On May 18, Bloomberg cited informed sources reporting that the SEC may soon issue an "Innovation Exemption" for tokenized equities, enabling crypto platforms to trade on-chain versions of publicly listed stocks. These tokens could circulate on decentralized platforms without requiring approval or endorsement from public companies and may not confer traditional shareholder rights such as voting or dividend entitlements.

Although the SEC has paused progress due to opposition from parts of Wall Street, this move remains a core component of Chairman Paul Atkins’ “Project Crypto” initiative since his appointment. Yet, as the path ahead is clearly fraught with challenges, the momentum toward realization is undeniable. For the RWA market, this signals a highly promising development. On-chain U.S. equities with potential scale in the trillions—offering 24/7 trading, instant settlement, fractional ownership, stablecoin payments, and elimination of traditional brokers or banks—could serve as the proving ground for true convergence between DeFi and TradFi, acting as a catalyst to ignite the next crypto bull run.

But the closer these on-chain equities mirror real-world stocks, the less likely they are to be merely an upgrade in trading experience. As long as the underlying assets remain linked to real securities or their exposures, traditional financial rules—on taxation, rights, custody, inheritance, and disclosure—will not vanish simply because the asset is tokenized. Previously, these responsibilities were distributed across broker-dealers, custodians, clearinghouses, tax reporting systems, and investor protection frameworks. Once stocks become tokens entering wallets, AMMs, lending protocols, and cross-border flows, those liabilities must be redefined within a new on-chain architecture.

One of the most critical issues is taxation. Do on-chain U.S. equities truly bypass U.S. dividend taxes? When non-U.S. users purchase exposure to U.S. equities via stablecoins, are they still subject to cross-border information exchange under CRS or CARF? If the SEC’s Innovation Exemption enables U.S. domestic participation, who bears responsibility for Form 1099-DA, wash sale rules, cost basis tracking, and IRS reporting?

These “invisible ledgers” are precisely what the SEC’s Innovation Exemption aims to test in practice.

One: 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 currently available are fundamentally cross-border exposure instruments designed for non-U.S. users, with almost no access granted to domestic U.S. users:

The reason is not obscure: once opened to U.S. residents, on-chain equities would no longer face only product design challenges but full integration into the U.S. securities regulatory framework. Whether under the registration or exemption requirements of the 1933 Securities Act, or the obligations tied to retail distribution—including broker-dealer licensing, Reg ATS, Reg NMS, KYC, AML, tax reporting, and investor protection—the compliance, issuance, and distribution costs would rise significantly. Thus, many products opt to launch in non-U.S. markets and avoid direct entry into the U.S. retail distribution system.

The SEC’s Innovation Exemption seeks to reopen this door previously closed to U.S. users. According to Bloomberg’s report, three key elements were presented simultaneously: third-party tokens can be issued without issuer consent, bypass full broker-dealer registration, and be traded on DeFi platforms. Hester Peirce has been a major proponent of this direction, and Paul Atkins formally incorporated it into the “Project Crypto” framework in November 2025.

Yet this does not mean tokenized stocks will escape securities regulation. In a joint statement on January 28, the SEC explicitly affirmed that securities, regardless of form, remain securities. The Innovation Exemption does not alter the legal classification of on-chain U.S. equities; its primary impact will be on user structure. Should U.S. domestic users be included, the product’s tax, compliance, and investor protection frameworks will inevitably evolve.

Two: What Kind of “On-Chain U.S. Equity” Are You Buying?

The term “on-chain U.S. equity” is easily misleading, as it bundles vastly different products under one label. These products may differ significantly in legal classification, underlying asset structure, user rights, and tax treatment.

Some products resemble on-chain instruments backed by real stocks—such as xStocks, which are 1:1 backed tokenized equities where the issuing entity or related structure holds actual shares and maps economic rights into token form. Others function more like derivative contracts; Robinhood EU Stock Tokens exemplify this category. Robinhood’s official page explicitly states that Stock Tokens are derivatives under MiFID II and do not grant users rights to the underlying stock or ETP.

Both products are informally labeled “on-chain U.S. equities,” yet their legal structures differ fundamentally, with tax implications potentially varying by a factor of two or more. If the user holds an instrument closely aligned with real stock equity, issues like dividends, withholding tax, custody, potential U.S. estate tax, corporate actions, and bankruptcy isolation cannot be avoided. But if the user holds a derivative contract, the question shifts: should returns be classified as capital gains, derivative income, or another contractual yield? Does the user have any rights to the underlying stock? And in case of issuer or service provider failure, what is the recovery pathway? These cannot be interpreted through conventional equity ownership models.

