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The cryptic art of taxing digital token transactions – in a nutshell

David Sandison David Sandison


I don’t think anyone would dispute the assertion that we have seen peak ICO (or “Initial Coin Offerings”). These phenomena started out, as indeed Bitcoin did, as a means of operating outside the limitations imposed by regulated financial systems; and, in the case of ICO’s, specifically as a means of capital raising for entrepreneurs looking to build the next blockchain-based platform that would knock your socks off, end famine and bring everlasting peace to the world.

The idea of an ICO is that the ICO issuer would issue digital (i.e. non-paper) tokens to its benefactors in proportion to the funding they provided for the technology platform the issuer group professed it was going to create. “Benefactors” is a more apt description of the financial contributors to an ICO than “investors”, since they were certainly not allowed to “invest” in anything. As a result, what they were offered in return was not shares, voting rights, or debt obligations, but:

  1. the “potential” of exchanging the tokens for goods or services derived through usually privileged access to the platform, assuming the platform ever saw the light of day (and assuming you would have any need for them) or exchanging them with other people that wanted them for some reason. These are known as utility tokens; or
  1. nothing, other than the hope that they could be exchanged for other similar tokens that were backed by a platform which had things you did want, or could be exchanged for traditional fiat currencies. These are known as payment tokens.

As with many ideals, reality eventually bites. The initial band-wagon-jumping feeding frenzy has died down, leaving the playing field to the hard-core, better managed, sustainable concepts. But the survival, even of these, requires constant evolution, innovation and, dare we say it, credibility. The “traditional” ICO is thus giving way to the STO, or the security token offering. This is more aligned with and accepting of, attendant regulatory pressures and “investor” savviness. This means offering documents, and compliance, and without being too unkind to innovation, almost back to where we started.

A security token though, does what it says on the tin. It gives you certain financial rights over the issuer or his assets, similar to shares or bonds.

So we are left with three-ish types of token:

  1. the payment token
  2. the utility token; and
  3. the security token; or
  4. hybrids of the above.

Many of the more resilient digital tokens created in these ICOs and STOs are still around. Many are still being created. The concept is slowly being understood and accepted. Blockchain and the digital token are here to stay. As a result, we are beginning to see a growth in the mainstream use of the tokens, irrespective of their underlying utility or security. They are being used either as a medium of exchange for traditional business transactions, or simply for investment or trading purposes, using market arbitrage techniques of varying hues of sophistication.

IRAS approach

It has taken a while (given that the ICO boom came and went between 2017 and late 2018), but the Inland Revenue Authority of Singapore (IRAS) has recently issued two guides on the topic, one for GST, the other for Income Tax. We now have the full set, hence the purpose of this article. The aim is not to explain the detail. Rather it is to set the context in which the detail is applied.

GST was first out of the traps in November 2019 with its e-Tax Guide: GST - Digital Payment Tokens. Income Tax followed on 17 April 2020, with the e-Tax Guide: Income Tax Treatment of Digital Tokens.

Both guides acknowledge the existence of the different types of tokens as described above; and the glossaries in each guide are broadly the same. But that is where the similarities end. It turns out it’s not so much the plot of this story that is tricky; it is getting past page one and understanding who the characters are, that requires the deep concentration. The plot looks after itself.

So the first, and most important step is to work out what sort of token you have. Once you have done that, you can go apply the basic GST and Income Tax principles we are all familiar with and relax, give or take. However, intuition and logic alone will not get you off the mark. For that you will need some help.

Spoiler alert!

Once you have grasped who the main characters are, the guides are not exactly page-turners.

Goods and Services Tax

Essentially, the GST guide digs out payment tokens for special consideration – and applies specific rules around their definition. These tokens are then treated, effectively, as money, except where they are used to buy actual money, or another digital payment token, or are in fact money. This means that transactions in payment tokens where they are used to buy other goods or services are ignored for GST purposes, as money effectively is.

However, the exchange of payment tokens for fiat currency or other payment tokens is treated is an exempt supply, and the GST treatment is the same as that applied to the exchange of fiat currency (i.e. the absolute value of the FX gain or loss).

So even though a payment token may walk like a duck, and quack like a duck, it can only be categorised as a riverbank-dwelling web-footed member of the anatidae family for GST purposes sometimes. It all depends on what it is used for. With me so far?

All other tokens are then lumped together and treated, effectively, as intangible property. Transactions in these tokens are consequently looked upon as supplies of services in a barter transaction (pigs for goats). The type of supply (standard, zero) will then logically follow by applying GST principles as you would to any other barter transaction.

