How to Classify Crypto Assets

In classifying crypto assets — Tokens — for tax and accounting purposes the following aspects have to be allowed for:

a) the economic substance of the relationship between any Token Issuer and the Token Holder.

b) the nature of the digital asset by identifying the rights associated with the particular crypto asset.

The distinction between centralized and decentralized business ecosystems (networks)

If one of the seven points is fulfilled, a centralized network is established:

Only in case no Project Owner/Token Issuer can be identified according to the above given list a decentralized business network empowered by a crypto asset/Token is established.

The main feature of all Tokens useable within a centralized network (business ecosystem) is the right to be used resp. to access the network exclusively in this business ecosphere established and controlled by the Token Issuer. Very often the establishment of such networks is funded by selling crypto assets upfront during a Token Sale.

Very often these Access Tokens show additional rights and functionalities which cause them to be classified differently for legal and economic purposes:

Please be aware that most of the Access Tokens are used as means of exchange within the centralized business ecosystems:

Tokens within a centralized network can be summarized as follows:

Depending on the exact legal structure of the specific Token agreements such Tokens can represent equity or debt instruments.

Tokens which neither qualify as debt or equity but entitle the holder to a percentage of the gross revenues from the company are also called Revenue Tokens (also profit participation Tokens) for regulatory purposes also qualify as Security Token.

If rights like profit participation, repayment of the money, a share in liquidation proceeds and so on are granted, there is always a responsible project owner and therefore a centralized application.

It is irrelevant whether the Token Sale takes place before or after the establishment of an application, the Tokens always qualify as Security Tokens.

In addition to grant access some crypto assets sold to provide the owner of the Tokens with a functional benefit in a network. Within this network such Tokens can have different additional rights e.g.:

For accounting and tax purposes consumer Tokens must be further distinguished:

If such a right for the delivery of goods or services in exchange for the Tokens are granted, there is always a responsible project owner and therefore a centralized network. Only in centralized apps/networks there are Voucher Tokens in which the Token Holder has the right to exchange the crypto assets for services or products offered by the Token Issuer.

In case it is a genuine voucher Token meaning the main focus of the Token Holder is to consume the goods or the services to be delivered, it is irrelevant whether the Token Sale is done before or after the establishment of the application.

A presale of a utility Token could be qualified as a pre-sale of services (the right to participate) comparable to a pre-sale of a Voucher Token. The application of blockchain concepts and cryptographic technologies in these reward-based crowdfunding campaigns results in the issuance of Tokens representing a digital and tradable form of the right of the Token Holder.

Very often such pre-sale Token agreements provide for a preliminary ECR20 Token which will be exchanged for the specific network Token, after the future blockchain protocol resp. the decentralized network is finished (comparable to the US SAFT agreements).

Only if in a centralized network in addition to the Tokens issued by the Token Issuer also other Tokens or legal currencies can be used to pay for the services and goods delivered within the established app/network, they qualify as Payment Token (also termed cryptocurrency). Tokens in a centralized application (i.e. an identified issuer…) can be understood as special means of payment in that they are accepted as means of payment in a certain environment (“ecosphere”).

In case crypto assets with the sole purpose to be used as cryptocurrency on a specific centralized platform/application have to be bought upfront the crypto assets and if these Tokens are exclusively accepted as the means of payment between users or also between the network operator and users these Tokens are to be qualified as Access Tokens.

If no one of the seven points stated above is fulfilled, no central issuer can be identified.

Tokens which are mined/or otherwise generated by smart contracts/ in a decentralized network can never qualify as Access Tokens.

Also Tokens within a decentralized network can never qualify as Security Tokens as no central entity promising profits,

Work Tokens within a decentralized business ecosphere can provide the owner of the Tokens with a functional benefit in a blockchain-based network (organized by smart contracts). Within this network such Tokens can have the same rights as Consumer Tokens within a centralized business ecosphere e.g.:

As there is no central party promising to accept the Tokens in exchange for rights (access rights), goods and services to be delivered, Consumer Tokens within a decentralized network never qualify as Voucher ‘Tokens (as defined for tax and accounting purposes).

Very often Tokens in a decentralized network qualify as Cryptocurrencies like Monero, ZCash, Bitcoin, .. are Tokens which are accepted exclusively as a means of payment for transactions between users or and also between the network operator and users. Such payment Tokens also very often referred to as Coins are mined in a decentralized network.

Please be also aware that they know that the delimitation between centralized and decentralized networks is very often not that easy as described in this paper. Especially regarding governance and voting of the future development resp. BIP it is sometimes quite tricky to differentiate between a centralized and a decentralized network — as a rule of thumb, we propose that in any case if there is one decisive decision maker the network qualifies as a centralized network.

tities of the potential customers, the Token does not qualify as voucher but constitutes a means of exchange.

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