The $140 billion Market and Tax Risks Behind Meme Coins

In 2024, Bitcoin took center stage in the world financial arena while also witnessing the frenzy of meme coins. Data shows that about 75% of meme coins were born this year, and by early December, the trading volume of meme coins increased by over 950%, with a total market capitalization surpassing 140 billion USD. This wave not only injected new vitality into the crypto market but also attracted more ordinary investors into the realm of crypto assets.

The meme coin craze reminds people of the ICO boom around 2017. At that time, the emergence of the ERC-20 standard greatly lowered the threshold for issuing tokens, leading to a plethora of projects with hundreds or thousands of times returns, with billions of dollars flooding into the ICO wave. Today, a batch of launching platforms represented by Pump.fun has once again simplified the token issuance process, sparking an ongoing meme coin storm. Although ICOs and meme coin issuance differ in technology and logic, the tax compliance risks faced by investors and projects may be similar.

During the last round of the ICO craze, many investors and project parties encountered related tax issues. As the popularity of meme coins continues, tax compliance once again becomes 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 ICO-related tax evasion cases, to provide investors in the meme coin craze with insights on tax compliance.

Two Typical ICO Tax Evasion Cases

Oyster case: Concealing coin sales income, founder sentenced to four years in prison.

In September 2017, Bruno Block founded the Oyster Protocol platform, aiming to provide decentralized data storage services. In October of the same year, the platform began its ICO, issuing Pearl (PRL) tokens. Oyster Protocol claims that PRL will create a win-win ecosystem, allowing websites and users to benefit from data storage. Bruno Block also publicly promised not to increase the supply of PRL after the ICO and will "lock" the smart contract that created PRL.

Oyster Protocol raised approximately $3 million through its initial ICO, leading to the launch of its mainnet. However, in October 2018, Bruno Block exploited a vulnerability in the smart contract to privately mint a large number of new PRL and sell them on the market, resulting in a significant drop in the price of PRL, while he personally gained substantial profits.

This matter has attracted the attention of regulatory authorities. The SEC has filed a civil lawsuit against it for defrauding investors, while the prosecution has initiated a criminal lawsuit regarding tax evasion. The prosecution believes that Bruno Block has not only harmed investor trust but also violated tax obligations on millions of dollars in cryptocurrency profits. Between 2017 and 2018, he reported only about $15,000 in "patent design" income in 2017, and did not report any income in 2018, yet spent at least $12 million on the purchase of properties, yachts, and so on.

Ultimately, Bruno Block admitted to tax evasion, signed a plea agreement in April 2023, and was sentenced to four years in prison and ordered to pay approximately $5.5 million in tax losses.

Bitqyck case: ICO funds 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 Bitqy coin, claiming to provide wealth opportunities for "those who missed Bitcoin," and conducting an ICO in 2016. The company promised that each Bitqy coin would come with 1/10 of a share of Bitqyck common stock, but in reality, the shares were always held by the founders and not distributed to investors. Subsequently, the company launched BitqyM coin, claiming that buyers could participate in the "Bitcoin mining business," but the so-called mining facilities did not exist.

Through these false promises, Bise and Mendez raised $24 million from more than 13,000 investors, most of which was used for personal expenses. The SEC filed a civil lawsuit against their fraudulent activities, and a settlement was reached in August 2019, with Bitqyck and the two founders jointly paying approximately $10.11 million in civil penalties.

The prosecution also charged Bitqyck with tax evasion: from 2016 to 2018, Bise and Mendez earned at least $9.16 million by issuing Bitqy and BitqyM, but underreported the relevant 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 (a total of about eight years), and each was held jointly liable for $1.6 million.

Analysis of Tax Issues Involved in the Case

One of the core issues in these two cases is the tax compliance of ICO revenues. Some issuers have obtained huge revenues through fraud or improper means, yet reported less income or failed to declare taxes, leading to tax compliance issues.

How does the United States determine tax evasion?

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 pay taxes on time, etc. 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 in prison and a fine of $250,000, while entities may face a fine of up to $500,000, with specific penalties depending on the amount and nature of the tax evasion.

To constitute tax evasion, the following conditions must be met: ( failure to pay a large amount of taxes; ) implementation of active tax evasion behaviors; ( existence of subjective intention to evade taxes. Investigations usually 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 behaviors are more likely to occur.

) specific tax-related activities in the two cases

In the United States, each stage of an ICO may involve tax obligations, with project parties and investors bearing different tax responsibilities at various stages. Project parties must comply with tax regulations when raising funds during the ICO, and the funds raised can be considered as sales revenue or capital raised. For instance, funds used to pay for operational expenses, develop new technologies, or expand business should be regarded as company income, which is subject to taxation. Investors also have tax obligations upon receiving tokens through an ICO, especially when the tokens generate rewards or airdrops, which will be considered as capital gains for tax purposes.

In the Oyster case, Bruno Block exploited a vulnerability in the smart contract to mint and sell a large amount of PRL for significant profits, but failed to fulfill tax obligations, violating relevant tax regulations. It is worth noting that there is currently no consensus on whether the act of minting tokens should be taxed. Some argue that minting tokens is similar to mining, as both involve creating new digital assets through computation, and should therefore be taxed. However, whether the income from minting needs to be taxed should depend on the market liquidity of the tokens.

The tax evasion behaviors in the Bitqyck case involve false promises to investors and the illegal transfer of raised funds. The founders used most of the funds raised from the ICO for personal expenses, effectively converting investor funds into personal income. According to U.S. law, taxes are owed on all income, whether legal or illegal. Bise and Mendez did not report the illegal gains transferred from the ICO funds as income, directly violating tax regulations.

Advice for meme coin investors

With the popularity of meme coins, many individuals in the cryptocurrency industry have gained substantial returns. However, taking lessons from previous ICO tax evasion cases, in the meme coin market, we should not only focus on technological innovation and market opportunities but also pay attention to tax compliance.

First, understand the tax responsibilities of issuing meme coins to avoid legal risks. Although issuing meme coins does not directly raise funds like an ICO, taxes on capital gains should still be paid when the tokens purchased early are sold at a profit. While meme coins can be issued anonymously on the chain, this does not mean one can evade tax audits. Complying with tax laws is the best way to avoid risks.

Secondly, pay attention to the trading process of meme coins to ensure that trading records are transparent. Due to the speculative nature of the meme coin market and the continuous emergence of new projects, investors may trade frequently. It is recommended to use professional crypto asset management and tax reporting software to keep detailed trading records, ensuring that all buys, sells, transfers, and profits are traceable for accurate tax reporting, thereby avoiding potential disputes.

Finally, keep track of tax law developments and collaborate with professional tax advisors. Tax laws regarding crypto assets are still in their infancy in various countries and may be frequently adjusted, with key changes potentially impacting actual tax burdens directly. Meme coin investors and issuers should closely monitor the tax law developments in their respective countries and seek professional tax advice when necessary to make optimal tax decisions.

In summary, the $140 billion meme coin market contains enormous wealth effects, but it also comes with new legal challenges and compliance risks. Issuers and investors must fully understand the associated tax risks, remain cautious in the rapidly changing market, and minimize unnecessary risks and losses.