ICO Tax Implications to Know When You File Your Taxes

On: March 13, 2020

Crypto users should stay well-informed of the tax implications of initial coin offerings. An initial coin offering (ICO) is a fundraising vehicle for new cryptocurrencies. It’s something akin to the initial public offering (IPO) of shares in a corporation to raise capital for growth by selling ownership stakes and making them available to the general public New cryptocurrencies looking to raise cash for rapid development pitch their product to potential investors and offer units of their digital currency for sale, usually at a bargain ICO price. The very first cryptocurrency, bitcoin, had no initial coin offering. Its creators probably had not even envisioned ICOs as a possibility.

A Brief History of ICOs

Because bitcoin was creating an entirely new market out of thin air, and had no assurances of the smash success it has had in disrupting financial technology, there wasn’t the relentless rush of speculative investors hungry to acquire new digital tokens at ICO. The first ever token sale was an innovation by MasterCoin, which held its ICO in 2013. In 2014, Ethereum’s ICO raised over two million dollars worth of bitcoin within 12 hours. By 2018 ICOs raised nearly $7 billion in Q1 alone. The market has cooled since then, but ICOs are still running strong through the end of 2019. In just one example of many, last October Binance Launchpad helped a collateralized loan blockchain named Kava raise $3 million from a crowdfunded sale of tokens.

ICO Tax Implications

The tax implications of initial coin offerings vary depending on whether you are the issuer of a new cryptocurrency or utility token via ICO, or the purchaser. Whether or not a purchaser of coins at ICO incurs a tax obligation to the IRS will also vary based on what they used to buy the coins. Using coins bought at ICO as utility tokens can also have tax implications when it comes time to file with the IRS. Issuers of new cryptocurrencies who sell tokens in an initial coin offering must report their sales revenue from the ICO as income to the IRS. The tax authorities view an ICO as the sale of a digital asset with a cost basis of zero. So all proceeds are taxable as income.

Taxes on Buying Tokens With Other Crypto

Crowdfunders who buy tokens at ICO don’t create a tax obligation– if they buy tokens with US dollars. If they use another cryptocurrency to buy ICO tokens, it will be treated by the IRS as a sale of the crypto they used to make the purchase, and trigger capital gains or losses. So if you buy $100 worth of bitcoin, and then use it six weeks later to buy coins at ICO when the price of bitcoin has risen and your initial purchase could be sold for $125, you have an ICO tax obligation as a purchaser to report $25 to the IRS in short term capital gains. If your purchase a utility token like Ether at an ICO, then use it as “gas” to pay for computations to be performed on the Ethereum network, even though you didn’t get another token or currency back for it, you have to report a capital loss or gain at the time of sale using the ICO price of the token as your cost basis.