Bitcoin Forum

I've been doing some research on this topic and have not found the exact answer.

Basically, I was wondering what are the legal/tax implications when participating in an ICO as an American citizen?


Let's say a US citizen uses a VPN to partake in an ICO. They double their money and then sell. They decide to cash out to fiat (USD) legally and pay the 40% short-term tax on that trade profit (as well as report it) to the IRS.

I heard that ICO providers prevent US citizens from participating to protect themselves legally from the American Government if a scam were to occur. Is this true? Any advice/input would be greatly appreciated. I basically come to realize this is a gray area.

Caveat emptor. In the SEC's recent decision, they indeed said that ERC tokens can constitute securities, so I imagine that some ICO administrators are moving to restrict participation from US citizens. In the exchange world, enforcing such by IP restriction is usually seen as "good enough."

Between that and the fact that it's still pretty much the wild west (the SEC also chose not pursue any charges against anyone for anything), I'd say that your chances of recovery in a scam are low. So, buyer beware. There's money to be made in the ICO craze for sure, but there are many over-inflated promises and hyped expectations as well.

As far as I know, the SEC hasn't banned the participation of US citizens in the ICOs outright. They have just expressed "concern" over the rising number of ICOs and the shady people behind them. So unless the ICO explicitly bans US passport holders in its terms and conditions, you can participate in them. The federal income tax will be 39.6%, if your annual income is more than $418,401.

You're technically correct in that there isn't a US legal ban on its citizens. The exclusion of US citizens from most ICOs (or any other crypto service offering investment vehicles for that matter) are pre-emptive of regulatory measures most people feel must happen soon. It's just cautionary so they cover their asses legally down the line, so to speak.

Personally, I doubt you have much to worry about if you're thinking of using a bypass (VPN, for example) for short-term participation. For now at least, in practice, it would be very difficult for authorities to pursue you anyway if you also cover your ass in privacy-wise.

Okay understood, thanks for the input! I'm just trying to figure out if as US citizen participated in an ICO with a VPN without any firm US laws stating that US citizens cannot participate whatsoever, why would I be possibly pursued legally? From my understanding the ICO providers do this to protect themselves legally. I understand the risk of being scammed and if I am that is at my cost.

Thanks for the feedback! Let's say the SEC does enforce regulation that makes it illegal for US citizens to participate in ICOs. What about the US citizens who participated before that regulation? Would there likely be repercussions?

I'm no lawyer (although I do work in the field of legal compliance and I deal with federal regulations often), so take what I say with a grain of salt. I highly doubt that the SEC would pass regulations that made it illegal to participate in ICOs outright, but it may create a regulatory framework so complex that it makes sense for ICO administrators to ban US citizens/residents from participation.

If they did make it illegal for US citizens to participate at all, I very much doubt there would be any retroactive repercussions. I think this is the case especially because of their recent decision, which basically said to US investors, "We're being pretty hands-off. Be careful."

Thank you so much for the help! I've been trying to wrap my head around cryptocurrencies in regards to legality and taxes. I think from now on I will avoid ICOs as it is such a gray area I'm not comfortable being in. Thanks again! You were very helpful.

So there is really no penalty to be imposed by the government to someone who covertly joined an ICO even if the company doing the offer is clearly not accepting US citizens. Anyway, in this case, it is not anymore the fault of the ICO issuer but of the ICO buyer but they have to declare it once there is already a gain out of the transaction and must pay the right rate of tax. That announcement from SEC on ICO is just an introduction of the many possibilities in the future and definitely it was not detailed.

It's somewhat simple. They are not going after citizens because security laws are not for citizens in that the punitive measure are for those offering unregistered securities. It's way too costly to seek out people that buy non-securities, and there's no purpose as the law exists to stop them from wasting money. Why fine people that you made a law around preventing them from being ripped off?

The ICO's that don't allow US participation are not protecting you, they are protecting themselves from the long arm of the SEC. If you have to VPN and all of that to participate it shows a record that they clearly didn't allow it, but you cheated their protection so they aren't particularly liable so long as they obviously try to be compliant and protective.

You can't "cash out" an ICO anyways, you have to convert it to a more legal crypto first.

Don't play the capitol gain games. It's all senseless IMO since decentralized things are out of the states purview. Just pay income tax when you convert to fiat and withdraw from the custodian.

