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Why is the difference between these two concepts important?
Because while Crypto Coins are a recognized asset class under US tax law, tokens are not. And that’s very significant. Why? Because with a U.S. “Coin” you may be able to avoid being classified as a dealer in securities and paying most of the fees associated with that status as well as a capital gains tax on your holdings. However, if you hold Crypto Tokens not classified as Coins under U.S. law, you may be treated as a dealer in securities and subject to significant fines and penalties to which you may find crypto coins an attractive alternative. There is a difference between crypto coins and crypto tokens.
What’s The Key Difference Between “Coins” And “Tokens”?
What is a Coin?
Under the Internal Revenue Code of 1986 Section 475, Coins are defined as “determined by the Secretary [of Treasury] to be used as money.” Specifically, they must meet three requirements:
(1) they must have their value determined by their weight and content;
(2) they must be minted under the authority of the U.S., and
(3) they must be legal tender in the United States. As a result, Cryptocurrencies that qualify as “Coins” include Bitcoin, Ethereum, Monero, ZCash, and Litecoin.
Learn more about the new coin and Is ApeCoin a Good Investment or not?
What is a Token?
A Crypto Token, on the other hand, is a digital representation of an asset or utility. For example, Ethereum is a platform for the development and deployment of smart contracts (contracts written in code). Tokens are integral to their network. Rather than being used as money, Token holders have rights that are conveyed by the code based on how they’re used on the platform.
Examples of Tokens include Ethereum, Golem, Augur, Basic Attention Token, and Network Tokens. While Crypto Coins (Bitcoin, Ether) are considered property and taxed as capital gains upon disposal or sale, Crypto Tokens are securities that can be a highly lucrative tax target for the IRS if you aren’t careful. When checking the facts about BitIQ, this is discussed in detail.
The key difference is how they are used. There is no single test to determine if a given cryptocurrency qualifies as a “Coin” or a “Token.” However, when in doubt, assume it’s a security (i.e., Token) because you will be safer that way for two reasons:
- Coins (e.g., Bitcoin, Ether) are treated as property and incur capital gains taxes when they are disposed of or sold; Tokens are securities that put you at risk for a tax fine and/or penalty if the crypto tokens have been issued via an “initial offering.”
- Coins (e.g., Bitcoin, Ether) are safe from securities laws and the “blue shoe investigations” of the SEC; Tokens are not safe from those types of investigations.
Crypto Token Tax Implications
Specifically, if you’re holding crypto tokens – even if they cannot be legally defined as a Crypto Coin (i.e., Ethereum, Golem, etc.) under U.S. law – you must retain records of the amount and date of their acquisition; any cost basis adjustment and/or gains or losses that have occurred up until the time they are disposed of or sold.
In addition, if your crypto tokens have been issued in an offering there is a tax due upon their disposition (i.e., when you sell or exchange them for something else of value). These tokens are considered “Covered Securities.” If you hold them as inventory, they will be treated as stock-in-trade; if you hold them for investment or personal use, they’ll be treated as capital assets (e.g., stocks, bonds).
There you have it! Crypto coins and tokens are not the same thing. Crypto coins are treated as property that can be highly lucrative – and have a high cost – to the IRS if you don’t follow protocol. Crypto tokens are treated as securities and can be highly lucrative to the IRS if you don’t watch out.