A Framework for Understanding the Taxation of Digital Tokens

Abstract

As a relatively new area, the taxation of digital tokens can give rise to several dangerous misconceptions. This article lays out five propositions to counter these misconceptions: 1) digital tokens are not a single monolithic asset class attracting uniform tax treatment; 2) the common trichotomous division of digital tokens into payment, utility and security tokens is derived from securities regulation and should not be blindly adopted into tax law; 3) the three classes are not mutually exclusive and hybrid tokens may exist; 4) the fact that an asset is a digital token rarely changes its tax treatment by itself, which must be determined by the surrounding circumstances of the relevant taxable event; and 5) there are broad similarities in the way that digital tokens of the same class might generally be taxed across a variety of common taxable events, which might provide a useful broad overview of this field.

Keywords: Taxation, taxation law, tax law, cryptocurrencies, digital tokens

JEL Classification: K34, F38, H2, H20, H24, H25, H26, H27, H29