Singapore has given guidance on how it intends to tax bitcoin transactions for businesses and merchants, becoming one of the first governments in the world to do so.
Singapore-based bitcoin brokerage Coin Republic received an official response to its requests to the Inland Revenue Authority of Singapore (IRAS) for clarification on how to handle capital gains, earnings, and even GST (aka VAT, or sales tax) on bitcoin exchanges and bitcoin related sales.
Coin Republic provided the IRAS with a number of detailed scenarios to match its business activities, and asked the authority to review the tax implications for each.
“The guidance which IRAS laid out is rational and well thought out. As a business owner, I can clearly account for my earnings on Bitcoin trades for my clients and my own positions and pay the proper taxes,” said David Moskowitz, Coin Republic’s founder.
As a regional financial services hub and IT center, Singapore could provide a useful model for authorities in other countries to follow. It has also adopted a cautious but sensible approach to bitcoin so far — after initially warning people against using bitcoin, the Monetary Authority of Singapore (MAS) later declared it would not interfere in people’s or businesses’ ability to transact in bitcoin, essentially opening the country up as a base for bitcoin entrepreneurship.
Defining bitcoin
There were some interesting points in the IRAS’s response. Some highlights were: Companies will be taxed on income based on bitcoin sales, as though bitcoins were products. When used as an investment, though, they are treated as capital gains (Singapore has no capital gains tax for non-property investments). GST rules could vary depending on the level of service an exchange provides (see below).
When accepted as payment for goods and services, bitcoins are counted as barter exchange. This includes digital products like music, but not in-game virtual products unless they are exchanged for money or other goods in the real world.
The IRAS reminded Coin Republic that bitcoins do not fit the definition of ‘money’ or ‘currency’, so supplying them is seen as a good/service for taxation purposes rather than a currency exchange. Also, companies (eg: payment processors) deemed to be overseas companies, or operating from outside of Singapore, will not be taxed.
Moskowitz said he hoped the GST regulations would be reconsidered to prevent bitcoin businesses being double or even triple-taxed: Once upon acquiring the bitcoins, again when using them as payment, and again when selling bitcoins for cash.
“Ideally, I’d like to see GST to only apply when bitcoin is exchanged for goods or services with a GST registered vendor – that’s when an exchange of value or service actually takes place,” he said.
“The exchange of currency to bitcoin is simply an exchange of stores of value, similar to investment grade gold or silver – which is already GST exempt in Singapore.”
Is taxation possible?
There has been much discussion around whether any government even has the power to tax transactions on an essentially anonymous form of money. Libertarian-leaning bitcoin fans often scoff at the idea. More pragmatic businesspeople see taxation as inevitable at some point, arguing that it is another step towards legitimacy and would lead to greater adoption in the business world.
It’s important to remember that business transactions in hard cash are already subject to taxation in most countries, despite the anonymous nature of cash making it impossible to notice every small interaction. Technically, the same applies to any form of payment you receive for goods or services, even if it is barter. Try to run a multi-million dollar business purely in cash though, and you will soon attract the tax authorities’ attention.
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Thus it is hard to imagine a significant online retailer or other business accepting bitcoin without some form of tax assessment in place. At least, not without the kind of creative jurisdictional interplay employed by large corporations and offshore small businesses.
Other countries
So far, the world’s governments and central banks have put more energy into persuading the public that bitcoin is risky and not a currency, or restricting its use, than formulating rules to tax its transactions.
A few countries have issued statements where the exact tax rules hinge on whether bitcoin is classifed as a virtual currency, asset, or good. Slovenia (the home of Bitstamp) has said bitcoin is a virtual currency but not a ‘monetary asset’, and bitcoin income would be taxable.
Germany has said it regards bitcoin a ‘private money’ or a ‘financial instrument’, and the Swiss parliament is “considering” a move to have bitcoin officially recognized as a currency.
Here are some more details on Singapore’s tax plans, based on Coin Republic’s email exchange:
Income Tax
Companies in the business of buying and selling bitcoins will be taxed based on the gains from sales of those bitcoins. On the other hand, if the bitcoins are part of the company’s investment portfolio acquired for long term investment purposes, the gains from the sales will be capital in nature, and thus not taxable.
GST (aka VAT or sales tax)
The sale (including the exchange) of bitcoins in return for a consideration in money or in kind is a taxable supply of services subject to GST. If the seller is a GST-registered person, he would have to account for output tax on the sale of bitcoins made in the course or furtherance of his business.
Where bitcoins are accepted as payment for real goods or services (or digitized items like online music), such transactions are treated as a barter exchange. GST should be accounted for on the individual supplies made (ie: the supply of bitcoins and the supply of real goods or services) if the parties involved are GST-registered persons. However if the bitcoins are used to exchange for virtual goods or services within the virtual gaming world, as a concession, the supply of bitcoins will not be taxed until the bitcoins are exchanged for real monies, goods or services.
As bitcoin does not fall within the definition of ‘money’ or ‘currency’ under the GST Act, a supply of bitcoins is not a supply of money and would be disregarded for GST purposes. The supply of bitcoins would be treated as a supply of services as it involves the granting of the interest in or right over the bitcoins.
The GST treatment of the supply of bitcoins will depend on whether the company is acting as an agent or principal in the transaction. If the company merely facilitates and is acting as an agent in the bitcoin trade (eg: bitcoin exchange transfers bitcoins directly to a customer’s wallet), then GST is chargeable only on the commission fees received. However if the company is acting as a principal in the bitcoin trade (eg: it buys and onward-sells bitcoins to the customer), GST is chargeable on the full amount received, ie: the sale of bitcoins and commission fees.
Singapore Merlion image via Shutterstock