Should an employee accept payment of her salary in cryptocurrency or digital tokens? Should a business accept digital payment tokens as payment for goods or services? What are the tax implications? What is the best way to structure such payments?
Singapore's tax authority, the Inland Revenue Authority of Singapore (IRAS), clarified in the IRAS e-Tax Guide Income Tax Treatment of Digital Tokens dated 9 October 2020 its position on income tax treatment of the receipt of digital payment tokens (DPTs) i.e. cryptocurrency.
Businesses receiving DPT payments for goods or services
Q. Can a business accept digital payment tokens as payment for goods or services?
Yes, a business can receive DPTs for selling its products or supplying services.
Q. What is the tax treatment?
The business will then be charged income tax on that payment.
The taxable amount is based on the value of the underlying goods or services supplied.
IRAS will look at the substance of the contractual terms and transaction value. This should reflect the open market value of the goods or services.
Conversely, a business that uses DPTs to pay for goods or services may deduct the value of payment as expenses. The deductible amount is based on the underlying value of the goods or services.
Q. What is the taxable amount?
Will the taxable amount be computed based on the DPT value or the fiat currency value? This is especially important since cryptocurrency values are volatile.
This depends on the contractual terms.
- If the price of the goods or services is S$100, then the taxable amount is based on S$100.
- If the price is say 1 Bitcoin (BTC), then the taxable amount is based on the value of 1 BTC at the time the income accrues to the business. Generally, accrual means when the income is due to be received but not necessarily when it has actually been received. This is not professional tax advice or opinion so do seek a tax consultant to ascertain this.
Q. What is the best way to structure this?
It depends on whether the business prefers (i) certainty of the taxable amount, or (ii) volatility in order to possibly benefit from having a lower taxable amount.
If the business prefers certainty, the price of goods or services should be explicitly indicated to be in fiat currency.
The downside is that if the value of the cryptocurrency soars in the period between the time payment is due and the time payment is actually received, the amount of tokens received would be less than if the .
Consider this illustration:
- The price of a product is US$40,000.
- Invoice is issued on 1 February with a 14-day payment term.
- 1 BTC on 1 February is worth US$40,000.
- If the buyer had paid on 1 February, the buyer would have had to pay 1 BTC.
- However, the buyer only pays the price on 14 February.
- On 14 February, 1 BTC is worth US$50,000.
- The buyer only pays 0.8 BTC.
If the business prefers volatility to possibly benefit from arbitrage, then the price should be explicitly indicated to be in the value of the DPT or cryptocurrency.
Employees receiving DPT payments as remuneration
Q. Can an employee accept digital payment tokens or cryptocurrency as payment for salary or other remuneration?
Yes, an employee may accept digital payment tokens or cryptocurrency as payment for salary or other remuneration.
Q. What is the tax treatment?
Similar to above, the employee will be charged income tax on that payment.
The taxable amount is based on the value of the employment services provided.
IRAS will look at the substance of the contractual terms.
Q. What is the taxable amount?
This depends on the contractual terms.
- If the employment contract states that the salary component is S$100, then the taxable amount is based on S$100.
- If the salary component is say 1 Bitcoin (BTC), then the taxable amount is based on the value of 1 BTC at the time the income accrues to the employee. Generally, accrual means when the income is due to be received but not necessarily when it has actually been received. This is not professional tax advice or opinion so do seek a tax consultant to ascertain this.
Q. What if there is a moratorium or vesting period or condition for the DPT payment?
The payment will then be taxable only when the moratorium is lifted or the payment entitlement vests. Essentially the income is deemed only to accrue when the moratorium is lifted or the payment vests.
Q. What is the best way to structure this?
It depends on whether the employee prefers (i) certainty of the taxable amount, in which case stating the amount in fiat currency is preferable, or (ii) volatility in order to possibly benefit from arbitrage between taxable amount on date of accrual and date of actual receipt.
The latter would also depend on whether the employee intends to, and is able to, liquidate the DPT upon receipt.
If the employee considers the long-term appreciation in value of the DPT to be likely and would want to hold on to it for the long term, then the former may be preferred.
Further, typically, one would expect that an employer would generally pay salary on actual due date / date of accrual if it is in DPT (since this can be easily automated). There may thus be no significant arbitrage in any intervening time.
It also depends on what the employer would prefer as a matter of practical expediency. If the DPT payment is automated based on DPT value, it would likely be more convenient for the employer.
It is likely also that CPF amounts payable by employer and employee are to be calculated based on the value of the salary components, which include the DPT component. However, this may not be a significant consideration since there is a ceiling on CPF contributions. In contrast, there is no ceiling on income tax.
Valuation of DPT
IRAS has stated that it does not prescribe any specific methodology for valuing DPT or cryptocurrency. It simply requires that:
- The exchange rate must be reasonable and verifiable, e.g. it is determined using an average of exchange rates available on payment token exchanges, such as Coinbase and Binance. Where the exchange rate is not available on exchanges, taxpayers can use other means to support their claim that the basis of the exchange rate used is reasonable; and
- The methodology used to determine the exchange rate should be consistently applied year on year.
Taxpayers should therefore keep documented records of the value of the DPT reflected in various exchanges as at the relevant date for valuing the tokens.
Note that in Singapore, capital gains are not taxed. Generally, then, a business or employee who receives DPTs as payments will not then be taxed further on gains in the DPT value. This is whether the DPT is later liquidated or not. Likewise, depreciation in value does not allow businesses to deduct as the fall as expenses.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
