Taxation of the sale of real estate tokens with income tax
From the moment Bitcoin was created in 2009 to the present day, cryptocurrencies have consolidated their position in the market. As one of the reasons for this turn of events, it can be pointed to the reliance of the above on blockchain technology, i.e. a decentralized digital record of transactions shared on the network, which is immutable. This technology has also found its way into the new phenomenon on the market, which is the tokenization of real estate. It involves expressing the value of a property in tokens assigned to it. Such an action aims to remove the barrier to investing in real estate of its high price. By expressing this value in tokens, where each token will have a relatively small value, investors can choose to purchase only a small portion of a property or plot of land. It is also worth mentioning that such a token does not have a fixed value – it expresses a certain portion of the property, based on which its value is calculated. In addition, the token may have entitlements such as the right to take profits generated by the property.
How to tax the sale of tokens?
Currently in the Polish legal system there are no regulations governing, among other things, the sale of real estate tokens. Nevertheless, before analyzing the above issue, it is necessary to determine what type of token, a real estate token would be. We can, in fact, divide tokens into three categories:
- equity tokens – representing the right to share in the value, income or profits of an asset or project. Such tokens function in a similar way to traditional financial instruments, such as stocks or shares in companies;
- crypto tokens – which serve as proof of ownership, rights or access to specific digital assets. These tokens can be created and stored on public and private blockchains and can take different forms depending on the application, such as Non-Fungible Tokens (NFTs) or Fungible Tokens;
- utility tokens – allowing access to specific services, applications or IT systems of an ecosystem. They act primarily as a payment method or a carrier of value within a specific platform and are not intended as investment instruments.
According to the above definitions, real estate tokens would have to be classified as equity tokens, among other things, because of the ability to increase the value of the token and trade it. On the other hand, this classification does not further give us an answer to the main question – how to tax the sale of tokens?
In the absence of regulations defining the sale of equity tokens, the possible sale of such tokens for corporate income tax purposes should be considered in terms of:
- sale of a financial instrument (by the similarity of the token to a stock, e.g., in a joint-stock company or a right to stock), or
- sale of a property right (due to the similarity of the token to a share, e.g., in a limited liability company).
If one considers the sale of a real estate token as a sale of a financial instrument, the tax rate on the income obtained in this way would be 19%, while as a proper source of income, one would have to consider capital gains income.
Meanwhile, if it is considered appropriate to consider the sale of a real estate token as a property right, the income thus obtained would have to be allocated to other sources of income, due to the lack of explicit designation of this category of income as income from a source such as capital gains, and taxed at a rate of 19%.
For personal income tax, the situation will be similar when it comes to matching the income received to the appropriate category. For personal income tax, sales can be classified as:
- sale of a financial instrument,
- the sale of a property right (defined as a property right similar to real estate as defined in Article 10(1)(8) of the PIT Act), or
- as income from the sale of real estate.
If the sale of a real estate token is considered for personal income tax purposes like the sale of a financial instrument, the income obtained in the above manner should be taxed at a flat rate of 19%. The same rate will also apply if the sale of the token is considered a sale of a property right or as income from the sale of real estate. On the other hand, the option cannot be ruled out either, in which the resulting income should be taxed, for example, on the tax scale in the case of a non-business person. Nevertheless, it is worth remembering that there is currently a lack of tax rulings and court judgements that would clarify how the tax authorities believe such a transaction should be treated. The current wording of the regulations does not allow unanimous resolution of this issue in CIT and PIT.
Summary
Real estate tokens are not a popular solution in Poland at the moment, nevertheless, in the future they may become one of the most common forms of investment. The issue of taxation of the sale of such a token is currently not a clear issue. There are no provisions in tax laws directly addressing the above. In addition, there are no tax rulings or court judgments addressing this topic. If you wish to make an investment involving the “tokenization” of real estate and put the tokens up for sale, we recommend that you apply for an tax ruling in order to properly include such a sale in your tax return and apply the correct tax rate. In the coming years, if tokenization becomes more popular, it will be expected that regulations will be amended to bring income tax laws in line with market realities.
