Utility tokens: Use, benefits and taxation from an entrepreneur’s perspective

Utility tokens open up new business models and revenue streams for companies that would not be possible in traditional markets. This gives them flexible and innovative ways to finance, retain users, reduce costs and create a dynamic and engaging blockchain ecosystem.

But what about the taxation of utility tokens? What do companies need to consider from a tax perspective when issuing utility tokens?

What are utility tokens?

Utility tokens can convey usage rights or a claim to these usage rights in order to exchange them for a service or goods. These crypto tokens can be used on platforms, for example, to redeem credit or a reward or to gain exclusive access.

Owners of utility tokens do not receive any financial consideration, so they do not constitute a stake in the company like security tokens.

How can companies use utility tokens?

Utility tokens are often issued as part of Initial Coin Offerings (ICOs) to raise funds for the development of a platform or project. Investors purchase the tokens with the expectation that they will later be useful within the network when the platform is up and running. Companies can also use utility tokens to draw attention to their products and make it easier for users to access blockchain systems.

Ideally, issuing utility tokens creates a community that shows great interest in project development and the long-term success of the project.

How do companies benefit from issuing utility tokens?

Utility tokens offer companies numerous advantages, such as:

Financing through ICOs and token sales:

Companies can raise capital quickly through Initial Coin Offerings (ICOs) without having to rely on traditional financing channels such as venture capital or bank loans. ICOs allow companies to reach investors worldwide, increasing the reach and potential pool of capital.

Promoting user loyalty and participation:

Companies can use utility tokens to reward users for their activities and contributions on the platform, which increases user loyalty. By offering incentives such as rewards for certain actions, companies can increase activity on their platform.

Cost efficiency and automation:

Blockchain technology can significantly reduce transaction costs by eliminating intermediaries and enabling direct transactions. Smart contracts can automate many processes and thus reduce operating costs.

Transparency and security:

Transactions with utility tokens are traceable on the blockchain, which increases transparency and reduces fraud. Blockchain technology also offers a high level of security due to its decentralized and unchangeable nature.

Innovation and competitive advantage:

Utility tokens enable new business models and revenue streams that would not be possible in traditional markets, and companies that are early adopters of blockchain technology and utility tokens can gain a competitive advantage by offering innovative solutions.

What do companies need to consider when taxing utility tokens?

The BMF has so far only issued one income tax letter on tokens in general and also on utility tokens (see BMF letter dated 10.05.2022). However, the BMF has not yet taken a position on the VAT treatment of utility tokens.

The issue of utility tokens can be relevant for VAT purposes, as many utility tokens entitle their holders to make use of services or goods. In addition, these services can also be acquired through payment with state currencies or cryptocurrencies, which is why the sale of utility tokens could be subject to VAT. However, it is already becoming problematic to determine the type of service relationship as an initial requirement for VAT.

The special features of the acquisition process also play a role here, as do the subsequent usability and the associated consequences.

In accordance with the VAT Directive, utility tokens are similar in function to a voucher. With the utility token/voucher, buyers receive a claim to a service or a product. As a rule, the service or product delivery for the utility token only takes place at a much later point in time, as the focus of the token issue is on raising capital. It is therefore questionable whether the issue is relevant for VAT purposes at all. After all, there is no direct link between the issue and the consideration.

In addition, different forms of this “voucher” must be taken into account. For example, a very specific good/service may be owed (single-purpose voucher), but the Utility Token may also function as a multi-purpose voucher. In the first case, the Utility Token (if the type of service relationship were not taken into account here) would already be subject to VAT at the time of issue; in the second case, only the time of redemption would be relevant for VAT purposes.

Even if the classification of the utility token as a single-purpose voucher often fails in practice because the token issue is linked to a specific service/goods when it is redeemed, a case-by-case assessment is usually required in practice.

Conclusion on the taxation of utility tokens

Utility tokens offer companies innovative financing and user engagement opportunities that are not available in traditional markets. Initial Coin Offerings (ICOs) allow companies to raise capital quickly and reach investors worldwide.

However, companies must also consider numerous tax aspects when issuing utility tokens. While there are clear income tax guidelines, the VAT treatment remains complex and depends heavily on the specific characteristics of the tokens.