What ICO Issuers and Investors Need to Know About Taxes

Much attention has been paid to regulatory issues in connection with token issuances. Less attention has been paid to the potential tax issues that may arise for both issuers and investors. But these issues are just as real. The Internal Revenue Service (IRS) has not issued any guidance concerning the tax treatment of token issuances. Practitioners and taxpayers, therefore, generally are left to apply existing tax rules by relying on precedents and rules that provide imperfect analogies to token issuances. 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 (SAFT) or Simple Agreement for Future Equity or Tokens (SAFE-T).

Determining how to characterize these instruments for tax purposes is a fact-intensive process. Issuers should consult a tax adviser for assistance in structuring their token offerings so as to minimize the risk that the IRS will re-characterize them.

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