When it comes to crypto assets, there are more than just coins and NFTs. Crypto tokens offer people the chance to invest in crypto in a way that isn’t tied to a volatile market, but rather the success of projects they believe in.
Here we talk about what a crypto token is and how it differs from crypto coins. We’ll then go into two examples of crypto tokens and how they are used. Let’s go.
A crypto token is used to represent a virtual, non-cash asset. This could be a stake of ownership, for example. They can also be used to gain special rights within a blockchain, such as voting rights.
Tokens and coins exist within the general crypto sphere, but they are not the same. While a token is used to represent a virtual, non-cash asset, coins represent an actual currency.
Since coins represent currency, they have a cash equivalent. Tokens cannot do this. While Tokens have tangible value, they don't exist as a form of transferring that value. They exist to facilitate transactions more nuanced than monetary ones.
Security tokens are crypto assets tied to a securities offering. The securities in question are often shares in the company, who have offered the token as a form of investment in the company. This type of token is regulated just like securities you'd find in the traditional market.
But there’s another cool trait with security tokens. When you own one, you get to have a say in what happens with the company, in which you hold some ownership. In other words, you become a shareholder, and the token’s value is directly impacted by the company's value. You have rights with respect to an entity, either with equity or debt.
This is different from a crypto coin, where the value is related to the demand for a particular coin and the confidence others hold in the platform (in which you're now an owner).
Security tokens are an awesome way for investors to get into the crypto market without speculating on choosing a coin. For some people, the idea of securities is familiar, as they could be compared to holding stocks. The chance to own part of the next hot decentralized application start-up is pretty cool, right?
Utility tokens are often issued at an initial coin offering (ICO). Rather than representing an ownership stake in the actual company, they're more like VIP passes.
They give holders access to utilities, such as access to the blockchain platform developed by the issuer.
In light of this, you can see that utility tokens are more like promotional tools than investments. Unlike security tokens, utility doesn't don't grant ownership or stakes in companies. For this reason, utility tokens aren't really treated like investments.
However, it is still possible for utility tokens to grow in value if a token’s utility becomes in demand. For instance, if your token represents a limited access pass, this could be very valuable to keen investors who missed out on the initial ICO.
If you just want to buy and hold a symbolic relic from a company that matters to you, a utility token is ideal. What’s more, it could even get you a helpful discount.
The tax treatment of all types of tokens is dependent on the nature and use of the token, rather than simply the definition of the token. Anyone who holds crypto assets is taxed on profits made on them, via Capital Gains Tax (CGT). This means you pay tax on the difference between what your crypto cost you, and how much you sold it for.
For more detail on the general tax implications of crypto, see our extensive crypto tax guides.
If you need help sorting out your crypto tax, try using our free crypto tax software. Koinly is a crypto tax tool that calculates your crypto taxes for you, meaning you don’t have to go through the hassle of doing it yourself.
Not only does the software integrate with your chosen exchange or wallet, but it calculates your taxes in a format that makes sense for your country’s tax office. Essentially, Koinly does all the boring tasks that would cost your hours and hours sitting at a computer.
As a quick breakdown, here’s a short summary of what Koinly does: