By Pramod Batra
Tax authorities have taxed crypto transactions either based on existing tax legislation or relying on specifically enacted laws or guidelines (where applicable). Here we look at the tax treatment that India has adopted vis-à-vis three developed A-Pac jurisdictions.
India has passed provisions for the taxation of income from virtual digital assets (VDAs), which include cryptocurrencies and non-fungible tokens (NFTs), among others, to tax gains at 30%. The law also provides that in the calculation of these gains, only the cost of acquisition will be allowed as a deduction. In addition, a VDA’s transfer loss has been made ineligible for offsetting against income and this loss cannot be carried forward for offsetting in future years. ARV donations over 50,000 have also been made taxable.
The government, to prevent tax leakage, has also introduced a 1% withholding tax requirement on the purchaser of a VDA. Recent guidelines issued by the Central Board of Direct Taxes set among other things the primary responsibility for withholding tax on the buyer, with the provision that the exchange may take steps to ensure compliance with withholding tax where there is a written agreement to this effect between the buyer/seller and the exchange.
On the GST front, the GST authorities are apparently considering labeling cryptocurrencies/NFTs as actionable goods, services, or debts. This would be essential in determining the applicable rate of GST, with the maximum rate of 28% being applicable to the supply of actionable claims, such as lotteries. Another question concerns the determination of the “provider” as well as the “place of supply” of the cryptos provided in the metaverse.
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There is no crypto-specific tax legislation in Australia. However, the Australian Tax Office (ATO) has issued guidance on various crypto-related income tax aspects. The tax consequences depend on how a crypto asset is acquired, held and disposed of. The ATO guidelines provide that the gain on the disposal of crypto assets held as investments (sale, exchange, exchange, gift, conversion into fiat currency, etc.) gives rise to capital gains tax . As an exception to this general rule, gains on the disposal of “personal use” crypto assets are not subject to capital gains tax consequences. (However, these gains are taxable when personal-use crypto assets are acquired for more than AUD 10,000). The ATO guidelines also provide that gains/rewards from crypto as well as the value of crypto tokens acquired through airdrops are taxable as ordinary income on the income account, with the same applying to businesses. trading companies that transact crypto assets. . The ATO guidelines take due account of the fact that crypto assets can be stolen or lost due to a multitude of circumstances such as the loss of a private key. In such cases, the taxpayer may claim a capital loss. The ATO also provides guidance on GST for “digital currency” transactions and designates them as “financial supplies” not subject to GST. “Digital currency” excludes certain digital units that entitle the holder to an exchange of goods or services in the future or units that derive value from something else, for example, NFTs backed by tangible assets.
Singapore follows a territorial tax system whereby only income originating in Singapore is taxable. The nation also does not tax capital gains, and there are no crypto-specific tax laws. Therefore, companies and individuals holding cryptocurrencies for long-term investment purposes are not subject to tax. Businesses that derive income from cryptocurrency transactions are taxed provided the income originates in Singapore.
The IRAS e-Tax guidance on the tax treatment of digital tokens provides for the classification of crypto assets/tokens into payment tokens, utility tokens or security tokens. Payment tokens are considered intangible assets and related transactions are considered barter requiring valuation of goods/services for the calculation of taxable income or deductible expenses. Unrealized capital gains/losses on payout tokens have no tax impact.
The cost of acquiring the utility token (to be exchanged for goods/services in the future) is treated as a prepayment and allowed as a deduction at the time of exchange. Security tokens, i.e. the token form of securities/assets/investment instruments, are taxed according to the nature, rights and obligations attached to them.
The IRAS e-Tax GST1 guide provides guidance on GST implications for digital payment token (‘DPT’) transactions. DPTs include cryptocurrencies but generally exclude utility tokens and DPT supplies are not subject to GST. It has also been clarified that the transfer of NFT constitutes a taxable supply of services.
Hong Kong levies tax on income derived from Hong Kong. Departmental Interpretation and Practice Notes No. 39 (Revised) issued by the Inland Revenue Department provide for the categorization of crypto assets into payment tokens, utility tokens, and security tokens. Frequent trading of cryptocurrencies in the “ordinary course of business” is considered income, subject to Hong Kong income tax.
Tax challenges arising from the digital economy (intended to be addressed by OECD Pillar 1) are expected to increase exponentially. The advice provided by Australia and Singapore reflects a broad consensus around bringing cryptocurrencies and blockchain-based businesses into the mainstream. India. on the other hand, enacted strict provisions generally seen as a deterrent to cryptocurrency transactions. It should be remembered that tax certainty and a liberal compliance regime go a long way towards ensuring tax compliance and therefore future tax laws should be designed accordingly.
The author is partner, Deloitte Haskins & Sells LLP