2024 is a crucial year for Bitcoin, as it takes center stage in the global financial spotlight, but it is also the year of the meme coin frenzy. According to data, about 75% of meme coins were created this year. As of early December 2024, meme coin trading has surged by over 950%, with a total market capitalization exceeding $140 billion. The rise of meme coins has not only brought a new wave of excitement to the cryptocurrency market but has also attracted an increasing number of ordinary investors into the crypto asset space.
The meme coin craze inevitably brings to mind the ICO (Initial Coin Offering) boom around 2017. In 2017, with the advent of the ERC-20 standard, the cost of launching tokens significantly decreased. Projects offering returns of hundreds or thousands of times appeared frequently, and billions of dollars flowed into the ICO wave. This year, a new wave of token issuance platforms, represented by Pump.fun, has made the process of launching tokens simpler and fairer, creating an ongoing meme coin storm within the crypto community. Although there are significant technical and logical differences between ICOs and meme coins, the tax compliance risks faced by both investors and project founders are potentially similar. During the previous ICO boom, many investors and projects found themselves facing tax-related issues. Now, with the meme coin frenzy continuing, tax compliance will once again become a core issue for crypto asset investors and meme coin issuers to address. This issue of tax compliance will be revisited in this article, looking back at the Oyster and Bitqyck cases, two tax evasion cases related to ICOs, to provide crypto investors with some cold reflections on tax compliance during the meme coin boom.
1. Two Typical ICO Tax Evasion Cases
1.1 Oyster Case: Failure to Report Coin Sale Income, Founder Sentenced to Four Years in Prison
The Oyster Protocol platform was launched by Bruno Block (real name Amir Bruno Elmaani) in September 2017, aiming to provide decentralized data storage services. In October 2017, Oyster Protocol began its ICO, issuing a token called Pearl (PRL). The protocol claimed that the issuance of PRL was intended to create a win-win ecosystem where both websites and users could benefit from data storage, and value exchange and incentive mechanisms would be realized through PRL. At the same time, founder Bruno Block publicly promised that the supply of PRL would not increase after the ICO, and the smart contract used to create PRL would be “locked.”
Through the ICO, Oyster Protocol initially raised about $3 million, which was used to launch the mainnet and officially begin offering data storage services, turning the Oyster Protocol from a concept into a usable product. However, things took a downturn in October 2018 when founder Bruno Block exploited a loophole in the smart contract to mint a large amount of new PRL and sell it on the market, causing the PRL price to plummet while Block personally profited significantly.
The sharp decline in PRL’s price attracted the attention of regulators. The U.S. Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS), the Federal Bureau of Investigation (FBI), and other relevant agencies launched investigations. Ultimately, the SEC filed a civil lawsuit against Block for defrauding investors, while prosecutors pursued a criminal tax evasion case. On the tax issue, prosecutors argued that Block not only betrayed investors’ trust but also violated his duty to pay taxes on millions of dollars in cryptocurrency profits. Block only filed one tax return between 2017 and 2018, reporting approximately $15,000 in income from a “patent design” business, and failed to file a return for 2018, nor did he report any income to the IRS, even though he spent at least $12 million on properties, yachts, and other personal expenses.
In the end, Oyster founder Bruno Block confessed to tax evasion and signed a plea agreement in April 2023. He was sentenced to four years in prison and ordered to repay about $5.5 million in tax damages.
1.2 Bitqyck Case: Failure to Report ICO Income for Taxation, Two Founders Sentenced to a Total of Eight Years
Bitqyck was a cryptocurrency company founded by Bruce Bise and Samuel Mendez. The company first launched the Bitqy coin, claiming to provide an alternative wealth-building opportunity for “those who missed Bitcoin,” and conducted an ICO in 2016. At the same time, Bitqyck promised investors that each Bitqy coin would come with 1/10th of a share of Bitqyck common stock. However, in reality, the company’s shares were always held by the founders Bise and Mendez, and the company never allocated the promised shares or corresponding profits to investors. Soon after, Bitqyck launched a new cryptocurrency called BitqyM, claiming that buying the coin would allow investors to participate in “Bitcoin mining operations” by paying to power Bitqyck’s Bitcoin mining facility in Washington state, but no such mining facility existed. Through these false promises, Bise and Mendez raised $24 million from more than 13,000 investors, much of which was spent on personal expenses.