I wouldnt paint this so cut and dry. I will agree that they will not retroactively enforce this; that is making a list of participants and going after them (would be really difficult, to be honest). But you are running afoul of some pre established law by participating in these as a guidance has been issued. Since you aren't the one holding the money; they would be more likely to go after the ICO (this is about money, after all). Besides willfully purchasing an illegal, unregulated security, most of us are not accredited investors, which requires an AMAZING amount of income or wealth to qualify for. Only accredited investors would be allowed by the SEC to participate in something with this much risk. If you lie about being an accredited investor, or your region, to participate in one of these (they are starting to ask this now), you may forfeit your ability to seek damages/redress as you committed fraud.

Be careful. All of these arent securities, but for the ones that are, treat these as truly risky/volatile investments.

Agreed, I think that this issue needs to be discussed more. I feel that the majority of people who bypass region restrictions via VPN are ultimately worried about being about to retain their tokens. Also, the ability to eventually transfer to BitCoin and cash out to fiat.  If the investor is scammed, that is their fault as I see it. Crypto investments are definitely a high risk/high reward venture. Not everyone will hit it big but wow what an exciting time to be in. There really isn't a firm US law blatantly restricting Americans from ICO participation. Only statements have been released regarding their position. I do however fully expect explicit laws within a couple of years. Until then, it's like the Crypto Wild West.

it's not the authorities you'd have to worry about. who the hell's ever heard of some egyptian being jailed because they bought some shares in america behind a vpn?

it's the ico operators you should be concerned with. they'll all be so scared of triggering the americans they'd shut you down the moment they sniffed you out.

What do you mean by "shut me down"? ICO operators are only doing this to protect themselves legally.

if they could prove you were american you'd be kicked out of whatever the distribution was and your money returned.

they're gonna be more than a little more concerned with staying out of legal hell than keeping one american customer happy.

It's no different than exchanges that prohibit US customers, but don't require KYC. You can be damn sure that US customers will still be using Bitfinex 3 months from now (albeit through VPNs), just like they are using Bitmex and Okcoin through VPNs right now.

This is the next phase as we move towards regulation. Service providers and, in this case, securities issuers, need to make a good faith effort not to run afoul of the US government. For now, it seems that asking users to confirm they aren't US residents and maybe banning US IP addresses is enough.

"In the United States, to be considered an accredited investor, one must have a net worth of at least $1,000,000, excluding the value of one's primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year."

If you don't have a lot of money, you can't be liable for not applying to be an accredited investor. Just don't lie and say you are.

This is a major problem in the USA. The laws for accredited investing are there to protect people that previously couldn't even look into investments. It's all pre-information age. It's archaic, old, bullshit. The problem came from supposedly "creditable" people claiming it was safe to give them money, not the other way around. This is an ancient statute that needs to be turned to rubble. One of the biggest values in cryptos today is that the average person can choose to have some autonomy with it.

But please, continue to roll over and keep the status quo. We all know that's why everyone became interested in Bitcoin to begin with.

So, worst case scenario is you get found out and your money is returned. Do you really think ICOs will do more beyond covering their asses with a T&C that prohibits US citizens? They don't have to do anything more at the moment and there is no motivation to weed out Americans who somehow bypass the filter.


Exactly. ICOs aren't the only ones who are blocking US customers. The majority of online casinos (and even a few anon crypto casinos offering investment options) do the same, but they aren't going to seek out and destroy Americans who slip through. Just look at the communities talking about these casinos, ICOs and exchanges. Plenty of Americans. And you're right, you won't see them disappear either from Bitfinex.

Ya many ICOs are not allowing US members to participate. Recently EOS didn't permitted US members, but all other for it's ICO. Should we take that as a sign of a scam, if they are not allowing US members to participate in any ICO?

Well if you really want to be avoided by being audited by the IRS you mus include your earnings from the ICO In your income tax report. It could be classified as 2 kinds you can either make it as an income or you can put it as capital gains like in real estate and stocks. It is really up to you on which it can be tax lower. Hiding your true income is really a pain in the ass, so if you don't want to be bothered by the IRS you must be truthful.

Its not necessarily means that they have the intention to scam likewise we have seen some gambling sites that would nande you accept the condition that you are not a US citizen before using their service can we also say they are scams the reasons why some of the reputable ones is because of the paperworks which is not only money consuming but also time consuming in which at the end only a fraction of the US population might get interested in which case the cost had overshadowed the benefit of such.

