To say that the world of cryptocurrency and digital tokens has been a tumultuous one would be an understatement — it has seen its early days on the fringes of internet culture, through to wild speculation from individuals and large investors alike. Today cryptocurrency sits in a more subdued state, holding a fraction of their respective values from the heady days of late 2017.
Regardless, governments around the world have been forced to face the reality of digital tokens being part of the wider economy. As of the second quarter of 2020, Singapore has announced its income treatment of digital tokens, which aims to address the complexities inherent in mixing cryptocurrencies with fiat (government-issued) currency.
Let’s take a look at a basic overview of how the Inland Revenue Authority of Singapore (IRAS) plans to deal with tax-related issues with digital tokens, as well as the issuing of digital tokens through Initial Coin Offerings (ICOs).
First we need to define the three major types of digital tokens, as set out by IRAS — payment tokens, utility tokens, and security tokens.
Income Tax Treatment for Payment Tokens
Payment tokens have been defined as being designed for payment for goods and services. IRAS has determined such a transaction should be treated as a barter trade, and therefore is not to be treated as fiat currency.
When a business receives payment tokens in exchange for its goods and services, they will be taxed on the fiat value of those goods and services at the time of transaction. Conversely, if a business uses payment tokens to buy goods or services, they can have fiat value of those goods or services deducted, following general deduction rules.
Related Read: Everything a first-time business owner should know about Goods and Services Tax (GST) in Singapore »
The way in which the value of the goods and services are determined can vary. In one instance, if a company sells goods and services that they price at 1 bitcoin, the taxable income on that transaction will be calculated by the fiat value of 1 bitcoin on the date of the transaction. Alternatively, if the company sells goods and services listed/valued in fiat currency (e.g. $100), and they are paid in the equivalent payment tokens, the taxable revenue will be $100.
The payment tokens must be able to have their value verified, and the methodology should be applied the same each financial year.
In the case where a payment token holder sells their tokens for fiat currency, the tax treatment depends on whether the tokens are being held as a revenue asset or a capital asset. If the payment token is being held as a revenue asset, the gain or loss from the token sale will be taxable or deductible. If the payment token is being held as capital asset, the gain or loss from the token sale will not be taxable or deductible.
The tax treatment for miners of payment tokens will depend on the miner’s intentions, be it a hobby or for profit. If the individual is merely mining tokens as a hobby, any gains from selling/disposing of the mined tokens will not be taxable. However, if the individual mines payment tokens with the express intention of making a profit, the selling/disposal of said tokens should be taxable.
Income Tax Treatment for Utility Tokens
IRAS has defined utility tokens as a token that will give the holder access to goods and services that will be launched in the future. They are usually sold in the form of an ICO, when a token developer is looking for investment, and are taxable when the services of the ICO are fulfilled.
When a buyer acquires their utility token/s, IRAS will treat that as a prepayment for the ICO’s promised goods and services. Tax treatment will be done under general tax deduction rules, when the token is utilised for its intended purpose.
Income Tax Treatment for Security Tokens
Security tokens will be treated much the same as fiat equities, bonds, and derivatives, in that they serve as stand-ins for actual underlyings, companies, earnings, and claims to interest payments or dividends.
Depending on the rights and obligations of the token, security tokens are seen as a form of debt or equity, so interest payments or dividends issued will be accordingly taxable.
Upon selling/disposing of the security token, the gains or losses will be taxed depending on whether the security token was held as a revenue asset or a capital asset.
Read more on how to reduce your tax in Singapore.
Conclusion — Where to Next for Figuring Out Taxation on Your Digital Tokens
Generally, most digital tokens will come under one of those three categories, however, there are other options, such as hard forks, ICO failures, and airdrops. These scenarios are also discussed in the IRAS tax treatment report, which you can read here.
As competently as IRAS has defined the treatment of digital tokens, this is still a new realm in the tax world, so there will inevitably be unforeseen complications and intricacies involved in the future. We would imagine that most token holders will have some legitimate and understandable questions about how to undertake their tax obligations, so we would like to offer our services to help.
Rikvin has a long history in helping individuals and organisations understand and save money with their tax obligations, and our team of specialist accountants have been undergoing intensive training in the world of digital tokens. If you are looking for the most up to date information on how to handle your taxes for your digital tokens, please do reach out to us for some no-obligation advice.
FAQ
- The tax treatment for miners of payment tokens will depend on the miner’s intentions, be it a hobby or for profit. If the individual is merely mining tokens as a hobby, any gains from selling/disposing of the mined tokens will not be taxable. However, if the individual mines payment tokens with the express intention of making a profit, the selling/disposal of said tokens should be taxable.
- Upon selling/disposing of the security token, the gains or losses will be taxed depending on whether the security token was held as a revenue asset or a capital asset.
- Utility tokens are usually sold in the form of an ICO, when a token developer is looking for investment, and are taxable when the services of the ICO are fulfilled.
- When a buyer acquires their utility token/s, IRAS will treat that as a prepayment for the ICO’s promised goods and services. Tax treatment will be done under general tax deduction rules, when the token is utilised for its intended purpose.
Find Out How to Treat Your Taxes for Digital Tokens in Singapore
Rikvin’s team of experts can help you figure out how to move forward with the taxation of your digital tokens.
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