In response, the SEC filed a civil lawsuit against Bitqyck for defrauding investors. In August 2019, Bitqyck admitted the facts and reached a civil settlement with the SEC, with Bitqyck and the two founders paying approximately $10.11 million in civil penalties. Meanwhile, prosecutors continued to pursue tax evasion charges. Between 2016 and 2018, Bise and Mendez earned at least $9.16 million through the issuance of Bitqy and BitqyM but underreported their income to the IRS, resulting in more than $1.6 million in tax losses. In 2018, Bitqyck earned at least $3.5 million from investors but failed to file any tax returns.
In the end, regarding the tax issue, Bise and Mendez both pleaded guilty in September and October 2021, respectively, and were sentenced to 50 months in prison each (a combined sentence of about eight years). They were also held jointly liable for $1.6 million in tax damages.
2. Explanation of Tax Issues in the Two Cases
In both the Oyster and Bitqyck cases, one of the core issues is the tax compliance of ICO revenue. In this emerging fundraising method, some issuers acquire huge amounts of money through fraudulent means or other improper methods, underreport their earnings, or fail to file tax returns, which leads to tax compliance issues.
2.1 How Does U.S. Law Define Tax Evasion?
In the U.S., tax evasion is a serious crime and refers to intentionally using illegal means to reduce the amount of taxes owed. This typically manifests in actions such as concealing income, inflating expenses, failing to file tax returns, or not paying taxes on time. According to Section 7201 of the U.S. Internal Revenue Code (26 U.S.C. §7201), tax evasion is a federal offense, and if convicted, individuals can face up to five years in prison and a fine of up to $250,000, while corporations can face fines up to $500,000. The specific punishment depends on the amount and nature of the evasion.
Under Section 7201, to constitute tax evasion, the following conditions must be met: (1) a significant amount of taxes is owed, (2) active efforts to evade taxes have been made, and (3) there is a willful intent to evade taxes. Investigations into tax evasion typically involve tracing and analyzing financial transactions, sources of income, and asset flows. In particular, in the cryptocurrency space, due to its anonymity and decentralized nature, tax evasion is more likely to occur.
2.2 Tax Issues in the Two Cases
In the U.S., different stages of an ICO can involve tax obligations, and both issuers and investors bear different tax responsibilities at each stage. On one hand, issuers must comply with tax regulations when raising funds through an ICO. The funds raised through an ICO can be regarded as sales revenue or capital fundraising. For example, if the funds are used to cover company operational costs, develop new technologies, or expand the business, these funds should be considered company income, subject to tax. On the other hand, investors also have tax obligations after obtaining tokens through an ICO. Particularly, when tokens acquired through an ICO yield rewards or airdrops, these rewards will be considered capital gains, subject to capital gains tax. In the U.S., the value of airdropped and rewarded tokens is usually calculated based on their market value and must be reported for tax purposes. When investors hold these tokens for some time and sell them later for a profit, the profit will also be subject to capital gains tax.
Objectively speaking, both the Oyster and Bitqyck cases involved actions that not only harmed investor interests, constituting fraud, but also violated U.S. tax law to varying degrees. Although the tax evasion in each case differs, it will be analyzed in more detail below.
2.2.1 Tax Evasion in the Oyster Case
Specifically, in the Oyster case, after conducting the ICO for PRL tokens, Oyster Protocol’s founder, Bruno Block, exploited a vulnerability in the smart contract and minted a large number of PRL tokens, which he then sold for a significant profit. Bruno quickly accumulated wealth through the sale of PRL tokens but failed to fulfill his tax obligations. This behavior violated Section 7201 of the U.S. Internal Revenue Code.
