The IRS brought down Al Capone… will the IRS bring down Safemoon?

Everyone knew Al Capone was doing illegal things, but nobody was able to stop him… until the IRS.

To my knowledge Safemoon isn’t doing anything illegal; but they are taking 5% of every transaction and putting it into a dev-controlled wallet. This 5% is used to make the so-called “auto-LPs” and is locked up for 4 years. Now, in my opinion, taking 5% of the daily volume for yourself is scummy, but it’s not illegal, because it’s public info: “have they not been totally honest about this since the beginning?

For some reason, people are still buying Safemoon, happily sending the dev wallet 5% of whatever they buy in for, and then 5% of whatever they sell. And that’s fine — their money, their decision.

But here comes the first catch: this 5% dividend that the devs receive is a receipt of cryptocurrency (specifically, of Safemoon), and the receipt of cryptocurrency is a taxable event under the US Tax Code (source). More specifically, the receipt of cryptocurrency is taxed as ordinary income(so the top marginal tax rate of 37% would apply).

And here is the Catch-22: Safemoon has committed to locking up this LP for 4 years, which means they can’t use it to pay tax! This puts them in pickle, as their “5% dividend” is so large that the amount of tax they are incurring is nothing short of absurd. Here is a summary of the transactions to date:

By Safemoon Protocol: Deployer (0x9adc6fb78cefa07e13e9294f150c1e8c1dd566c0)

648 liquidity injection transactions received between March 1-April 25, 2021, totalling 25452 LP tokens, each currently valued at $4,107, for a total value received of $105 million.

By 0x79c4af7c43f500b9ccba9396d079cc03dfcafda1

78 liquidity injection transactions received between March 1-April 25, 2021, totalling 33344 LP tokens, each currently valued at $4,107, for a total value received of $137 million.

Here is a summary of the above (to see the individual transactions, click the links above):

* the taxable event occurred when the LPs are received, so tax will differ from current value

Now, some of these LPs saw appreciation, so their current value isn’t quite equal to the amount of taxable income, but it’s very close. So the Safemoon team has received cryptocurrency valued at approximately 240 MILLION dollars. The receipt of cryptocurrency is a taxable event.

It seems then that the Safemoon team likely owes ~$100M in taxes for the months of March-April. Extrapolating to the end of 2021 (if this carries on), their tax bill for 2021 will be over HALF A BILLION US DOLLARS.

Since this is a tax on ordinary income, it can only be offset by tax credits (there are none) or deductions (business expenses might qualify, but locking or even burning the LPs is not likely to be deductible as a business expense). So it seems unlikely that they can escape this tax.

How will they pay this $500M tax bill for 2021, and what does this mean for Safemoon holders?

It seems to me that current & future LPs (the 5% tax on every transaction) is at risk. Either it is used to pay the tax, or it is seized by the IRS. It may be possible the Safemoon devs find another solution, but I’m not seeing one myself. Either way, the “secret sauce” of the Safemoon tokenomics is in grave danger…

I analyse cryptocurrencies.