A note to all the bros on the board:

You do know the IRS knows all of us, personally, and has been tracking our transactions for years at this point?

Sit down and let me rap to you  ;)

https://www.coindesk.com/irs-using-bitcoin-tracking-software-since-2015/



Yes. This is why the dark markets, and exchanges, have been getting run on by the LEOs so much lately. Besides this particular piece of software, understand that the NSA has every reason in the world to watch this forum, esp. the Legal and Politics subs. Assume that there is a file on you, and that if you have every publically posted an address under one of your avatars, it is associated with your real life persona. Unless you have newly minted coins on a paper wallet, or coins that are completely "isolated", the IRS already knows what you have. If you have enough, and convert it to fiat, they are simply waiting to garnish your value. Low hanging fruit arent worth it; there are multimillionaires among us. Thats worth climbing the tree for ;)

That's the thing, I am 100% for paying rightful taxes and plan on doing so. From my understanding, you only pay taxes on a taxable event (like a trade/sell) correct? If I buy and hold without selling/trading, does this need to be reported also? This is a new field to a lot and I want to do it the right way.

There is one ICO that I know of that is allowing sale of their tokens to US citizens.

They worked out some work around it so they are not under the rulings of SEC and this law that is not allowing the participation of anyone from the US in their sale or company ownership of their tokens.

If you are just holding, you are fine. When you convert a crypto to real world value,however, you have experienced a "capital gain" and would be subject to the relevant taxes. This isnt just sellig a crypto for a fiat; this would include purchasing anything with crypto that has an appreciable "real world value" and that could be sold for fiat (the government, while heavy handed, is not stupid). Make sure to establish your basis (purchase price) of the crypto each time you buy more, in your records. Exchanges track this for you, but you will have a much more organized record if you do it yourself, rather that examining your trading history across multiple exchanges with a shifting bitcoin rate ;)

If the SEC wanted to flex muscle it would be against the ICO issuers.  I view this as being no different than the accredited investor rule in alternative securities investments.  I have not heard of any investor being sanctioned by a regulator for misrepresenting their accredited status in order to buy an alternative investment.  The issue for the investor would be difficulty seeking recourse against the issuer for losses incurred by fraud and misrepresentation in the offering when the investor misrepresented himself to the issuer.

FULL DISCLOSURE

I am a licensed attorney who practices securities arbitration in the securities industry.  The foregoing is not to be taken as legal advice and no attorney-client relationship shall be implied.

Can we petition the SEC to allow US investors?  Would it help if we had a large number of signatures?

You can't participate to all ICOs asking for the KYC, a lot after the futur regulations

US CItizens are prohibited to participate in ICO's to safeguard their citizens from fraud/scam. ICO's to keep themselves safe from any legal obligation, they now ask for KYC information before applying/or at the time of distribution of token. So you can't  bypass VPN to participate in ICO's.  doubt you have much to worry about if you're thinking of using a bypass (VPN, for example) for short-term participation.

" ICO uses KYC to keep themselves safe from any legal obligation". But what if ICO is not from the US and its tokens are utility tokens (not security)?

To my knowledge, it does not matter the location. The SEC has a global reach and power. If American citrizens are allowed to participate in that ICO, it automatically opens up that ICO issuer to the SEC. If Americans were unable to participate by the ICO issuer but do so anyways, the company has an argument against the SEC jurisdiction.

Is the federal income tax the only tax that you are paying in us when you earn above $418,401?

No, it is just part of the tax bracket as a whole. If you are making $418,401+, you will be taxed at the highest rate (currently 39.6%). There are several different tiers of income that have their corresponding tax percentage. If you research "2017-2018 tax brackets", there will be a spreadsheet that details everything.

If a US citizen, using various VPN programs, invests in ICO projects and then shows his profits to the tax authorities, he will only be liable for violations of the ban on participation in the ICO. Therefore, it is necessary to look at what sanctions are set for this. I think that it can be either a maximum fine payment, or even there can be no punishment in this case.

Many good companies are not accepting the US people into their ICO because till now we didn't get any clearance from US governments about the ICO launching. Companies should follow a lot of documentation in order to accept people from the US.