What Are Crypto Tokens? (And How Are They Taxed?)
What is a crypto token?
Crypto tokens are units of value built on an existing blockchain network that may serve a number of purposes. This could be to represent a piece of art, represent a stakeholder in a given project, allow governance rights, or many other purposes.
Crypto token vs. coin
The phrase token and coin is often used interchangeably in crypto, but they're not quite the same. In this context, coin tends to refer to the native currency of the blockchain. For example, Bitcoin is the native currency of the Bitcoin blockchain and Ether is the native currency of the Ethereum blockchain. Meanwhile, ERC-20 tokens, like UNI or SHIB, are tokens with specific purposes that exist on the Ethereum blockchain.
What are the different kinds of crypto tokens?
The most common kinds of crypto tokens include:
Utility tokens are a kind of token that give holders the right to use a particular function of a project. Two popular examples include BAT (Basic Attention Token) and FIL (Filecoin).
BAT tokens are distributed to those using the Brave browser as a reward for viewing ads - turning the traditional online advertising mechanism on its head. Meanwhile, FIL tokens are used for decentralized file storage.
While the two serve very different purposes, they are good examples of how utility tokens may serve a number of functions for users.
Security tokens represent an investment in a given project, expected to provide a return. You’ll most often see security tokens offered in relation to an Initial Coin Offering or, less commonly, a Security Token Offering.
An example of a relatively popular security token provider was tZERO. tZERO was a fintech company offering tokenized shares and digital securities, all tradable on a given blockchain. However, the company recently announced its closure due to unclear regulations in the US.
Many security tokens may be regulated, or outright effectively banned, by authorities including the SEC (US Securities and Exchange Commission). Confusingly, some tokens deemed security tokens by the SEC would not fit the general description.
Stablecoins are a particular kind of token that are pegged to the value of a fiat currency, most often the US dollar. These tokens are built to allow users to trade and invest in cryptocurrency without the price volatility associated with many other coins and tokens.
Read next: What are stablecoins?
Governance tokens give holders the right to vote on decisions relating to a particular project. They’re most often utilized by DAOs (decentralized autonomous organizations).
Some popular examples of governance tokens include COMP and MKR. COMP is the governance token for the Compound protocol. Anyone who holds COMP can vote on proposals for the development of the Compound Protocol. Similarly, MKR is the governance token for MakerDAO, the DAO that enables the generation of the popular stablecoin DAI. Holders can use MKR to vote in proposals, as well as delegate their vote if they don’t have the time to monitor the latest proposals.
Read next: What exactly are DAOs?
DeFi tokens are tokens associated with a given decentralized finance protocol (also known as a dApp). These may also be utility or governance tokens.
Some examples of DeFi tokens include CAKE, stETH, and yCRV. CAKE is a BEP20 token used to incentivize investors to provide liquidity to the decentralized exchange, PancakeSwap. stETH is a token that represents Ethereum staked on the Lido protocol, which allows users to take ETH without losing liquidity as stETH can still be traded, sold, or otherwise invested. Finally, yCRV is a liquidity pool token that returns enhanced yields in return for providing liquidity for a given market.
Read next: Ultimate DeFi Hub
NFTs are non-fungible tokens. This means they're a specific type of token representing a given asset that has been tokenized on the blockchain. At the time of writing, NFTs are mostly used to tokenize artworks, as well as in-game assets.
Some popular examples of NFTs include Bored Ape Yacht Club and CryptoPunks. Bored Ape Yacht Club is a popular NFT collection featuring a collection of 10,000 unique artworks. Owners of BAYC NFTs also receive exclusive membership to the Yacht Club. Similarly, CryptoPunks is a collection of 10,000 unique avatar-style NFTs that proved very popular on release in 2017.
NFTs are also used in-game in a variety of blockchain-based games including Axie Infinity, Decentraland, and The Sandbox.
Read next: How are NFTs taxed?
How are crypto tokens taxed?
For the most part, crypto tokens are taxed exactly the same way as coins. This means when you dispose of tokens by selling, swapping, or spending them, you may be liable to pay Capital Gains Tax on any gain. Meanwhile, if you earn crypto tokens, you may be liable to pay Income Tax.
However, crypto tax varies depending on where you live - and a few countries have given explicit guidance on the tax implications of different types of tokens. You can learn more in our extensive crypto tax guides.
More questions about crypto tokens? We have you covered.
What are ERC-20 tokens?
ERC-20 is a technical standard for fungible tokens created on the Ethereum blockchain. So ERC-20 tokens are a particular type of token built on the Ethereum blockchain, and currently, the most popular type. Examples of ERC-20 tokens include UNI, USDT, and SHIB to name only a few.
What are BEP-20 tokens?
BEP-20 is a technical standard for fungible tokens created on the Binance Chain. Like ERC-20 tokens, these are the most common kinds of tokens on the Binance Chain currently. Examples of BEP-20 tokens include CAKE, BURGER, and BUSD.
What are ERC-721 tokens?
ERC-721 is a standard for non-fungible tokens built on the Ethereum blockchain. It is the most widely used standard for NFTs on the Ethereum blockchain.
What are ERC-1155 tokens?
ERC-1155 is a multi-token standard that allows for the creation of fungible, non-fungible and semi-fungible tokens in a single contract on the Ethereum blockchain. This means developers can create both ERC-20 tokens and ERC-721 tokens in a single contract, whereas prior to this standard, this was not possible. ERC-1155 tokens are popular as in-game assets, as there may be a variety of both unique and fungible tokens needed.
What's the difference between ERC-20 vs. BEP-20 tokens?
ERC-20 and BEP-20 are standards for fungible tokens on the Ethereum and Binance Chain respectively. The standards themselves are quite similar, the primary difference between the two is the underlying network.
What makes a token a security?
It's a good question! In general, security tokens are tokens that represent a given share in a company or project and pay out as shares would. However, the SEC has deemed many tokens, and indeed cryptocurrencies, securities in recent years, including BNB, BUSD, SOL, ADA, MATIC, and AXS.