Taxation Issues for Security Token Offerings

November 2, 2021
John Marcarian

One of the most exciting developments of the Fourth Industrial Revolution presently underway, due to the emergence of digital assets, is the long overdue prospect that there will be a global redistribution of wealth unlike anything seen before.

The decentralised nature of digital asset ownership, the freedom to trade on decentralised platforms and the transparent nature of blockchain technology, means that for the first time in history – centralised forms of authority no longer ‘run the global wealth game’.

In this paper, our Founder, John Marcarian provides a non-technical, general outline of:

  • STOs;
  • Tax issues to consider for STO issuers;
  • Alternative structuring approaches to STOs;
  • Tax issues to consider for STO participants;
  • International state of play on STOs;

Taxation Issues for Security Token Offerings has been written by our Founder, John Marcarian 

John is an Australian Chartered Accountant with over 25 years of experience.

He has a deep understanding of digital assets and the Fourth Industrial Revolution presently underway around the world in the area of blockchain and digital assets. 

John’s passion for digital assets has led him to co-found, NeoFlow Asset Management Limited, (with Joshua Boles and Richard Stromback), a funds management business that seeks alpha for its investors in all classes of digital assets and decentralised finance.

A recognised tax specialist in digital assets, John has a qualification from the MIT Sloan School of Management in BlockChain technologies. 

John regularly works with companies issuing tokens and other forms of digital assets, and is one of the very few global tax specialists that has founded a funds management business in digital assets. 

This unique blend of skills gives John a practical day to day knowledge of the business challenges faced by entrepreneurs in the digital asset market.

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International Taxation of Digital Asset Transactions

July 13, 2021
John Marcarian
The Growth of Digital Asset Transactions

Digital assets have become a rapidly growing phenomenon over the past decade. With this new growth comes the question of how to tax these assets.

Guidance on how to account for the vast array of digital assets is currently lacking, as is an international consensus on how to tax digital assets.

To understand more about what digital assets are and how they are spreading globally, we recommend reading our blog and downloading the paper on Digital Assets: A window into the new economy.

Different Approaches Around the Globe

Some countries currently regard digital assets as being currency for tax purposes. This includes Belgium, Italy, and Poland. This means that realised gains and losses would be taxable.

Many others, including Australia, view Digital Assets as a form of intangible assets, with gains and losses being treated under the capital gains regime. For countries such as Singapore and Hong Kong, classifying digital assets as property means that individuals avoid taxation, as there are no capital gains taxes applicable for individuals.

Mining Digital Currencies

Virtual currencies can be created through what is known as the mining process. This is where rewards are generated via a proof of work protocol, rather than through purchasing the digital assets. The question arises as to whether we should be taxing the digital currencies at this point of creation, or not until they are actually disposed of and there is a measurable flow of revenue.

 Mining: Taxation at the Point of Creation

One potential taxation point for digital assets is at the point of creation.

Many major companies including Finland, New Zealand, Japan, Norway, the United Kingdom, and the United States, consider such creation events to be taxable as ordinary income, with the costs of production allowed as a deduction. When the digital assets are later sold, this is treated as a capital gains event and taxed under the relevant capital gains regime.

Some countries, including Australia, Canada and Singapore, only tax the creation of digital assets through mining activities if the activity takes place as a business activity (as opposed to a hobby).

Mining: Taxation on Disposal

Many countries ignore the creation of digital assets through mining as a taxation point. Instead, the first taxation point is the disposal of the digital currency. In these countries the total disposal value is included as assessable income (less allowable costs incurred to mine the digital asset).

Usually countries that tax digital assets this way treat the income as a capital gain.

Mining: Taxation on Receipt

In some taxation jurisdictions the mining activities are taxed on a receipts basis when those activities are carried on as a business. This means that all mined digital assets are treated like stock and included in business income as income, losses or sales revenue. Deductions are treated in the same manner as any other business deduction.

Disposal of Virtual Currencies

Regardless of the different taxation options, most countries agree that disposal of a digital asset is a taxation event. Disposals can occur through loss, exchange, or sale of the digital asset.

