The tokenization of physical goods in indirect taxes

Since the arrival of Bitcoin, with its decentralized registration technology (or DLT) and its open programming code, new digital businesses have proliferated hand in hand with the smart contracts, whose programmable clauses are executed automatically without the need for intermediaries.

The tokenization of physical assets arises from the fruitful use of these smart contracts, so it has quickly become a growing trend in the digital economy, since they offer the possibility of increasing the accessibility, liquidity and efficiency of assets, and can have a significant impact on the way business is conducted and invested in the future.

These economic events referring to assets represented by tokens, could fall under the orbit of indirect taxes, depending on certain factors, such as the type of asset being tokenized, the intended use of the token, the country where the transaction is made and the legal status of the buyer and seller of the token.[1]


What is a token?

A token is a unit of account that operates within the blockchain, and which represents a certain amount of goods or services registered on a blockchain platform.

The best and most used way to exemplify a token is through its analogy with casino chips. These operate as a unit of value represented with certain formats and colors and whose use is limited to the casino ecosystem, where everyone agrees on their use and value.

The characterization made by the OECD in its document “TAXING VIRTUAL CURRENCIES. An Overview of Tax Treatments and Emerging Tax Policy Issues” [2] mention the following types of tokens:

  1. Payment Tokens: intended to be used primarily as a medium of exchange for goods or services. These are cryptocurrencies or virtual currencies.
  2. Utility Tokens or utility tokens: Their main use is to facilitate the exchange or access to specific goods or services. They can, for example, act as a license to allow the holder to access a particular service, a prepayment or a voucher for a good or service, even if they are not yet available.
  3. Security Tokens or Value Tokens: Designed as a marketable asset held for investment purposes and classified as a security under applicable laws. Within this category some people call Equity Token to those who support a traditional asset, such as shares or real estate.

However, this classification should not be understood exclusively in a pure state. Currently, thanks to the evolution of the blockchain and their smart contracts, it is possible to program tokens with combined clauses and conditions, in the spirit of arousing greater interest in investors.


The tokenization of assets

The term “tokenization” is commonly used to refer to the virtualization of physical goods through blockchain.

In this sense, tokenizing an asset is basically generating a digital representation of it, using a token created by a smart contract that reflects the value of the asset because it will have as support the represented asset itself. (CEAT, 2021) [3]

Under normal market circumstances, the price of the token is equal to the value of the underlying goods or services. Any difference between the price of the token and the value of its underlying provides its holder with opportunities for arbitrage.[4]

In this way, a property, a current or future harvest, the profits of a company, marketable securities, and almost all goods exposed to human creativity within the blockchain, can have their representation in tokens.

However, the shortage of regulatory frameworks at the global level can be considered a factor that increases the risk of fraud and manipulation, especially in new projects.[5]

Therefore, the function of the so-called “oracles” in the tokenization process becomes relevant. These are the bridge between the physical and the digital plane, since they are responsible for sending and verifying real-world information that is relevant to a blockchain or for a smart contracts. The participation of the oracle is necessary to ensure the correspondence of the token ( “onchain” environment) with the real asset (“offchain” environment). For example, in the case of grain tokenization, they are responsible for certifying the existence of grain storage by the producer.

Some authors[6] understand that the intermediary that has the most convenient regulatory framework for this is the guarantee trust, since the assets managed for the benefit of the token holders will be exempt from the individual and collective action of the creditors, both the trustee, and the  initial trustee (who initially transmits the underlying asset for tokenization), as well as the beneficiaries (the token holders).


The effect on indirect taxes

In general terms, indirect taxes fall on the supply of movable assets, services and final imports of goods and services[7].

The tokens, in themselves, are not within the definition of the object of the tax since they are not a movable thing or a service proper. However, the goods represented, their rights, or the services contained, could fall under the scope of taxation of indirect taxes such as VAT.

In this sense, utility tokens and security tokens digitally represent economic facts that could be taxable, to the extent that they fall within the object, the territoriality of the source is defined and are carried out by the legally defined subjects.

Since the tokens are not expressly indicated in the standard, it is essential to carry out a detailed functional analysis of the project in order to understand the underlying economic event and with it its probable tax framework.

Tokenization can encompass various underlying economic events with dissimilar treatments. It is not the same to sell a commodity in advance using tokens, as the rights to profits from shares of a multinational, to cite only two extremes.

Therefore, a thorough evaluation of the “White Paper” of the project (since it is the document that helps to summarize the main characteristics and technical specifications), and its functionality in the facts from the execution of the smart contracts (which are programmed to react automatically to the events recorded in the blockchain).

On the other hand, the territoriality of the tax is a factor that has a substantial impact on the taxability and should be taken into account in the specific analyses.

Following the general criteria, in the case of sale of movable goods, they must be located or placed in the territory of the country to be subject to the tax. For the services, they must be performed in the jurisdictional territory. If the services are performed abroad, the actual use or exploitation must be carried out in the country.


Final words

Given its recent consolidation, the tax treatment of tokenized assets in VAT is not specifically regulated in current regulations, and there are very few official interpretative pronouncements. In equitable terms, the treatment of tokenized goods and services should not differ from that received by the same economic event in a traditional process.

However, the versatility of the smart contracts allows creating an almost infinite universe of tokenized goods and services, so a strict regulation would be very difficult to implement.

Therefore, in order to mitigate the tax risk inherent to tokenization, the focus of the TAs could be oriented in two planes:

  1. Towards the functional analysis of each project, precisely defining factors such as the type of asset being tokenized, the intended use and the one that ultimately materializes, the country where the transaction is made and the legal status of the buyer and seller of the token.
  2. Focusing on the activity of intermediaries or “oracles”, given that these turn out to be the bridge between the underlying asset and the digital token, for which the regime and the responsibility in their actions should be regulated, in order to protect tax revenues and protect investors from possible frauds, through greater transparency and trust.

In summary, strengthening the legislative and procedural framework through appropriate regulations would allow to precisely address the risks of tax fraud, protect the investor, and would be vital to achieve a fair and equitable taxation in a world that becomes increasingly digital.


[1] “LA TOKENIZACION EN EL IVA.” (Micrositio Criptomonedas/Febrero 2023), Editorial Errepar. Author: Gabriel Alejandro Vadell –

[2] “TAXING VIRTUAL CURRENCIES. An Overview of Tax Treatments and Emerging Tax Policy Issues” Courtesy translation in: by Alejandro Aued, CEAT-FCE-UBA

[3] by Ana Julia Gavilán Benjamín Achával Juan José Zalazar German Fabris Diego D. Balbi, CEAT-FCE-UBA, 2021

[4] FIDEICOMISO, SECURITIZACIÓN Y REPRESENTACIÓN DIGITAL DE ACTIVOS (TOKENIZACIÓN) Authors: Fernández Madero, Nicolás – Recondo, María – Minerva, Diego N. – Krüger, Cristian – LA LEY – 2020

[5] CNV – Alerts the investing public about initial offers of virtual currencies or tokens


[7] We Recommend summary by Dario Gonzalez and Raul Zambrano VALUE ADDED TAX: ITS APPLICATION IN AMERICA in:

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