How to Report Tokenized Real Estate on Taxes: 2025 Guide

Made $847 from Lofty? $5K from RealT? Tax season is here. This guide walks you through exactly where your RWA income goes, which forms to file, and how to avoid the most common mistakes.

How the IRS Treats Tokenized Real Estate
Reporting Rental Income (Step-by-Step)
Reporting Token Sales
Cost Basis Tracking & Records
Special Situations
Common Mistakes to Avoid
Do You Need a CPA?
FAQ

How the IRS Treats Tokenized Real Estate

The Basic Framework

Here’s the good news: the IRS doesn’t treat RWA tokens as some mysterious new asset. They treat them like what they actually are—fractional ownership stakes, similar to shares in a real estate partnership or REIT.

Two key takeaways:

Rental distributions = ordinary income (Schedule E)
Token sales = capital gains/losses (Schedule D)

This isn’t a gray area. Tax professionals have reached consensus based on existing IRS guidance about fractional ownership and digital assets.

Understanding Your Ownership Structure

When you buy a Lofty or RealT token, you don’t own the physical property directly. Instead, you own a digital token representing fractional ownership in an LLC or Special Purpose Vehicle (SPV) that owns the property.

Why this distinction matters:

The SPV manages the property, handles expenses, and claims depreciation
You receive net income (already after expenses)
You’re a passive investor, not a landlord
You don’t file as a property owner would

This is crucial because it’s why you cannot deduct expenses on your own taxes.

Token Sales Create Taxable Events

Selling tokens triggers capital gains or losses, just like selling stock or crypto. The holding period determines your tax rate:

Held ≤ 1 year: Short-term capital gain (taxed at ordinary rates: 10%-37%)
Held > 1 year: Long-term capital gain (preferential rates: 0%, 15%, or 20%)

Important: Your holding period begins when you purchased the token, not when the property was tokenized.

Reporting Rental Income (Step-by-Step)

The Form: Schedule E

Schedule E (Supplemental Income and Loss) is where your distributions go. It’s the same form traditional landlords use—because that’s exactly what these payments are.

Step 1: Enter Your Property Information

On Schedule E, Part I, report your properties.

For 1-4 properties: List each separately with its address.

For 5+ properties: Use aggregate reporting with a note like “Multiple tokenized properties through Lofty (see attached)” and provide a separate sheet showing:

Each property address
Annual income per property
Combined total

Most CPAs recommend the aggregate approach for 10+ properties—it keeps the form cleaner and more organized.

Example

Property	Annual Income
Cleveland duplex (Lofty)	$234
Chicago apartment (RealT)	$189
Denver townhouse (Lofty)	$424
Total	$847

On Line 3 (Rents Received), enter: $847

Step 2: Leave Expense Lines Blank

Lines 5-19 (Operating Expenses): Leave these completely blank.

This is the most commonly misunderstood part. Your platform has already deducted everything—property management, maintenance, insurance, taxes, HOA fees, utilities. What lands in your wallet is net income after all costs.

If you deduct expenses again, you’re double-deducting, which is an immediate audit red flag.

You cannot deduct:

Property management fees
Maintenance and repairs
Property taxes
Insurance premiums
Utilities
HOA fees
Depreciation (the SPV claims this)

Step 3: Calculate Your Net Income

The math is straightforward:

Rents received: $847
Less: Expenses: $0
Net income: $847

This amount flows to Form 1040, Line 5 (Other Income).

Platform-Specific Details

Lofty: Generates pre-filled 1099-DIV forms with distributions already tracked. File as-is.

RealT: May not provide consolidated annual statements. Export transaction history from their dashboard or manually track using blockchain data via Etherscan.

Reental: European-sourced distributions require USD conversion. Use the exchange rate from the distribution date. May need extra documentation if the IRS questions foreign-sourced income.

Missing Your 1099 Form?

If the platform didn’t send one—you’re still responsible for reporting all income. The IRS doesn’t forgive tax obligations because documentation wasn’t issued.

