Singapore is recognized as a pacesetter in blockchain and cryptocurrency due to its unfailingly supportive regulatory environment. Over the last few years, Singapore has seen a tremendous rise in the number of blockchain projects that have been registered within its borders.
To keep up with the evolving world of digital tokens, the Inland Revenue Authority of Singapore (IRAS) published a guide on the e-Tax that details how digital token transactions including ICOs, IEOS and STOs shall be taxed. These came a few months after Singapore released its new regulations for enterprises offering payment services.
The guide focuses on the taxation of three types of digital tokens. These include security tokens, utility tokens and payment tokens (tokens used as payment options). The guide also elaborates on the taxation of other tokens that are distributed through unconventional means like hard forks and airdrops.
According to the e-Tax guide, all transactions done using payment tokens shall be considered to be in the form of barter trade. Therefore, the recipients of the tokens shall be taxed depending on the value of the underlying goods or services.
Nonetheless, purchasing a payment token is not taxable. However, the returns from the disposal of the token are taxable if the process involved is a trading activity.
Payment tokens miners shall also be taxed if the mining intends to make profits.
Payment tokens distributed via hard forks and airdrops are not taxable if they are freely given out.
According to the e-Tax guide, utility token transactions are not taxable since they are mainly acquired to enable the users to acquire future services within a specific blockchain network.
According to the e-Tax guide, security tokens are regarded as a form of equity or debt since they give owners an implied degree of control or equity to a certain asset or project. As such, the taxation of the returns gotten from security tokens depends on the type of the return. The types in consideration here are interests and dividends.
ICOs and STOs taxation
According to the IRAS, the proceeds of Initial Coin Offerings (ICOs) and Security Token Offerings (STOs) shall be taxed depending on the functions and rights of the used token.
If the issued token is a utility token, the sale shall be considered to be in the form of revenue and is therefore taxable. This is because the utility token is an obligation for the issuer to provide a service or good in the future that shall be bought or paid for using this token.
On the other hand, the issuance of security tokens shall not be taxed since the proceeds parallel the proceeds obtained from issuance of equities or debts, which is normally capital in nature. However, as mentioned above, withholding tax obligation and the general income tax shall apply to the interest and dividends paid to the owners of the token.
Tokens set aside for founders in ICOs and STOs
In most cases, startups set aside some tokens for the founders. In this case, if the tokens are used to pay or compensate the founders, they are regarded as revenue and the founder that receives them shall be taxed. However, if the tokens are not issued as a form of payment, they are regarded as a capital asset of the founder.
What a taxpayer dealing with digital tokens in Singapore should do
IRAS instructs taxpayers in Singapore that deal with digital tokens to keep proper records of the digital token transactions so that it can be simple to file the returns.
The records should have the following:
- Transaction date.
- The number of tokens sold or received.
- Value of the digital token at the time of transaction.
- The used exchange rate.
- Purpose of the transaction.
- Details of the customers/suppliers in case it was a buy or sell transaction.
- Details of the ICO or STO.
- Invoices or Receipts of the expenses incurred within the business.