Meme coin market size soars to $140 billion, tax compliance becomes a new challenge

In 2024, Bitcoin will take center stage on the world financial stage, while also becoming the year of meme coin festivities. 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 exceeding $140 billion. The popularity of meme coins has not only brought a new wave of enthusiasm to the crypto market but has also attracted more ordinary investors into the crypto asset space.

The recent boom in meme coins brings to mind the ICO craze around 2017. At that time, the emergence of the ERC-20 standard significantly reduced the cost of issuing tokens, with hundreds and thousands of projects emerging, and billions of dollars poured into the ICO frenzy. This year, a group of launch platforms represented by Pump.fun has made it even easier and fairer to issue tokens, sparking a meme coin storm that continues to this day. Although there are many differences in technology and logic between ICOs and issuing meme coins, the tax compliance risks faced by investors and projects may be similar. During the last ICO boom, many investors and project parties encountered tax issues related to ICOs. Now, as the meme coin craze continues, tax compliance issues will once again become a core concern for cryptocurrency investors and meme coin issuers.

Let's take a look back at the Oyster case and the Bitqyck case, using these two ICO-related tax evasion cases as examples to provide crypto investors with some cold thoughts on tax Compliance amidst the meme coin craze.

1. Two Typical ICO Tax Evasion Cases

1.1 Oyster case: Coin sale income not declared, founder sentenced to four years in prison.

The Oyster Protocol platform was initiated 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 named Pearl (PRL). Oyster Protocol claims that the issuance of PRL is to create a win-win ecosystem, allowing both websites and users to benefit from data storage, and to realize value exchange and incentive mechanisms through PRL. Meanwhile, founder Bruno Block has also publicly committed that after the ICO, the supply of PRL will not increase, and the smart contract for creating PRL will be "locked".

Through the ICO, Oyster Protocol raised approximately $3 million in its initial phase, using these funds to launch its mainnet and officially start its data storage services, transforming Oyster Protocol from an idea into a usable product. However, the good times were short-lived. In October 2018, founder Bruno Block exploited a vulnerability in the smart contract to privately mint a large number of new PRL and sold them on the market, causing the price of PRL to plummet, while Bruno Block personally gained enormous profits.

The sharp decline in the price of PRL has attracted the attention of regulatory authorities, who have launched an investigation. Ultimately, the SEC filed a civil lawsuit against it for defrauding investors, and the prosecutor's office brought criminal charges against Bruno Block for tax evasion. Regarding tax issues, prosecutors believe that Bruno Block not only undermined the trust of investors but also violated the obligation to pay taxes on millions of dollars in cryptocurrency profits. Bruno Block submitted only one tax return in 2017 during the period from 2017 to 2018, claiming he earned approximately $15,000 from his "patent design" business, and did not file a tax return in 2018 or report any income to the IRS, although he spent at least $12 million on purchasing properties, yachts, and more.

Ultimately, Oyster founder Bruno Block did not shy away from confessing his tax evasion in court, signing a plea agreement in April 2023, and was sentenced to four years in prison for tax evasion and ordered to pay approximately $5.5 million to the tax authorities to cover the tax loss.

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

Bitqyck is a cryptocurrency company founded by Bruce Bise and Samuel Mendez. The company first launched the Bitqy coin, claiming to provide an alternative way to wealth for "those who missed out on Bitcoin," and conducted an ICO in 2016. At the same time, Bitqyck promised investors that each Bitqy coin came with 1/10 of a share of Bitqyck common stock. However, in reality, the company's shares have always been held by founders Bise and Mendez, and the company has never allocated the promised shares and corresponding profits to investors. Soon, Bitqyck launched a new cryptocurrency, BitqyM coin, claiming that purchasing this coin would allow investors to join the "Bitcoin mining business" by paying to power Bitqyck's Bitcoin mining facility in Washington State, but in fact, such a mining facility does not exist. Through false promises, Bise and Mendez raised $24 million from over 13,000 investors through Bitqyck and used most of the funds for their personal expenses.

In this regard, the SEC filed a civil lawsuit against Bitqyck for defrauding investors. In August 2019, Bitqyck acknowledged the facts and reached a civil settlement, with Bitqyck and its two founders collectively paying approximately $10.11 million in civil penalties to the SEC. Meanwhile, the prosecution continued to bring tax evasion charges against Bitqyck: from 2016 to 2018, Bise and Mendez earned at least $9.16 million through the issuance of Bitqy and Bitqy, while underreporting their related income to the IRS, 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.

Finally, regarding the tax issues, 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 for both), and they each bear joint liability of 1.6 million dollars.

2. Detailed Explanation of the Tax Issues Involved in the Two Cases

In the cases of Oyster and Bitqyck, one of the core issues is the tax compliance of ICO revenues. In this emerging form of fundraising, some issuers obtain huge revenues through fraudulent means against investors or other improper methods, underreport their earnings or fail to file tax returns, leading to tax compliance issues.

How does US law determine tax evasion?

