GST Treatment of Virtual Currencies

GST Treatment of Virtual Currencies

GST Treatment of Virtual Currencies
Recently, a growing number of online merchants are willing to accept virtual currencies such as Bitcoin as a form of payment. As the adoption of virtual currencies for purchases are expected to grow, it is necessary to understand the Goods and Services Tax (GST) implications arising from the use of this method of transaction. 

GST is essentially a consumption tax levied on the supply of goods and services in Singapore, with some exceptions.

In January 2014, during a period of increasing emergence, awareness and buzz surrounding virtual currencies, the Inland Revenue Authority of Singapore (IRAS) released content on its website with regards to the GST treatment of transactions involving virtual currencies as detailed below.

What is the Nature of Virtual Currencies for GST Purposes?

The starting point in determining the GST treatment of virtual currencies is to ascertain the nature of virtual currencies – is it a supply of goods or is it a supply of services? This is an important distinction as there are different GST rules that apply to goods and services. For example, in order to zero-rate a supply of virtual currencies made to a person outside Singapore, it must be considered as “exported” if it is treated as goods; or it must fall within the definition of “international services” if it is treated as services.

In this regard, the IRAS has clarified that the supply of virtual currencies shall be treated as a supply of services. 

This brings us to the next question. Since virtual currencies are considered as a supply of services, can it be treated as a financial service that is exempted from GST in accordance with the Fourth Schedule of Part I of the Goods and Services Tax Act? For example, the exchange of currency (whether effected by the exchange of bank notes, currency notes or coin) is treated as an exempt supply. GST need not be charged or paid for exempt supplies.

The IRAS has clarified that virtual currencies will not be considered as “money” for GST purposes. As such, it does not qualify for GST exemption.

Given this characterization of virtual currencies, buyers and sellers of virtual currencies, and merchants and customers transacting using virtual currencies need to understand the GST implications.  

Businesses that Sell Virtual Currencies

Different GST treatments apply for the supply of virtual currencies as a principal (i.e. sale of virtual currencies in the business’s own capacity) and as an agent (i.e. the business merely facilitates the sale of virtual currencies transaction).

For a GST-registered business that sells virtual currencies as a principal, it will have to charge GST on the sale of the virtual currencies, unless the sale qualifies as international services whereby GST is charged at 0%.

A supply of services to overseas persons that meets the following conditions will qualify as international services:

  1. It is supplied under a contract with a person who belongs in a country outside Singapore;
  2. It directly benefits a person who belongs in a country outside Singapore and who is outside Singapore at the time the services are performed; and
  3. It is not supplied directly in connection with land or goods in Singapore.

If a GST-registered business acts as an agent for another party to facilitate the sale of virtual currencies, it will need to charge GST on the commission fees that it receives, unless the services are considered as international services and hence, zero-rated.

GST registered virtual currency exchange located in Singapore will need to charge GST on the trading fees that it charges.

Businesses that Buy Goods or Services Using Virtual Currencies

When a business buys goods or services using virtual currencies, the transaction will be considered as a barter trade. In a barter trade, two supplies are made – one by the supplier who supplies the goods and services, and another for the supply of virtual currencies by the business who pays the supplier using virtual currencies.  

GST should be accounted for on each supply (i.e. the supply of goods or services and the supply of virtual currencies) if the respective supplier is GST-registered.

As a concession, if virtual currencies are used to exchange for virtual goods or services within the gaming world, GST need not be charged until they are exchanged for real monies, goods or services.

Goods imported and paid for using virtual currencies are subject to the same import GST rules and reliefs as those paid for using real currencies.

Budget 2018 Announcement

In the Budget 2018 announcement made by the Finance Minister on 19 February 2018, it was announced that GST will be introduced on imported services on or after 1 January 2020.

Business-to-Business (“B2B”) imported services will be taxed via a reverse charge mechanism and the imposition of GST on Business-to-Consumer (“B2C”) imported digital services will take effect through an Overseas Vendor Registration (“OVR”) mode.

Since virtual currencies are considered as a supply of services for GST purposes, this means that, Singapore persons receiving virtual currencies from overseas persons, depending on their GST registration status, may either have to account for GST under the reverse charge mechanism or the overseas supplier will charge the GST on the supply if the overseas vendor is registered for GST under the OVR mode.  

The IRAS has released draft guidelines, with respect to GST on imported services, for public consultation. As at the date of this article, these guidelines have not been finalized.