRL and sell it off, leading to a drastic drop in PRL's price, while he personally gained a substantial profit.

This incident has triggered an investigation by regulators. Regarding tax issues, prosecutors believe that Bruno Block not only undermined investor confidence but also evaded tax obligations on millions of dollars in cryptocurrency profits. During the period from 2017 to 2018, he submitted only one tax return for 2017, reporting approximately $15,000 in "patent design" income, while failing to report anything in 2018, despite spending at least $12 million on properties, yachts, and more.

Ultimately, Bruno Block pleaded guilty and was sentenced to four years in prison in April 2023, and he compensated the tax authorities approximately 5.5 million dollars.

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

Bitqyck was founded by Bruce Bise and Samuel Mendez, initially launching the Bitqy coin, claiming to provide an alternative investment opportunity for "those who missed Bitcoin." The company promised investors that each Bitqy coin would come with 1/10 of a share of the company's common stock, but this was never fulfilled in reality. Subsequently, the company launched BitqyM coin, claiming that investors could participate in Bitcoin mining operations by purchasing it, but the so-called mining facilities did not exist.

Through these false promises, Bise and Mendez raised $24 million from over 13,000 investors, most of which was used for personal expenses. The SEC filed a civil lawsuit regarding this, and in August 2019, a settlement was reached where Bitqyck and its two founders collectively paid about $10.11 million in civil penalties.

The prosecution department subsequently filed tax evasion charges against Bitqyck: from 2016 to 2018, Bise and Mendez earned at least $9.16 million through the issuance of Bitqy and BitqyM but underreported related income, 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, Bise and Mendez pleaded guilty in September and October 2021, respectively, and were each sentenced to 50 months in prison for tax evasion, and each was held jointly liable for $1.6 million.

2. Analysis of Tax Issues in the Case

One of the core issues in the cases of Oyster and Bitqyck is the tax compliance of ICO revenues. Some issuers obtain enormous income through fraudulent means against investors or other improper methods, yet underreport their earnings or fail to file tax returns, leading to tax compliance issues.

2.1 Definition of tax evasion under U.S. law

In the United States, tax evasion is a felony, referring to the deliberate use of illegal means to reduce tax liabilities, such as concealing income, inflating expenses, failing to report, or not paying taxes on time. According to Section 7201 of the U.S. Internal Revenue Code, tax evasion is a federal crime, and individuals may face up to 5 years in prison and a fine of $250,000, while entities may face a fine of up to $500,000.

To constitute tax evasion, the following must be met: ( a large amount of unpaid taxes; ) the implementation of active tax evasion behaviors; ( the existence of subjective intent to evade taxes. Tax evasion investigations typically involve tracing and analyzing financial transactions, sources of income, asset flows, etc. In the field of cryptocurrency, due to its anonymity and decentralized characteristics, tax evasion is more likely to occur.

) 2.2 Analysis of Tax-related Behaviors in the Two Cases

In the United States, various stages of an ICO may involve tax obligations. Project parties must comply with tax regulations when raising funds through an ICO, and the funds raised can be regarded as sales revenue or capital fundraising. Investors also have tax obligations after obtaining tokens through an ICO, especially when the tokens provide rewards or airdrops; these gains will be considered capital gains and taxed.

(# 2.2.1 Tax evasion behavior of the Oyster case

In the Oyster case, Bruno Block exploited a vulnerability in the smart contract to privately mint a large amount of PRL and sell it for profit, but failed to fulfill relevant tax obligations, violating Section 7201 of the Federal Tax Code.

Regarding whether the minting of tokens should be taxed, there is currently no conclusion. Some believe that minting tokens is similar to mining, as both create new digital assets through computation, and therefore should be taxed. However, whether the income from minting should be taxed depends on the market liquidity of the tokens. When the token market has not yet formed liquidity, the value of the minted tokens is difficult to determine; but if the market has a certain level of liquidity, these tokens acquire market value, and the income from minting should be considered taxable income.

)# 2.2.2 Bitqyck tax evasion case

The tax evasion behavior in the Bitqyck case involves false promises to investors and the illegal transfer of raised funds. The founders used the funds raised from the ICO for personal expenses, essentially converting investor funds into personal income, rather than using them for project development or fulfilling investor interests.

According to the U.S. Internal Revenue Code, both legal and illegal income are considered taxable income. This rule was confirmed by the U.S. Supreme Court in the case of James v. United States (1961). U.S. citizens must report illegal gains as income when filing their annual tax returns. Bise and Mendez did not report the illegal income transferred from the funds raised through the ICO as income, thereby directly violating tax laws and ultimately facing criminal liability.

3. Suggestions for meme coin participants

With the booming meme coin market, many people in the cryptocurrency industry have gained huge returns. However, participants not only need to pay attention to technological innovations and market opportunities but should also place importance on tax compliance issues.

First, understand the tax responsibilities involved in issuing meme coins to avoid legal risks. Although issuing meme coins does not directly generate revenue like an ICO through fundraising, when meme coins appreciate in value, the issuers and early investors should still pay capital gains tax upon selling. Although meme coins can be issued anonymously, this does not mean that issuers can evade tax audits. Complying with tax laws is the best way to mitigate risks.

Secondly, pay attention to the trading process of meme coins to ensure that transaction records are transparent. Due to the highly speculative nature of the meme coin market, investors may trade very frequently. It is recommended to use professional cryptocurrency asset management and tax reporting software to keep detailed transaction records for accurate categorization during tax reporting, avoiding potential tax disputes.

Finally, keep up with tax law developments and collaborate with professional tax advisors. Tax laws regarding crypto assets are still evolving in various countries and may undergo frequent adjustments. Investors and issuers of meme coins should closely monitor tax law changes in their respective countries and seek professional tax advice when necessary to make optimal tax decisions.

In summary, while the meme coin market has a huge wealth effect, it also comes with new legal challenges and compliance risks. Participants need to fully understand the related tax risks and remain cautious in the rapidly changing market to minimize unnecessary losses.