The Dark Tax Trap Behind Meme Coin Get-Rich Dreams: A $140 Billion Market
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The Dark Tax Trap Behind Meme Coin Get-Rich Dreams: A $140 Billion Market
Looking back at the Oyster and Bitqyck cases—two tax evasion incidents related to ICOs—this article offers crypto investors a sober reflection on tax compliance amid the current Meme coin frenzy.
Navigating Web3 tides with focused insightsAuthor: FinTax
2024 has been the year Bitcoin stepped into the center of the global financial stage—and also the year of meme coin mania. Data shows that around 75% of all meme coins were launched this year alone. By early December, trading volume for meme coins had surged over 950%, with a total market capitalization exceeding $140 billion. The explosive growth of meme coins has not only brought renewed excitement to the crypto market but also attracted increasing numbers of retail investors into the digital asset space.
This meme coin frenzy inevitably recalls the ICO boom around 2017. That year, the emergence of the ERC-20 standard drastically reduced the cost of launching tokens, giving rise to countless projects delivering hundredfold or thousandfold returns, drawing billions of dollars into the ICO wave. Today, platforms like Pump.fun have made token issuance even simpler and more accessible, igniting a sustained meme coin storm across the industry. While ICOs and meme coin launches differ significantly in technology and logic, both pose similar tax compliance risks for investors and project teams. During the last ICO surge, numerous investors and founders faced serious tax-related legal troubles. Now, as the meme coin craze continues, tax compliance is once again becoming a critical issue for crypto investors and meme coin issuers alike. In this article, FinTax revisits the Oyster and Bitqyck cases—two high-profile ICO-related tax evasion prosecutions—to offer cold, sober insights on tax compliance amid the current meme coin fever.
1. Two Classic ICO Tax Evasion Cases
1.1 Oyster Case: Founder Sentenced to Four Years for Unreported Token Sale Revenue
The Oyster Protocol platform was launched in September 2017 by Bruno Block (real name Amir Bruno Elmaani), aiming to provide decentralized data storage services. In October 2017, Oyster Protocol conducted an ICO to issue its token, Pearl (PRL). The project claimed that issuing PRL would create a win-win ecosystem where both websites and users could benefit from data storage, using PRL for value exchange and incentives. Founder Bruno Block publicly promised that after the ICO, no additional PRL tokens would be created, and the smart contract for generating PRL would be "locked."
The ICO raised approximately $3 million, which funded the launch of the mainnet and initiated the data storage service, turning Oyster Protocol from a concept into a functional product. However, this success was short-lived. In October 2018, founder Bruno Block exploited a vulnerability in the smart contract to privately mint a large quantity of new PRL tokens, which he then dumped on the market. This caused the price of PRL to crash, while Bruno personally profited enormously.
The sudden collapse of PRL’s price drew regulatory attention. The U.S. Securities and Exchange Commission (SEC), Internal Revenue Service (IRS), Federal Bureau of Investigation (FBI), and other agencies launched investigations. The SEC filed a civil lawsuit against Block for defrauding investors, while prosecutors pursued criminal charges related to tax evasion. On the tax front, prosecutors argued that Block not only betrayed investor trust but also violated his obligation to pay taxes on millions of dollars in cryptocurrency profits. Between 2017 and 2018, Block filed only one tax return—in 2017—reporting just about $15,000 in income from a “patent design” business. He filed no return in 2018 and reported no income to the IRS, despite spending at least $12 million on real estate, yachts, and other personal expenditures.
Ultimately, Oyster founder Bruno Block pleaded guilty to tax evasion in court, signing a plea agreement in April 2023. He was sentenced to four years in prison and ordered to pay approximately $5.5 million in restitution to cover tax losses.
1.2 Bitqyck Case: Two Founders Serve Eight Years Combined for Evading Taxes on Misappropriated ICO Funds
Bitqyck was a cryptocurrency company founded by Bruce Bise and Samuel Mendez. It first launched the Bitqy token, marketed as an alternative path to wealth for “those who missed Bitcoin,” and conducted an ICO in 2016. The company promised each Bitqy holder a 1/10 share of common stock in Bitqyck. In reality, shares remained entirely under the control of founders Bise and Mendez, and no promised equity or dividends were ever distributed to investors. Soon after, Bitqyck introduced a new cryptocurrency, BitqyM, claiming that purchasing it would allow investors to join a “Bitcoin mining operation” by paying to power Bitqyck’s mining facility in Washington State. In truth, no such mining facility existed. Through these false promises, Bise and Mendez raised $24 million from over 13,000 investors, diverting most of the funds to their personal expenses.
The SEC filed a civil lawsuit against Bitqyck for defrauding investors. In August 2019, Bitqyck admitted wrongdoing and reached a civil settlement, with the company and its two founders jointly paying approximately $10.11 million in civil penalties to the SEC. Meanwhile, prosecutors continued pursuing criminal tax charges: between 2016 and 2018, Bise and Mendez earned at least $9.16 million from selling Bitqy and BitqyM but significantly underreported their income, resulting in over $1.6 million in unpaid taxes. In 2018 alone, Bitqyck earned at least $3.5 million from investors but filed no tax returns whatsoever.
On tax charges, Bise and Mendez pleaded guilty in September and October 2021, respectively. Both were convicted of tax evasion and sentenced to 50 months in prison each—totaling roughly eight years—and held jointly liable for $1.6 million in back taxes.
2. Detailed Analysis of Tax Issues in These Cases
In both the Oyster and Bitqyck cases, a central issue was tax compliance related to ICO proceeds. In this novel fundraising model, some project teams generated massive revenues through investor fraud or other improper means, yet failed to report income or file tax returns—leading directly to serious tax violations.