Recover records by:

Exporting transaction history from the platform dashboard
Using blockchain explorers (Etherscan for Ethereum, Polygonscan for Polygon) with your wallet address
Manually summing your monthly or daily distributions
Contacting platform support for historical data

Keep this documentation as backup in case of audit.

Reporting Token Sales

The Forms: Form 8949 & Schedule D

Token sales are reported separately from income:

Form 8949 – Detailed transaction information
Schedule D – Summary of gains and losses
Form 1040 – Final tax calculation

Step-by-Step: Completing Form 8949

For each token sale, fill in these columns:

Column	What to Enter
(a) Description	“Lofty Token – Cleveland Duplex” or “RealT – Property #42”
(b) Date Acquired	MM/DD/YYYY when you purchased
(c) Date Sold	MM/DD/YYYY when you sold
(d) Proceeds	Total amount received from sale
(e) Cost Basis	Total amount you paid to acquire
(h) Gain or Loss	Proceeds minus cost basis

Critical: If you held the tokens longer than 1 year, report on Part II (Long-term). If 1 year or less, use Part I (Short-term).

Real Example: Token Sale with Capital Loss

Scenario:

Purchased 10 Lofty tokens on March 15, 2024 at $52/token = $520 total
Sold all 10 on September 22, 2025 at $48.50/token = $485 total
Platform fee deducted: $2.50 → net proceeds: $482.50
Holding period: 1 year 6 months = Long-term holding

Form 8949 Entry (Part II):

Column	Entry
Description	Lofty Token – Cleveland Duplex, 123 Main St
Date Acquired	03/15/2024
Date Sold	09/22/2025
Proceeds	$482.50
Cost Basis	$520.00
Gain/Loss	-$37.50 (capital loss)

Result: You have a long-term capital loss of $37.50. This reduces other capital gains or up to $3,000 of ordinary income per year.

Determining Cost Basis: FIFO Method

If you purchased tokens at different prices, the IRS assumes you sold the oldest first (FIFO—First In, First Out).

Example:

January 1, 2024: Bought 5 tokens @ $50 each = $250
March 1, 2024: Bought 5 tokens @ $55 each = $275
June 1, 2024: Sold 5 tokens @ $60 each = $300

FIFO calculation:

You sold the January purchase (oldest first)
Cost basis per token: $50
Sale price per token: $60
Gain per token: $10
Total gain: $50

Alternative: Specific Identification

If you maintain detailed records identifying which exact tokens you sold, you can use that method instead. This requires contemporaneous written documentation. For most investors, FIFO is simpler.

Short-Term vs. Long-Term Capital Gains

Short-term (held ≤ 1 year):

Taxed at your ordinary income tax rate (10%-37% depending on bracket)
Report on Form 8949, Part I

Long-term (held > 1 year):

Preferential tax rates (0%, 15%, or 20%)
Much more tax-efficient
Report on Form 8949, Part II

Holding strategy tip: Waiting 12 months before selling can save thousands in taxes.

Capital Losses & Loss Harvesting

Capital losses offset capital gains dollar-for-dollar. If your losses exceed gains, you can deduct up to $3,000 against ordinary income in a single year. Any excess loss carries forward indefinitely to future years.

Example:

Long-term capital gains: $200
Long-term capital losses: $800
Net loss: -$600

Tax deduction this year: $600 (all of it, since it's under $3K limit)
Carryforward to next year: $0

This is one advantage of tokenized assets: you can harvest losses to reduce other taxable income—something difficult with passive rental property.

Cost Basis Tracking & Records

What You Need to Track

For every token purchase:

Purchase date (MM/DD/YYYY)
Number of tokens purchased
Price per token
Total amount paid (including all fees)
Transaction confirmation or receipt

For distributions:

Monthly or daily amounts received
Distribution dates
Annual total
Platform statements or blockchain records

For token sales:

Sale date and number of tokens
Sale price per token
Transaction fees charged
Net proceeds received

Record retention: Keep all documentation for at least 7 years.

