Conventus Law

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Indonesia - Income Tax Treatment Of Digital Tokens.

 

21 August 2021

 

Asia Pacific Legal Updates
 

I. Introduction
 

On 17th April 2020, the Inland Revenue Authority of Singapore ("IRAS") published an e-Tax Guide providing guidance on the income tax treatment of certain transactions involving digital tokens. Together with the GST Guide on Digital Payment Tokens published on 19 November 2019,1 the e-Tax Guide provides a helpful level of certainty to the tax treatment of certain digital token transactions.
 

II. Income Tax Treatment of Digital Tokens
 

The income tax consequences of a digital token transaction depend on the type of digital token involved. The IRAS e-Tax Guide covers three types of digital tokens: (i) payment tokens; (ii) utility tokens; and (iii) security tokens. The tax treatment of the respective transactions involving such tokens are summarised below.
 

Payment Tokens
 

Payment tokens represent a digital right that can be used or is intended to be used as a means of payment for goods and/or services. However, they are not fiat currencies nor are they legal tender.
 

For income tax purposes, IRAS treats payment tokens as intangible properties and therefore transactions involving the use of payment tokens as payment for goods or services are viewed as barter transactions.
 

Where a business receives payment tokens for the goods or services it has provided, the business would be taxed on the value of the underlying goods or services supplied. Conversely, where a business uses payment tokens to pay for goods and services, a deduction for the goods purchased or services received is allowable, subject to general deduction rules. The value of the deduction will be based on the value of the underlying goods purchased/services received.
 

Additionally, IRAS provided guidance on the income tax treatment of payment tokens in a number of situations beyond those for the sale and purchase of goods and services. These include the following.
 

• Wages paid in the form of payment tokens are taxable in the hands of the employee based on the value of the employment services performed by the employee, when the income accrues to the employee. Payment tokens subject to a moratorium will however be taxed only when the moratorium is lifted.
 

• The taxability of a miner's profits from the disposal of payment tokens (including those obtained from a mining pool) depends on whether the miner performs the mining activity with an intention to profit. There is a general presumption of a profit-seeking motive if the mining is performed by a company, while individuals are prima facie considered to be undertaking mining as a hobby unless such individuals display "habitual and systematic effort to make a profit from the activities". Where a profit-making intent is established, the payment tokens successfully mined will be taxed only at the time of disposal. ;
 

• Payment tokens received through airdrops not in return for or in expectation of any goods or services are not taxable.
 

• Payment tokens received through a hard fork are viewed as a windfall to the recipient who had received the additional tokens without doing anything in return, and therefore are not taxable in the hands of the recipient.
 

In some of these scenarios, it may be necessary to determine the value of the payment tokens. In this regard, IRAS does not prescribe any methodology to value payment tokens, but instead, allows the use of an exchange rate that best reflects the value of the tokens received, provided that:
 

▪ the exchange rate is reasonable and verifiable e.g. it is determined using an average of exchange rates available on payment token exchanges (such as Coinbase and Binance); and
 

▪ the methodology used to determine the exchange rate is consistently applied year on year.
 

There is helpful clarification that a change in accounting fair value of the payment tokens recognised in the financial statements will not be taxable (for gains) or deductible (for losses) under current tax rules as the gain or loss has not yet been realized.
 

However, in situations where gains or losses on disposal of payment tokens are taxable, such as when such disposal is by a trader who had acquired such tokens over a period of time at different values/prices, IRAS will accept the "First In First Out" or weighted average cost methods in determining the value of the payment token disposed.
 

The source of such income is a facts and circumstances determination depending on where the bulk of the business operations are performed. If the operations are performed in Singapore, then the income derived from such activities would likely to be regarded as sourced in Singapore and hence taxable in Singapore.
 

Utility Tokens
 

Utility tokens give the owner of the token a right to goods or service in exchange for that token.
 

The amount incurred to purchase a utility token to exchange for goods or service which are to be provided in the future will be treated as a prepayment for the goods or service. Provided that an expenditure for such goods or services would be deductible under the tax deduction rules, a tax deduction will be allowed on the amount incurred on acquiring the token only at the point the utility token is used to exchange for the goods or service.
 

Security Tokens
 

Security tokens are defined as digital tokens that provide security (such as equity or bond) investment in an entity.
 

