Rules of ICO Taxation

Implementing a new idea or technology presupposes investment. Nowadays the classical schemes of funding come to the background, giving in to crowdfunding and ICO.

If Bitcoin, the first cryptocurrency, emerged back in 2008, then the first ICO was conducted in 2013, when they raised $5 mln. In 2017, ICO raised $180 mln. — more than in all 2016 ($101 mln.). And the volume of investment is on the rise.

Indeed, 2017 has become a year of the ICO boom — a way of crowdfunding projects based on the sales of tokens, the cryptocurrency of start-ups. Unlike other forms of crowdfunding, the ICO is aimed at funding the launch of whole businesses, not just specific products or services, and it attracts people by its opportunity to test the idea on the audience quite quickly and, in case the response is positive, raise funding for it on moderate terms, compared to practically any other source of funding.

And what is the difference between an IPO and an ICO?

The main difference is that investors in an IPO (initial placement offer) purchase valuable securities (shares) for fiat currency, and in case of an ICO (initial coin offering), tokens (internal project currency) are used as shares. The key task for the initiators of cryptocurrency crowdfunding is to sell as many tokens as possible. Or, rather, sell a sufficient number of tokens to develop their project. Their real value remains uncertain until the project comes onto the stock exchange.

So, if I got it right, an ICO is a form of cryptocurrency crowdfunding. That means attracting investment for project development. And its integral part is tokens.

Purchasing tokens during an ICO, you are actually buying private keys. They contain information regarding the number of assets that belong to you. Tokens are an object of investment and tend to increase their value.

Tokens can be of different types: either a cryptocurrency itself, like bitcoins, or a digital counterpart of shares, entitling you to dividends (equity tokens), there could be tokens that are credit instruments (debt tokens), or utility tokens, giving you a right to use a product or a service in future.

Now that we have clarified the basic terms and the essence of an ICO process, let’s move on to the question of taxation. How much tax can you impose on assets, profits and capitals in the virtual worlds?

These transactions are not so virtual, after all. Any ICO has a jurisdiction to which it is tied. That means the country where a legal person, that initiated an ICO, is registered. For the moment, it is one of a few “legal” aspects of cryptocurrency crowdfunding. Never-the-less it exists, hence it provides tax residence. The ICO is fraught with certain tax obligations and reporting. Most favourable terms have been created in such jurisdictions as Singapore, Great Britain, and Switzerland.

Who of the ICO participants can be taxed?

If we are talking about Switzerland, for example, about the Crypto Valley in the Swiss canton of Zug, then both investors and organizers of the ICO have to pay taxes.

At the ICO organizer’s level, the issue of equity tokens, i.e. establishment or increase of nominal cost of shared valuable securities can be taxed once with a capital tax at 1%, and if we are talking about issuing debt tokens, this tax is not imposed on them.

Utility tokens are slightly more complicated. If the purpose during the issue process is not clearly defined, then this token has to be equalled to a cryptocurrency. If during the issue process it is clearly defined what service is due and when it can be provided, in this case we have an advance payment, and shouldn’t forget to pay a VAT.

And what happens to tokens which give me a right to get dividends? Are the taxation rules the same as with real dividends?

Yes, the distribution of income among the shares or their counterparts falls under the Swiss withholding tax at 35% (WHT). So the income received from the payments of credit instruments also falls under this tax.

Transactions with tokens equalled to valuable securities are charged a special tax at the rate of 0.15% or 0.3% on non-domestic instruments. And don’t forget about taxation of the company itself. Profits tax varies from 12% to 24% depending on the canton.

And what happens to investors?? They are investing into intangible and nonexistent assets at the moment.

To understand how an investor will be taxed, you have to understand what individual rights he has. If the issued tokens are a cryptocurrency, he will have to pay a property tax. If tokens give additional rights to the investor, then his tax return can significantly change. Since if we are talking about dividends, then a token is equaled to an electronic share, and this means that it has to be listed as valuable security, and the corresponding profit is appropriately taxed. As you understand, all will depend on the design of the token itself.