Tracking Tools & Methods

Manual Spreadsheet (Most Reliable)

Create a simple Google Sheet with these columns:

Purchase Date	Property	Qty	Price/Token	Total Cost	Sale Date	Sale Price	Proceeds	Gain/Loss
03/15/2024	Cleveland Duplex	10	$52.00	$520.00	09/22/2025	$48.50	$482.50	-$37.50

Update it each time you buy or sell. This is the most reliable method.

Crypto Tax Software

Tools like Koinly, CoinTracker, and TokenTax exist—but most don’t support RWA tokens well. Manual entry is often necessary. Test any platform before committing to it.

Platform Exports

Lofty: Transaction history available in dashboard
RealT: Limited export; manual blockchain tracking recommended
Reental: Dashboard export option available

Blockchain Explorers (For Verification)

If you lose platform records, use Etherscan (Ethereum) or Polygonscan (Polygon) with your wallet address. You can download all transactions as CSV for reference.

Three Common Cost Basis Mistakes

Mistake #1: Forgetting transaction fees

Wrong: Cost basis = $50/token Correct: Cost basis = $50/token + transaction fee

Fees are part of your total acquisition cost and must be included.

Mistake #2: Not tracking separate purchases

Each purchase needs its own date and price. Mixing purchases together breaks FIFO calculations and creates audit risk.

Mistake #3: Confusing income with basis

Wrong: “My cost is $50, I earned $8 in distributions, so basis is now $58” Correct: Basis stays $50. Distributions are separate income (reported on Schedule E)

Special Situations

Platform Doesn’t Provide Tax Documents

You remain responsible for reporting all income. Platform failure is not an excuse.

Here’s what to do:

Export transaction history from the platform dashboard
Use blockchain explorers with your wallet address
Manually total all distributions received
Document your calculation method
Attach a note to your return if needed

Lost Platform Access

Contact platform support with proof of ownership (email address, KYC documents). Request your account history and transaction data. If unsuccessful, use the blockchain explorer method. Work with a CPA to make reasonable estimates based on what you can recover.

Peer-to-Peer Token Trades

Trading tokens directly with another investor is a taxable event. Report on Form 8949 including:

Trade date
Your cost basis
Proceeds received
Holding period calculation

Document the transaction with screenshots and wallet addresses.

Tokens Received as a Gift

Good news: no gift tax on you (the giver handles that). Your cost basis equals the donor’s original cost basis. Your holding period carries over from when they purchased.

When you eventually sell, use the donor’s cost basis (not what you received it for).

Tokens Become Worthless

If a platform collapses and tokens are truly worthless, you may claim a capital loss under IRS Section 165. This requires proof—bankruptcy filings, liquidation notices, etc. Consult a CPA before claiming worthless securities; the IRS scrutinizes these heavily.

Tokens in Retirement Accounts

Tax treatment differs significantly in IRAs or 401(k)s. Rules are stricter, and not all platforms work with retirement accounts. This requires a specialized CPA. Do not attempt DIY.

International Income (Non-US Citizens)

US withholding taxes apply to your distributions. You may need Form W-8BEN or W-8BEN-E to reduce withholding rates. You’ll file Form 1040-NR instead of 1040. Use USD exchange rates from the distribution date for conversions. Work with an international tax specialist.

Common Mistakes to Avoid

Mistake 1: Skipping Small Income Amounts

“I only made $50, why report it?”

Reality: ALL income must be reported, no matter how small. The IRS explicitly requires this. Report $0.01 rather than nothing.

Mistake 2: Using the Wrong Tax Forms

Token sales on Schedule E (wrong) → should go on Schedule D Distributions on Schedule D (wrong) → should go on Schedule E

This misclassification can trigger audits and penalties.

Mistake 3: Claiming Depreciation

You cannot deduct depreciation. The SPV that owns the underlying property claims it. Attempting to claim it yourself is a major red flag and audit trigger.

Mistake 4: Separately Deducting Platform Fees

Your platform’s management fee is already deducted from distributions. You report net income only. Double-deducting fees creates audit risk.

Mistake 5: Miscalculating Holding Periods

Bought March 1, 2024 → Sold March 2, 2025 = 1 year 1 day = LONG-TERM (preferential rates)

Bought March 1, 2024 → Sold February 28, 2025 = 11 months 28 days = SHORT-TERM (ordinary rates)

One day matters.

