Singapore is a leading financial and technological hub and it is no coincidence that this is due to its attitude towards nurturing a conducive environment for the growth of new technology such as cryptocurrencies and blockchain. When it comes to such technology, is there a specific tax treatment for digital tokens? Let’s take a look.
Beyond the various initiatives to enhance Singapore as a cryptocurrency and blockchain hub, one area where Singapore has excelled is in providing certainty and clarity from a regulatory perspective, so as to build a friendly environment for fintech to thrive. The area of taxation is no exception.
IRAS e-Tax Guide for Digital Tokens
The Inland Revenue Authority of Singapore (IRAS) released an e-Tax Guide, “Income Tax Treatment of Digital Tokens” on 14 April 2020, which provides guidance on how transactions involving digital tokens are treated.
According to the guide, the tax treatment of digital tokens is largely premised on the application of the provisions found in the existing Singapore tax laws.
A digital token is a digital representation of a token holder’s right to receive a benefit or to perform specified functions. Generally, there are three types of digital tokens:
- Payment token – used by owner as a mode of payment;
- Utility token – gives the owner a specified or implied right to use or benefit from services in exchange for the token; and
- Security token – gives the owner equity / an interest akin to a specified or implied degree of control or economic entitlement.
Tax treatment of payment tokens
Payment tokens are not fiat currency as they are not issued by any government and not legal tender. For Singapore income tax purposes, they are viewed as intangible property as it represents a set of rights and obligations and do not have any physical form. Transactions involving the use of payment tokens as payment of goods and services are regarded as barter trade and value of goods or services transferred is determined at the point of the transaction.
Therefore, 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 provided/ services performed. On the other hand, 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 the normal deduction rules. The value of deduction will be based on the value of the underlying goods purchased/ services performed.
The IRAS does not prescribe any methodology to value payment tokens. Taxpayers are allowed to use an exchange rate that best reflects the value of the tokens received, provided:
- The exchange rate is reasonable and verifiable, e.g. it is based on average exchange rates available on payment token exchanges. If the exchange rate is not available on exchanges, other means to support the exchange rate can be used provided they are reasonable.
- The methodology used to determine the exchange rate should be consistently applied year on year.
Payment tokens may appreciate or depreciate. If a change in fair value of the payment tokens is recognised in the financial statements for accounting purposes, the fair value gain/ loss will not be taxable / deductible as it is not realised.
Also Read: How is a Variable Capital Company taxed in Singapore? »
Tax treatment of utility tokens
A utility token gives the owner of the token a specified implied right to use or benefit from goods or services in exchange for that token. When a person (or user) acquires a utility token to exchange for goods or services to be provided in future, the amount incurred by the user to purchase the utility token will be treated as a prepayment, and a deduction will be allowed on the amount incurred at the point the token is used to exchange for goods or service, subject to meeting the normal deduction rules.
Tax treatment of security tokens
A security token gives the owner equity or an interest akin to a specified or implied degree of control or economic entitlement. Generally, security tokens are accounted for as a form of debt or equity, depending on the rights and obligations created by the token. Interest or dividend derived by the owner of the security token will be taxed accordingly. Where the security token is disposed by the owner, tax treatment of the gain/ loss on disposal will depend on whether the security token is a capital or revenue asset to the owner, and accordingly, whether the gain/ loss is capital or revenue in nature (there is no separate capital gains tax regime in Singapore).
Related Read: What are the taxes on Funds and Fund Managers in Singapore? »
Tax treatment for Initial Coin Offers
An initial coin offer (ICO) involves the issuance of a new token, which is often issued in exchange for other payment tokens, or in some cases, fiat currency. ICOs are commonly used by the creator of the token to raise funds or to make available the means of access to an existing or future specific goods or service.
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. The proceeds from the issuance of payment tokens may be taxable depending on its specific facts and circumstances; while the proceeds from the issuance of utility tokens will generally be regarded as deferred revenue. Proceeds from the issuance of security token is akin to proceeds from the issuance of a debt or equity and is thus capital in nature and not taxable.
For security tokens which pay interests or dividends, the deductibility of such payments to the issuer are subject to the normal deduction rules.
ICO failure
An ICO could fail and if the ICO proceeds are refunded to the token investors, the company will not be subject to tax on the amount it refunded. On the other hand, if the ICO receipts are not refunded, the taxability of the amount would depend on whether the ICO is a capital or revenue transaction. The determination will depend on, amongst other factors, the ICO company’s principal business activities, the reasons for the ICO and the contractual obligations arising from the issuance of the tokens.
Founder’s tokens
An ICO company may set aside a percentage of the ICO tokens to be awarded to the founding developers of the ICO in recognition of their efforts in creating and implementing the tokens. Such tokens are commonly referred to as founder’s tokens.
Where the token is used to remunerate a founder for the services he has rendered, it is regarded as revenue in nature and hence, the remuneration is taxable on the founder. However, if the token is not given as remuneration for services provided, the founder will not be taxed on the tokens as it will be regarded as his capital asset. For example, if the founder has contributed money towards the formation of the company and the ICO, and the token was issued to him to confer an ownership right or a right to vote and participate in the business of the token-issuing entity, then the token will be treated as his capital asset.
Founder tokens issued as remuneration are taxable when they accrue to the founder, i.e. when the founder is entitled to the tokens. A moratorium may be imposed such that the founder is not allowed to sell the tokens before the end of a certain number of years from the date of the ICO. If there is a lock-in period or moratorium, the tokens will be regarded as being accrued to the founder when the lock-in period ends or when moratorium is lifted, and will only be taxable then. The amount to be taxed is the value of the token when the moratorium ends.
How InCorp can help?
We have a team of professional tax advisors that have helped many companies to align their tax strategies to their business. We can help you to navigate the tax treatment on digital tokens in Singapore seamlessly while staying compliant so that you can achieve peace of mind.
FAQs
- A digital token is a digital representation of a token holder’s right to receive a benefit or to perform specified functions. Generally, there are three types of digital tokens:
● Payment token – used by owner as a mode of payment;
● Utility token – gives the owner a specified or implied right to use or benefit from services in exchange for the token; and
● Security token – gives the owner equity / an interest akin to a specified or implied degree of control or economic entitlement.
- Payment tokens are not fiat currency as they are not issued by any government and not legal tender. For Singapore income tax purposes, they are viewed as intangible property as it represents a set of rights and obligations and do not have any physical form. Transactions involving the use of payment tokens as payment of goods and services are regarded as barter trade and value of goods or services transferred is determined at the point of the transaction.
- An ICO company may set aside a percentage of the ICO tokens to be awarded to the founding developers of the ICO in recognition of their efforts in creating and implementing the tokens. Such tokens are commonly referred to as founder’s tokens.
- Navigating the tax system in Singapore might be tedious for foreign companies. By engaging a legal tax advisor, you can be at peace of mind and stay compliant with the regulations.
Let us manage your taxation needs.
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