I love this stuff; it's very entertaining  🙂  I find it helps to separate the issues.

"itonewbie buys level 1 of "smart contracts" in forsage."

That's not something that gets reported on the income tax form. It's the same as my example: I buy shares in GM or Ford. That is my new asset; that is Not a tax reported event.

"you cannot get that money back." <== not a tax reporting issue; choosing to buy a non-sellable asset is not a tax event. It's like buying a bunch of Beanie Babies "as investment" and now they are in your closet.

I actually teach this in the lesson in my class, for Asset or Expense: I buy some teddy bears in Dec to hold until Feb for Valentine's day. For that year end, my business has no expense entry, because the teddy bears are right here in my Inventory closet. I didn't Spend that money; I invested it. It is no longer Money. That value is now teddy bears. I developed "the chocolate chip cookie rule" to help them retain the difference between Expense and Depreciation. I find this helps the non-accounting students retain the concepts, by imagining teddy bears and chocolate chip cookies.

"owning that level now gives you access to commissions when you refer someone."

That's part of their Game; not part of tax reporting. "When" is always a deciding factor. "When" something happens that is reportable, you report it.

"you referred me under you and i buy level 1, then itonewbie, you, immediately receives $15 of commission appearing in your digital wallet."

The $15 is a "when" event = something has now happened that would be reportable. The reporting here is the realized income, then, based on the FMV of the $15 as income. As long as Ethereum has a convertible value, of course. Otherwise, I can give you Monopoly money, and you would not need to report that as income, since it has no FMV.

"You can cash that out anytime you want" <== Now something else happened (gain/loss)

"or use it to buy level 2" <== not a reportable event

"That's how this work"

If you cannot sell the contract, how can you try to use depreciation or depletion, then? It just is what it is when you bought it. But some day, when the whole scheme is revealed, I suppose there will be loss against the reported income from the initial investment. It seems unlikely anyone will get more than their initial investment, other than relying on ETH to increase in value.

That's how most of these virtual currency schemes work; the scheme itself is Smoke and Mirrors. You are betting on the increase of value of ETH to prove it was a good investment.

Start out thinking through each step as if it involved Real Money. You don't report those purchases on your tax form, just because you put a lot of money into the purchases.

You didn't start out with, "I convert USD to Ethereum. Now I have a wallet of Etherum to buy contract levels with." That is why I used the example of currency traders. You have many different aspects:

Currency trading for the initial conversion.

Purchase of "contracts/levels" that has an indefinite life and never wears out. That means no depreciation of any sort. You "bought In" and not "bought something."

You stated Commission as income and keep trying to explain it will be Sched C and Active. Not like Royalty (so, no depletion) and not Passive. If this was Business, but the purchase is not a reportable event, then only the income and the related business cost to generate the income would be reportable. Not the investment.

And the payment of this Income is in the form of Ethereum, so as long as it has FMV, you use that info.

And when you "sell" Ethereum, it's like any other sale of a currency or asset you have been holding at a basis. Sched D.

"you can actually call directly to SEC and they have no nay or yay about it as it is not required to be registered with SEC, it's not trading, rather it is crowd funding."

You don't get to argue both sides.

If this is not security trading as investment (making it not Sched D) and it is Crowd Funding, then Crowd Funding income is taxable as Other income on the 1040 and is not Sched C, because you are not operating a business and there are no operating expenses against this income. More than once, you stated it isn't earned, but more like a commission or reward. It's all about perspective: if the contract holder is considered the "creator" for crowd-funding purposes, then this is not for business purposes (not being raised for the business to operate), but personal.