Income Tax and GST Treatment of Virtual Currencies
Virtual currency is an emerging digital asset, designed to function as a medium of exchange, which may be used to pay for goods or services, or held for investment. In some environments, it operates like “real” currency (i.e. the coins and banknotes designated as legal tender) but it does not have legal tender status in any jurisdiction.
Due to the growing popularity of virtual currencies, some businesses in Singapore accept virtual currencies as a mode of payment for goods and services they provide / make payment for goods or services using virtual currencies. Businesses that choose to accept virtual currencies remain subject to normal income tax rules. These businesses should record the sales based on the open market value of the goods or services in Singapore dollars, not in virtual currency.
However, if the open market value of the goods or services cannot be determined (e.g. the goods or services are only traded with virtual currencies), the virtual currency exchange rate at the point of transaction may be used.
Trading in Virtual Currencies
Besides accepting virtual currencies as a mode of payment, some businesses in Singapore may buy and sell virtual currencies.
As there are no capital gains taxes in Singapore, any gains/losses from the disposal of virtual currencies which were held for long-term investment purposes are not taxable/tax-deductible in Singapore.
However, if businesses are buying and selling virtual currencies in the ordinary course of their business, the profits/losses derived from trading in the virtual currencies are taxable/tax-deductible. Profits/losses derived by businesses, which mine and trade virtual currencies in exchange for money, are also taxable/tax-deductible.
Whether a transaction is capital or revenue in nature is dependent on the facts and circumstances of each case.
- Motive – whether there was an intention to trade at the time of the acquisition of the virtual currencies
- Frequency of transactions – extensive buying and selling of the virtual currencies would suggest the existence of a trade as compared to an isolated transaction.
- Holding periods – Shorter holding periods would be indicative that the virtual currencies were held for trading instead of investment.
- Circumstances of the realisation – Certain situations will less likely to be considered as trading e.g. to tide over cashflow issues, foreclosure threat by creditors etc.
- Mode of financing – Short-term financing would suggest the existence of a trade.
- Other factors – Availability of documentation maintained by the company to indicate its intention, whether there were any feasibility studies conducted etc.
GST Treatment of Virtual Currencies
As the adoption of virtual currencies continues to grow, it is also crucial to understand the GST implications arising from the use of virtual currencies.
In Singapore, GST is chargeable on goods and services categorised as taxable supplies. Taxable supplies are further categorised as standard-rated or zero-rated. Standard-rated supplies are goods sold or services provided locally. Meanwhile, zero-rated supplies, which GST is chargeable at 0%, are goods exported overseas or services classified as international services under Section 21(3) of the GST Act.
To determine the GST treatment of virtual currencies, we need to ascertain if virtual currencies is a supply of goods or services. For GST purposes, virtual currencies (e.g. Bitcoins) are not considered as ‘money’, ‘currency’ or ‘goods’ for GST purposes. Instead, the supply of virtual currency is treated as a supply of services, which does not qualify for GST exemption.
Selling Virtual Currencies
For a GST-registered business which sells virtual currencies as a principal, it will have to charge GST on the sale of the virtual currencies, unless the sale is made to a person belonging outside Singapore.
For a GST-registered business that acts as an agent to facilitate the sale of virtual currencies, it needs to charge GST on the commission fees it receives, unless the service is supplied to a person belonging outside Singapore.
Meanwhile, GST-registered virtual currency exchange located in Singapore will need to charge GST on the trading fees that it charges.
Buying Goods or Services Using Virtual Currencies
When a business buys goods or services using virtual currencies, the transaction will be considered as a barter trade. Here, two supplies are made – one by the supplier who supplies the goods and services, and another by the buyer who supplies the virtual currencies.
If the respective supplier is GST-registered, GST needs to be charged on each supply (i.e. the supply of goods and services and the supply of virtual currencies).
As a concession, GST needs not be charged if virtual currencies are used to exchange for virtual goods or services within the gaming world. However, if virtual currencies are exchanged for real monies, goods or services, GST will need to be charged.
Importing Goods Paid by Virtual Currencies
Goods imported and paid for using virtual currencies are subject to the same import GST rules and reliefs as those paid for using real currencies.
References
Disclaimer: This guide is intended as a general guide only, and the application of its contents to specific situations will depend on the particular circumstances involved. Accordingly, readers should seek appropriate professional advice regarding any particular tax issue that they encounter, and this guide should not be relied on as a substitute for this advice. While all reasonable attempts have been made to ensure that the information contained in this guide is accurate, Enston accepts no responsibility for any errors or omissions it may contain, whether caused by negligence or otherwise, or for any losses, however caused, sustained by any person that relies on it.