On May 18, Bloomberg reported that the SEC is preparing to issue an 'Innovation Exemption' for tokenized stocks, a move that would permit crypto platforms to trade blockchain-based versions of listed company equities. These digital assets could circulate on decentralized platforms without requiring the explicit consent of the underlying listed companies and might not confer traditional shareholder rights such as voting or dividend eligibility. While Wall Street institutions have voiced opposition, the SEC has opted to postpone further immediate action, viewing this initiative as a cornerstone of 'Project Crypto' under Chair Paul Atkins. This development signals a potential integration of DeFi and TradFi, offering 24/7 trading, instant settlement, and fragmented ownership capabilities that could unlock trillions of dollars in market value.

However, the proximity of these blockchain-based assets to traditional securities ensures that fundamental financial rules regarding taxation, custody, inheritance, and disclosure remain in force.

The transition of stocks into tokens and their subsequent entry into wallets, AMMs, and lending protocols necessitates a redefinition of responsibilities within the new blockchain framework. Historically, these duties were distributed among brokers, custodians, clearing agencies, and tax filing systems. Now, the critical question centers on taxation: can blockchain-based US stocks truly allow users to evade US dividend taxes? If non-US users purchase these assets using stablecoins, they may still face CRS or CARF cross-border information reporting requirements. Woofun AI notes that if the Innovation Exemption allows US residents to participate, the responsibility for filing 1099-DA forms, managing wash sales, determining cost bases, and submitting IRS reports must be clearly assigned within the new ecosystem.

Currently, most mainstream blockchain-based US stock products are restricted to non-US users to avoid the complex regulatory framework governing traditional securities markets. Opening these products to US residents would trigger requirements under the 1933 Securities Act, including registration or exemption obligations, broker-dealer rules, Reg ATS, Reg NMS, KYC, AML, and investor protection mandates. The SEC's Innovation Exemption aims to reopen this door, with Bloomberg citing three key considerations: third-party tokens traded on DeFi platforms without issuer consent, the advocacy of Hester Peirce, and the inclusion of this initiative in Project Crypto in November 2025. Despite this, the SEC clarified in a January 28 joint statement that securities remain securities regardless of form, meaning the exemption alters the user base but not the legal nature of the assets.

The term 'blockchain-based US stocks' encompasses diverse products with distinct legal properties and tax treatments. Some, like xStocks, function as 1:1 backed certificates representing economic rights, while others, such as Robinhood EU Stock Tokens, operate as derivative contracts under MiFID II without granting underlying asset rights. This distinction is vital for tax implications. If users hold equity-like tokens, they face issues regarding dividends, withholding taxes, custody, and potential US inheritance taxes. Conversely, derivative contracts raise questions about whether gains constitute capital gains or derivative income and what recourse exists against issuers. Woofun AI analysis suggests that many non-US users mistakenly believe using stablecoins bypasses the traditional tax system, yet dual tax obligations often persist for investors in jurisdictions like China.

For non-US tax residents, selling US stocks generally avoids direct capital gains tax in the US, but dividends are typically withheld at 30%, reducible to 10% with a completed W-8BEN form under the US-China tax treaty. In China, individuals must still file tax returns on overseas income, with dividend income taxed as 'interest, dividends, and bonuses,' allowing for deductions of US withholding. When trading xStocks through KYC platforms like Kraken, user identity and transaction records remain controlled, subjecting these activities to CRS, CARF, or local reporting systems. As CARF expands to include crypto asset service providers in regions like the UK, EU, Japan, and South Korea, the visibility of blockchain-based assets increases beyond traditional brokerage accounts.

For US residents, the introduction of blockchain-based stocks brings direct IRS tax system challenges, particularly regarding capital gains. In traditional brokerage accounts, brokers record purchase prices, sale prices, holding periods, and dividends, providing year-end tax returns. In a blockchain environment, these records become fragmented across wallets, AMMs, lending protocols, and cross-chain bridges. A single swap could trigger a disposal event, and entering liquidity pools or engaging in yield strategies could generate new tax obligations. The US 1099-DA reporting framework is gradually bringing these transactions under clearer scrutiny, and if tokenized stocks are classified as securities, they will be subject to traditional securities tax rules, including the wash sale rule which previously did not apply to ordinary crypto assets.

Beyond trading taxes, blockchain-based US stocks introduce complex inheritance arrangements for US residents. Assets held in token form representing securities interests are not exempt from inheritance tax. Self-custody creates unique challenges regarding the inheritance of private keys, the inclusion of wallet addresses in estate plans, and the proof of asset ownership for heirs. Unlike traditional financial systems where custodians provide clear asset records, self-custody requires meticulous management of private keys to ensure assets can be inherited. If keys are included in wills or trusts, assets re-enter the inheritance and tax reporting processes, complicating the relationship between asset control and tax liability.

Ultimately, the SEC's Innovation Exemption does not offer a 'tax-free pass' but establishes a comprehensive compliance framework for tokenized equities. Intermediaries will not disappear but will reappear in different forms, shifting from traditional brokerage systems to issuers, KYC platforms, CASPs, wallets, and reporting frameworks. As blockchain-based US stocks approach traditional stocks, they must address who collects taxes, identifies identities, confirms rights, and manages custody risks. Every blockchain-based transfer may soon be accompanied by an invisible 1099 form and an unprinted inheritance tax statement, ensuring that the integration of DeFi and TradFi does not come at the cost of fiscal responsibility.