Virtual Currency Tax Consequences

A growing number of startups are offering virtual currencies to investors through initial coin offerings (ICOs) as a way to raise capital, often with little or no awareness of the tax consequences of their actions. Many startups sell specially created cryptocurrencies to initial project backers who expect the currency to increase in value if the startup succeeds. These cryptocurrencies, or tokens, are initially issued in fixed, limited amounts which generally can be used only in connection with the venture associated with the cryptocurrency. The cryptocurrency may increase in value if the venture succeeds. Investors may then seek to sell the appreciated cryptocurrency on the secondary market. Those same currencies can be used to compensate executives of the company, including as incentive compensation. But what does the Internal Revenue Service (IRS) have to say about these uses of virtual currency?