Initial Coin Offerings | Tax Implications

If you’re a US taxpayer who is planning an initial coin offering (ICO), beware that this is a very significant event from an IRS perspective. The IRS defines virtual currency as a medium of exchange that operates like a currency in some environments but does not have all the attributes of real currency and does not have legal tender status in any jurisdiction.

Until recently, the IRS only had limited guidance on the tax treatment for all things crypto. To make things more challenging, the cryptocurrency environment is evolving faster than IRS guidance can keep up.

The good news is we can help you. We’ve closely monitored all the IRS guidance on tax treatment of cryptocurrency (which goes back to 2014). And we’ve prepared many tax returns involving cryptocurrency. We’ve even shared our cryptocurrency tax expertise as featured speakers at conferences for attorneys and other tax professionals. If you need help preparing your US tax returns or planning for your ICO, let us help you.

Taking Your ICO Offshore

If you have not yet launched your ICO, you may be wondering whether your virtual currency may be subject to future SEC regulation. Although the SEC doesn’t currently have jurisdiction over US ICOs or virtual currency trades, that may change. The environment is uncertain and evolving. As a result, some offerors are choosing to take their ICOs offshore.

If you are a US taxpayer, then there will be tax implications whether you set up in the US or outside the US. Setting up as a foreign offshore entity changes the implications but doesn’t eliminate them. The type of foreign entity you choose will have ramifications on how that entity is reported to the IRS.

Entity structure options include creating a controlled foreign corporation (CFC), controlled foreign partnership, or foreign disregarded entity. You should work with both an attorney in the foreign jurisdiction and a US tax consultant to determine the proper foreign business entity and corresponding US tax classification.

ICO Agreement for Tax Purposes

Before the launch of your ICO, you’ll need a written agreement to define how your future tokens will work for tax purposes both in the foreign jurisdiction and the US. This agreement should be written in conjunction with an attorney in the foreign jurisdiction. Your agreement should detail:

• Whether the tokens represent equity or debt
• If they represent a prepayment for goods or services
• If they represent business property which can be classified as inventory for business purposes
• How the airdrops and chain-splits (hard or soft forks) will be treated
• If there will be any withholding taxes for the foreign jurisdiction (i.e., the entity becomes a withholding agent)

ICO’s Impact on the Controlled Foreign Corporation (CFC) Form 5471

If you are a US tax resident and owner of a controlled foreign corporation (CFC), then the income generated from an ICO could be classified as Subpart F income. This is reported on Schedule I of Form 5471. You may also be subject to the US GILTI tax on the proceeds of the ICO. This reporting will occur on IRS Form 8992.

Failure to file either of these forms can result in a $10,000 penalty per form. It’s very important to detail all of the financial information related to the ICO for US tax purposes.

How We Can Help You

We’ve closely monitored all the IRS guidance on tax treatment of cryptocurrency since it first emerged in 2014. And we’ve prepared many tax returns involving cryptocurrency. We’ve even shared our cryptocurrency tax expertise as featured speakers at conferences for attorneys and other tax professionals. If you need help preparing your US tax returns or are facing a tax compliance issue, let us help you.

Our services for issuers of cryptocurrency include:

• Foreign Corporate Tax Reporting (Form 5471) and associated forms filing for a foreign corporation
• Business tax preparation for people doing an ICO offshore