After the SEC’s Innovation Exemption: Who Will Collect Taxes on On-Chain U.S. Stocks?
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After the SEC’s Innovation Exemption: Who Will Collect Taxes on On-Chain U.S. Stocks?
On-chain U.S. stocks do not have a “tax-exemption pass”; instead, taxes are embedded within the product mechanism.
Navigating Web3 tides with focused insightsBy Lacie Zhang, Researcher at Bitget Wallet
On May 18, Bloomberg cited anonymous sources reporting that the U.S. Securities and Exchange Commission (SEC) may soon issue an “Innovation Exemption” for tokenized stocks—potentially as early as this year—allowing crypto platforms to trade on-chain versions of publicly listed company shares. These tokens could circulate on decentralized platforms, might not require issuer consent or endorsement, and would not necessarily confer traditional shareholder rights such as voting or dividend entitlements.
Although the SEC has temporarily paused its advancement due to opposition from certain Wall Street institutions, this initiative remains a cornerstone of “Project Crypto,” launched under newly appointed SEC Chair Paul Atkins. As expected, progress will be arduous—but inevitable. For the real-world asset (RWA) market, this development signals a profoundly imaginative turning point. Around-the-clock trading, instant settlement, fractional ownership, stablecoin payments, and the elimination of traditional brokers or banks could unlock a multi-trillion-dollar on-chain U.S. equity market—one poised to serve as a true testing ground bridging DeFi and TradFi, and potentially catalyzing the next crypto bull run.
Yet the closer tokenized U.S. equities get to replicating real stocks, the less they can be viewed merely as upgraded trading experiences. So long as their underlying assets remain tied to actual securities—or exposure thereto—traditional financial rules governing taxation, rights, custody, inheritance, and disclosure will not vanish simply because those assets are “on-chain.” Historically, these responsibilities were distributed across brokers, custodians, clearing agencies, tax-filing systems, and investor protection frameworks. Once stocks become tokens—and flow into wallets, AMMs, lending protocols, and cross-border networks—those obligations must be re-allocated within new on-chain architectures.
Among the most critical questions is taxation. Do on-chain U.S. equities bypass U.S. dividend taxes? When non-U.S. users purchase U.S. equity exposure via stablecoins, do they still fall under the Common Reporting Standard (CRS) or the Crypto-Asset Reporting Framework (CARF)? And if the SEC’s Innovation Exemption permits participation by U.S. domestic users, who bears responsibility for IRS Form 1099-DA reporting, wash sale compliance, cost-basis tracking, and related tax filings?
These “invisible ledgers” represent precisely what the SEC’s Innovation Exemption will truly test post-implementation.
I. On-Chain U.S. Equities Have Historically Been “Cross-Border Exposure Products for Non-U.S. Users”
The dominant on-chain U.S. equity products available today are, in essence, cross-border exposure vehicles designed exclusively for non-U.S. users—and almost universally exclude U.S.-based retail investors:
- xStocks (Backed Finance × Kraken): Explicitly excludes the U.S., Canada, and other restricted jurisdictions.
- Robinhood EU Stock Tokens: Available only within the European Union.
- RWA platforms such as Securitize and Ondo: Primarily distribute under Regulation D private placements—not open to U.S. retail investors.
The rationale is straightforward: serving U.S. domestic users transforms the challenge from one of product design into full compliance with the U.S. securities regulatory framework. Requirements—including registration or exemption under the 1933 Securities Act, broker-dealer registration, Regulation ATS, Regulation NMS, KYC/AML obligations, tax reporting, and investor protection mandates—significantly raise regulatory, issuance, and distribution costs. Consequently, many projects opt to launch first in non-U.S. markets without directly entering the U.S. retail distribution system.
The SEC’s Innovation Exemption aims to reopen this door for U.S. users. Per Bloomberg’s report, three key elements have been placed on the table simultaneously: third-party tokens need not obtain issuer consent; full broker-dealer registration is unnecessary; and trading on DeFi platforms is permitted. Hester Peirce has long championed this direction, and Paul Atkins formally integrated it into Project Crypto’s broader framework in November 2025.
This does not mean tokenized stocks escape securities regulation. In its joint statement on January 28, the SEC reaffirmed unequivocally that securities retain their legal classification regardless of form. The Innovation Exemption does not alter the fundamental legal nature of on-chain U.S. equities; rather, its greatest impact lies in reshaping the user base. If U.S. domestic users gain access, the associated tax, compliance, and investor protection frameworks will inevitably evolve in tandem.
II. What Kind of “On-Chain U.S. Equity” Are You Actually Buying?
The term “on-chain U.S. equity” is highly misleading—it lumps together fundamentally different products under a single label. Legal classification, underlying asset structure, user rights, and tax treatment can vary significantly across offerings.
Some products resemble on-chain certificates backed by real shares—for instance, xStocks’ 1:1 backed tokenized stocks. Their core mechanism involves issuers or associated entities holding actual equities and mapping economic rights onto tokens. Others function more like derivative contracts; Robinhood EU Stock Tokens serve as a representative example. Robinhood’s official page explicitly states these tokens qualify as derivatives under MiFID II and do not confer any rights to the underlying stock or ETP.
