Do you pay taxes on your crypto earnings? Here’s why you might need
Singapore is often cited as a crypto haven due to the country’s tax laws. According to rulings by the Inland Revenue Authority of Singapore (IRAS), residents are not required to pay capital gains taxes. This can include the sale of stocks, properties, and crypto assets.
However, this does not mean that all crypto related products are tax exempt. The IRAS examines the purpose for which crypto assets are used before determining the nature of the resulting income.
To do this, crypto assets have been broadly categorized into three different categories: payment tokens, utility tokens, and security tokens. Each token category serves a unique purpose and is treated accordingly from a tax perspective.
Here is an overview of how different crypto related activities are subject to Singapore tax laws.
Buying and Selling Cryptocurrency
Until 2020, the sale of payment tokens such as Bitcoin and Ethereum were subject to the Goods and Services Tax (GST). Buyers had to bear this additional cost, which made it unfavorable to purchase from a Singapore-based stock exchange.
However, Singapore has since revisited these laws. IRAS now recognizes that payment tokens should not be treated as goods or a service as they primarily serve as a medium of exchange. In light of this, crypto exchanges that offer payment tokens no longer need to charge GST on sales.
Sales of utility tokens may be subject to GST if the tokens are designed to be vouchers. For example, consider an F&B company that issues NFTs that can be used to redeem a meal. The business should charge GST in accordance with IRAS rules for handling vouchers.
If a buyer were to resell their DFT at a higher price, they would have to record their earnings as income and pay taxes on those as well.
Other forms of utility tokens, such as those used as virtual currency in crypto games, are treated the same as payment tokens. They are exempt from GST because they are often used as a medium of exchange.
Sales of security tokens is also not subject to GST, but not for the same reason. Security tokens are classified as financial services that represent a stake in a business or a debt instrument. These services are exempt under the GST law.
Hold a cryptocurrency as an investment
As an extension of the previous subtitle, crypto gains may be taxable depending on Why the underlying assets have been acquired.
Factors such as length of ownership and frequency of transactions examine whether the holder has purchased crypto assets for their intended use or for profit. In the latter case, the gains would be taxable as investment income. This applies to all three categories of crypto assets.
For example, if someone made a profit from arbitrage transactions using Bitcoin, they would be required to pay taxes on their earnings. On the other hand, if Bitcoin were used as a form of payment or as a long-term investment, any profit could be recorded as capital gain.
The same goes for utility tokens. One can buy AXIE tokens to play the online crypto game, Axie Infinity. Over time, the token could increase in value and the holder would not have to pay income taxes. However, if the tokens were bought in a speculative trade and discharged the next day, it would not be classified as a gain.
There are no objective standards that separate capital gains from investment income. A series of considerations must be applied on a case-by-case basis to determine which category crypto profits might fall into.
Payment for goods or services
When cryptocurrency is accepted as a means of payment for goods or services, tax considerations apply as usual. GST and income tax must be paid based on the market value of the goods or services offered.
The same goes for individuals who receive a salary or commissions in the form of cryptocurrency. They are required to pay income tax based on the value of their services, calculated in fiat currency.
If the cryptocurrency received is then exchanged for fiat currency, any gain (or loss) made should also be recorded at the prevailing exchange rate. These may be taxable depending on whether they are perceived as capital gains or investment income.
Crypto mining in Singapore is subject to tax if miners actively use it as a source of income. This is defined by IRAS as a “habitual and systematic effort to profit from activities”.
On the other hand, those who engage in recreational mining are not required to pay taxes when they dispose of their earned crypto assets.
Airdrops are a common marketing strategy used by blockchain companies to promote their token and encourage use. This involves giving or “depositing” tokens into selected user portfolios.
In Singapore, airdrop recipients are not required to pay taxes when disposing of tokens. However, it depends on the requirement that the tokens be given away without any compensation.
Often times, companies can ask users to follow their social media accounts or invite friends to their Discord channel in order to receive an airdrop. In such cases, the amount received could be subject to income tax.
Initial Coin Offerings (ICO)
ICOs are a way to raise funds from the public. A blockchain startup often issues its token for the first time, in exchange for existing payment tokens or fiat currency. The proceeds of an ICO may be taxable depending on the type of token issued.
The issuance of payment tokens may be subject to taxation depending on their specific nature. The tax guide published by IRAS does not detail the considerations that could inform such a decision.
In the case of utility tokens, revenue is classified as deferred revenue. This is because tokens provide access to an upcoming product or service. Thus, taxes should only be paid once the income has been earned.
Like other traditional securities and investment assets, the proceeds from the issuance of security tokens are not taxable at all.
Taxation on cryptocurrency
In countries like the United States and the United Kingdom, taxes on capital gains can be as high as 20 percent. Compared to this, Singapore remains a crypto haven for everyday investors.
That being said, it is important not to equate cryptocurrency with a notion of “zero taxation”. In most cases, tax obligations boil down to the purpose for which the crypto assets are used.
As such, investors need to do their due diligence before deciding where to put their money.
Featured Image Credit: Financial Magnates