Crypto-assets for real estate projects: public security token offering (STO)

STO

Crypto does real estate

Crypto-asset news: For the first time the Federal Financial Services Supervisory Authority (BAFin) in Germany has approved a public Security Token Offering (STO). The German Fundament Group plans to fund real estate ventures in Hamburg, Frankfurt and Jena with an investment amount of 250 million euro. The STO, which is available to both institutional and private investors, launched on 8 October 2019, according to CoinDesk. What is 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 are:

  • Fostering trade 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)
  • The probability of spending very small sums equal to the total value of the tokens.

Each Token-based bond is represented by one Fundament Token in the Ethereum network

The terms of the debenture are: variable annual interest return, subordinated with a nominal value of 1 euro and repayment of the full nominal sum on 31/12/2033, with investors additionally being able to benefit from the value-added yield of the assets retained in the portfolio. Growing token-based debenture is represented by a token in the Fundament Group’s Ethereum network’s Smart Contract. Investments may be rendered in EUR or tokens (Ether ETH).

Tips for Austrian Security Token/Equity Token Investing

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

Further explanations of income tax

In this article, in accordance with the Austrian legal situation, the general income tax-related implications are defined briefly and in a simplified form. In transnational circumstances or in situations involving international elements, in particular, constellations can occur that need to be investigated separately, leading to different, deviating fiscal implications due to relevant legal requirements (foreign tax law, EU legislation, double taxation treaties, etc.).

  • If the tokens purchase is paid with euros, the buyer buying the tokens from fiscal private assets must actually conduct a sales transaction that does not cause any income taxes.
  • The scenario is different if the tokens are purchased using other cryptocurrencies or crypto-assets; in this case, the trade would basically be a swap subject to income tax at the progressive rate in the span of a one-year speculative period.

How is taxation to be carried out within fiscal private assets?

The prevailing view in the case of tokens similar to securities is that they count as profit participation rights and thus 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 fiscal 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 sold in both legal and factual terms to an unspecified group of people.

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

No Security or no Public Placement Token

However, if the investment in question is not a bond and/or a public offering, the interest rate 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 cryptocurrencies or crypto-assets are made to the lender, then the lender must also dipose 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 purchase costs.

Tax tip TPA on tokens

Regardless of how the tokens (using fiat money or cryptocurrencies) 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 the records are accurate and understandable!