Both may loosely be labeled “on-chain U.S. equities” by the market—but their legal structures differ markedly, and tax outcomes may diverge by over 100%. Holding tokens closely mirroring genuine equity exposes users to issues including dividends, withholding tax, custody, potential U.S. estate tax, corporate actions, and bankruptcy remoteness. By contrast, derivative-based tokens shift the focus to questions such as: Is the return classified as capital gains, derivative income, or something else entirely? Do users hold any rights to the underlying stock? And where does recourse lie if the issuer or service provider fails? These cannot be interpreted through conventional equity-holding frameworks.
Hence, before debating whether “trading on-chain U.S. equities triggers tax liability,” a more foundational question must be asked first: Is what you’re buying actually a stock? This determination directly dictates subsequent tax treatment.
III. CRS and CARF Are Redefining the Tax Boundaries for Non-U.S. Users of On-Chain U.S. Equities
Many non-U.S. users assume a simple intuition about on-chain U.S. equities: Since they’re purchased not through traditional brokerage accounts but via stablecoins on-chain, do they therefore bypass conventional tax systems?
The answer is far less straightforward.
Take Chinese tax residents investing in U.S. equities via overseas brokers such as Interactive Brokers or Tiger Securities. They typically face two layers of tax obligations—one in the U.S., another in their country of tax residence. In the U.S., non-resident aliens generally aren’t subject to U.S. capital gains tax on sales of U.S. equities; however, U.S. dividends are typically subject to a 30% withholding tax—reduced to 10% under the U.S.-China tax treaty upon submission of Form W-8BEN. Back home in China, residents remain obligated to declare foreign-sourced income: dividends may be taxed under the “interest, dividends, and bonus income” category, with U.S.-withheld amounts eligible for credit against Chinese tax liability; capital gains from foreign stock sales also fall within taxable scope. For traditional U.S. equity investments, final tax outcomes hinge on the interplay between U.S. withholding arrangements and domestic tax rules.
If users trade xStocks via KYC-compliant platforms like Kraken, those platforms retain full records of identity, accounts, and transactions—placing such activity squarely within reach of regulatory oversight and information-reporting regimes. Compared to fully non-custodial peer-to-peer transfers, these platform-based pathways are far more likely to fall under CRS, CARF, or local tax-reporting frameworks. Simplified: CRS primarily covers traditional financial accounts, while CARF progressively extends coverage to on-chain asset service providers. As CARF rolls out, crypto asset service providers (CASPs) are emerging as new reporting nodes—progress is notably advanced in the UK, EU, Japan, and South Korea, with Hong Kong, Singapore, Switzerland, and the UAE already scheduled for subsequent information exchanges. Visibility into on-chain U.S. equities hasn’t disappeared—it has merely shifted from brokerage accounts to platforms, wallet addresses, and transaction trails.
Certainly, short-term enforcement gaps persist for non-KYC, P2P, and self-custodial routes. Tax authorities cannot instantly monitor every on-chain transaction. Yet for users accessing on-chain U.S. equities via KYC platforms, this arbitrage window is rapidly narrowing.
The dividend mechanism of xStocks offers a particularly illustrative case. Kraken’s official FAQ explicitly states: “The rebasing calculation for xStocks uses net dividends after a 30% U.S. withholding tax.” In other words, xStocks does not circumvent U.S. dividend tax—it applies the tax first, then embeds the post-tax amount into the rebasing formula. Users may not receive formal tax statements like those issued by traditional brokers, but the token adjustments they observe reflect net-of-tax values.
This is the first counterintuitive truth about on-chain U.S. equities:
Taxation doesn’t disappear—it gets embedded into product mechanics and platform architecture.
For non-U.S. users, what truly changes with on-chain U.S. equities is the *presentation* of tax obligations and information reporting. Under traditional pathways, those duties manifest via brokerage accounts, tax forms, and CRS reporting. In the on-chain world, the same obligations surface through product design, KYC platforms, CARF reporting, and user-initiated declarations—yet the underlying tax liability itself remains unchanged by the act of tokenization.
IV. With U.S. Domestic Users Entering the Market: On-Chain U.S. Equities Will Be Fully Reintegrated Into the IRS Tax System
If non-U.S. users contend with CRS/CARF reporting, U.S. dividend withholding, and home-country tax filing, U.S. domestic users confront the full, unfiltered IRS tax regime. This represents the central question the SEC’s Innovation Exemption must resolve once it reshapes the user base.
First, capital gains tax. In traditional brokerage accounts, U.S. investors benefit from automated recordkeeping: brokers track acquisition cost, sale price, holding period, dividends, and cost basis—and issue year-end tax forms to both users and the IRS. Short-term gains are taxed as ordinary income; long-term gains benefit from preferential rates. Though complex, this system relies on mature account infrastructure and standardized reporting.
