Security Token Market's crowdfund is going live on Securitize Markets on July 6th.
Mar 3, 2019
Disclaimer:Disclaimer: This post is provided for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal, accounting, nor investment advice. You should consult your own advisors before engaging in a Digital Security Offering or related transaction.
A Digital Security Offering (DSO) is a security offering that utilizes distributed ledger technology (DLT) to generate tokenized securities. Through the use of DLT, digital securities offered through a DSO are connected to smart contracts that automate many of the compliance and lifecycle management processes inherent in a traditional security.
For example, DLT technology can provide for accurately enforced compliance (for initial issuance and secondary trading), rapid distributions and settlements and real-time ownership information.
To date, most DSOs have been private equity offerings, which is to say they have been conducted through exemptions from registration (e.g.Rule 506(c) of Regulation D). However, we are optimistic that the DSO market will open to public offerings and other types of securities, such as complex debt instruments in the not-so-distant future.
Investing in a DSO is straightforward. Most DSO issuance platforms, such as Securitize, have intuitive investing portals where you can invest in these offerings. However, because DSOs are sales of registered securities, issuers are required to pre-qualify investor in order for them to participate in the sale. Rules vary by country, but generally speaking, a KYC/AML check is required.
In the USA for example, only accredited investors can invest in DSOs on the primary market. This means that they must satisfy certain earnings and/or asset ownership requirements as well as pass KYC/AML (see more details here).
Tax laws vary around the world. In most countries (like the USA), cryptocurrencies are taxed as capital assets. Therefore if the asset appreciates in value and you sell/trade/use it for profit, the gains are taxed like capital gains. If the asset depreciates in value and you sell/trade/use it at a loss, you may be able to deduct the losses against other capital gains to reduce your taxes.
The amount of tax depends on how much capital gain/loss there has been on the asset, how long you have held the asset, and the specific regulations in your country/jurisdiction. Because each taxable event may create a capital gain, you need to know the date, cost basis, sale value, and any fees associated with each transaction.
Generally speaking, these are considered taxable events:
On the other hand, the following are generally not considered taxable events:
In the USA, because disposing of a cryptocurrency asset is a capital disposal, it is a taxable event. Therefore, if you invest into a DSO with cryptocurrency, you are triggering a taxable event based on the capital gain of the asset you are investing into the DSO.
For example, let’s say that Carol buys 10 ETH for $100. Two years later, the ETH have appreciated to be worth $1,000. Now she invests the 10 ETH into a DSO. The 10 ETH have appreciated by $900, so Carol triggers a long term capital gain on $900.
If on the other hand, Carol spends $1,000 (fiat) on the same DSO, there is no taxable event because no cryptocurrency is being disposed.
In both cases, if the token from the DSO were to be traded or sold, then that would also be a capital gains event based on the fair market value of the DSO token at the time of the disposal minus the cost basis of acquiring the token.
See more details about how cryptocurrency taxation works here.
Let’s say that you invest into a DSO like SPICE. You can use software such as CoinTracker to automatically calculate your cryptocurrency capital gains per the rules above.
Next you would edit any transactions with the amount of fiat currency you paid for the security (e.g. SPICE) by editing the transaction using the dropdown next to the transaction:
That’s it! Once all your transactions are synchronized and correctly edited to reflect your transaction history, you will be able to access your tax summary.
In the USA, the amount you pay in federal taxes on your digital security gains depends on how long you have held the assets and your ordinary tax rate.
If you have held the digital security for one year or less, they are considered short term capital gains. In this scenario, the gains are simply added to your income for tax purposes and taxed at your ordinary income tax rate (2018 rates, 2019 rates). This is the higher tax treatment scenario.
If you have held the digital securities for more than one year, they are considered long term capital gains. In this scenario, the gains are taxed between 0 – 20% depending on your ordinary income tax rate (you can look them up here). This is the lower tax treatment scenario.
For example, let’s say that your annual income is $50,000 and you are filing as single. You buy a security token on January 1, 2016, for $400 and sell it on January 1, 2017, for $1,000. You have a short term capital gain of $600, which taxed at your ordinary income tax rate of 25% results in a tax of 0.25 * $600 = $150 in additional federal taxes.
Instead, let’s say that your annual income is $30,000 (still filing as single). You buy one security token on January 1, 2016, for $400 and sell it on January 2, 2017, for $1,000. You have a long term capital gain of $600. Your ordinary income tax rate is 15%, and your long term capital gains rate is 0%. Therefore you pay no federal tax on this token sale (state taxes may still apply).