The Tax Risks Behind Meme Coin Frenzy: A Look at ICO Cases and Compliance of Encryption Assets

2024 witnessed the rise of Bitcoin and the explosion of meme coins. Data shows that about 75% of meme coins were born this year, and by early December, meme coin trading increased by over 950%, with a total market value of over $140 billion. This wave not only injected new vitality into the encryption market but also attracted a large number of ordinary investors into the encryption field.

This meme coin feast evokes memories of the ICO boom around 2017. At that time, the emergence of the ERC-20 standard significantly lowered the threshold for issuing tokens, leading to a plethora of hundredfold and thousandfold projects and billions of dollars flooding into the ICO market. Today, launch platforms like Pump.fun have once again simplified the token issuance process, sparking an ongoing meme coin storm. Although there are technical and logical differences between ICOs and meme coins, the tax risks faced by investors and projects may be similar.

During the last round of the ICO boom, many investors and project parties encountered tax issues. As the popularity of meme coins continues, tax compliance has once again become a critical issue that cryptocurrency participants need to focus on. This article will provide considerations for cryptocurrency investors regarding tax compliance during the meme coin boom by reviewing the Oyster case and the Bitqyck case, two ICO-related tax evasion cases.

1. Analysis of ICO Tax Evasion Cases

1.1 Oyster case: Concealing coin sale income, founder sentenced to four years in prison

Oyster Protocol was founded by Bruno Block(, whose real name is Amir Bruno Elmaani), in September 2017, aiming to provide decentralized storage services. In October 2017, the project launched an ICO, issuing Pearl(PRL) tokens. Oyster Protocol claims that PRL will create a win-win ecosystem that allows websites and users to benefit from data storage. Bruno Block also publicly promised that there would be no additional issuance of PRL after the ICO, and the smart contract would be "locked."

After raising approximately $3 million in an ICO, the Oyster Protocol launched its mainnet. However, in October 2018, Bruno Block exploited a smart contract vulnerability to mint a large amount of PRL and sell it off, causing the price to plummet while he personally reaped substantial profits.

This incident attracted the attention of regulatory authorities, ultimately leading to civil lawsuits against fraudulent investment activities by the regulatory agency, while the prosecution initiated criminal proceedings related to tax evasion. The prosecutors pointed out that Bruno Block not only breached his fiduciary duty but also evaded tax obligations on millions of dollars in cryptocurrency profits. Between 2017 and 2018, he only reported about $15,000 in "patent design" income in 2017, and did not report any income in 2018, yet spent at least $12 million on properties, yachts, and other purchases.

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 taxes.

1.2 Bitqyck Case: Transferring ICO Revenue to Evade Taxes, Two Founders Sentenced to a Total of Eight Years

Bitqyck was founded by Bruce Bise and Samuel Mendez, initially launching the Bitqy coin, claiming to provide a wealth opportunity for "those who missed Bitcoin," and conducted an ICO in 2016. The company promised that each Bitqy coin came with 1/10 share of common stock, but in reality, the shares have always been held by the founders and were never allocated to investors. Subsequently, the company launched the BitqyM coin, claiming that purchasers could participate in the "Bitcoin mining business," but the so-called mining facilities do 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. Regulators filed a civil lawsuit against Bitqyck for fraud, reaching a settlement in August 2019, with the company and its two founders collectively paying about $10.11 million in fines.

The prosecution subsequently 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 related income, resulting in over $1.6 million in tax losses; in 2018, the company earned at least $3.5 million from investors but failed to 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.

2. Analysis of Tax Issues in the Case

One of the core issues in the Oyster and Bitqyck cases is the tax compliance of ICO revenue. Some issuers obtained huge revenues through fraud or improper means, yet reported less or nothing, leading to tax issues.

2.1 Standards for Determining Tax Evasion in the United States

In the United States, tax evasion is considered a felony, which refers to intentionally using illegal means to reduce the amount of tax owed, such as concealing income, inflating expenses, failing to report, or not paying taxes on time. According to U.S. law, 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: (1) a large amount of taxes owed; (2) engaging in active tax evasion behavior; (3) the existence of subjective intent to evade taxes. Tax evasion investigations typically involve tracing and analyzing financial transactions, sources of income, asset flows, and more. In the field of encryption currency, due to its anonymity and decentralized features, tax evasion is more likely to occur.

2.2 Analysis of tax-related behaviors in the two cases

In the United States, every stage of an ICO may involve tax obligations, with project parties and investors bearing different tax responsibilities at various phases. Project parties must comply with tax compliance requirements when raising funds during the ICO, and the funds raised 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 treated as capital gains subject to taxation.

2.2.1 Oyster Tax-related Behavior

In the Oyster case, Bruno Block exploited a vulnerability in the smart contract to mint a large amount of PRL and sold it for profit, but failed to fulfill his related tax obligations, violating U.S. tax law. The uniqueness of this case lies in the fact that Bruno Block had minting activities before the sale. There is currently no consensus on whether token minting should be taxable. Some argue that minting is similar to mining, creating new digital assets, and should be taxed. However, whether the income from minting is taxable should depend on the market liquidity of the token.

2.2.2 Tax-related activities in the Bitqyck case

The tax evasion behavior of 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, effectively converting investor funds into personal income, yet failing to report this income.

U.S. law stipulates that all income, whether legal or illegal, is taxable income. Bise and Mendez did not report the illegal income transferred from the ICO funds as income, directly violating tax regulations.

3. Tax Compliance Recommendations

With the booming meme coin market, many people are reaping huge rewards. However, the ICO tax evasion cases remind us that tax compliance is equally important in the meme coin market where wealth myths abound.

First, understand the tax responsibilities of issuing meme coins to avoid legal risks. Although issuing meme coins does not directly raise funds for profit, early holders still need to pay capital gains tax when selling after the token appreciates. Anonymous issuance does not mean one can escape 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 transaction records are transparent. Due to the high speculation in the meme coin market, new projects continue to emerge, and investors may trade very frequently. It is recommended to use professional encryption asset management and tax declaration software to keep detailed transaction records for proper tax classification and to avoid potential tax disputes.

Finally, keep up with tax law developments and collaborate with professional tax advisors. The tax laws for encryption assets in various countries are still evolving and may undergo regular adjustments. Meme coin participants should closely monitor changes in tax laws and seek professional tax advice when necessary to make optimal tax decisions.

In summary, the $140 billion meme coin market contains immense wealth, but it also comes with new legal challenges and compliance risks. Issuers and investors must fully recognize the related tax risks, maintain caution in a complex market, and reduce unnecessary risks and losses.