The on-chain environment fragments this system further. If tokenized stocks trade solely within compliant platforms, tax recordkeeping remains relatively manageable. But once tokens enter wallets, AMMs, lending protocols, cross-chain bridges, and yield strategies, cost basis, holding periods, and taxable events quickly multiply. A single swap may constitute a disposal; entering or exiting liquidity pools may trigger new taxable events; collateralized borrowing, liquidations, cross-chain wrapping, and re-staking all risk altering users’ tax positions. Functions previously handled automatically by back-office systems now scatter across multiple addresses, protocols, and transaction paths.
Nonetheless, the IRS’s emerging 1099-DA reporting framework for digital asset transactions is gradually incorporating certain crypto activities into clearer information-reporting requirements. For tokenized securities classified as stocks or securities, IRS forms already include fields for reporting wash-sale disallowed losses. Should a given on-chain U.S. equity be deemed a stock or security, it will no longer be treated as a generic crypto token—but instead pulled back into the established securities tax regime.
This matters especially for DeFi users. Historically, most crypto assets have been treated as property—not securities—under U.S. tax law, meaning wash-sale rules do not automatically apply. Many crypto traders routinely sell losing positions to realize tax losses, then repurchase them shortly thereafter—a practice known as “tax-loss harvesting.” However, if tokenized stocks are classified as stocks or securities, such maneuvers may fall squarely under wash-sale rules. Familiar crypto tax strategies may thus prove inapplicable to on-chain U.S. equities.
A deeper layer involves inheritance planning.
For U.S. domestic users, equity holdings already fall under the estate tax regime. Tokenized U.S. equities representing securities rights or exposures won’t magically escape estate tax scrutiny just because they exist as tokens. On the contrary, self-custody introduces novel complications absent in traditional brokerage accounts: How are private keys inherited? How are wallet addresses incorporated into estate planning? How do heirs verify and claim assets? How is valuation determined? And how are relevant records substantiated for tax authorities?
In traditional finance, brokerage accounts, bank accounts, and custodians provide relatively clear asset records and inheritance pathways. In self-custodial environments, however, failure to properly arrange private-key succession risks rendering assets technically irrecoverable. Conversely, if private keys are included in wills, trusts, or other estate instruments, assets re-enter formal estate reporting and tax processing. Thus, self-custody doesn’t “bypass estate tax”—it merely complicates the relationship among asset control, inheritance planning, and tax reporting.
This is the most pragmatic challenge facing on-chain U.S. equities entering the U.S. domestic market: front-end trading experience can be streamlined, but tax recordkeeping and inheritance arrangements cannot be erased by UI design. A user may execute a tokenized stock swap seamlessly in their wallet—but behind that action lie unresolved questions of cost basis, holding period, profit/loss computation, reporting obligations, and future inheritance logistics—all requiring documentation, interpretation, and accountability.
Without answers to these questions, on-chain U.S. equities cannot evolve into mainstream products for U.S. domestic users. They may offer 24/7 trading, stablecoin settlement, and AMM liquidity—but unless tax reporting, cost-basis tracking, disclosure duties, and inheritance pathways are clearly resolved, they cannot fully replicate the institutional functionality of traditional equity markets.
With U.S. domestic users onboard, on-chain U.S. equities cease to be merely “stocks moved onto chains.” Instead, they become a story about how the IRS, wallets, trading platforms, and DeFi protocols collectively rebuild an on-chain securities tax infrastructure.
V. Conclusion: Tokenization Doesn’t Decouple Assets From Taxation
Returning to the broader question underlying the SEC’s Innovation Exemption: Will future financial markets still need so many intermediaries?
On-chain U.S. equities suggest intermediaries won’t vanish—they’ll simply take new forms.
Historically, stock trading relied on a mature division of labor: brokers managed accounts and client relationships; custodians and clearing agencies handled assets and settlement; trading venues enforced market rules; tax forms documented gains and cost basis; and investor protection frameworks governed dispute resolution and risk boundaries. Users saw only a simple U.S. equity account—but behind it lay an intricate financial infrastructure.
On-chain U.S. equities dismantle this architecture. Accounts become wallet addresses; trades move into AMMs; assets may be held by issuers or custodial structures; tax records disperse across platforms, protocols, and user-submitted filings. Intermediaries haven’t died—they’ve migrated from traditional brokers and clearinghouses to issuers, KYC platforms, CASPs, wallets, frontends, and reporting frameworks.
Yet tokenization does not sever ties to real-world finance. The closer on-chain U.S. equities approach real stocks, the more they must confront the same foundational questions real stocks have always raised: Who collects the tax? Who verifies identity? Who confirms rights? Who bears custody risk? Who designs inheritance pathways? And what risk disclosures must users see before transacting?
The SEC’s Innovation Exemption isn’t a “tax-free pass” for on-chain stocks. Rather, it represents the first systematic deployment of a comprehensive compliance framework over the on-chain U.S. equity ecosystem. Tokenized stocks bring equities onto chains—but they leave taxation firmly rooted in reality. Behind every on-chain transfer may lurk an invisible Form 1099—and an unprinted estate tax bill.
Note: This article presents market research and product-structure analysis only. It does not constitute legal, tax, or investment advice. Specific tax treatment depends on the user’s tax residency status, the legal structure of the product, transaction pathway, and applicable local laws.
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