Taxwise Or Otherwise

As the national debt ballooned to P12.50 trillion in May 2022, the previous government’s Finance department proposed new tax measures to the successor administration. One such proposal is to tax cryptocurrency.

Cryptocurrency is a type of virtual currency (VC) that exists on a blockchain and relies on a cryptographic protocol to regulate its creation and exchange. Unlike conventional currency, cryptocurrency operates independently of central banks.

There are currently thousands of cryptocurrencies circulating worldwide, the most popular of them being Bitcoin and Ethereum. Cryptocurrency is widely used for speculative purposes like stock trading, but some countries have adopted them as legal tender.

In other countries, such as the US, VC is treated as property. The general tax principles applicable to property transactions are applied to transactions involving VCs. Hence, if the fair market value of property received in exchange for the VC exceeds the taxpayer’s adjusted basis (cost basis adjusted by certain expenditures and deductions) of the VC, the taxpayer has taxable gain. On the other hand, the taxpayer incurs a loss if the fair market value of the property received is less than the adjusted basis of the VC.

In Italy, cryptocurrency is treated like foreign currency. Meanwhile, Germany views cryptocurrency as private money, which will trigger tax if held for more than one year, for later sale or spending.

The Philippine treatment of cryptocurrency, however, remains vague. The Bangko Sentral ng Pilipinas (BSP) has yet to issue guidelines to regulate cryptocurrency, although it advises the public of the features, benefits, and risks of dealing with it. So far, a formal regulatory framework was issued for VC exchanges and companies or businesses engaged in changing VCs into fiat currency (and vice versa), requiring their registration with the BSP as remittance and transfer companies. 

For now, the Philippines characterizes cryptocurrency as digital or virtual assets. As assets, cryptocurrency may be the object of taxation either as an ordinary asset or a capital asset.

Despite the lack of clear guidelines from the Bureau of Internal Revenue (BIR), investors should expect their income from dealing with cryptocurrency to be subject to taxation.  But the question is, what type of taxes apply?

Section 32 (A) of our Tax Code states that for purposes of tax computation, gross income means all income derived from whatever source. Meanwhile, Section 43 of the code provides in part that taxable income is computed based on the annual accounting period observed and following the method of accounting regularly employed in keeping the taxpayer’s books. Thus, in the absence of specific tax guidelines, the taxation of cryptocurrency will generally depend on whether it is treated as an ordinary asset or capital asset.

In Philippine Interpretation Committee (PIC) Q&A 2019-02, the accounting treatment for cryptocurrency can follow the rules governing inventory or intangible assets.

Under Philippine Accounting Standard (PAS) 2, inventory is not required to be in physical form, but should consist of assets held for sale in the ordinary course of business. Hence, inventory accounting might be appropriate if an entity holds cryptocurrency for sale in the ordinary course of business. An entity that actively trades cryptocurrency, purchasing them with a view to their resale in a short period of time, and generating a profit from fluctuations in the price or traders’ margin, might consider whether the guidance in PAS 2 for commodity broker-traders should be applied.

If treated as inventory, cryptocurrency may be considered ordinary assets subject to ordinary income tax on the total amount of income.

Does it follow then that its sale or exchange is subject to value-added tax (VAT)? Technically, the sale or exchange of goods and services in the ordinary course of trade or business, and those that are incidental to it, is subject to 12% VAT.  Hence, when cryptocurrency is treated as inventory, sale or exchange may be subjected to VAT if the VAT threshold is satisfied.

However, if the entity holds cryptocurrency for investment purposes (capital appreciation) over extended periods, it will not likely meet the definition of inventory, but that of an intangible asset.

In the Q&A, the PIC explained that cryptocurrency can also be treated as intangible assets since they are non-monetary assets, which are without physical substance and are identifiable. An asset is identifiable if it is separable (i.e., it is capable of being separated or divided from the entity and sold, transferred, etc.) or if it arises from a contractual or legal right. Cryptocurrency for investment purposes would likely meet the definition of an intangible asset.

If treated as an intangible asset, cryptocurrency is considered a capital asset for tax purposes. The term capital asset includes property held by the taxpayer, whether or not connected with his trade or business, but excludes stock in trade or property for sale to customers in the ordinary course of business.

As a capital asset, net capital gains derived from sale or exchange are subject to ordinary income tax after considering the holding period in proper cases; however, capital losses are deductible only to the extent of the capital gain.

Likewise, there is a basis for arguing that the sale or exchange of cryptocurrency treated as intangible/capital assets is not subject to VAT since the transaction is not in the ordinary course of a business nor incidental to it.

Lacking clear guidelines in the taxation of crypto-related transactions, BIR officials may have differing interpretations on the matter. Nevertheless, a taxpayer receiving income from cryptocurrency is still required to contribute to the government — the inevitable and indispensable bidding of taxation.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.


Rommel Rhino C. Edusma is a senior associate at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.

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