We have looked into the challenges of accounting for cryptocurrency in our earlier article in Another No Man’s Land – Crypto CurrenciesJuly 6, 2021. Accounting for cryptocurrencies is a contentious subject that dealt in ambiguity but for taxes, as it is often said to be as certain as death. IRAS has on 9 October 2020 revised the earlier 17 April 2020 issue of e-tax guide for the taxation of transaction involving digital tokens which includes cryptocurrencies and other digital tokens. 

Under the e-tax guide, a digital token is defined to be any cryptographically-secured digital representation of value that can be transferred, stored or traded electronically. It includes 3 types:

  1. Payment token – used as a means of payment for goods and/or service seg Bitcoin and Ether. 
  2. Utility token – represents a right to a goods or services eg vouchers, credits or key in exchange for services or digital goods.
  3. Security token – represents ownership or right to an underlying assets or investments eg shares, bonds, precious metals.

The income tax treatment varies depending on whether the digital token being used in the transaction is a payment, utility or security token as follows:

Digital token

Taxable Transaction: The transaction is a barter trade. Payment token is taken as a mode of payment for the underlying assets or services transacted or exchange.

Taxable Value: The open market value of the underlying assets or services exchange in the contractual arrangement.

Taxable Point: The transaction is taxable at the point of the exchange and usually the income is taxable and the corresponding direct costs relating to the transaction is tax deductible.

For a miner, the taxability will depend on whether the miner performs the mining activity with an intention to profit. As a company set-up is usually for commercial profit-making, thus it will be treated as a trading activity by default. Accordingly, a company engaging in mining activities will be regarded as carrying on a business of mining and general tax rules will apply. For individuals, it is treated by default as one who perform mining as a hobby or to hold the tokens mined as a long-term investment. Accordingly, the disposal gains/losses of the payment tokens are not taxable/deductible. However, if an individual shows a habitual and systematic effort to make a profit from the activities, he may be considered as carrying on a vocation of a miner and his profits from the sale of the mined tokens will be subject to tax.

Utility token

Taxable Transaction: The transaction is a prepayment for an underlying goods or services. Utility token is taken as a prepayment or advance payment.

Taxable Value: The open market value of the underlying assets or services exchange in the contractual arrangement.

Taxable Point: The transaction is taxable at the point of when the underlying assets or services is used or consumed, NOT at the point of issuance or exchange.  The income is taxable and the corresponding direct costs relating to the transaction is tax deductible when the performance obligation is fulfilled eg services are performed, goods delivered.

Security token

Taxable Transaction: The transaction is purchase or acquisition for an underlying rights or investment. Security token is taken as an investment or assets acquisition.

Taxable Value: The open market value of the underlying rights or assets exchange in the contractual arrangement and whether it is an investment or trading assets/rights. The general income tax rules/withholding tax obligations will apply to the dividend, interest and other distributions derived by the investor/token holder as well as the profit/loss on the disposal of security tokens.

Taxable Point: The proceeds from the issuance of security token is capital in nature and not taxable. The general source rules will apply for interest income, dividend income or other distribution income.

It is important to understand that cryptocurrency is treated differently in accounting and taxation. You could possibly exercise a bit more creativity in the accounting for cryptocurrency, but in taxation, you can be sure that the tax authority’s stake on it will be certain.