The Inland Revenue Authority of Singapore (IRAS) released on April 17 an e-Tax Guide on the income tax treatment of transactions involving digital tokens, as well as initial coin offerings (ICOs).
The guide focuses on three types of digital tokens, namely payment tokens, utility tokens and security tokens, and further clarifies the tax treatment of tokens received in unconventional ways such as via airdrops or hard forks.
Tax treatment for digital tokens
According to the guide, transactions involving payment tokens are regarded as barter trades. Recipients of payment tokens are taxed on the value of the underlying goods provided or services performed.
The purchase of a payment token is not a taxable event, though a gain or loss realized when a payment token is sold is taxable if the disposal of the token is a trading activity, it says. Similarly, payment tokens received through mining are taxable if the miner performs the mining activity with the intent to profit, versus the activity being just a hobby.
Payment tokens received through airdrops and hard forks will not be taxable, as long as recipients get them for free, the guideline say.
Meanwhile, transactions involving utility tokens are unlikely to trigger a taxable event, it says, adding that utility tokens are often purchased as a right to future services.
Finally, security tokens, which give owners equity or an interest akin to a specified or implied degree of control or economic entitlement, are accounted for as a form of debt or equity. The taxability of the return derived from a security token will depend on the nature of the return, for example, whether it is in the form of interest or dividend, the IRAS says.
Tax treatment for ICOs
For ICOs, proceeds will be taxed depending on the rights and functions of the tokens issued.
For example, the issuance of utility tokens that comes with the obligation for the issuer to provide a service in the future will be considered revenue in nature, and thus taxable.
Meanwhile, proceeds from the issuance of security tokens will not be taxable since it is akin to proceeds from the issuance of a debt or equity, and thus capital in nature. However, general income tax and withholding tax obligations will apply to the dividend or interest paid to the owner of the token, the authority says.
The guide also clarifies the treatment of so-called founder tokens. Oftentimes, a company conducting an ICO will set aside a percentage of the ICO tokens to be awarded to the founding developers of the project.
If founder tokens are used to remunerate a founder, these tokens will be regarded as a revenue in nature and hence, will be taxable on the founder, the IRAS says. If founder tokens are not given as remuneration, these tokens will be regarded as the founder’s capital asset.
The IRAS advises taxpayers dealing with cryptocurrencies and ICOs to keep proper records of transactions. These records should include the date of of transaction, number of units received or sold, value of digital token at the time of the transaction, exchange rate used, purpose of the transaction, details of customers or suppliers for buy or sell transactions, details of the ICO, and receipts or invoices of business expenses, it says.
The release of the crypto tax guidelines comes just a few months after Singapore introduced new payments legislation, allowing cryptocurrency firms to apply for operating licenses.
The Payment Services Act, which came into force on January 28, is a comprehensive regulation for companies involved in activities ranging from digital payments to cryptocurrency trading, bringing them into the regulatory fold under the ambit of the Monetary Authority of Singapore (MAS).
Currently, a number cryptocurrency firms including Binance, Coinbase, and Ripple, are being temporarily exempted from holding a payments license in Singapore.
The exemption will end on July 28, 2020, or if these companies submit a license application under the Payments Services Act 2019, or are approved or rejected for a license by MAS.