However, there is a special aspect of Bruno Block’s actions. Before selling the Pearl tokens, he also minted them. It is clear that capital gains tax should be applied to the profits earned from the sale of tokens, but whether minting tokens should be taxed remains unresolved by the IRS. Some believe that minting tokens, like mining, is the creation of new digital assets through computation, and thus, the income from minting should also be taxed. FinTax argues that whether minting income should be taxed depends on the liquidity of the token in the market. When a token market lacks liquidity, the value of minted tokens is difficult to determine, making it hard to calculate the income. However, once the market has liquidity, these tokens have a market value, and income from minting should be treated as taxable income.
2.2.2 Tax Evasion in the Bitqyck Case
Unlike the Oyster case, the tax evasion in the Bitqyck case involves the false promises made to investors and the illegal transfer of raised funds. After successfully raising funds through an ICO, the founders of Bitqyck, Bise and Mendez, did not fulfill their promises of returns to investors. Instead, they used most of the funds for personal expenses. This transfer of funds essentially turned investors’ money into personal income without being used for the project’s development or the fulfillment of investor interests. Unlike the direct sale of tokens during an ICO, the key tax issue in the Bitqyck case is the illegal transfer of ICO-raised funds and the failure to report income.
Under the U.S. Internal Revenue Code, both legal and illegal income are considered taxable income. The U.S. Supreme Court also confirmed this rule in the case of James v. United States (1961). U.S. citizens are required to report illegal earnings as income when filing their annual tax returns. However, taxpayers often fail to report illegal income because doing so could trigger investigations into their illegal actions. Bise and Mendez’s failure to report the illegal income they transferred from ICO-raised funds directly violated tax law, and they were ultimately held criminally liable for their actions.
Are You Ready for Tax Compliance?
As the case illustrates, dealing with tax risk isn’t just about avoiding fines, it’s about the future and freedom of your assets – simplify your tax filing process with FinTax and know your tax compliance by entering your address.
No wallet link required, click here for free for a limited time!
- FinTax’s Tips and Recommendations
With the booming popularity of meme coins, many individuals in the cryptocurrency industry have gained substantial returns. However, as the previous ICO tax evasion cases have shown, in the meme coin market—where wealth myths emerge daily—we should not only focus on technological innovation and market opportunities, but also on the important matter of tax compliance.
First, understand the tax responsibilities of issuing meme coins to avoid legal risks. While issuing meme coins does not directly generate revenue like ICOs through fundraising, when the tokens purchased early by meme coin issuers and investors appreciate in value, they must still pay capital gains tax upon sale. Furthermore, although anyone can anonymously issue meme coins on the blockchain, this does not mean that issuers can evade tax audits. The best way to avoid tax risks is to comply with the tax laws, rather than seeking more effective anonymous means on the blockchain.
Second, pay attention to meme coin transactions and ensure transparent transaction records. Due to the highly speculative nature of the meme coin market and the continuous emergence of new projects, meme coin investors may engage in very frequent transactions, resulting in numerous transaction records. Cryptocurrency asset investors need to maintain detailed records of these transactions, especially by using specialized cryptocurrency asset management and tax filing software, to ensure that all buying, selling, transferring, and profits can be traced. This will allow for correct tax classification during tax filing and avoid potential tax disputes.
Third, stay updated on tax law developments and collaborate with professional tax experts. The tax laws regarding cryptocurrency assets are still in their infancy across various countries, and frequent adjustments are made. Key changes may directly affect the actual tax burden. Therefore, both meme coin investors and issuers should remain highly vigilant to tax law developments in their respective countries. If necessary, they should seek advice from professional tax experts to help them make optimal tax decisions.
In conclusion, the meme coin market, with a market capitalization of up to $140 billion, carries immense wealth potential. However, these wealth opportunities are accompanied by a new wave of legal challenges and compliance risks. Issuers and investors need to fully understand the related tax risks, remain cautious and alert in the ever-changing market, and reduce unnecessary risks and losses.
Still Hesitating on How to Handle Crypto Tax Issues?
Don’t wait until you’re targeted by the tax authorities to realize the importance of compliance. The lessons of the two tax evasion cases have taught us that tax compliance should never be neglected! Investing is not only technical, but also financial and tax compliance.
FinTax, the largest cryptocurrency tax filing platform on the chain, provides a comprehensive crypto tax filing solution to make your tax filing simpler, more accurate, and more timely, and avoid legal troubles.