Thus, before discussing whether investing in on-chain U.S. equities requires tax payment, one must first ask a foundational question: Is what you’re holding actually a stock? This directly determines subsequent tax treatment.

Three: CRS and CARF Are Redefining the Tax Boundary for Non-U.S. Users in On-Chain Equities

Many non-U.S. users harbor an intuition: since on-chain U.S. equity exposure is acquired via stablecoins rather than traditional brokerage accounts, does it therefore bypass the conventional tax system?

The answer is not so straightforward.

Consider a Chinese tax resident investing in U.S. equities through overseas brokers like Interactive Brokers or Tiger Securities. Typically, such investors face dual tax jurisdictions—one in the U.S., one in their country of residence. In the U.S., capital gains from selling U.S. equities are generally not taxed directly by the IRS for non-resident aliens; however, dividends are typically subject to a default 30% withholding tax. With proper W-8BEN filing and application of the U.S.-China tax treaty, this rate can often be reduced to 10%. Back in China, individuals are generally required to declare foreign-source income. Dividends are usually treated as “interest, dividends, and bonuses,” with the U.S. withholding tax deductible per applicable rules. Gains from foreign stock sales are also typically taxable in China. For traditional U.S. equity investments, tax outcomes usually result from the interplay between U.S. withholding arrangements and the tax rules of the taxpayer’s home jurisdiction.

If a user trades xStocks via Kraken or similar KYC-compliant platforms, the platform retains user identity, account details, and transaction records. Such transactions remain within reach of regulatory oversight and information reporting systems. Compared to fully non-custodial P2P transfers, these platform-based routes are more likely to fall under CRS, CARF, or local tax reporting frameworks in the future. Simply put, CRS primarily covers traditional financial accounts, while CARF increasingly targets on-chain asset service providers. As CARF advances, crypto asset service providers are becoming new reporting nodes. Jurisdictions including the UK, EU, Japan, and South Korea are moving quickly, while Hong Kong, Singapore, Switzerland, and the UAE have already entered follow-up exchange timelines. Visibility of on-chain U.S. equities hasn’t disappeared—it has merely shifted from brokerage accounts to platforms, wallet addresses, and transaction paths.

Naturally, short-term execution gaps remain for non-KYC, P2P, self-custody routes. Tax authorities cannot overnight cover all on-chain transactions. But for users accessing on-chain equities through KYC platforms, this arbitrage space is narrowing.

The xStocks dividend mechanism offers a clear example. Kraken’s official FAQ explicitly states that the rebasing calculation uses net dividends after deducting the 30% U.S. withholding tax. Thus, xStocks does not circumvent U.S. dividend taxation—it processes the tax upfront and embeds the post-tax result into the rebasing logic. Users may not see a tax form directly as in traditional brokerage accounts, but the token adjustments they observe are already net of tax.

This is the first counterintuitive insight about on-chain equities:

It doesn’t eliminate taxes—it hides them within product mechanics and platform structures.

For non-U.S. users, the real change lies in how tax treatment and information reporting are presented. Under traditional pathways, obligations are identified via brokerage accounts, tax forms, and CRS. In the on-chain world, these relationships manifest more through product design, KYC platforms, CARF reporting, and individual self-declaration. The tax liability itself hasn’t vanished just because the asset is on-chain.

Four: With U.S. Domestic Users Entering, On-Chain Equities Return to the Full IRS Tax Framework

If non-U.S. users confront CRS, CARF, U.S. dividend withholding, and reporting obligations in their home countries, then U.S. domestic users face an entire, more direct IRS tax regime. This is the central challenge that on-chain equities must address after the SEC’s Innovation Exemption alters the user base.

First is capital gains tax. In traditional brokerage accounts, U.S. users buying and selling stocks trigger record-keeping by brokers: purchase price, sale price, holding period, dividends, and cost basis—all compiled into year-end tax forms sent to both the user and the IRS. Short-term capital gains are taxed at ordinary income rates; long-term gains benefit from lower long-term capital gains rates. While complex, this system is supported by mature account and reporting infrastructure.

On-chain environments fracture this system further. If tokenized stocks trade only within compliant platforms, tax records remain relatively manageable. But once they enter wallets, AMMs, lending protocols, cross-chain bridges, and yield strategies, cost basis, holding periods, and taxable events rapidly become complex. A single swap may constitute a disposition, entering or exiting liquidity pools may generate new tax events, and activities like collateralized borrowing, liquidation, cross-chain wrapping, and re-staking may alter a user’s tax profile. Tasks once automatically handled by backend systems in traditional brokerage accounts now scatter across multiple addresses, protocols, and transaction paths on-chain.

