What ICO Issuers and Investors Need to Know About Taxes

There is little guidance from the IRS on how to treat a token offering or SAFT for tax purposes. Determining how to do so is a fact-intensive process.

AccessTimeIconApr 16, 2018 at 11:00 p.m. UTC
Updated Sep 13, 2021 at 7:50 a.m. UTC
AccessTimeIconApr 16, 2018 at 11:00 p.m. UTCUpdated Sep 13, 2021 at 7:50 a.m. UTC
AccessTimeIconApr 16, 2018 at 11:00 p.m. UTCUpdated Sep 13, 2021 at 7:50 a.m. UTC

Lisa Zarlenga is Co-Chair of the Tax Group and John Cobb is an associate at the law firm of Steptoe & Johnson.

The following article is an exclusive contribution to CoinDesk's Crypto and Taxes 2018 series.


In the last couple years, blockchain token issuances—sometimes referred to as initial coin offerings or ICOs—have skyrocketed, both in terms of number and size.

According to CoinDesk’s ICO tracker, there were 43 ICOs in 2016 raising an aggregate $256 million; that number jumped to 343 ICOs in 2017 raising in excess of $5.4 billion; thus far in 2018, 92 ICOs have raised in excess of $3 billion.  

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 (FinCEN).  

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).

Token tax treatment

In general, the facts and circumstances of a particular token issuance, including the rights associated with a token, must be analyzed to determine the appropriate characterization of the tokens for tax purposes.  

A token might properly be treated as debt or equity interests in the issuing entity, as equity in a de facto partnership among holders of the tokens if there is no entity, as a prepayment for goods and services, as “convertible virtual currency” under Notice 2014-21 (which is treated as property), or as some other type of property. The tax consequences to issuers and holders will depend upon which of these buckets the token falls into.

Equity. Tokens characterized for tax purposes as equity of a corporation (because, for example, they have rights to distributions, rights to a share of profits, or voting rights) 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.  

If the equity interest is in a partnership, however, the rules can get very complicated, and the taxable income of the partnership will flow through to the investors, so they may have ongoing tax liability.

Debt. Tokens characterized as debt (because, for example, there is a definite obligation to repay the investor with interest) generally do not give rise to current tax to either the issuer or investor, but can result in deemed interest payments over the life of the “loan” and can result in tax to the issuer if the loan is ever forgiven.

Prepaid good/services: Tokens may represent the ability to acquire goods or services provided on the platform and, as such, may be characterized as a prepayment for such goods or services. If the issuer meets certain requirements, including not recognizing the income for financial accounting purposes, it may defer recognition of the income from prepaid goods or services until the following tax year.

Property. Tokens characterized as property (whether convertible virtual currency under Notice 2014-21 or otherwise) generally result in current tax to the issuer equal to the amount of the proceeds received less any basis in the tokens.  

In addition, if the investor used appreciated cryptocurrency to acquire the tokens, it will generally result in current tax to the investor on the appreciated cryptocurrency, though depending on the facts, the investor may be able to argue that the exchange of cryptocurrency for tokens was a tax-deferred like-kind exchange, at least before 2018.

Many of the tokens we’ve seen have multiple uses, including as a medium of exchange on the platform, and probably fall into this category.

Thus, ICOs permit token issuers to raise money early in the life cycle of the company, and that money may be taxed up front if the tokens are treated as property. However, the expenses to fully develop the platform may be incurred into the future, thus reversing the typical pattern of a start-up company.

Token airdrops

Some token issuers issue some of their tokens free of charge through an “airdrop.”

Recipients often sign up for airdropped tokens through the issuer’s website, and they sometimes have to do something to receive them, such as using social media to spread the word about the tokens.  

The value of tokens received in an airdrop is likely taxable income to the recipient, but they could give rise to a deduction to the issuer if they are considered payments for marketing activities.

Reporting and withholding

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

For example, 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.  

If the token is properly treated as a partnership interest, the issuer must file Form 1065 and Schedule K-1’s to partners. Finally, token issuers should consider the potential application of reporting and withholding requirements on Form 1099 or 1042 if they airdrop tokens.


Token issuers often pre-sell some tokens through a SAFT or SAFE-T.  

Under a SAFT, the holder typically pays a fixed amount (in either fiat or cryptocurrency) for the right to receive a determinable amount of tokens upon the occurrence of a token sale to the public.

SAFTs typically provide that the intended tax treatment of the SAFT is as a forward contract. If this treatment is respected, then taxation of the purchase amount should be deferred until delivery of the tokens to the SAFT holder. 

However, the characterization of a SAFT as a forward contract will not necessarily be respected by the IRS; the agency may seek to re-characterize a SAFT as a debt instrument or to distinguish it from a traditional prepaid forward contract and tax the proceeds upon receipt.

A SAFE-T is based on a Simple Agreement for Future Equity (SAFE), which is intended to be treated as equity rather than convertible debt. The tax treatment of a SAFE-T is uncertain, but it contains elements of both a SAFT and a SAFE.  

Depending on the terms of the SAFE-T, it could be treated as a contingent stock right, a SAFT with an equity kicker, or an investment unit consisting of an equity element and a SAFT element. 


It should be obvious from this discussion that there is little guidance from the IRS on how to treat a token offering, SAFT, or SAFE-T for tax purposes.  

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.

Tax form image via Shutterstock.

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