In October 2018, an asset management company, Elevated Returns, reportedly raised $18 million through securitized tokens backed by commercial real estate. Other asset managers are thinking of similar token issuances.
Many investors in such token issuances may think the asset they hold is a new token. However, the U.S. tax law likely would treat the investors in these types of token issuances as owning an interest in the underlying real estate. This can be important for a number of reasons, including where a token holder is not a U.S. tax resident.
In such an instance, the investor not only may be subject to U.S. tax on the sale of a token but also may be required to comply with special tax rules applicable to transfers by a non-U.S. resident of a U.S. real property interest. Moreover, under these rules, the purchaser of the token could be responsible for withholding and depositing with the IRS 15 percent of the proceeds they transfer to the seller. Special tax filing obligations can also apply to the non-U.S. resident, and certain pre-certifications may be needed prior to any sale – regardless of whether the token seller is a U.S. or non-U.S. person.
These results are generally different from the normal rules that would apply to a sale of a token, such as bitcoin or ether. In other words, the federal and state tax consequences on the sale of a token may vary based on whether and what assets back a particular token. Similar rules may apply in other countries, as well, where the real estate or other assets backing the token are outside of the United States.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.