CRYPTO: Taxation on crypto-assets

PH Taxation

Xcept for refunds, tax laws should be construed against the government (i.e., in favour of the taxpayer) particularly in the case of ambiguity; hence, no prescriptive guidance on a subject means the subject is not to be taxed. However, Tax Code was wittingly crafted to tax all earned income. And, unless it is explicitly exempted, it is taxable in practice.

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In all occasions, a levy is dependent on its classification. For instance, if it is a property, then capital gains tax (CGT) applies; for shares of stocks, stock transaction tax (STT) applies – unless not listed where CGT applies. In most cases, it follows the accounting classification save for the glaring difference on the treatment of realized and unrealized gains (and losses) where tax rules follow cash movements, i.e., taxable (deductible) only when realized or cash is received.

BIR might have been deferring the issuance of a descriptive ruling since they would like to observe the crypto happenings in the CEZA being the ‘sandbox’ (test environment) prior to drafting a comprehensive tax regulation.

Absent the implementing rules and regulations, we think the below tax treatment would be compliant with TRAIN Law and NIRC 1997 (as amended) – collectively here forth as ‘Tax Code’:

Income tax / CGT
When crypto is received as a compensation, normal income tax rules apply. Similarly, for businesses that accept payment for goods or services in crypto, there is nothing special to when revenue is recognised or how taxable income is calculated.

The author views the gains resulting from trading activities, including that of exchange of crypto to fiat currency (net gains only) being subjected to CGT similar to the 15% levy on the sale of shares not through the stock exchange – unless held for less than a year similar to Germany’s tax treatment until SEC issues the final DAE rules and of course, BIR’s eventual issuance of specific guidance . Unrealized gains, including foreign exchange gains, are non-taxable.

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Income derived from mining crypto may not represent a tax-free capital gain and as such, has to be viewed as a separate commercial activity. Therefore, this activity is subject to income tax which can be reduced by the costs associated with it (e.g., IT-related expenses, electricity, rent, etc.).

Value Added Tax
In all instances, VAT will be due in the normal way from suppliers of any goods or services sold in exchange for (or remunerated by way) cryptocurrency (i.e., same way as any other supplies for VAT purposes). The value of the supply of goods or services on which VAT is due will be the PHP value of the cryptocurrency at the point the transaction takes place.

The author views the trading activities, including exchange of crypto to fiat currency, as VAT exempt transactions consistent with the treatment across the globe.

Borrowing from HMRC (UK’s Tax Authority), ‘income received from crypto mining activities will generally be outside the scope of VAT on the basis that the activity does not constitute an economic activity for VAT purposes because there is an insufficient link between any services provided and any consideration received.’

Other tax matters
Any party considering raising capital by way of an ICO should also consider the tax implications of doing so. Parties acquiring such tokens also need to consider the associated taxation implications.

Withholding tax (as agent) – VCs when provided as compensation or payment for a product or service should be subjected to normal withholding requirements.

In summary: PH individual vis a vis corporate
Without prejudice to the sub-classifications, currencies and tokens (utility, security or asset-backed – or hybrid), below summarizes the tax treatment of earned crypto income:

TaxpayerIncome taxCGT VAT
As a part of compensation      
Individual /
Corporate /
As a payment for product or service      
Individual / /
Corporate / /
As a trading gain / exchange      
Individual /(1) /(1)
Corporate /(1) /(1)
As ‘mined’      
Individual /
Corporate /
Acquired via ‘hard fork’ or ‘airdrop’      
Individual
Corporate

1Only realized gains, including effects of foreign exchange, are taxable; speculative gains and unrealized foreign exchange gains are not taxable (similarly, losses are not deductible)

It is also common to come across cases that require extensive declaration and documentation efforts. For instance, PHP are exchanged for BTCs; later on, BTCs are exchanged for ETHs, and these ETHs are then used to take part in an ICO and one receives new tokens (or BTCs are used directly to, for example, pay a restaurant bill).

In the words of Matthias Langer, crypto tax specialist, ‘cryptocurrencies may exist in the digital realm but their tax implications are very real. Detection of cryptocurrency investments is difficult–to–impossible for government tax collectors. Although investments that stay in the digital world may go unnoticed for a few more months, the rising value will ring the alarm for tax agencies. Banks that receive large transactions will ask questions and report suspicious activity. Instead, investors are expected to honestly declare cryptocurrency income and wealth to authorities each year’.

NEXT STEPS

Deloitte’s Bridging the digital gap: How tax fits into cryptocurrencies and blockchain development posits that in a futuristic state, blockchain could revolutionize how tax is calculated with real-time transactions that everyone, including governments, taxpayers and their advisers, could have live access to. This would allow governments to charge tax immediately and may eventually eliminate the compliance and audit issues that all parties face. Looking ahead, the potential uses for these technologies in financial markets and the regulatory benefits surrounding them have the potential to revolutionise how governments and taxpayers conduct their business and pay their taxes. It could potentially mark the end of corporates needing tax advisers to file their tax returns.

Crypto taxes are still in flux. Paying crypto taxes is just like paying any other type of capital gains or income tax, except for one big factor: it is generally up to you to compile the information yourself. This means going through your trades, recording the necessary data, and planning to do it all again next year. Further, there is a lot of dip-dive to do on the nitty-gritty of crypto let alone the tax implications. Exceptional IT affinity, solid technical understanding of blockchain transactions and a balance between restrictions and free-hand are all needed to advance well. But just like anything tax-related, the sooner you start preparing for filing season, the less difficult it will be – and several sort of penalties may be avoided.

Next article: AUDITING CRYPTO.

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