Recently I’ve become involved with a blockchain company that is heading towards an ICO. The name is still private, but when it is announced I will announce it here. In my capacity as “advisory CFO” I’ve had to consider the tax implications of a token issuance, and have had the good fortune to be able to talk to some knowledgeable (and expensive) attorneys about the matter. This has prompted me to do some additional research on global crypto taxation, which I will summarize here. In each case below, I’ll try to touch briefly on the tax implications of token investing and company token sales.
This is not legal or tax advice. I’m really doing this for my own personal knowledge and to get some marketing benefit. Consult someone whom you pay, like an attorney or CPA, if you have questions you need to be answered.
U.S.A.: All you need to know is in this blog post from one of the world’s leading experts on crypto taxation. If you want supporting documentation, read IRS Notice 2014-21.
Canada: Like the US, Canada treats cryptocurrency as property, and taxes accordingly. And, on top of that, they have GST in up north, which can come into play if you use crypto to buy things. This article is a good overview.
As far as token sales are concerned, the Canada Revenue Agency (like our IRS) has not explicitly stated how proceeds from token sales are to be taxed, but a good guess is that proceeds should be reported as income by the company and taxed accordingly. Note that it’s possible that GST might apply as well.
UK (excl territories): Capital gains rules apply to crypto trading in the UK but there is a (good) catch – an annual allowance, and if your profits fall below this amount, you don’t need to report them. Currently, that allowance is £11,700. There are other reporting requirements for higher volume traders, but I won’t get into them here. HMRC’s crypto tax guidance is here.
For a company raising funds through a token sale, are the funds raised subject to corporation tax? The thinking seems to be similar to the US – that proceeds are generally taxable income unless you can make the argument that it’s a de facto capital raise, which would then subject you to Financial Conduct Authority (FCA) oversight. So it’s a two-edged sword. The FCA is due to issue a statement on cryptocurrencies in the third quarter of 2018.
Let’s move on to some of the fun ones. Several of British Overseas Territories (BOTs) have become popular locations for token issuances for a variety of reasons – language, no income tax, English common law-based legal systems, and narrower definitions of a regulated security.
The Cayman Islands: The Cayman Islands is a popular home (ok, THE home) for hedge funds. This makes it a very attractive location for other types of investments. The banking sector is well-developed. Many crypto hedge funds are based here, and it has become a popular place to launch an ICO. In this case companies l establish a Cayman sub to their home-country parent. ICO proceeds will be tax-free locally. Currently, the Securities and Investments Business Law (SIBL), which has parallels to the Securities Act of 1933 in the US, does not exclude cryptocurrencies in its definition of security. This makes the Cayman Islands a safer place to launch a token from a regulatory perspective. Similar to the proceeds from a token issuance, the gains from trading in cryptocurrency are also tax-free to investors.
British Virgin: Islands (BVI) Like the Cayman Islands, the BVI has effectively no income or capital gains taxes, making it an excellent location for token issuance and for tax residents investing in cryptocurrency. Company setup and maintenance is a bit cheaper in the BVI than in the Cayman Islands.
Gibraltar: Gibraltar has been aggressive in positioning itself as a crypto-friendly country. Part of the strategy involves providing clarity on the regulatory environment, as evidenced by the issuance at the end of 2017 of regulations governing distributed ledger technology, by the Gibraltar Financial Services Commission (GFSC). In addition, the Gibraltar Stock Exchange (GSX) and associated Gibraltar Blockchain Exchange (GBX) aim to provide regulated trading of crypto assets. The GFSC regulations do not address taxation on cryptocurrency trading and token issuance. Existing tax rules thus apply, including no capital gains tax and a low (10%) flat corporate tax.
Let’s turn our eyes to some European countries.
Malta: Malta is a group of islands off the tip of Sicily, a member of the EU, and a former British colony. As a result of the latter English is commonly spoken. They have been aggressive with providing guidance on regulation in the DLT/blockchain/ICO space. In addition, from a tax perspective ICO proceeds to date are not taxed, and the corporate tax rate hovers around 5%.
Recently crypto exchange Binance moved operations from Hong Kong to Malta.
Estonia: Estonia is becoming a more attractive location for block-chain businesses due to the low costs of corporate setup and ongoing operation of the company. In particular, entrepreneurs have found the eResidency program an efficient way to get started, even from abroad.
ICOs are lightly regulated, with even the government getting into the game by proposing the issuance of its own token. Tax are also low; with ICO’s not subject to VAT or income tax.
Switzerland: In February 2018 the Swiss Financial Market Supervisory Authority FINMA released guidance on how existing regulation applies to ICOs. While reserving the right to make decisions on a case-by-case basis, the agency also identified three main categories of token and explained how they would be treated from a regulatory perspective. For the purposes of this discussion we will focus on the tax treatment of the utility token, which confers upon the holder the right to use a service at a particular future time.
Hong Kong: In fall 2017 Hong Kong issued a “Statement on initial coin offerings“, which warned that in certain circumstances digital tokens could be considered securities, and would need to be registered as such. From a taxation perspective, Hong Kong uses a “territorial source principle“, which means that only income that arises from a Hong Kong-based source are taxable. So, a Hong Kong-based company raising funds through an ICO, where the token is not a security, could argue that only proceeds from Hong Kong-based investors should be taxed at the 16.5% rate.
For Hong Kong residents investing in cryptocurrency, there is no tax concern as Hong Kong does not have a capital gains tax.SingaporeLastly, let’s look at Singapore. In Singapore, the sale of cryptocurrency through an ICO would be considered a sale of services, and thus subject to Goods and Services Tax (GST). However, this tax would only apply to sales to Singapore residents. For individuals, there is no tax on crypto investing. Like Hong Kong, Singapore does not have a capital gains tax.