Mistake 6: Treating Tokenized Assets Like Direct Property Ownership

Direct ownership: Schedule E with expenses, depreciation, active loss deductions

Tokenized ownership: Schedule E with NO expenses (net only), NO depreciation, no active loss deductions

The rules differ significantly. Don’t mix them.

Do You Need a CPA?

DIY Filing Works If:

✅ Total annual income under $1,000 ✅ No token sales during the year ✅ Single property ✅ Simple overall tax situation (W-2 income only) ✅ Organized record-keeping ✅ Comfortable with tax software

Hire a CPA If:

⚠️ Annual income exceeds $5,000 ⚠️ Multiple token sales and capital gains/losses ⚠️ Tokens held in retirement accounts ⚠️ International income ⚠️ Complex overall tax picture ⚠️ Unsure how to classify your income ⚠️ Missing or incomplete records ⚠️ Prior IRS issues or audits

Finding a Good CPA

Look for:

Specific experience with crypto or digital assets
Understanding of fractional real estate structures
Willingness to research emerging asset classes
Transparent pricing ($300-1,000 for RWA returns)

Questions to ask:

“Have you handled tokenized real estate clients?”
“How do you classify distributions from RWA platforms?”
“What’s your approach to cost basis tracking for tokens?”
“Do you use specialized software for digital asset taxation?”

Cost vs. Benefit: If a CPA finds $500+ in legitimate deductions or prevents a $1,000+ filing error, they’ve paid for themselves.

FAQ

Q: Must I report RWA income under $600?

A: Yes. All taxable income must be reported regardless of amount. The absence of a 1099 doesn’t eliminate the requirement.

Q: My platform didn’t send a 1099 form. What do I do?

A: You’re still responsible for reporting all income. Export your platform history, use blockchain explorers, or manually sum distributions. Keep documentation for potential audits.

Q: Can I deduct my platform’s management fee?

A: No. It’s already deducted from your distributions before you receive them. Report only the net amount. Double-deducting creates audit risk.

Q: Do I claim depreciation on my tokenized real estate?

A: No. The underlying SPV claims depreciation, not token holders. You cannot claim it twice.

Q: How do I calculate cost basis if I made multiple purchases at different prices?

A: Use FIFO (First In, First Out)—assume you sold your oldest tokens first. Unless you specifically tracked and identified individual tokens at purchase.

Q: What’s the difference between short-term and long-term capital gains?

A: Short-term (≤1 year) taxed at ordinary rates. Long-term (>1 year) taxed at preferential rates (0%, 15%, 20%). Holding 12+ months saves money.

Q: Can I use capital losses from token sales?

A: Yes. Losses offset gains dollar-for-dollar. Excess losses (up to $3,000) reduce ordinary income annually. Excess carries forward indefinitely.

Q: What if my tokens become worthless and a platform fails?

A: You may claim a capital loss under Section 165, but it requires proof of worthlessness. Consult a CPA—the IRS scrutinizes worthless security claims heavily.

Q: Does filing in a retirement account change things?

A: Completely. Tax treatment is different in IRAs/401(k)s. Requires a specialized CPA. Don’t attempt this on your own.

Q: What happens if I don’t report RWA income?

A: Platforms increasingly issue 1099s. The IRS is tracking this market. Non-compliance results in penalties, interest, and audit risk. Voluntary compliance now prevents future problems.

What’s Next

Explore related RWApedia guides to deepen your understanding:

How Lofty works
RealT vs. Lofty: Platform comparison
Tokenized real estate investing basics
RWA tax software comparison

Have questions? Join the RWApedia community or consult a CPA specializing in digital assets.

Important Disclaimer: Tax laws change. The IRS has not issued specific guidance on tokenized real estate taxation. Individual circumstances vary significantly. This guide reflects the most conservative interpretation based on existing IRS rules, but guidance could change. If you receive an IRS notice, consult a tax professional immediately.

Your responsibility: Accurate filing is your obligation. This article does not create a CPA-client or attorney-client relationship.

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