In the United States, tax evasion is a felony, referring to the deliberate use of illegal means to reduce tax liabilities, typically manifested in behaviors such as concealing income, falsely reporting expenses, failing to file tax returns, or not paying taxes on time. According to Section 7201 of the U.S. Federal Tax Code, tax evasion is a federal crime, and once determined to be a tax evader, an individual may face up to 5 years in prison and fines of up to $250,000, while entities may face fines of up to $500,000, with specific penalties depending on the amount and nature of the tax evasion.

Under the provisions of Article 7201, tax evasion must meet the following requirements: (1) failure to pay a large amount of taxes; (2) implementation of active tax evasion behavior; (3) the existence of subjective intent to evade taxes. Investigations into tax evasion typically involve tracing and analyzing financial transactions, sources of income, asset movements, and so on. Particularly in the field of cryptocurrency, due to its anonymity and decentralized characteristics, tax evasion is more likely to occur.

2.2 Tax-related activities in the two cases

In the United States, various aspects of ICOs may involve tax obligations, with project parties and investors bearing different tax responsibilities at different stages. On one hand, project parties must comply with tax compliance requirements when raising funds through an ICO. The funds raised in an ICO can be viewed as sales income or capital raised. For example, if the funds raised in the ICO are used to pay for company operating expenses, develop new technologies, or expand the business, then these funds should be regarded as company income and taxed accordingly. On the other hand, investors also have tax obligations upon receiving tokens through the ICO. Particularly, when the tokens obtained by investors through the ICO bring rewards or airdrops, these rewards will be considered capital gains and subject to capital gains tax. In the United States, the value of airdropped and rewarded tokens is generally calculated based on their market value for tax reporting. When investors hold tokens for a period and then sell them for a profit, that profit is also treated as capital gains for taxation.

Objectively speaking, whether from the Oyster case or the Bitqyck case, the actions of the parties not only infringed on the interests of investors and constituted fraud, but also indeed violated U.S. tax law to varying degrees. Of course, the tax evasion behaviors in the two cases are not entirely the same, which will be analyzed in detail later.

2.2.1 Tax Evasion in the Oyster Case

Specifically regarding the Oyster case, after the ICO of PRL, the founder of the Oyster Protocol platform, Bruno Block, exploited a smart contract vulnerability to privately mint a large amount of PRL and sold it, reaping huge profits. Bruno quickly accumulated wealth through the sale of PRL, but failed to fulfill related obligations regarding tax issues. This behavior violated the relevant provisions of Title 26, Section 7201 of the Federal Tax Code.

However, in this case, Bruno Block's behavior has its peculiarities because he engaged in minting Pearl before selling it. It goes without saying that capital gains tax should be paid on the income from the sale of the tokens, while whether the act of minting tokens should be taxed remains inconclusive. Some viewpoints argue that minting tokens and mining both create new digital assets through computation, thus the income from minting tokens should also be taxable. Some opinions suggest that minting tokens is similar to the mining process, as it creates new digital assets through computation, and therefore should also be taxed. Whether the income from minting needs to be taxed should depend on the market liquidity of the tokens. When there is no liquidity in the token market, the value of the minted tokens is difficult to determine, making it impossible to clearly calculate the income; however, if the market has a certain level of liquidity, these tokens possess market value, and the income from minting should be regarded as taxable income.

2.2.2 Tax Evasion in the Bitqyck Case

Unlike the Oyster case, the tax evasion in the Bitqyck case involves false promises made to investors and the illegal diversion of raised funds. After successfully raising funds through an ICO, Bitqyck's founders Bise and Mendez failed to fulfill their promised returns on investment and instead used most of the funds for personal expenses. This act of diverting funds is essentially equivalent to converting investors' funds into personal income, rather than using them for project development or fulfilling investors' interests. Unlike the direct sale of tokens during the ICO process, the key tax issue in the Bitqyck case lies in the illegal transfer of funds raised through the ICO and the failure to report income.

According to the relevant provisions of 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. U.S. citizens must report illegal gains as income when filing their annual tax returns, but such taxpayers often do not report this income because reporting illegal income may trigger investigations by relevant authorities into their illegal activities. Bise and Mendez failed to report the illegal gains transferred from funds raised in the ICO as income, directly violating the relevant provisions of tax law, and ultimately faced criminal liability for this.

3. Tips and Suggestions

With the explosive popularity of meme coins, many people in the cryptocurrency industry have gained huge returns from it. However, as previously highlighted by the ICO tax evasion cases, in the meme coin market where wealth myths emerge daily, we not only need to pay attention to technological innovation and market opportunities but also focus on the important matter of tax Compliance.

First, understand the tax responsibilities of issuing meme coins to avoid legal risks. Although issuing meme coins does not generate income directly through fundraising like an ICO, the issuers of meme coins and investors should still pay taxes on related capital gains when they sell the tokens that have appreciated in value after early purchases. At the same time, although anyone can anonymously issue meme coins on-chain, this does not mean that issuers can evade tax audits. The best way to avoid tax law risks is to comply with tax laws, rather than seeking more effective means of on-chain anonymity.

Second, focus on the trading process of meme coins and ensure that transaction records are transparent. Due to the highly speculative nature of the meme coin market, along with the continuous emergence of various new projects, investors may engage in meme coin trading very frequently, and