The rapid development of digital currencies represents significant challenges for authorities in various countries. There has been uncertainty about the treatment of digital currencies under existing regulatory regimes around the world. Much of this uncertainty results from the fact that digital currencies are a relatively new development and current legislation is typically not designed with digital currencies in mind.
The legal nature of cryptocurrencies is commonly described as intangible property, a means of payment and a service. Therefore, from a tax perspective, cryptocurrencies could be covered by income and capital tax concepts as well as Goods and Services Tax (GST). Treating the same cryptocurrency as an asset and a currency is paradoxical and may create a number of issues potentially resulting in double taxation. Various countries experience similar issues but there is no common approach to taxation of cryptocurrencies as many governments have chosen to adopt a ‘wait and see’ position to regulation.
This article examines the legal nature and taxation of cryptocurrencies in Australia and Singapore. Both countries are considered to be cryptocurrency friendly jurisdictions in the Asia-Pacific region. Singapore has been positioning itself as a global hub for international trade since the second half of the 20th century and, as a result, has introduced various tax policies supporting trade and e-commerce. Australia is one of the major financial centres in the Asia-Pacific region that is also welcoming cryptocurrencies. Therefore, this article aims to compare Australian and Singaporean legislative approaches to cryptocurrencies and to identify some strategies helping to facilitate legal solutions to the tax treatment of cryptocurrencies.
Australia
The Australian tax regime treats cryptocurrencies quite inconsistently. The inconsistency is demonstrated by the fact that cryptocurrencies are treated as money for the purposes of the GST Act and as assets under the income tax and capital gains tax (CGT) provisions.
For example, there is a need for a taxpayer to decide whether the cryptocurrency is being held on a capital or revenue account. Furthermore, the record keeping requirements under the trading stock and the CGT regimes have been designed for different types of assets and it is therefore more problematic to apply these requirements to cryptocurrency transactions. The nature of cryptocurrencies in terms of the volume of transactions and the capacity to split cryptocurrencies into small parts makes these regimes ineffective regulatory mechanisms.
Yet, considering the rapid development of cryptocurrencies as well as their major functionalities including as a means of exchange, as a unit of account and as a store of value, cryptocurrencies could be considered as money from the Australian tax law prospective. For example, there are no legislative or operational impediments in Division 775, Income Tax Assessment Act 1997 that would preclude inclusion of cryptocurrencies in the scope of this provision. The value of the Australian dollar could be compared with a cryptocurrency at particular points in time to determine a currency exchange rate effect.
Furthermore, recently, the Australian Transaction Reports and Analysis Centre (AUSTRAC) introduced a new law that is covering digital currency exchange providers operating in Australia. The new law requires digital currency exchanges operating in Australia to register with AUSTRAC and also to comply with the Government’s anti-money laundering and counter-terrorism financing compliance and reporting obligations. Relevantly, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 has been amended to include digital currencies. In other words, cryptocurrencies are treated as money under the Act.
Singapore
The Singaporean tax approach to cryptocurrencies is also contradictory and it is missing a straightforward legal definition of cryptocurrencies.
One of the Singaporean Government’s priorities is to maintain the most business-friendly environment possible and that includes recognition of cryptocurrencies. In November 2018, the Monetary Authority of Singapore (MAS) introduced to the Parliament the Payment Services Bill (the Bill). The Bill came in force on 28 January 2020 as the Payment Services Act 2019. The Act covers various activities including: account issuance service; domestic money transfer service; cross border money transfer service; merchant acquisition services; e-money issuance service; digital payment token service and money-changing service. Also, the Act introduces licencing requirements for the relevant service providers and aims to enhance consumer protection as well as confidence in the use of e-payments. As is the case in Australia, the MAS approach is to treat cryptocurrencies as money for the purposes of the Payment Services Bill.
However, the approach of the Inland Revenue Authority of Singapore (IRAS) to cryptocurrencies is rather rudimentary. The IRAS similarly to the Australian Tax Office (ATO) prefers to fit the new phenomena into the old income tax regime. Moreover, the current of cryptocurrencies leads to significant issues such as double taxation, complexity and lack of fairness for taxpayers. The Singaporean GST has not been modified to accommodate cryptocurrencies, and as a result, transactions involving cryptocurrencies are treated as a supply of services, which leads to potential double taxation of such transactions.
In other words, the Singaporean tax authority has chosen to ‘wait and see’ rather than proactively regulate a new digital development. That can be explained by the fact that traditionally IRAS takes a very caution position regarding tax law changes. For example, the recently introduced tax reform focuses on cross-border e-commerce transactions (supply of digital services), while the cross-border supply of goods is not addressed
Comparative analysis
The Australian approach to the GST treatment of cryptocurrencies is relatively progressive, but such an approach is more precarious than the traditional one used in Singapore.
In both countries, the economic and legal nature of cryptocurrencies remains uncertain due to limited experience with this phenomenon and that implies certain fiscal risks, including tax avoidance, which could increase if volumes of transactions with cryptocurrencies grow significantly.
It can be contended that the Australian income tax and CGT treatment of cryptocurrencies may imply high administrative and compliance costs. Hence, the efficiency criterion implying that a tax should generate revenue with minimal administration and compliance costs is not well addressed under the Australian regime applicable to cryptocurrencies.
On the other hand, the Singaporean tax regime does not have CGT and thus CGT related issues will not arise. Conversely, Singapore is adhering to a traditional GST treatment of cryptocurrencies. Thus, the GST treatment of cryptocurrencies in Singapore implies significant complexity contrary to the Australian approach that facilitates simplicity and neutrality for taxpayers.
In both countries, their approaches to the taxation of cryptocurrencies only partially reflect the ‘good tax’ criteria.
The need for harmonised treatment
Preferably, the tax treatment of cryptocurrencies should be harmonised with the broader regulation of cryptocurrencies in the state and ensure their neutral tax treatment. Differences in the tax treatment of transactions with cryptocurrencies in various states should be taken into account to ensure neutral treatment of cross-border transactions.
Given the fundamental international scope of cryptocurrencies, a more unified position would encourage international cooperation. Thus, stronger international cooperation is imperative in order to regulate cryptocurrencies more efficiently.
Bearing in mind that ‘harmonised global approaches’ take significant time to develop and are very difficult to achieve it is more likely that, for the time being, various countries will be acting depending on their priorities and attitudes towards cryptocurrencies.
The way forward
There are some important similarities between the Australian and Singaporean approaches to the tax treatment of cryptocurrencies for example, the treatment of cryptocurrencies as assets for income tax purposes. That is justifiable, as this tax policy option is conventional, but it may create complexity issues for taxpayers as is the case in Australia.
Australia and Singapore address issues related to cryptocurrencies on the basis of their national priorities. However, the tax treatment of cryptocurrencies in both countries is only partially consistent with principles of efficiency, fairness, simplicity and neutrality.
It is a challenging task to fit such a virtual instrument into the current legislative framework, considering that cryptocurrencies were initially engineered as an alternative to traditional currencies. Equating cryptocurrencies with traditional currencies may facilitate extensive usage of these instruments in e-commerce transactions and it could also better address the principles of the ‘good tax’. This consistency in respect of the definition of cryptocurrencies could simplify a taxpayer’s compliance with tax laws as well as streamline the administration of the tax systems in this area.
Lawmakers should recognise that cryptocurrencies are an emerging and promising development that should not be discouraged by feverish regulations.
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