Appleby: Taxing Tokens

Andrew D. Appleby (Stetson; Google Scholar), Taxing Tokens, 91 Tenn. L. Rev. __ (2024):

Tokenization began a fundamental transformation of our laws of ownership, but this transformation is curbed by a lag in the laws of taxation. This Article provides the theory and doctrinal tools to mend this disconnect. Tokenization provides a method to prove and transfer ownership of valuable assets such as art, real property, and equity interests in all types of entities. The tokenization process creates a nominal token that represents the legal ownership rights in the underlying asset. The token, and thus the ownership of the underlying asset, can then be verified and transferred in a process that may be more efficient than doing so with the underlying asset directly.

Blockchain-based tokenization promises to increase efficiency exponentially, which will reduce transaction costs and allow for greater market participation. Blockchain-based tokenization also inherently obscures ownership and transfers of the underlying asset, which may produce significant tax benefits for the asset owner but erode the state and local tax base. State and local governments impose taxes on the ownership and transfer of property. These taxes typically apply only to tangible property, not intangible property. If ownership of tangible property is transferred via an intangible token, such as a blockchain-based non-fungible token (“NFT”), significant transaction taxes may be avoided. In addition, determining which taxing jurisdiction has the statutory and constitutional basis to impose tax on the tokenized transaction is problematic.

This Article answers the crucial tax questions that arise with blockchain-based asset tokenization. First, this Article examines foundational tokenization principles, which implicate many fields of law. Next, this Article analyzes blockchain-based tokenization in several important contexts, focusing on the tax implications of each. In conclusion, this Article resolves jurisdictional and constitutional challenges, and provides a normative approach for taxing blockchain-based tokenized assets.