TaxWraps: Tokenization - Your Financial Christmas Gift Unwrapped

• Tokenizing Assets and the Potential Growth of TaxWraps
• Increasing Institutional Interest in Crypto
• Understanding TaxWraps
• The Concept of a Tokenized Asset Fund (TAF)
• Benefits of TaxWraps

Tokenizing Assets and the Potential Growth of TaxWraps

Asset tokenization, a remarkable concept in the current cycle of blockchain development, was first introduced in Dacoinmister's Second Bitcoin$42,260 -0.64% Whitepaper in 2012. This document proposed the creation of MasterCoin as a layer built over the Bitcoin network. In 2014, Tether$1.000 -0.12%, the first tokenized fiat stablecoin, was launched. The overall market valuation for tokenized assets currently exceeds $200 billion, comprising $128 billion in stablecoins and $1.3 billion in diverse real-world assets such as U.S. Treasuries, real estate, and debt.

Increasing Institutional Interest in Crypto

As institutional interest in crypto continues to rise, tokenization is expected to experience exponential growth in 2024. This article intends to introduce TaxWraps, a novel concept that could potentially enhance the growth of tokenization.

Understanding TaxWraps

To comprehend the function of TaxWraps, a basic understanding of dividend taxation is required. When companies distribute profits in the form of non-qualified dividends, recipients incur immediate tax liabilities. Exchange-Traded Funds (ETFs) are a tool utilized to defer these tax obligations. ETFs often reinvest dividends back into the fund, permitting value growth to occur tax-deferred until investors decide to sell their ETF shares. The purpose of TaxWraps is to extend this ETF-style deferral mechanism through tokenization.

The Concept of a Tokenized Asset Fund (TAF)

Consider a scenario involving a Tokenized Asset Fund (TAF). A family office seeking to reduce their tax burden could transfer income-generating assets to TAFs in return for tokens that represent their ownership in the trust. Similar to ETFs, the value of these tokens is derived from the assets pool within the fund.

Income generated by the stocks/assets results in the fund acquiring more of the underlying asset (e.g., reinvesting the dividends), increasing the value of the existing token pool. When the family office decides to liquidate its holdings, the tokens can be sold or burned. At this stage, only the overall gains or losses are considered for tax purposes.

Benefits of TaxWraps

While avoiding the intricate details of tax codes and the structuring of TAFs, this model could serve as a beacon of tax efficiency achieved through tokenization. TAFs can delay tax liabilities associated with investing in digital assets and align with long-term wealth preservation strategies previously only available through ETFs/ETNs and other structured products. Tokenization could be seen as a method to democratize ETF-like products.

The Lindy Labs team, responsible for the wealth management platform Sandclock, has been researching TaxWraps. Along with tools like total return swaps, dividend swaps, and ETNs, they aim to create a derivative portfolio to maximize tax efficiencies for family offices and high net worth individuals through tokenization.

TaxWraps offer an exciting combination of modern technology and existing tax law through ETF-style wrappers. This approach could power the next significant wave of adoption and growth of tokenization.

Edited by Jonathan Stoker