Singapore Finance Ministry said in reply to the Parliament on MAR 11, 2022, that it would treat income from all cryptocurrencies, including non-fungible tokens(NFTs) transactions or trading, as ordinary income and subject to income tax regulations. He also stated capital gains tax did not apply to NFTs as Singapore had no such a rule.
The ordinary income tax rule applies to businesses and individuals deriving income from crypto trades or transactions. Firms and individuals that make income or profits by mining or staking crypto are also subject to income tax.
Suppose they hold digital tokens for long-term investment purposes. In that case, the Inland Revenue Authority will view price appreciation as capital gains and not impose capital gains taxes as no such tax is available in Singapore.
How do Cryptocurrencies(digital payment tokens) Tax Work in Singapore?
Singapore, a regional financial hub, is one of the places offering the lowest tax rate. The crypto industry has prospered due to lax regulations and low tax rates. Stakeholders in the industry should note the tax obligations from the income derived from the activities related to the virtual currency.
Before discussing the tax effects further, understanding the tax considerations concerning types of virtual currencies defined by the Inland Revenue Authority is necessary.
The Inland Revenue Authority(IRA) defines the use of payment tokens from the other 2 crypto assets as payment for goods and services. Not recognizing the digital token as a legal medium of money, the IRS considers transactions involving payment tokens with goods and services as barter trade and the determination of value at the point of transaction. Bitcoins, Ether, Litecoins, and Dash are payment coins.
A user of utility tokens is not likely to produce an income in exchange for goods and services. A business may deduct the use of utility tokens as expenses according to usual deduction rules. Examples of utility tokens are Filecoin, Siacoin, Golem(GNT), and Basic Attention Token(BAT).
The token, like other investments, is digitalized form of conventional security representing a fraction or whole of an investment. A security token may produce returns to investors like dividends and interest. Whether an investor will be taxed depends on the nature of the return.
Goods and Services Tax(GST)
- Businesses producing and offering payment tokens are now exempt from goods and services tax. They don’t need to register for GST in trades of virtual currencies.
- The IRS doesn’t require entities to file for the output tax due to using digital payment tokens for payments.
- Yet, businesses should report for output tax if they receive payment tokens for the supply of goods and services.
- Companies supplying exempt and taxable digital payment tokens may be partially liable to good and services tax.
- The nature and characteristics of a utility token determine whether a GST is applicable.
- Digital tokens replacing vouchers for redeeming goods and services cease to be a medium of exchange and will be subject to GST treatment of vouchers.
- The use of utility tokens shows the characteristics of payment tokens that will qualify for a GST treatment as a payment token class.
The sale of a security token constitutes a taxable activity unless they belong to exempted financial services under the Goods and Services Tax Act.
- Regarding the digital token as intangible property, the IRS views the use of payment tokens in exchange for goods and services as barter trade.
- Businesses should record unrecognized changes, which are not deductible and taxable, in the fair value of the goods or services.
- The IRS reminds businesses they should apply the same accounting rules to transaction-related to paying digital tokens or cash.
- Whether a transaction is a capital or revenue determines the tax treatment of gains or loss incurred.
- Businesses claim deductions for using payment tokens in exchange for goods or services, the determinant of the trade value.
- The IRS treats the proceeds from the utility token issuance as deferred revenue.
- The issuer is subject to income tax when goods or services are provided or performed.
- Businesses claim tax deductions by paying the tokens for goods or services.
- The rights and obligations of a security token define whether it is a debt or equity and determine its tax status.
- The tax treatment for returns like dividends and interests depends on a security token’s tax status.
- Proceeds from the security token issuance are not taxable owing to their capital nature.
- Tax does not apply to security tokens as capital in nature; otherwise, it is taxable if it is of a revenue nature.
- Issuer may claim tax deductions on dividend, interest, or other distribution payments.
- Non-tax residents may be subject to withholding tax obligations on dividends, interests, and other distributions.
Personal Income Tax
Purchase of Cryptocurrencies
Purchasing cryptocurrencies itself is not subject to tax, but the IRS may consider a buyer’s intention for tax considerations concerning the future sale of the digital tokens.
Sale of Cryptocurrencies
- Like typical business activities, a person can file for tax and claim deductions due to profit or loss if he carries on the business of trading cryptocurrencies.
- A person is not subject to income tax for exchanging cryptocurrencies for fiat money, other digital tokens, or goods or services. But he can not deduct the loss from personal investing in cryptocurrencies.
- Like businesses, the IRS considers each case based on its facts and circumstances. The essential factors assessed include holding periods, transaction frequency, and purposes.
Receipt of Cryptocurrencies
- A person receives cryptocurrencies as compensation upon rendering services and is subject to income tax. The value of a service or good is a determinant basis for assessing tax payable. Related Article: how to pay income tax Singapore
- The IRS considers crypto mining or staking a hobby, and the capital gains derived are taxable. But the expenses incurred are not deductible.
- If a person makes a habitual and systematic effort to profit from the mining and staking activities, the IRS may regard him as a professional miner or staker and may be subject to income tax through the sale of mined or staked cryptocurrencies.
