Tokenization can represent ownership or economic rights in a real-world asset (RWA), such as real estate, debt, fund interests, artwork, receivables, bank deposits, etc. as a digital token on a public blockchain. The result can be fractional ownership, faster settlement, programmable distributions, real-time cap tables, greater liquidity/transferability, and the ability to tap into new retail markets that may otherwise be unavailable.

What began as something crypto-native is now drawing attention from traditional market players. Some exchanges such as Robinhood already offer tokenized stocks to foreign investors. In January, the SEC issued a joint staff statement on tokenized securities. Together, these developments reflect tokenization’s rise into the financial mainstream.

For investors and founders, the upside is real, especially when paired with mindful tax considerations.

What Kind of Token?

Not all tokens are created equal, and the tax treatment depends on what the token actually represents. Classification matters: it can drive the income character (e.g., ordinary vs. capital), recognition, timing, source, potential exposure to US anti-deferral regimes (i.e., CFC, PFIC), related reporting, etc.

RWA tokens typically fall into these categories:

• Equity tokens represent ownership in a legal entity (e.g., shares in an SPV holding public or private company stock). These tokens carry the tax characteristics of the underlying equity: dividends, capital gains on sale, and potential CFC or PFIC exposure for foreign structures.
• Debt tokens reflect a creditor relationship: lending money with the token evidencing a right to principal and interest. Depending on the terms and investor base, OID, registered form requirements, or withholding obligations may apply.
• Revenue/profit-participation tokens pay performance-based returns rather than a fixed coupon. Depending on how they are structured, they may be treated as debt, equity, or a hybrid, each with different tax outcomes.
• Asset-backed tokens provide a direct fractional interest in the underlying asset, such as real estate, artwork, or collectibles.

Blockchain simply provides the rails. Tax analysis then starts with the rights the token conveys and where those rights reside: within a legal entity, a contract, or a direct asset interest.

US Tax Considerations

Token Classification

A threshold question is whether a tokenized asset should be treated as a token or the underlying asset for tax purposes. The oldest guidance available would seem to treat a tokenized asset as a token. Notice 2014-21 purports to treat all “virtual currencies” as property for tax purposes. As such, under this Notice, a sale of a virtual currency is treated as a sale of property, no matter what the token represents.

More recent IRS guidance suggests that it might be more appropriate to “look through” the token to the underlying asset. Notice 2023-27 governs non-fungible tokens (NFTs) and holds that, if the underlying is a collectible for tax purposes, the NFT should also be treated as a collectible. The result unfortunately is a higher long-term capital gains rate (28%).

Probably look-through treatment for RWAs is more appropriate. Otherwise, taxpayers could avoid all of the tax issues associated with holding bonds, real estate, etc. just by tokenizing the asset. More guidance is needed here.

The tax classification may also depend on the rights given to, and obligations assumed by, the holder. If a tokenholder has similar rights and obligations as owning the underlying asset, then it may make sense to look through. However, if all the tokenholder has is a right to sell a token whose price mirrors the asset, the holder probably just owns a token for tax purposes.

Is Tokenization Itself a Taxable Event?

Tokenization is not automatically a taxable event; the key question is whether the process results in a sale or exchange. For example, for debt instruments, if tokenization changes legal rights or obligations in a significant way, the old instrument can be treated as exchanged for a new one, potentially triggering gain or loss.

For equity interests, there is no such “significant modification” rule. Instead, the tax analysis hinges on whether the tokenization results in a new equity interest (such as a new SPV, a different class of shares, or materially different rights) or whether it merely adds a digital wrapper without changing the underlying legal ownership (e.g., a new transfer or recordkeeping mechanism).

Stock Tokens

For tokens that represent stocks, it may be that the token is classified as a derivative for tax purposes. As a result, any dividends paid to foreign tokenholders could be considered “dividend equivalent payments” subject to withholding—regardless whether paid in fiat or additional tokens.

Fund Tokens

If tokens represent fund interests and are traded on a secondary market or are readily tradable, this can possibly recharacterize the fund from a partnership to a corporation for US tax purposes. To avoid such publicly traded partnership (PTP) recharacterization, the quoting, matching, and transfer mechanisms must be carefully structured and maintained.

Debt Tokens

Tokenized notes must be in “registered form” and not bearer form to preserve issuer interest deductions, prevent a 1% excise tax, and qualify foreign holders for the portfolio interest exemption. This remains a major impediment to tokenizing US debt instruments. Registered form can be satisfied through a properly structured book-entry system that records future transfers of the token, likely requiring some form of KYC. Designing the registry and transfer mechanics upfront is key.

Real Estate Tokens

Tokenizing US real estate likely does not sidestep FIRPTA. If a token represents a US real property interest or US real property holding corporation, foreign sellers remain subject to FIRPTA tax and 15% withholding. Transfer mechanics must be designed to accommodate FIRPTA certifications, withholding, and remittance.

Distributions

A platform or paying agent with control, receipt, custody, or payment of US-source income to foreign persons can be treated as a withholding agent. Withholding agents can be held primarily liable for under-withholding, plus related interest and penalties. With smart contracts automating distributions, Form W-8 and W-9 collection, treaty rate validation, and Form 1042 reporting should be built into onboarding and distribution workflows to manage these obligations.

Bottom Line…

Tokenization offers real benefits: broader access, improved efficiency, and programmable cashflows. Those benefits are easiest to capture when tax is integrated into the design from Day One. That means aligning classification, withholding mechanics, reporting infrastructure, and cross-border compliance across the asset’s full lifecycle: from issuance to trading to exit.

Done right, tokenized structures can deliver both innovation and tax efficiency.