Meme coin market size surpasses 140 billion USD, hiding huge tax risks behind it.

2024 is the year Bitcoin ascends to the center of the global financial stage, and it is also the year of the meme coin frenzy. Data shows that about 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. The popularity of meme coins not only brings a new wave of enthusiasm to the crypto market but also attracts more ordinary investors into the crypto asset space.

This wave of meme coin frenzy inevitably reminds people of the ICO boom around 2017. In 2017, the emergence of the ERC-20 standard significantly lowered the cost of issuing tokens, leading to a surge of projects with hundredfold and thousandfold returns, as billions of dollars poured into the ICO craze. This year, a group of launch platforms represented by Pump.fun has made issuing tokens even simpler and fairer, 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.

In the last round of the ICO boom, many investors and projects faced tax-related troubles concerning ICOs. Now, with the ongoing meme coin craze, tax compliance issues will again become a core concern for cryptocurrency investors and meme coin issuers. This article will review the Oyster case and the Bitqyck case, using these two tax evasion cases related to ICOs as examples to provide cryptocurrency investors with cold reflections on tax compliance during the meme coin boom.

1. Two Typical ICO Tax Evasion Cases

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

The Oyster Protocol platform was initiated by Bruno Block 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 where both websites and users can benefit from data storage, and to realize value exchange and incentive mechanisms through PRL. At the same time, founder Bruno Block has 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, the Oyster Protocol raised approximately $3 million in its early stage, and with this funding, it launched its mainnet and officially started data storage services, turning the Oyster Protocol from an idea into a usable product. However, the good times did not last long. 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 PRL price to plummet, while Bruno Block personally gained enormous profits.

The sharp drop in PRL prices has attracted the attention of regulatory authorities, leading to an investigation by the relevant departments. Ultimately, the SEC filed a civil lawsuit against it for issues related to fraud against investors, while the prosecutor's office initiated a criminal lawsuit against Bruno Block for tax evasion issues. Regarding tax matters, the prosecutor believes that Bruno Block not only undermined investor trust but also violated the obligation to pay taxes on millions of dollars in cryptocurrency profits. During the period from 2017 to 2018, Bruno Block submitted only one tax return in 2017, claiming he earned approximately $15,000 from his "patent design" business, and did not submit a tax return in 2018, nor report any income to the IRS, yet spent at least $12 million on properties, yachts, and more.

Ultimately, Oyster founder Bruno Block openly confessed to his tax evasion in court and signed a plea agreement in April 2023, being sentenced to four years in prison and compensating the tax authorities approximately $5.5 million to cover the tax loss.

1.2 Bitqyck case: ICO transfer income not taxed, the 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 Bitcoin," and conducted its 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 shares have always been held by founders Bise and Mendez, and the company never allocated the promised shares and corresponding profits to investors. Soon after, Bitqyck launched a new cryptocurrency, BitqyM, claiming that purchasing this coin would allow investors to join the "Bitcoin mining business" by paying to power Bitqyck's Bitcoin mining facilities in Washington State, but in fact, such mining facilities do not exist. Through false promises, Bise and Mendez raised $24 million from over 13,000 investors through Bitqyck and spent most of the funds on personal expenses.

In this regard, the SEC filed a civil lawsuit against Bitqyck for defrauding investors. In August 2019, Bitqyck admitted the facts and reached a civil settlement, with Bitqyck and its two founders jointly paying approximately $10.11 million in civil fines to the SEC. Meanwhile, prosecutors 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, but reported less 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 failed to file any tax returns.

In the end, regarding the tax issues, Bise and Mendez respectively pleaded guilty in September and October 2021, both sentenced to 50 months in prison for tax evasion (a total of about eight years for the two), and each bore 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 known as ICO, some issuers have obtained huge revenues 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 How does U.S. law determine tax evasion?

In the United States, tax evasion is a felony, referring to the intentional use of illegal means to reduce the tax owed, typically manifested as concealing income, falsely reporting expenses, failing to file, or failing to pay taxes on time. According to Section 7201 of the U.S. Federal Tax Code, tax evasion is a federal crime; once determined to be a tax evader, an individual may face up to 5 years of imprisonment and a fine of up to $250,000, while a business may face a fine of up to $500,000, with specific penalties depending on the amount and nature of the evasion.