However, the U.S. digital asset reporting framework via Form 1099-DA is gradually bringing certain digital asset transactions into a clearer information reporting system. For tokenized securities deemed stocks or securities, IRS forms already include fields related to wash sale loss disallowance. If a particular type of on-chain U.S. equity is classified as a security or stock-like asset, it won’t be treated as a generic crypto token but may be pulled back into the securities tax regime.

This matters especially for DeFi users. Historically, most crypto assets are treated as property—not securities—under U.S. tax law, meaning wash sale rules don’t automatically apply. A common strategy among crypto investors has been to sell a losing asset, confirm the loss, and quickly repurchase it to harvest tax losses. But if tokenized stocks are classified as stocks or securities, such maneuvers may fall under wash sale rules, rendering familiar DeFi tax strategies ineffective when applied to on-chain equities.

A deeper layer involves inheritance planning.

For U.S. residents, stock holdings naturally enter the estate tax framework. If on-chain equities represent securities or related exposures, their tokenized form doesn’t exempt them from estate tax discussion. Worse, self-custody introduces novel problems absent in traditional brokerage accounts: How are private keys inherited? How are wallet addresses integrated into estate planning? How do heirs prove ownership and claim assets? How is asset valuation determined? How are relevant records explained to tax authorities?

In traditional finance, brokerages, banks, and custodians provide relatively clear asset records and inheritance pathways. In self-custody environments, if private keys aren’t properly arranged, assets may technically be irrecoverable. If keys are included in wills, trusts, or other succession plans, assets re-enter the estate declaration and tax processing pipeline. Thus, self-custody isn’t a way to evade estate tax—it merely complicates the relationship between asset control, inheritance planning, and tax reporting.

This is the most realistic challenge for on-chain equities entering the U.S. domestic market: user experience can be streamlined at the front end, but tax records and inheritance arrangements cannot be erased. A user may execute a tokenized stock swap in a wallet, but the underlying cost basis, holding period, gain/loss calculations, reporting obligations, and future inheritance path still require someone to document, explain, and assume responsibility.

If these questions remain unanswered, on-chain equities will struggle to become mass-market products for U.S. domestic users. They may offer 24/7 trading, stablecoin settlement, and AMM liquidity—but as long as tax records, cost basis, reporting duties, and inheritance mechanisms remain unclear, they cannot fully replicate the institutional functions of the traditional stock market.

With U.S. domestic users onboard, on-chain equities cease to be a simple “stock-on-chain” proposition—they become a story of how the IRS, wallets, trading platforms, and DeFi protocols collectively rebuild an on-chain securities tax infrastructure.

Five: Conclusion – Tokenization Didn’t Take Taxes Off-Chain

Returning to the larger question behind the SEC’s Innovation Exemption: Will future financial markets still need so many intermediaries?

On-chain equities suggest the answer: intermediaries won’t disappear—they’ll simply reappear in a new form.

Previously, stock trading was underpinned by a well-established division of labor: broker-dealers managed accounts and client relationships, custodians and clearinghouses handled assets and settlement, exchanges enforced market rules, tax forms recorded gains and cost basis, and investor protection frameworks managed disputes and risk boundaries. Users saw a simple U.S. equity account, but behind it lay a complex financial infrastructure.

On-chain equities dismantle this structure. Accounts may become wallet addresses, trades may flow into AMMs, assets may be held by issuers or custodial structures, and tax records may be dispersed across platforms, protocols, and user-submitted declarations. Intermediaries haven’t died—they’ve migrated from traditional broker-dealers and clearinghouses to issuers, KYC platforms, CASPs, wallets, frontends, and reporting frameworks.

But tokenization hasn’t detached from the real financial system. The closer on-chain equities resemble real stocks, the more they must answer the very same questions that real stocks already face: Who collects the tax? Who verifies identity? Who confirms rights? Who bears custody risk? Who arranges inheritance? What risk disclosures must users see before transacting?

The SEC’s Innovation Exemption is not a “tax-free pass” for tokenized stocks. Instead, it will place a more comprehensive compliance net over on-chain equities for the first time. Tokenized stocks bring stocks on-chain—but they do not take taxes off-chain. Behind every on-chain transfer may lie an invisible 1099 form and an unprinted estate tax bill.

Note: This article is for market research and product structure analysis and does not constitute legal, tax, or investment advice. Specific tax treatment depends on the user’s tax residency status, product legal structure, transaction path, and local laws.

Written by: Lacie Zhang, Researcher at Bitget Wallet