Beware of the ‘celebrity crypto’ coins

05 July 2024

The value of cryptocurrencies has surged in the last year, with Bitcoin trading at around $27,000 in June 2023 but trading at around $67,000 in June 2024. That represents growth in the region of 150% in 12 months. Whilst a typical investor would likely be delighted with that sort of return, there are some in the crypto space chasing significantly higher returns.

The last year has been described by some as ‘memecoin season’, as some coins of that nature have seen very high growth. Memecoins are a particularly volatile type of cryptocurrency, often inspired by an internet meme or pop-culture reference, and can have limited actual use. Recent examples of memecoins that have risen significantly in value in a short period of time include Dogwifhat, which has seen growth in excess of 2000% in the last six months, and Pepe, which has seen annual growth of more than 1000%. 

The potential for such high returns has made the memecoin market ripe territory for scammers looking to take advantage of people speculating to get rich quick. Some have therefore raised an eyebrow, or perhaps two, at the new memecoins being launched in recent weeks that have seemingly been endorsed by US celebrities.

The most high-profile of these memecoin launches has been the Jenner token, which appeared to have ties to the television celebrity and former Olympian Caitlyn Jenner. There was some speculation that Jenner’s social media accounts had actually been hacked, with deepfake videos posted to promote the memecoin. The Jenner coin rose quickly in value after it launched and crashed again soon after, leaving some investors in the red.

However, it may have been more a case of social engineering, rather than a hack. Reports indicate that some celebrities are pointing the finger at an individual who has apparently assisted with celebrity memecoin launches. The celebrity memecoin launches have also led some social media users to undertake their own investigations into who is withdrawing funds, once the memecoins have ‘pumped’ up in value.

So, what are the UK tax consequences if you fall victim to what is commonly known in the crypto community as a ‘rug pull’? Well, in many instances the best you can hope for is a capital loss that you can offset against other gains in the same tax year or carry forward to future years. It may be a scam, but HMRC will likely just view it as a bad investment. The capital loss can usually be triggered by a simple sale of the cryptoasset. However, a claim for the loss will need to be made within four years of the end of the tax year in which it arose, usually on a tax return.

In some instances, a sale may not even be possible, as there may not be a market for it if a scam is uncovered. In these cases, it could be necessary to explore whether a ‘negligible value claim’ can be made to effectively trigger a taxable loss without an actual sale.

Generating big returns on a memecoin could feel like winning the lottery, but in many instances investors could find the bonus ball has been pocketed by someone else.