When we think of ICOs, the first thing that comes to mind is a project and a token. But under all the luster of a fun and vibrant token launch is some heavy duty accounting. For a company to gain and keep investors, financial accountability is critical. In fact, the very basis of blockchain technology is transparency with security.
In order to run and maintain a successful ICO, companies need careful and consistent accounting practices, and a consistent plan for token and finance management. Below are four key practices to think through when starting your ICO.
Income From Tokens is Still Income
Token income is no different than Kickstarter income. You’ll be taxed on the total income you’ve earned from the sale, regardless of what country your company is based in. (Taxation, by the way, is one excellent reason to plant your ICO in Switzerland. The small nation has become something of a hub because corporate income tax is only 14%.)
This corporate taxation also makes it much better to raise money in the first six months of the year, since you’ll have substantially more time to spend the funds in startup expenses in that initial year before paying taxes
Handle Your Proceeds Wisely
To make the most of your accounting practices, you need to understand how to handle your proceeds. If you move yourself to the end of your ICO and think through what you’ll be doing, imagine you have a load of ether sitting in a multi-sig wallet. You sell while the price is high, and then, over time, the price falls a bit as you near the end of your taxable calendar. While you think of ether as a currency, most federal governments do not consider it that way. That means that you can buy back ether at a lower price point, and eliminate a large portion of your income because of the unrealized loss.
If you’re sitting on a substantial amount of money raised, it’s generally good to diversify about two thirds of what you have out of the one or two cryptocurrencies that you initially raised in. Put some of that money into ETFs or indices that allow for stability of value. The money needs to be used to get your project going and a crypto flash crash could cost you everything.
Lastly, it generally pays to cash out some of your ether or Bitcoin in order to run your business. As you see the price pop up, sell a small amount (90 days worth of expenses). If the price of the cryptocurrency continues to rise, watch for peaks and sell and continue to replenish you 90 day supply. If the price drops, use up your reserves and wait for a bump in price that makes selling worth it. Either scenario allows you a 90 day lead time on selling, so you can watch the market and decide what timing is best.
Every ICO has token policies, which are the overall fiscal plan for your tokens. For example, how many tokens will there be in total? How divisible will your tokens be? Is there a fixed number of tokens that will not vary? These questions all need analysis based on your platform.
Token management is also critical. If your ICO pays contributors or employees in tokens, those will be immediately dumped onto the market until you have a stable track record, which could take years. If you hold a large percentage of tokens back, investors will wonder what you’re doing with those and will be reticent to buy in, thinking that you could immediately flood the market and crush the token price. And if you do sell all your tokens, this is a taxable event. All this requires careful handling and crystal clear communication with interested buyers to protect you and your ICO.
Tax Exempt for Open Source
For now, open source projects can still be classified as charities in the US and file for a 501(c)(3). If your ICO has raised more than $1M, and your platform includes an open-source project, you may be able to apply for and form a tax exempt corporation before the end of your first year. It’s always best practice to form your company before your ICO. Many make the error of waiting, and discover that their income is outside of those regulations.
These are just a few guidelines for financial management and accounting for your ICO. As always, its best to have a team that can help you navigate through these waters. Check out our financial services under the ‘Services’ tab above to see more of what you’ll need to know.