Depending on the rights and obligations created by the token, which in turn determines whether such security tokens ought to be accounted for as debt or equity, the interest or dividend (as the case may be) derived by the owner of the security token will be taxed accordingly. Upon disposal of the security token, any gain or loss would depend on whether such security token is a capital or revenue asset to the owner—only revenue gains or losses are taxable or deductible.
 

III. Income Tax Treatment for ICOs
 
An initial coin offering ("ICO") involves the issuance of a new token in exchange for either payment tokens or fiat currencies. They are commonly used to raise funds or to make available the means of access to existing or future goods or services.
 
The taxability of the ICO proceeds in the hands of the token issuer depends on the rights and functions of the tokens issued to the investors.
 
• IRAS has indicated a general presumption for an ICO issuance of payment tokens to be treated as a supply of trading stock by the ICO company, and hence the proceeds are taxable at the point of issuance. However, IRAS also acknowledged the need to examine the specific facts and circumstances of a particular issuance of payment tokens in an ICO, which may negate this presumption.
 
• The proceeds from an ICO issuance of utility tokens will be treated as deferred revenue and taxable upon fulfilment of the underlying utility, i.e. the provision of goods or the performance of service.
 
• The proceeds from the issuance of security tokens are akin to proceeds from the issuance of a debt or equity and are thus capital in nature and not taxable. However, general withholding tax or income tax obligations would apply in respect of the dividend or interest payable to the owner of the token. IRAS has clarified that the usual source rules in relation to dividend and interest will apply to payments made to the holders of security tokens.
 
As for the source of income from proceeds from an ICO of payment or utility tokens, IRAS has identified a non-exhaustive list of factors to be considered in ascertaining whether the income is sourced in Singapore. These are:
 
• whether the company has a physical presence in Singapore;
 
• where and how the marketing and promotion of the ICO is conducted;
 
• whether the participants in the ICO are predominantly based in or out of Singapore; and
 
• whether the developers of the blockchain technology are based in an out of Singapore.
 
ICO proceeds that are refunded will not be subject to tax on the refunded amounts, and may be taxed depending on whether the ICO is a revenue or capital transaction, the determination of which depends on a number of factors, including the ICO company's main business activities, the purpose of the ICO and the obligations arising from the issuance of the tokens.
 
The tax treatment of founder's tokens issued pursuant to an ICO depends on the purpose for which they are issued. The general tax treatment of tokens issued as wages apply the founder's tokens are intended to remunerate the founder for services rendered. On the other hand, where the founder's tokens are issued in consideration of money contributed to the formation of the company and the ICO, then such tokens are treated as the founder's capital assets.
 
Record-keeping
 
The e-Tax guide also sets out details on the types of information that should be captured in supporting records of digital token transactions, which must be maintained and provided to IRAS upon request.
 
IV.Observations
 
IRAS's new e-Tax Guide on the income tax treatment of digital payment token transactions, ICOs and commonly encountered situations such as mining, airdrops and hard forks provides some much welcomed clarifications to taxpayers in this rapidly emerging and evolving space. The general approach is one that follows well-established Singapore income tax principles and seeks to achieve neutrality with conventional-equivalent transactions.
 
That said, some degree of uncertainty remains. For example, as currently worded, the tax treatments set out in Annex A – Income Tax Treatment of Receipt and Disposal of Payment Tokens of the e-Tax Guide apply only to payment tokens. It is unclear if the tax treatment set out in Annex A in respect of the acquisition of payment tokens through mining, airdrops and hard forks would apply equally to the acquisition of utility tokens and security tokens by the same means. Additionally, while the e-Tax Guide clearly defines the three main types of tokens, it does not provide guidance on the classification of tokens that are capable of being classified under more than one category.
 
While the e-Tax Guide has done a commendable job in setting out general principles governing key types of transactions, more details regarding these general principles would be helpful. For instance, IRAS explained that the tax treatment of payment tokens received in an airdrop depends on whether it involves the provision or expectation of services. In this regard, it is unclear if the sharing of a post on the token by an influencer (or a non-influencer, for that matter) on their social media accounts, where required as a condition in order to receive the tokens, amounts to the provision of services. As blockchain technologies and their commercial applications develop and evolve, there will be a need for IRAS to provide further guidance and clarifications. This e-Tax Guide is a positive step towards promoting greater tax certainty for taxpayers operating in this space.
 


 

For further information, please contact:

 

Eugene Lim, Co-Founder and Principal, TaxiseAsia

eugene.lim@taxiseasia.com

 

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