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

21. 1. 2020

Crypto goes real estate

News on crypto-assets: The Federal Financial Services Supervisory Authority (BAFin) in Germany has approved a public Security Token Offering (STO) for the first time. With an investment volume of EUR 250 million, the German Fundament Group intends to fund real estate projects in Hamburg, Frankfurt and Jena. According to CoinDesk, the STO that is open to both institutional and private investors started on 8 October 2019. Our tax experts explain the fiscal impact of such blockchain-based investments in the real estate sector.

What are the benefits of STOs in real estate projects?

The benefits of the issue of a token-based bond issuesin the real estate sector are

  • facilitated trade for foreign investors
  • the possibility to sellthe tokens on secondary markets (i.e. crypto-exchanges and possibly “traditional” exchanges in the future) at any time, as well as
  • the possibility to invest very small amounts equivalent to the nominal 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 yield, subordinated with a nominal value of 1 euro, and repayment of the full nominal amount on 31/12/2033, with investors additionally being able to benefit from from the value-added yield of the properties that are held in the portfolio.Each token-based debenture is represented by a token in the Smart Contract of the Fundament Group in the Ethereum network. Investments and payments can be made in EUR or cryptocurrencies (Ether ETH).

Tips for Austrian investors in Security Token/Equity Token

What are the general income tax consequences if Austrian private investors with exclusive tax residence in Austria acquire so-called “Security Tokens” (also called “Equity Tokens”)?

Further explanations to income tax

In this article, the general income tax-related consequences are described briefly and in simplified form in accordance with the Austrian legal situation. In transnational circumstances or in situations involving foreign elements, in particular, constellations may exist that need to be examined individually, which may lead to other, deviating fiscal consequences due to applicable legal provisions (foreign tax law, EU regulations, double taxation treaties etc.).

  • If the purchase of the tokens is paid with euros, the investor acquiring the tokens within fiscal private assets simply performs a purchase transaction that will not trigger any income taxes.
  • The situation is different if the tokens are acquired using other cryptocurrencies or crypto-assets; in that case, the transaction will basically be considered a swap subject to income tax at the progressive rate within the one-year speculative period.

How will taxation within fiscal private assets be effected?

In case of tokens similar to securities, the prevailing view is that they qualify as profit participation rights and hence as capital assets. In the case of issuers, they may constitute equity or debt capital depending on the structure; from a practical perspective, if there is comparability with bonds, only the effects of classification as debt capital will be discussed here.

If interest payments, for instance in euros, are made to the investor, these payments are subject to a special tax rate of 27.5 % on the part of the investor, if

  • the token represents a security evidencing a legal claim and (!)
  • if a public placement approved by the fiscal authority exists.

 Token as Security or Public Placement

Securities evidencing legal claims are, for instance, bonds registered on a certain name or made out to bearer. Public placement means that the tokens must be offered to an indefinite group of persons in legal and factual terms.

In case of such tokens, any ancillary acquisition costs, borrowing costs from the acquisition, and costs of the current administration of the tokens cannot be deducted from taxable income.

No Security or no Public Placement Token

If, however, the transaction concerned is no securities and/or no public placement, the interest yield will be subject to the full progressive income tax rate of currently up to 55 %. In that case, income-related expenses may also be offset against tax, such as the cost of the current administration of the tokens or borrowing costs.

If the interest payments are made to the investor in cryptocurrencies or crypto-assets, the investor will also dipose of taxable income.

Special income tax rate

In case of the token being sold profitably by the investor, provided the above-stated prerequisites (security evidencing a legal claim and public placement) are met, this constitutes income from capital assets that is subject to the special income tax rate of 27.5 %; the taxable profit is the difference between income and mere acquisition costs.

TPA tax tip for tokens

Regardless of how the tokens were acquired (using fiat money or cryptocurrencies), the interest received 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 that your records are complete and comprehensible!

If you consider blockchain-based investments in the real estate sector, contact our tax experts and discuss your investing plans before hand.