Whatever your opinion of cryptocurrencies/digital tokens, governments around the world are acknowledging the reality of their existence, trade, and of course possible taxability. While the landscape of digital tokens has been rollercoaster-esque, the fundamental appeals of privacy and transparency don’t appear to be going anywhere, and digital tokens will continue to be integrated with the traditional world of fiat (government-issued) currency.
It’s for that reason the Inland Revenue Authority of Singapore (IRAS) has compiled its tax guide, titled the Income Tax Treatment of Digital Tokens, published in April 2020. With what is still a relatively new phenomenon, there are a myriad of intricacies to be unfolded and addressed, but in this article we will break down the basics of future tax treatment for digital tokens in Singapore.
The three major components addressed by the IRAS report are segmented into the three major types of digital tokens — payment tokens, utility tokens, and security tokens.
Income Tax Treatment of Payment Tokens
Payment tokens are generally what most people think of in the world of cryptocurrency and digital tokens. They are designed largely to be used in place for fiat currency in the purchase and sale of goods and services.
It should be noted however that IRAS have determined any transaction using a payment token should be treated as a barter trade, and not treated as a fiat currency. The tax treatment for a payment token will depend on its use, value, and intent.
If a business uses payment tokens to purchase goods or services, they are allowed to have the fiat value of those goods or services deducted as per general deduction rules. If a business receives payment for their goods or services in the form of payment tokens, they will be taxed on the fiat value of those goods or services on the date of that transaction.
The value of the payment tokens must be verifiable, and the methodology in which they are treated must be consistent from year to year. The manner in which the value of a payment token is determined however can vary from token to token.
If a company lists the value of their goods or services in fiat currency (let’s say for example $100), and they are paid in equivalent payment tokens, their taxable revenue for the income will be $100. If however the company lists the value of their goods or services in payment tokens (let’s say for example 1 bitcoin), the taxable income will be determined by the value of 1 bitcoin at the time of the transaction. Given that the value of payment tokens relative to fiat currency can vary wildly, this makes a lot of sense.
Some individuals will mine for payment tokens using specialised computer hardware. The way in which tax is treated for mined payment tokens depends on the intent of the miner. If the individual is mining payment tokens just as a hobby, they will not be taxed upon the selling/disposal of those mined tokens. If however the miner was intending to make a profit from the selling/disposal of their mined payment tokens, they will be taxable.
For all other payment token holders looking to sell/dispose of their tokens, tax treatment will depend on whether they were holding their tokens as capital assets or revenue assets. If the holder is keeping their payment tokens as a revenue asset, the gain or loss from the sale will be taxable or deductible. If however they were holding their tokens as a capital asset, their gain or loss from the sale will not be taxable or deductible.
Income Tax Treatment of Utility Tokens
Utility tokens are often sold at the time of an initial coin offering (ICO), when a company is looking to raise funds for their new token or service. IRAS will treat utility tokens as giving the holder access to goods and services that will be launched in the future by the company, whether it is part of an ICO or not.
IRAS will deem utility tokens taxable when the promises of the ICO are fulfilled, rather than at time of purchase. This is because when the buyer acquires their utility token, they are seen as a prepayment for the future services of the ICO offerings.
Once the token is utilised for its intended purpose/s, IRAS will be taxed under general tax deduction rules.
Income Tax Treatment of Security Tokens
IRAS will treat security tokens similar to the way they treat bonds, derivatives, and equities in the fiat realm. This is an acknowledgment that security tokens represent actual underlyings, companies, earnings, and rights to interest payments or dividends.
Security tokens can be treated as either forms of debt or equity depending on the right and obligations of said tokens, so interest payments and dividends will be taxed depending on which category they fall under.
The gains or losses of selling/disposing of a security token will be taxed depending on whether they were being held by the seller as a revenue asset or a capital asset.
Conclusion — Where to Next for Working Out Tax for Your Digital Tokens
It’s hoped that most tax treatments will come under one of those three types of digital tokens, but there are also more complicated situations, such as ICO failures, hard forks, and airdrops to name a few. You can either read about them in the full IRAS report here, or you can just have a chat with us.
While IRAS has done a commendable job of classifying the tax treatments for various digital token scenarios, the landscape is still very much new and malleable, so we think it would be arrogant to assume things will be straightforward from here on in.
We’re very proud to say our team of expert accountants have been working very hard to be on the bleeding edge of these developments, and they are looking forward to sharing their proficiency with forward thinking digital token adopters.
If you have any questions about how to go about the tax treatment of your digital token holdings, both in terms of obligations and optimisation, we would encourage you to reach out for some no obligation advice.
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