Tyson Cross has published the following article on Forbes: “Planning To Do An ICO? Don’t Forget About Taxes.“
Planning To Do An ICO? Don’t Forget About Taxes
There’s a lot to learn if you’re a blockchain entrepreneur or have a startup and are thinking about using an Initial Coin Offering to raise capital for your project. When sorting through the technical complexities and regulatory pitfalls, don’t forget about the potential tax consequences of raising money with an ICO.
Here’s a few things you should keep in mind:
1. The money raised in an ICO is taxable income. Unlike conventional methods of raising capital, ICOs do not qualify for tax-free treatment under the Internal Revenue Code. This means that the proceeds of your ICO will be considered taxable income by the IRS. To figure the amount of the taxable income, use the fair market value of the cryptocurrency received from the ICO on the date it ended (or when you otherwise were able to take control of the proceeds). It does not matter if you hold this cryptocurrency and do not convert it to fiat. In the eyes of the IRS, the receipt of valuable property is taxable income, regardless of whether it is ever sold.
2. You might be personally liable for the taxes. Unless your startup has formed a corporation to conduct the ICO, you will be personally responsible for paying the taxes on the proceeds. If you have co-founders and no formal business entity, then your startup is likely a “partnership” for income tax purposes and will need to file a partnership tax return to report the income from the ICO.
As a partnership, each co-founder is responsible for paying the taxes on an an equal share of the net-income, regardless of whether he or she actually received any money from the partnership. This can result in each co-founder having larger tax bill than they can afford to pay. Known as “phantom income,” this is a particularly harsh (yet common) result of partnership taxation. Failure to file the partnership tax return and pay taxes on the ICO income can result in civil penalties and criminal prosecution.
3. You should establish a business entity prior to conducting an ICO. There are many different types of business entities, but a corporation is probably the best choice if the primary concern is avoiding personal liability for the taxes on the ICO income. As a corporation, the income from the ICO is taxed at the corporate level, instead of passing through to the individual co-founders. Just keep in mind that the corporate tax rate is higher than most personal rates. Regardless of what entity you choose, it must be established prior to the ICO to have any effect.
4. Conducting your ICO early in the year can help reduce taxes. An easy way to reduce the amount of taxes due on the income from your ICO is to spend the proceeds on tax deductible expenses. These would include operating expenses like salaries, office rent, and equipment purchases. In order to reduce your taxes as much as possible, you should consider conducting your ICO early in the year. This will give you more time to spend the ICO proceeds on tax deductible expenses before the year ends.