Crypto-assets for real estate projects: public Security Token Offering (STO)

Real estate investment and blockchain technology
Crypto-assets for real estate projects: public security token offering (STO)

Crypto goes real estate

Crypto-asset news: For the first time the Federal Financial Services Supervisory Authority (BAFin) in Germany has authorised a security token offering (STO). The German Fundament Group intends to fund real estate projects in Hamburg, Frankfurt and Jena with an investment volume of 250 million euro. The STO, which is available to both institutional and private investors, launched on 8 October 2019, according to CoinDesk. Our tax experts clarify the fiscal effect of such an investment focused on blockchain in the real estate market.

What are the advantages of STOs for real estate projects?

The benefits of issuing token-based bonds in the real estate industry:

  • Fostering exchange for foreign investors
  • The prospect of selling tokens at any time on secondary markets ( i.e. crypto-exchanges and probably “ordinary” exchanges in the future) and
  • The probability of spending very small sums equal to the total value of the tokens.

Every Token-based bond is represented in the Ethereum network by one Basis Token

The terms of the debenture are: variable annual interest return, subordinated with a nominal value of 1 euro and redemption of the full nominal sum on 31/12/2033, with creditors additionally being able to benefit from the value-added rate of the assets retained in the portfolio. Investments and transfers may be rendered in EUR (Ether ETH) or in cryptocurrencies.

Tips for Austrian security tokens/Equity tokens

What are the general tax consequences if Austrian private investors residing exclusively in Austria acquire the so-called “Security Tokens” (also known as “Equity Tokens”)?

  • If the tokens purchase is paid with euros, the investor buying the tokens from fiscal private assets must actually conduct a sales transaction that does not trigger any income taxes
  • The situation is different if the tokens are obtained using other cryptocurrencies or crypto-assets; in this case, the trade would basically be called a one-year investment contract swap subject to income tax at the progressive rate.

How will taxation within fiscal private assets be effected?

The prevailing view in the case of tokens similar to securities is that they qualify as profit participation rights and therefore as capital assets. In the case of issuers, they constitute equity or debt capital depending on the structure; only the consequences of classification as debt capital will be discussed here from a realistic viewpoint, if comparability with bonds exists.

If interest payments are made to the investor, for example in euros, these payments shall be subject to a special tax rate of 27.5 percent on the part of the investor if:

  • This token is a security proof of a legal argument, and
  • Where there is a public place authorised by the tax authority.

 Token as Security or Public Placement

For example, securities evidencing legal claims are bonds registered on a given name or issued to bearers. Public placement means the tokens must be given in both legal and factual terms to an unspecified number of persons.

In the case of these tokens, the taxable profits can not be excluded from any ancillary purchase expenses, borrowing costs from the transaction, and costs of the actual administration of tokens.

No Security or no Public Placement Token

However, if the investment involved is not a bond and/or a public placement, the interest return would be subject to the highest maximum rate of income tax of up to 55% at the moment. In that case, revenue-related expenditures can also be balanced against tax, such as the cost of the present tokens administration or borrowing costs.

If the interest payments in cryptocurrency or crypto-assets are made to the investor, then the investor must also dispose of taxable profits.

Special income tax rate

In the event that the token is sold profitably by the investor, given that the above-mentioned preconditions (security evidencing a legitimate argument and public placement) are fulfilled, this constitutes profits from capital assets subject to a special income tax rate of 27.5 percent; the taxable profit is the difference between revenue and pure purchase costs.

TPA tax tip for tokens

Regardless of how the tokens (using fiat money or cryptos) were purchased, the interest earned and the (re)sale of the tokens are taxable within fiscal private assets and must be included in the tax return. In that case make sure your records are accurate and understandable!

If you are considering blockchain-based real estate investments, please contact our tax experts and discuss your investment plans beforehand.