IRR (Internal Rate of Return)

IRR (internal rate of return) is the discount rate that makes the net present value (NPV) of all of an investment's cash flows equal to zero. Put another way, it is the annual return that equates what you invest with what you receive, taking into account when you receive it. In a tokenized offering, the investor's cash flows are what they pay for the tokens and what they collect afterward: interest, distributions and the redemption or sale proceeds.

How it is calculated. It is the rate r that satisfies 0 = −I + CF₁/(1+r) + CF₂/(1+r)² + … + CF_n/(1+r)ⁿ, where I is the initial investment and CF_t is the net cash flow in year t. Except in simple cases, such as a single final payment (r = (payment / investment)^1/n − 1), it cannot be solved directly and is found by successive approximation, which is what the IRR function in a spreadsheet does. If payments are not annual, their actual dates must be used. Spanish rules apply the same logic: the APR (TAE) of a consumer loan is the rate that equates the present value of the drawdowns with that of the repayments and charges (Annex I to Law 16/2011), and the accounting effective interest rate is the rate that equates a financial instrument's carrying amount with its estimated cash flows (Spanish General Accounting Plan, Part One, section 6, item 7).

Example with two tokenized offerings. Two investors buy EUR 1,000 of tokens in two different three-year offerings. The figures are illustrative, not a forecast:

Both return EUR 300 more than was invested, 30% over three years (10% a year if split evenly), but A has the higher IRR because it pays part of the money back sooner. Neither reaches 10%, because a simple return treats a euro received in year one the same as a euro received in year three. If payments to token holders are made or recorded on-chain, each one is logged with its date and amount, so the IRR actually earned can be reconstructed precisely. Someone who buys the tokens on a secondary market has different cash flows (a different entry price and date) and therefore a different IRR.

IRR vs. simple return. A simple return (gain / investment) tells you how much you made, not how fast. IRR captures time but not size: 20% for one year on EUR 1,000 leaves fewer euros than 9% for five years on EUR 100,000. That is why it is read alongside a multiple such as MOIC, which measures how many times the capital comes back.

Limitations.

• Reinvestment. IRR matches the actual growth of all your money only if interim cash flows are reinvested at that same rate. In offering A, if the two EUR 60 payments are reinvested at 2%, the capital at the end of year 3 is EUR 1,303.62 and the effective annual rate drops to 9.24%. The modified IRR (MIRR) fixes this by setting an explicit reinvestment rate.
• Non-conventional cash flows. If the sign of the cash flows changes more than once, for example because of an additional contribution midway, there may be several IRRs or none. The cash flows −100, +230 and −132 have two: 10% and 20%. In those cases it is better to compute NPV at a specific discount rate.
• Forecast vs. outcome. A "target IRR" depends on assumptions (sale price and date, defaults, costs) and guarantees nothing; the actual IRR is only known at the end. In the EU, if a crowdfunding platform offers a target rate of return in its individual portfolio management of loans, it must state it with its confidence interval, taking fees and default rates into account (Regulation (EU) 2020/1503, Annex I, Part I, point (f)).
• Gross or net. IRR before fees and taxes can be very different from net IRR. In the US, an investment adviser registered (or required to be registered) with the SEC that advertises gross performance must also show net performance, with at least equal prominence and calculated over the same period and with the same methodology (17 CFR 275.206(4)-1(d)(1)).

By instrument. In tokenized debt with an annual coupon, an investor who buys at par, with no fees, and collects everything agreed earns an IRR equal to the interest rate; buying below par raises the IRR, and buying above par lowers it (more in tokenized bonds). If the return depends mainly on the final sale of the asset, as in an equity investment in a property that is sold at the end, IRR is very sensitive to the price and timing of that sale (see real estate tokenization). In debt secured by real estate, IRR is read together with LTV, which measures the collateral cushion. In a participating loan, part of the interest depends on the borrower's business performance, so the IRR is not known in advance. And in a fund, the investor's IRR is calculated from the net asset value at entry and exit and the distributions received.

Official sources: Law 16/2011, Annex I (BOE); Spanish General Accounting Plan, Royal Decree 1514/2007 (BOE); Regulation (EU) 2020/1503, Annex I (EUR-Lex); 17 CFR 275.206(4)-1 (eCFR).

Framework verified as of October 13, 2026. At Unknown Gravity we build the platform and smart contracts that record the tokens and automate an offering's payments; return projections are the issuer's and its advisors'. Talk to us.