What ICO Issuers and Investors Need to Know About Taxes

Much attention has been paid to regulatory issues in connection with token issuances, including the potential treatment of tokens as securities subject to regulation by the Securities and Exchange Commission, treatment of tokens as commodities subject to regulation by the Commodity Futures Trading Commission, and treatment of issuers as money services businesses subject to regulation by the Treasury Department's Financial Crimes Enforcement Network.

Many areas of uncertainty exist, including the proper characterization of tokens for tax purposes; reporting and withholding issues for token issuers; and the treatment of token pre-sales through the use of such instruments as Simple Agreement for Future Tokens or Simple Agreement for Future Equity or Tokens.

The tax consequences to issuers and holders will depend upon which of these buckets the token falls into.

Tokens characterized for tax purposes as equity of a corporation generally do not result in current tax to issuers, and, if structured properly, investors may defer tax on any appreciated cryptocurrency used to acquire the tokens until they use or dispose of the tokens.

Some token issuers issue some of their tokens free of charge through an "Airdrop."

Token issuers should be aware of a variety of reporting and withholding requirements that could apply to token issuances.

Token issuers could be subject to barter exchange reporting rules on Form 1099-B if the tokens are properly characterized as "Scrip" through which customers of the issuer exchange property or services.

If a token properly is characterized as equity or debt, then a token issuer may need to report on payments made to U.S. holders on the appropriate Form 1099 or withhold and report on payments made to foreign holders of tokens on Form 1042.

Finally, token issuers should consider the potential application of reporting and withholding requirements on Form 1099 or 1042 if they airdrop tokens.

SAFTs and SAFE-Ts. Token issuers often pre-sell some tokens through a SAFT or SAFE-T. Under a SAFT, the holder typically pays a fixed amount for the right to receive a determinable amount of tokens upon the occurrence of a token sale to the public.