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Challenges of cryptocurrency taxation

21 Apr 2018 at 04:00 / NEWSPAPER SECTION: BUSINESS

Challenges of cryptocurrency taxation

Ever since cryptocurrencies started to gain popularity, policymakers in many countries have been debating how to design the tax system and regulate transactions in digital assets. Surprisingly, the positions of governments differ widely, in part because there is no multilateral agreement covering this new realm.

Essentially, a government has to decide whether it wishes to maintain the neutrality of its tax system by imposing the right kind of tax at the right time, or if it wants to discourage the use of cryptocurrencies by imposing unusually high tax burdens. While some countries treat cryptocurrencies in the same way as other forms of foreign exchange, others treat them as tradable assets for tax purposes.

Thailand trails many countries in addressing the rise of cryptocurrencies. Only after a local company announced an initial coin offering (ICO) did tax become a point of interest. Nevertheless, private firms have jumped into the game without knowing how they should realise income for tax purposes. In fact, they have no idea what kinds of taxes they might face.

Last month, the cabinet suddenly approved the drafts of two emergency decrees, one to regulate transactions, and the other on taxation rules for what the decrees refer to as "digital assets". The announcement shocked the market, effectively stopping new ICOs by imposing both income tax (as well as withholding tax) and value-added tax (VAT) on transactions. This appears to reflect an attempt to discourage the excessive use of and investment in digital assets.

Indeed, the diverse characteristics of cryptocurrencies make it hard to come up with one taxation rule for all digital assets, but the first draft seems to overlook this factor. Hence, the use of ICOs to raise funds could be caught in the net -- making them expensive or almost impossible from a tax point of view.

The draft divides "digital assets" into two categories. The first is "cryptocurrency", defined as having value in itself without having to reflect any underlying assets, currencies or equities. These "altcoins" such as Bitcoin and Ethereum can be used to pay for goods or services. The second is "digital tokens", which give a holder the rights to exchange for goods, services or other rights as agreed by the issuer of an ICO. Their value could reflect the underlying assets or the business projects (utility tokens), and sometimes represent the value of shares in an enterprise (security tokens). For example, the US Securities and Exchange Commission subjects securities tokens to securities regulations.

The draft suggests two new classes of taxable income from digital assets: profit distribution or other profits earned, and gains from the disposal of digital assets, on which 15% withholding tax will be imposed. For individual taxpayers, this withholding tax does not form the "final tax", and they may still be required to include income in the year-end tax calculation and pay additional taxes if their effective tax rate is higher.

In other words, if digital tokens are issued to reflect the value of shares or business projects, tax treatment of profits distributed to the holders of such tokens will be harsher than that applied to dividends, as the latter are taxed at only 10% for individuals and offshore corporate investors. Meanwhile, taxes on dividends distributed to a Thai company may be reduced by 50% or completely exempted under the existing rules.

However, many questions remain, such as how to decide the taxing jurisdiction of digital assets issued offshore and, in computing gains from the sale of digital assets, how to keep track of tax costs for withholding tax purposes.

The United States has taken the position since 2014 that the mining of cryptocurrencies is a derivation of taxable income in an amount equal to their fair market value, while Japan last year declared that mined cryptocurrencies must be treated as outright income for tax purposes. It is possible that Thailand will follow suit.

Nevertheless, there is concern that the draft does not clearly differentiate the tax liability of digital mining from fundraising schemes, which means that digital assets earned in the course of fundraising could be taxed right away, unlike a loan or the issuance of debentures. This feature will definitely kill most transactions involving digital tokens in Thailand.

In respect of indirect tax, when the US first declared cryptocurrencies as digital assets, some states treated the purchase of goods or services with cryptocurrencies as barter trade, and imposed sales tax on both parties. However, they later decided this was inappropriate. Japan also used to collect consumption tax on cryptocurrencies but ended the practice last year. Singapore treats virtual currencies as kind of a service provision and imposes goods and services tax (GST) on their use in barter trade, but no GST is imposed on the mere investment and sale of cryptocurrencies.

Thailand will need to consider whether it will really treat digital assets the same as other assets, which would have VAT implications. Since VAT is imposed on the sale of goods, if cryptocurrencies are treated as "assets", using digital assets to buy goods or disposing of them could be equivalent to a trade and trigger VAT on both parties.

The initial draft clearly was thrown together hastily, and the undue tax burden could slow Thailand's competitiveness as it moves towards the digital economy. The government really needs to carefully review its policy and differentiate between the taxation of cryptocurrency mining and digital token transactions in order to design a tax system that fits with the Thailand 4.0 strategy.

By Rachanee Prasongprasit and Professor Piphob Veraphong of LawAlliance Limited. They can be reached at

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