The genesis allocation of tokens refers to the initial distribution of newly created tokens, which do not yet have an established value, at the launch of a new blockchain project or cryptocurrency. Before the actual network launch, the number of tokens to be generated and the method of their distribution are predetermined. What are the tax implications of receiving tokens under the genesis allocation?
Genesis Allocation of Tokens
The genesis allocation process can involve various forms of token distribution, treating them as cryptocurrencies. Often, a significant portion is allocated to the team that created the project as a form of compensation for their work and commitment. Tokens may also be distributed during early funding rounds, such as Initial Coin Offerings (ICOs), where investors receive them in exchange for financial contributions. Some tokens may be reserved for the project’s further development, including future initiatives such as marketing, technological advancements, or strategic partnerships. Certain projects allocate tokens to their user community as an incentive to engage with the network or contribute to its development. In Proof-of-Stake consensus systems, some tokens may be reserved as rewards for validators who secure the network.
Genesis allocation is a crucial moment for any project since the method of token distribution can influence its future development, stability, and trustworthiness.
Genesis Allocation of Tokens and Taxes
A taxpayer who was set to receive a batch of newly created tokens from an issuer under the genesis allocation sought clarification from the Director of the National Tax Information (KIS) on whether this allocation would generate taxable income, which should only be taxed upon their sale. The taxpayer also inquired whether they would be required to pay inheritance and donation tax. Regarding the latter, the taxpayer argued that token creation and trading are aimed at generating economic benefits, so there can be no question of gifting the fruits of this activity to anyone. Thus, the tokens received under the genesis allocation should not be classified as a donation, nor should they be considered inheritance, a bequest, servitude, or any other title listed in Article 1(1) of the Act on Inheritance and Donation Tax (u.p.s.d.).
Economic Risk of Investing in Tokens
The taxpayer clarified that at the moment of receiving tokens under the genesis allocation, it is impossible to determine a measurable financial benefit. The issuance of tokens by the issuer to other entities is necessary for the token, as a cryptocurrency, to enter circulation in the virtual currency market. This is an essential step in launching a new blockchain. At this stage, the token’s value cannot be determined. Additionally, there is a possibility that the entire venture may fail, and the received tokens may never acquire any value.
Refusal of Interpretation
The tax authority decided not to consider the taxpayer’s request for an interpretation. The Director of KIS stated that the taxpayer had not sufficiently clarified the factual circumstances. When asked for further details, the applicant did not specify whether the acquisition of tokens under the genesis allocation occurred under any of the titles listed in Article 1(1) of the u.p.s.d. Moreover, the taxpayer could not determine and assign a specific value to the token at the time of acquisition. Thus, the authority lacked the necessary data to issue an interpretation (decision of April 12, 2024, ref. 0113-KDIPT2-3.4011.854.2023.7.IR, 0111-KDIB2-2.4015.143.2023.7.DR).
Court Had a Different Opinion
The Provincial Administrative Court in Kraków ruled that the tax authority had sufficient data to issue an interpretation. The taxpayer was not inquiring about factual matters but rather about the legal status of token transfers under the genesis allocation. The request aimed to confirm that, in this transaction, income tax liability would arise only upon the sale of the tokens and that it would not trigger an obligation under inheritance and donation tax. The authority was simply required to state whether, in its view, the taxpayer’s position was correct. However, in its ruling, the authority failed to explain why it deemed the taxpayer’s statement insufficient (judgment of July 25, 2024, ref. I SA/Kr 492/24).
Summary
Although the tax authority avoided confirming the taxpayer’s stance in this case, in a separate matter concerning the genesis allocation of newly created tokens, it acknowledged that income would arise only upon their sale (interpretation of May 27, 2024, ref. 0111-KDIB1-1.4010.128.2024.2.MF). However, in this interpretation, the Director of KIS did not address whether the transaction should be classified as a donation. This distinction is crucial not only for determining whether the transaction is subject to inheritance and donation tax but also for establishing the taxable base for income tax upon the sale of the virtual currency. If a token is acquired as a donation, no acquisition cost is recognized, meaning that the 19% tax would be calculated based on the full sale price.
Author: Robert Nogacki, legal counsel, managing partner, Skarbiec Law Firm, specializing in legal, tax, and strategic advisory services for entrepreneurs.
Source: https://managerplus.pl/podatkowe-konsekwencje-genesis-allocation-interpretacja-kis-i-wyrok-wsa-45037
