The guidelines are out on the income tax treatment of transactions involving distributed ledger technology (DLT) assets – electronic transactions in fiat currency are not covered under these guidelines. The income tax treatment of DLT assets is determined based on the nature of activities, parties involved, and specific facts of each case.

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Types of DLT assets

DLT assets are categorized into coins and tokens for income tax purposes, with tokens further divided into financial tokens and utility tokens. ​

Coins are cryptocurrencies that are designed to be used as a means of payment or medium of exchange, they have no connection with any project or equity in the issuer, and do not have any of the characteristics of a security.

Financial tokens have qualities that are similar to equities, debentures, or derivatives. Generally, they might be known as security, asset or asset backed tokens.

Utility tokens‘ utility, value or application is restricted solely to the acquisition of goods or services either solely within the DLT platform on which they are issued (or within a limited network of DLT platforms), do not have any connection with the equity of the issuer and do not have the characteristics of a security.

Hybrid tokens are classified based on their usage as either utility tokens or coins. ​ If a hybrid token is used as a utility token in a particular case, it should be treated as such. ​ Conversely, if the same hybrid token is used as a coin in another instance, it needs to be treated as a coin. ​ The classification of hybrid tokens depends on the specific purpose for which they are utilized. ​

Tax treatment of DLT assets

Ultimately, the tax treatment of any type of DLT asset will not necessarily be determined by its categorisation, but will depend on the purpose for and context in which it is used.

Each transaction needs to be analysed in the same way as any other transaction, i.e. by reference to the nature of the activities, the status of the parties and the specific facts and circumstances of the particular case.

Payments made or received in cryptocurrency are treated like payments in any other currency for income tax purposes, including revenue recognition and taxable profits calculation. ​When a payment is made by means of the transfer of a financial or a utility token, it will be treated like any other payment in kind.

Examples of the application of tax principles

Transactions in COINS

Profits from trading coins are taxed the same way as profits from trading regular money. Money made from selling coins used as trading stock is considered ordinary income. Gains or profits on revenue account from mining cryptocurrency is also taxed as income. Coins are not subject to capital gains tax.

Return on FINANCIAL tokens

Any returns from financial tokens, like payments that resemble dividends or interest, whether in cryptocurrency, cash, or other forms, are treated as income.

Transfers of FINANCIAL and UTILITY tokens

How you’re taxed on transferring financial or utility tokens depends on whether it’s a trading transaction or a capital asset transfer.

Trading Transaction: If you’re buying and selling tokens as part of your regular business activities, the money you make is treated as ordinary income. This means it’s taxed like any other business profit.

Capital Asset Transfer: If the transfer isn’t part of regular trading, you need to check if the tokens are considered “securities” for capital gains tax. If they are, any profit from selling them is subject to capital gains tax. If the tokens aren’t securities, like utility tokens, or if they’re convertible tokens not yet considered securities, they don’t fall under capital gains tax rules.

Treatment of Initial Offerings

An initial offering (or token generation event) of financial tokens typically will involve raising capital. These are not treated as income and doesn’t count as a capital gain for taxes. However, by the initial offering of utility tokens, service, goods, or benefits must be provided to the token holders. Any profit they make from these services or goods is considered income.