Business

Understanding Tax Treatment of Payment Tokens in Singapore

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10 August 2023

Introduction

Singapore is one of the most crypto-forward countries in the world, with a vibrant ecosystem of startups, VCs and retail presence. In fact, according to a recent survey by The Straits Times, Singapore’s state media, 4 in 10 surveyed said that they have at least 10% of their portfolio in crypto assets. 65% of Singaporeans surveyed who earn more than $5k a month (above the median salary) have crypto while this percentage increases when you move up the salary ladder.

It is not surprising that numerous companies in Singapore are considering crypto acceptance as a means to engage with the growing affluent population. Nevertheless, the crashes and scandals that occurred in 2022 have prompted Singaporean regulators to adopt a more stringent stance. As a result, any individual or business intending to explore accepting cryptocurrencies for their operations must ensure strict compliance with prevailing tax and accounting requirements.

In this blog post, we will take a look the current landscape for crypto regulations in Singapore, including the guidelines set by MAS and some practical advise for best practices to ensure you are always compliant.

Income Treatment in Singapore

Before diving into payment token tax treatment, let’s briefly review how income is treated in Singapore. Taxable income in Singapore is defined as income that is accrued or derived within Singapore’s boundaries and/or received in Singapore from outside Singapore.

The value of taxable income is determined by the gains or profits from any trade or business, income from investment such as dividends, interest, and rental, royalties, premiums, and any other profits from property. Other gains that are revenue in nature are also included in taxable income.

Capital gains, such as gains from sale of shares, properties and intangible assets are generally not taxable in Singapore. Some exceptions remain, such as income that is derived from economic activities in conducting one’s business in Singapore. IRAS employs the badges of trades test to determine taxability in this case.

💡You may have heard of the Singapore High Court case in which there was a fervent exchange between the judge and the plaintiff’s lawyer regarding whether crypto is considered money. Eventually, the judge decided that, in his view, crypto is not money, even though it may seem like one. This raises the question of whether crypto, not being considered money, should be taxed when received as earnings. Unfortunately, the tax code is clear in this case, stating that crypto received as part of payment or revenue will be subject to normal income tax rules.

Tax Treatment of Digital Tokens in Singapore

When a business chooses to accept digital tokens as a form of payment or revenue, they are subject to normal income tax rules. Transactions that involve the collection of crypto are treated as per normal income tax rules and are taxed on income derived from or received in Singapore. Tax deductions, where allowed, are permissible to be applied to these transactions.

Actions That May Be Subject to Taxation

Various actions related to payment tokens may be subject to taxation in Singapore. These actions include:

  1. Receive payment tokens as payment for goods and services
  2. Receiving payment tokens as part of employment remuneration
  3. Using digital tokens as payment for goods and services
  4. Buying and selling digital tokens
  5. Issuing digital tokens through an initial coin offering (ICO)

Digital Token Tax Treatment

Payment tokens are digital assets that can be used or are intended to be used as a means of payment for goods and services. Transactions involving payment tokens are treated as barter trades, and the value of goods and services transferred is determined at the point of the transaction. There is no specific methodology provided to value payment tokens, but the general rule of thumb is to use the exchange rate that best reflects the value of the tokens, considering reasonable and verifiable criteria.

Businesses are taxed on the value of the goods provided or services performed. If income is derived from a gain from the payment token (token price goes up), that gain may be taxable.

Utility tokens provide the holder with a specified or implied right to use or benefit from services in exchange for the token. They are similar to vouchers and may give rise to a deductible expense, subject to the usual deduction rules. The payment is treated as a prepayment, and deductions may be allowed for the amount incurred at the point where the token is used to exchange for goods and services.

Security tokens are digital tokens that represent a stake or investment in an underlying asset. The tax treatment of security tokens depends on the nature of the return derived from the security tokens. If the return is in the form of interest, dividends, or other distribution, it is taxable. Upon disposing of the token, the holder is taxed, and the tax treatment of the gain or loss is dependent on whether the security token is a capital or revenue asset, which will have bearings on whether the gain or loss is capital or revenue in nature.

Record Keeping

Record-keeping is a vital aspect of any accounting process, and it becomes even more critical when dealing with crypto transactions. The required supporting records will include the date of the transaction, the number of units of digital tokens received or sold, the value of digital tokens at the time of the transaction, the exchange rate used, the purpose of the transaction, details of customers or suppliers, as well as receipts or invoices of business expenses. Maintaining accurate records of all transactions involving payment tokens is essential for proper tax reporting.

💡 Suberra’s merchant dashboard provides a convenient way for merchants to keep track of their transaction history. You can learn more here.

Deeper Dive into Payment Tokens

The following is a summary of the tax treatment of payment tokens for different actions:

  1. Receiving payment tokens for goods and services:
    • If payment tokens are exchanged for goods or services, the tax deduction allowed for expenses incurred is determined based on the value of the underlying goods or services.
    • The taxability or deductibility of the gain or loss on disposal of payment token is determined based on the badges of trade.
  2. Receiving payment tokens as part of employment remuneration:
    • Wages paid in payment tokens for services performed by an individual are subject to income tax as per their income bracket.
  3. Using payment tokens as payment for goods and services:
    • Businesses are taxed on the value of the goods provided or services performed.
    • If income is derived from a gain from the payment token (token price goes up), that gain may be taxable.
  4. Buying and selling payment tokens:
    • The taxability of gain or loss from the disposal of payment tokens for fiat currency depends on whether the payment token is a capital or revenue asset, and consequently, whether the gain or loss is capital or revenue in nature.
  5. Issuing payment tokens through an initial coin offering (ICO):
    • The tax treatment of the ICO will depend on the nature of the token and the return derived from it.

Summary of Tax Treatment of Payment Tokens

In summary, the tax treatment of digital tokens in Singapore varies depending on the type of token. Payment tokens are taxed based on the value of the goods or services provided, while utility tokens may give rise to a deductible expense. Security tokens’ tax treatment depends on the nature of the return derived from them.

With these varying tax treatments, it’s important to keep accurate records of all crypto transactions. That’s where Suberra’s merchant dashboard comes in handy. It provides a convenient way for merchants to keep track of their transaction history, including essential details such as the date of the transaction, the number of units of digital tokens received or sold, the value of digital tokens at the time of the transaction, the exchange rate used, the purpose of the transaction, and the details of customers.

By utilizing Suberra’s merchant dashboard, merchants can streamline their crypto collection processes and ensure they stay compliant with tax laws. So if you’re a business owner in Singapore, consider signing up for Suberra’s merchant dashboard today and start simplifying your crypto collection processes without the headache of compliance!

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