Under the provisions of Article 7201, to constitute the crime of tax evasion, the following must be satisfied: (1) a significant amount of taxes owed; (2) active tax evasion behavior has been carried out; (3) there is subjective intent to evade taxes. Investigations into tax evasion typically involve tracing and analyzing financial transactions, sources of income, and asset flows. Especially 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 an ICO 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 regarded as sales revenue or capital raised. For example, if the funds raised in an ICO are used to pay for company operating expenses, develop new technologies, or expand the business, then these funds should be considered as company income and taxes must be paid according to the law. On the other hand, investors also have tax obligations after obtaining tokens through an ICO. Especially when the tokens obtained by investors through an ICO provide rewards or airdrops, these rewards will be regarded as capital gains and subject to capital gains tax. In the United States, the value of airdropped and rewarded tokens is usually calculated based on their market value for tax reporting. When investors hold the tokens for a period of time and then sell them for a profit, such profits will also be considered capital gains for taxation.

Objectively speaking, both the Oyster case and the Bitqyck case involve actions by the parties that not only infringe on the interests of investors and constitute fraud but also indeed violate U.S. tax law to varying degrees. Of course, the tax evasion behaviors in the two cases are not entirely the same, and this 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, Bruno Block, the founder of the Oyster Protocol platform, exploited a vulnerability in the smart contract to privately mint a large amount of PRL and sold it off, reaping huge profits. Bruno quickly accumulated wealth through the sale of PRL but failed to fulfill his tax obligations. This behavior violated the relevant provisions of Section 7201 of the Federal Tax Code.

However, in this case, Bruno Block's actions have special characteristics, as he engaged in the minting of Pearl before selling it. It goes without saying that capital gains tax should be paid on the proceeds from the sale of the token, but there is no consensus on whether the act of minting tokens should be taxed. Some argue that minting tokens and mining both create new digital assets through computation, and therefore the income from minting tokens should also be taxed. Some viewpoints suggest that minting tokens is similar to the mining process, which creates new digital assets through computation, and thus 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 market liquidity for the tokens, the value of the minted tokens is difficult to determine, making it impossible to clearly calculate the income; however, if the market already has a certain level of liquidity, these tokens have market value, and the income from minting should be considered taxable income.

2.2.2 Tax Evasion in the Bitqyck Case

Unlike the Oyster case, the tax evasion actions in the Bitqyck case involved false promises to investors and the illegal transfer of raised funds. After successfully raising funds through an ICO, Bitqyck's founders Bise and Mendez failed to fulfill their promised investment returns and instead used most of the funds for personal expenses. This transfer of funds is essentially equivalent to converting investors' funds into personal income, rather than using them for project development or fulfilling investor interests. In contrast to 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 unreported income.

According to the relevant provisions of the U.S. Internal Revenue Code, both legal and illegal income are included in 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 submitting their annual tax returns, but such taxpayers typically 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 income transferred from funds raised from the ICO as required, directly violating the relevant provisions of tax law, and ultimately bore criminal responsibility for this.

3. Tips and Suggestions

With the explosive popularity of meme coins, many people in the crypto industry have gained huge returns. However, as indicated by the previous ICO tax evasion cases, in the meme coin market where wealth myths emerge daily, we should not only focus on technological innovation and market opportunities, but also pay attention to the important issue of tax compliance.

First, understand the tax responsibilities of issuing meme coins to avoid legal risks. Although issuing meme coins does not directly generate profits like an ICO through fundraising, when the tokens purchased early by the issuers and investors appreciate in value, they should still pay taxes on the related capital gains upon sale. Moreover, even though anyone can issue meme coins anonymously on the blockchain, 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 anonymity on the blockchain.

Second, pay attention to the trading process of meme coins and ensure that transaction records are transparent. Due to the higher speculative nature of the meme coin market, along with the continuous emergence of various new projects, investors may conduct meme coin transactions very frequently, which brings about a multitude of