The only other feature of note, is that where tokens are dealt with on an exchange where the identity of the counter-party is not disclosed, the place of belonging of the exchange is to be taken as a proxy for the place of belonging of the counter-party.

To be a payment token for GST purposes, a token has to exhibit the following features:

(a)   it is expressed as a unit;

(b)   it is designed to be fungible;

(c)    it is not denominated in any currency, and is not pegged by its issuer to any currency;

(d)   it can be transferred, stored or traded electronically; and

(e)   it is, or is intended to be, a medium of exchange accepted by the public, without any substantial restrictions on its use as consideration.

Bitcoin, and Ether, among others, are cited as examples of digital payment tokens for these purposes.

However, a payment token does not include:

(a)   money;

(b)   anything which, if supplied, would be an exempt supply under Part I of Fourth Schedule to the GST Act for a reason other than being a supply of a digital token(s) having the characteristics of (a) to (d);

(c)    anything which gives an entitlement to receive or to direct the supply of goods or services from a specific person or persons and ceases to function as a medium of exchange after the entitlement has been used.

Income Tax

Income Tax takes a different (and less complicated) tack. It ignores all the subtleties around payment tokens and treats both payment and utility tokens as intangible property. In the context of transactions, they are treated as non-monetary consideration; and if acquired and held, they are regarded as investments, trading stock or prepayments (where they are in anticipation of a future entitlement to goods or services) as the case may be.

Transactions in them are regarded as taking place at market value. As a result, market valuations need to be done to determine the extent of income or expenditure. The guide sets out some acceptable valuation approaches.

Security tokens, unsurprisingly, need to be examined to determine whether they confer equity or debt entitlements, with their returns dealt with accordingly for tax, as essentially dividends or interest.

Purchases and sales of all the tokens come under the inevitable “Badges of Trade” scrutiny to determine whether any gains or profits made out of their realisation should be taxed as income or tax-free as capital.

The only diversions worthy of further comment is the section on ICOs and the treatment of hard forks and airdrops.


As noted above, these have been on the wane since late 2018, but a number may yet have open years of assessment, so the treatment adopted by IRAS is still topical. The critical question is whether the proceeds received for the issue of the tokens by the issuer are taxable or not; and if so, when. As the tokens in an ICO (as opposed to an STO) simply cannot confer any debt or equity entitlements (which would make the proceeds capital), they are simply a cash receipt of the business as they represent a prepayment for goods and services yet to be produced. They are therefore likely revenue in nature.

IRAS e Tax Guide: Tax Treatment Arising from Adoption of FRS 115 or SFRS(I) 15 - Revenue from Contracts with Customers (Second edition)

“With the adoption of FRS 115 or SFRS(I) 15, the accounting revenue as determined in accordance with the Standard would continue to be accepted as the revenue in most cases for tax purposes, except where specific tax treatment has been established through case law or provided under the law, or where the accounting treatment deviates significantly from tax principles”. 

The IRAS however, then make the rather sweeping statement that this revenue will generally be regarded as deferred revenue. However, they seem to miss an important point. This is the accounting treatment, and its interaction with the tax treatment.

Financial Reporting Standard FRS 115: Revenue from Contracts with Customers, is all about the timing and recognition of income. The IRAS e-Tax Guide: Tax Treatment Arising from Adoption of FRS 115 or SFRS(I) 15 - Revenue from Contracts with Customers (Second edition) dated 16 November 2018, basically states that the tax treatment will generally follow the accounting treatment unless there are good specific reasons not to.

The key question therefore is whether, under FRS 115, the proceeds will be deferred and spread over the life of the project. This in turn is determined by when “performance obligations” have been met and, in short, what percentage of completion that performance milestone represents.

I am not sure if you have read any ICO Whitepapers or their Terms and Conditions. But in most, you have to struggle to find any performance obligations. Or even any contractual obligations at all. Enough said.

Hard-forks and airdrops

Hard-forks are quite rare and happen when a token splits in two and the siblings go their own way. This does not constitute a taxable event, and nor should it, as no value has been realised (it is like a stock split).

Airdrops are free distributions of tokens, usually effected as part of a marketing effort to increase awareness and enhance liquidity. Interestingly, these are not regarded as income in the hands of the “dropee” unless they are ostensibly awarded in exchange for goods or services.

So that is it. The crypto story. Once you have sorted page 1 and decided what type of token you have, and what it is being used for, all you need is to be an income tax and GST expert, and you are on your way.