Taxes on Token Sales (in particular CA State taxes)


Assuming you have successfully designed a Token Network and are selling Tokens (whether directly or through SAFTs) you need to determine where you owe tax and at what rate.

The new federal rules  (Section 14202 of the Tax Cuts and Jobs Act) may provide significant benefits to Token sellers who can show that their income from Token sales is "foreign derived" (a reduced rate to 13.125%).  Unfortunately, the term "foreign derived" is not well defined and its unclear if Token sellers merely need to prove that the buyers have a foreign address or will need to show actual foreign residence and use, but it's worth watching and tracking whatever information you have on buyers.

Fortunately, the California rule is more straight forward and may offer some opportunities.

It says that the income from sales of intangible property may be allocated instate (subject to CA tax) and out of state (not subject to CA tax) as follows:

"Sales from intangible property are in this state to the extent the property is used in this state. In the case of marketable securities, sales are in this state if the customer is in this state."

While it's not clear if Tokens are “marketable securities” — and I would assume CA will take whatever position is better for it -- there may be an opportunity here.  I recommend that Token sellers (both the original sponsor and subsequent purchasers) track the residence of the buyer of Tokens and SAFTs as evidence of where the token might be used under the first test and to satisfy the second test. 

Maybe that will allow the seller to reduce the total tax burden on sales -- at least until CA changes the rules. 


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