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 admin@lawalliance.co.th