2.1 How U.S. Law Defines Tax Evasion
In the United States, tax evasion is a felony involving the intentional use of illegal methods to reduce tax liability. Common manifestations include concealing income, falsifying expenses, failing to file returns, or delaying tax payments. Under Section 7201 of the U.S. Internal Revenue Code (26 U.S.C. §7201), tax evasion is a federal crime. A conviction can result in up to five years in prison and fines of up to $250,000 for individuals, or $500,000 for corporations. Actual penalties depend on the amount evaded and the nature of the offense.
To establish guilt under Section 7201, three elements must be proven: (1) a substantial tax deficiency; (2) an affirmative act to evade tax; and (3) willful intent to violate the law. Investigations typically involve tracing financial transactions, income sources, and asset flows. In the cryptocurrency space, anonymity and decentralization make tax evasion easier to commit—and harder to detect.
2.2 Tax Violations in the Two Cases
In the U.S., various stages of an ICO may trigger tax obligations, with different responsibilities for project teams and investors. Project teams must comply with tax regulations when raising funds via ICO. ICO proceeds are generally treated as either sales revenue or capital contributions. For example, if ICO funds are used to cover operating costs, develop technology, or expand operations, they constitute taxable corporate income. Investors also face tax liabilities upon acquiring tokens through an ICO. When investors receive rewards or airdrops, those are considered taxable capital gains. In the U.S., the value of airdropped or rewarded tokens is typically assessed at fair market value and must be reported for tax purposes. Profits realized from selling tokens held over time are also subject to capital gains taxation.
Objectively speaking, the actions of the defendants in both the Oyster and Bitqyck cases not only constituted fraud against investors but also clearly violated U.S. tax laws. While the specific tax evasion behaviors differed, both cases illustrate the serious consequences of non-compliance.
2.2.1 Tax Evasion in the Oyster Case
In the Oyster case, after the PRL ICO, founder Bruno Block exploited a flaw in the smart contract to mint new PRL tokens and sell them for massive profit. He accumulated significant wealth through these sales but failed to meet his tax obligations. This conduct clearly violated Section 7201 of the Internal Revenue Code.
However, there is a unique aspect to Bruno Block’s behavior: before selling PRL, he first minted the tokens. While it's well established that profits from selling tokens are subject to capital gains tax, the IRS has not issued clear guidance on whether minting tokens constitutes a taxable event. Some argue that token minting is analogous to mining—both involve computational work to generate new digital assets—and should therefore be taxed. FinTax believes that whether minting is taxable depends on market liquidity. If a token lacks liquidity and thus has no determinable market value, it may not be feasible to assess tax at the point of creation. However, once a liquid market exists and the token acquires clear market value, the act of minting may generate taxable income.
2.2.2 Tax Evasion in the Bitqyck Case
Unlike the Oyster case, the tax violation in Bitqyck centered on fraudulent promises and the illegal diversion of investor funds. After successfully raising money through the ICO, founders Bise and Mendez did not use the funds as promised but instead diverted most of the proceeds to personal expenses. This misuse effectively converted investor capital into personal income without benefiting the project or investors. Unlike direct token sales, the key tax issue in Bitqyck was the illegal transfer of ICO proceeds and the failure to report this income.
Under the U.S. Internal Revenue Code, all income—whether legally or illegally obtained—is taxable. This principle was affirmed by the U.S. Supreme Court in James v. United States (1961). U.S. taxpayers are required to report illicit earnings on their annual tax returns, although many fail to do so because disclosure could expose their criminal activities. Bise and Mendez failed to report the misappropriated ICO funds as income, directly violating tax law and ultimately leading to criminal convictions.
3. FinTax Recommendations and Advice
As meme coins surge in popularity, many in the crypto industry have reaped enormous gains. Yet, as the earlier ICO tax evasion cases demonstrate, in a market filled daily with wealth-making legends, we must pay equal attention to tax compliance alongside technological innovation and market opportunities.
First, understand the tax responsibilities associated with launching meme coins to avoid legal risk. Even though meme coin creators may not raise funds directly like in traditional ICOs, they still incur tax obligations when early-purchased tokens appreciate in value and are later sold. Capital gains from such sales must be reported and taxed accordingly. Although anyone can anonymously launch a meme coin on-chain, this does not mean issuers can evade tax scrutiny. The best way to avoid tax risk is strict compliance—not seeking better anonymity tools.
Second, maintain transparency in meme coin trading activities. Given the highly speculative nature of meme coins and the constant emergence of new projects, investors may engage in frequent trades, generating complex transaction histories. Crypto investors must keep detailed records of all transactions. Using professional crypto asset management and tax reporting software is strongly advised to ensure every buy, sell, transfer, and gain is traceable and correctly classified for tax purposes, minimizing the risk of disputes with tax authorities.
Third, stay updated on evolving tax regulations and work with qualified tax professionals. Tax frameworks for digital assets are still developing and frequently changing. Key legislative updates can significantly impact actual tax liabilities. Therefore, both meme coin investors and issuers should closely monitor tax policy developments in their jurisdictions and consult professional tax advisors when necessary to make informed and compliant decisions.
In summary, the meme coin market, now valued at over $140 billion, offers immense wealth potential—but also brings new legal challenges and compliance risks. Issuers and investors alike must fully recognize these tax risks, remain cautious and vigilant in a volatile market, and take proactive steps to minimize unnecessary exposure and loss.
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