ICO and Cryptocurrencies- Tax Applicability
Digital Tokens has been in discussion for a various reason however an issue that is receiving relatively little attention is the potential tax exposure of the proceeds from a digital token issue. As a leading regional financial hub, Singapore provides a useful model for other authorities to look at. It has also adopted a cautious but sensible approach to cryptocurrencies and become the breeding ground for virtual tokens and ICO’s.
The nature of tokens and cryptocurrencies from a Singapore tax perspective has not been clearly defined and the Inland Revenue Authority of Singapore (‘IRAS’) has yet to release any detail guidance.
Businesses that choose to accept virtual currencies such as Bitcoins for their remuneration or revenue are subject to normal income tax rules. They will be taxed on the income derived from or received in Singapore. Tax deductions will be allowed, where permissible, under our tax laws.These transactions also comes under purview of Goods and Services Tax (“GST”). GST treatment depends on whether there is a supply of goods or a supply of services.
We set out below tax treatment as Inland Revenue Authority of Singapore (‘IRAS’) intend to tax the Virtual currencies:
Income Tax Treatment
The Singapore tax system is based on territorial basis. Corporate income tax is payable at the rate of 17% upon:
(i) income accruing in or derived from Singapore; and
(ii) foreign-sourced income to the extent that it is received in Singapore.
Virtual Currencies as Mode of Payment
Generally, businesses that accept virtual currencies as payment for goods or services should record the sale based on the open market value of the goods or services in Singapore dollars. The same applies for businesses which pay for goods or services using virtual currencies.
If the open market value of the goods or services that would have otherwise been exchanged in Singapore dollars cannot be determined (e.g. the good or service is only traded with virtual currencies), the virtual currency exchange rate at the point of the transaction may be used.
Trading in Virtual Currencies
Businesses that buy and sell virtual currencies in the ordinary course of their business will be taxed on the profit derived from trading in the virtual currency. Profits derived by businesses which mine and trade virtual currencies in exchange for money are also subject to tax.
Businesses that buy virtual currencies for long-term investment purposes may enjoy a capital gain from the disposal of these virtual currencies. However, as there are no capital gains taxes in Singapore, such gains are not subject to tax.
Whether gains from disposal of virtual currencies are trading or capital gains depends on the facts and circumstances of each case. Trade transactions are taxable and capital gains are not taxable in Singapore. Factors to determine whether trade exist are such as purpose, frequency of transactions, and holding periods are considered when determining if such gains are taxable, more details below:
Factors to determine whether trade exist
1.Nature of subject matter
This refers to the nature of the asset/ property that is being bought and sold. Some property (e.g. commodities, manufactured items) are normally regarded as the subject of trading while others are less likely to be regarded as trading when they are not bought in quantity (e.g. antiques, art work)
2. Length of ownership
This refers to the holding period of the asset/ property in question. The shorter the holding period, the more likely it would be regarded as held for trading.
3.Frequency of transactions
High frequency of similar transactions is more indicative of trading than an isolated transaction
This refers to additional work done on the asset/ property in question to make it more marketable or extra effort made to find or attract purchasers. If this is done, it is more likely that the subsequent disposal would be regarded as trading.
5.Circumstances of the realization
Some circumstances are less likely to indicate trading (e.g. company is forced to sell the property in question due to compulsory acquisition, the sudden urgent need of cash or threat of foreclosure by creditors).
This refers to whether there was an intention to trade at the time of the acquisition of the asset/ property in question.
7.Mode of financing
This refers to how the purchase of the asset/property in question is being financed. Short-term financing is more indicative of trading than long-term financing. The company’s financial position and ability to hold on to the property will also be taken into consideration.
Other factors include whether there were any feasibility studies conducted, the accounting treatment of the company, the availability of documentation or other evidence maintained by the company to indicate its intention.
Sale of Virtual Currency
Virtual currencies (e.g. Bitcoins) are not considered as ‘money’, ‘currency’ or ‘goods’ for GST purposes. Instead, the supply of virtual currency is treated as a supply of services, which does not qualify for GST exemption.
Buying Goods or Services Using Virtual Currencies
When you use virtual currencies to pay for goods or services, the transaction will be considered as a barter trade.
There are two supplies made – one by the supplier who supplies the goods and services, and another by you who use virtual currencies to pay the supplier.
GST will need to be charged on each supply if the respective supplier is GST-registered. However, if you use virtual currencies to pay a supplier belonging outside Singapore, you need not charge GST as the supply will be zero-rated.
As a concession, if you use virtual currencies to buy virtual goods or services within the gaming world, you need not charge GST until they are exchanged for real monies, goods or services.
Selling Virtual Currencies
If you are a GST-registered business and you sell virtual currencies as a principal, you will have to charge GST on the sale of the virtual currencies, unless the sale is made to a person belonging outside Singapore.
However, if you act as an agent for another party when selling the virtual currencies, you need to charge GST on the commission fees you receive, unless the service is supplied to a person belonging outside Singapore. Trading fees charged by a virtual currency exchange located in Singapore are subject to GST if that exchange is GST-registered.
Importing Goods Paid by Virtual Currencies
Goods imported and paid for using virtual currencies are subject to the same import GST rules and reliefs as those paid for using real currencies.
Businesses intend to deal with virtual currencies and ICOs out of Singapore will need to bear in mind several tax considerations. In addition to obtaining advice from a regulatory perspective, business should also seek experts advice to ensure that tax planning is efficiently done to avoid the unpleasant surprise.
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