No matter your stance on digital tokens, there is no denying the appeal these virtual currencies hold over the masses. Despite their volatility, they are still tied intrinsically to the traditional currencies we use daily. Their popularity has forced many government agencies worldwide to contemplate the impact these digital tokens have on their economies, and Singapore is no exception.
As such, the IRAS has published its tax guide, titled the Income Tax Treatment of Digital Tokens, last April to clarify the agency’s stance on the matter. Given that digital tokens are still relatively uncharted waters, this guide has various intricacies and impact on these virtual currencies. Let us break down what this information means for the crypto traders in Singapore and how it will impact their income taxes.
1. Income tax treatment of payment tokens
Payment tokens refer to cryptocurrencies that are used in lieu of fiat (government-mandated) currency. Due to the rise in value and popularity of these digital tokens, various businesses have begun to accept several virtual currencies as a legitimate form of payment for their goods and services.
If your business is one of these establishments that use or allow payment tokens, you should be aware that the IRAS has deemed any transaction conducted with payment tokens to be a barter trade, and it will not be treated like fiat currency. Therefore, how these payment tokens are taxed will ultimately depend on their value, uses, and corresponding intent.
If your company decides to utilise payment tokens to purchase any goods or services, you are entitled to a deduction of the fiat value of said goods or services as per IRAS’s general deduction regulations. In contrast, if your business receives payment tokens for the goods or services you offer, your company shall be taxed based on the fiat value of the sale on the date of the transaction.
For example, a company puts up a product or service for sale in a fiat currency of SGD 100. If they are paid in payment tokens of equivalent value, their taxable revenue for this income will also be SGD 100. However, if the business lists the value of their goods or services in payment tokens, for example, 1 Bitcoin, its taxable income will be determined by the token’s value at the time of transaction. This policy makes sense, given that the values of cryptocurrencies are highly volatile.
For individuals that mine cryptocurrencies using their hardware, taxation can come in two forms. If this is just a hobby for them, their earnings will not be taxed when they sell their mined tokens. Conversely, if these virtual currencies are mined for the sole purpose of trading, their gains will be taxed when they sell their mined tokens.
2. Income tax treatment of security tokens
Security tokens will be treated similarly to fiat bonds, equities, and derivatives. This means that security tokens are considered substitutes for underlying assets, earnings, companies, and rights to dividends or interest payments.
Depending on said token’s rights and obligations, they can be treated as either equity or debt. As such, dividends and interest payments shall be taxed based on the category they fall under. Any gains or losses from the sale of these security tokens shall be taxed based on whether they were held as a revenue or capital asset by the seller.
3.Income tax treatment of utility tokens
Utility tokens are usually sold during an initial coin offering (ICO). This offering is typically held when a company is trying to raise funds for their new token or service. In the eyes of the IRAS, these tokens grant their holders access to any goods or services offered by the company down the line, whether they are a part of the initial ICO or not.
These utility tokens are only taxable after the promises of the ICO have been fulfilled. This is because the IRAS views these utility tokens as a pre-payment for any future services offered by the company. After the tokens have fulfilled their initial purposes, they will be subjected to tax treatment under IRAS’s general tax deduction rules.
While the IRAS should be commended for providing Singaporeans with a guide to refer to for any clarifications regarding digital tokens and their tax status, the virtual currency landscape is still likely to be subjected to various changes. Therefore, it is imperative that every business remain vigilant and expect further changes to be made in the near future.
If your business relies on digital tokens as a payment method in any transaction, it is advisable for you to seek the advice of a specialised accounting firm so you can remain on top of your company’s taxes. At Ackenting Group, we provide a suite of tax and accounting services to help you plan your company’s taxes so that you can rest easy when reporting season arrives. Let our experienced accountants provide you with sound advice on your cryptocurrency transactions to ensure your company’s tax is filed correctly. In addition, we offer a wide range of corporate services, including hassle-free incorporation services for those looking to start a new business venture in Singapore.
If you require any assistance on accounting services, feel free to drop us an email at email@example.com or contact us at +65-66358767. At Ackenting Group, we offer a complimentary 30 minutes online consultation for us to better understand your business requirements.