- No capital gains tax regime for individual investors is available in Singapore.
The Regulations on the Protections of Investors from the Monetary Authority of Singapore(MAS)
On Jan 22, 2022, the MAS clarified its stance on cryptocurrencies(Digital Payment Tokens) and their related activities. The central bank does not encourage promotional activities concerning cryptocurrencies to the general public.
Before this, the digital payment token(DPT) service providers actively promoted their services through online, physical advertisements, automated teller machines(ATMs), and other public areas. The MAS thinks the activities may mislead the general public unfamiliar with the DPTs and cause irrational investing and subsequent losses. The updated guidelines prohibit such activities in public.
The MAS pinpoints 2 areas DPT service providers should stop promoting their services:
- The public areas refer to public transport, public transport venues, public websites, social media platforms, broadcast and print media, and provisions of ATMs.
- They include third-party engagements, like social media influencers, to promote cryptocurrency services.
- But DPT services providers can promote their products and services through official websites, mobile applications, and corporate social media accounts.
The MAS emphasizes its openness to developing creative technology like blockchain and welcomes the value-adding uses of innovative applications regarding cryptocurrencies. Yet, digital asset trading is hazardous and unsuitable for the general public. The DPT service providers should not attempt to minimize the risks inherent in these activities in promoting their services to the general public.
Like the contract-for-differences and futures, the payment token derivatives(DPD) are risky investments referring to cryptocurrencies as underlying assets. The MAS doesn’t regulate the investments unless they are traded on an approved exchange under the Securities and Futures Act. Investors should not underestimate the downsides inherent in the investment as they are riskier than cryptocurrencies.
The passed “Payment Services (Amendment) Bill” on January 4, 2021, further empowers the MAS to regulate activities concerning crypto transmissions, custodians, and exchanges.
A DPT service provider should get a license to carry on the crypto business and comply with the MAS’s rules and regulations.
The MAS requires services providers to segregate clients’ funds from companies’ assets to reduce clients’ risks of loss in case of default.
The MAS has broad power to enact measures to safeguard clients’ assets under the amendment bill.
Issues about Crypto Tax
Is receipt of payment tokens through “airdrop” taxable?
Airdrop is a marketing tactic in which businesses distribute cryptocurrencies for free. The aims are to promote and increase the liquidity of a new coin. The IRA views the tokens as taxable income unless it comes with conditions fulfilled in return for the cryptos.
What is a Hard Fork, and Is it Taxable?
A hard fork is the spitting of a payment token and creating a new digital coin with or without the original coin. A company aims to solve its technical problem, fix security issues, add new functions, or reverse certain transactions. Crypto owners may get additional coins besides current ones. According to the IRA, they are not taxable income, as taxpayers get them for free. Nevertheless, realized gains will be taxable if he is engaging in the trading of cryptocurrencies.
Is It Taxable to use Cryptocurrencies in Exchange for Fiat Money?
It depends on whether a digital token is of a capital or revenue nature. Gains will be taxable, and losses will be deductible if it is of a revenue nature; otherwise, it isn’t if it is in a capital status.
Is it Taxable to use Cryptocurrencies in Exchange for other Cryptocurrencies?
Like the answer above, it is subject to the asset’s nature at the point of transaction. The IRA uses the transaction intention to define the crypto’s tax position.
Are the Proceeds from Issuance of Initial Coin Offering(ICO) Taxable?
Businesses should determine the nature of the proceeds from issuance.
Proceeds from payment token ICO are trading stock of an issuer and taxable. Regarding utility tokens, the proceeds are a promise to perform a specific action in the future. The IRA treats the proceeds as deferred revenue and will tax upon fulfillment of services or obligations. Security tokens: digital coins attached with contractual rights or economic entitlements to holders are capital in nature.
Income tax rules or withholding tax obligations apply to dividends, interests, and other distributions owners receive.
How does the Inland Revenue Authority Determine the Source of Income?
The source of income is not easy to determine as transactions can be international across nations. Several factors are critical in confirming the country’s source of income.
For payment and utility tokens
- Physical presence: A physical location like an address is essential in an income source.
- Location of marketing activities: It is where the people the promotional activities target are Singaporeans or not.
- The participants in the ICO: Where the participants are based is critical to determining the source of income.
- The developers behind the blockchain technology: Whether the developers are based is crucial to the IRA’s tax considerations.
For security tokens
- Interest income: Considerations refer to the place the lending activity took place.
- Dividend income: The status of a dividend-paying company determines the income source.
Singapore crypto tax regulations have changed to the evolving trend of the industry. A crypto business or individual buyer should base its tax status on the uses and functions of a digital payment token. The IRA categorizes into 3 types for determining tax status: payment tokens, utility tokens, and security tokens.
- Income tax rules apply to the cryptocurrency industry, while capital gains tax rules are not applicable.
- The tax applies based on the uses and functions of 3 digital assets: payment tokens, utility tokens, and security tokens.
- Businesses and individuals should clarify their tax positions regarding cryptocurrency before carrying out the trades.