Exchange for Fiat Currency

Most major economies regard the disposal of digital assets for fiat currency to be a taxable event. Although there are notable exceptions, such as Italy, where such transactions are not taxed unless they are treated as speculative trading.

Exchange for Other Virtual Currency

In most countries the exchange of one digital asset for another digital asset is considered to be a taxable exchange. Other countries however, do not consider such exchanges to be taxable. This is possibly due to the difficulty in accurately valuing the realised gains or losses on such exchanges.

Other countries, such as Australia, Belgium, and Japan, vary their treatment of these type of exchanges depending on the type of owner and how the virtual currency is expected to be used.

Exchange for Goods and Services

With virtual currencies becoming more acceptable globally, it is becoming common for these digital assets to be used to purchase goods and services. This typically means that the person using the virtual currency to make a purchase has realised a taxable event. The person receiving the virtual currency as payment, likewise is in receipt of taxable income at that same value. The tax treatment then depends on that country’s personal income tax rules.

Exchange for no Value

Other situations of disposal may include gifting the digital asset, loss or theft. In these situations the owner of the digital asset has disposed of their holding but not received anything in exchange.

Some countries tax the recipient of gifts, others tax the disposal at the deemed value of the asset being disposed.

When it comes to theft or loss, this is typically deductible if the individual is running a business and the digital assets are trading stock, but not if they are holding the assets as private individuals.

Conclusion

Creating a cohesive treatment for digital assets, let alone a consensus on how to tax these assets, is a long way from being realised. This will require a lot of research and collaboration to come to fruition as the world continues to embrace the use of virtual currencies on an ever increasing scale.

Our Founder, John Marcarian, goes into further detail in the International Taxation of Digital Asset Transactions paper.

International Taxation of Digital Asset Transactions has been written by our Founder, John Marcarian

John is an Australian Chartered Accountant with over 25 years of experience.

He has a deep understanding of digital assets and the Fourth Industrial Revolution presently underway around the world in the area of blockchain and digital assets. 

John’s passion for digital assets has led him to co-found, NeoFlow Asset Management Limited, (with Joshua Boles and Richard Stromback), a funds management business that seeks alpha for its investors in all classes of digital assets and decentralised finance.

A recognised tax specialist in digital assets, John has a qualification from the MIT Sloan School of Management in BlockChain technologies.

John regularly works with companies issuing tokens and other forms of digital assets, and is one of the very few global tax specialists that has founded a funds management business in digital assets. 

This unique blend of skills gives John a practical day to day knowledge of the business challenges faced by entrepreneurs in the digital asset market.

NEED ASSISTANCE FOR YOUR SITUATION?

Contact us today
Contact Us
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Digital Assets: A Window into the New Economy

June 10, 2021
John Marcarian
Changing Economies

Monetary systems around the world have faced a rather large change in the form of digital assets. In barely a decade, virtual currencies have grown and become embraced around the world in many forms. Here we take a look at what digital assets are and how they are being used on a global scale.

Foundational Concepts of Digital Assets

To understand digital assets it is important to understand a range of foundational concepts and terms such as blockchain, DLT, DeFi, Decentralised Exchanges, Staking, and more. The information in this blog will only provide a brief overview of this information. For more details you can download the full paper on Digital Assets: A Window Into the New Economy, by our Founder John Marcarian.

Blockchain

In very simple terms a blockchain is an online record of transactions. This could include money, exchange of goods, or exchange of information.

Each transaction creates a record that is gathered with further transaction records into blocks. These blocks are linked together with cryptography.

Blockchain stores these records across many locations at the same time. This means that if any of the information in a blockchain is changed, everyone involved in the network has to consent to the changes. Since the information can only be changed if every record is changed at the same time, it is difficult to hack into, and therefore potentially more secure, transparent, and cost effective to hold than traditional databases.

DLT

The online record of the data and transactions that comprise blockchains is typically known as a distributed ledger. Any technology that utilises this type of system is collectively known as DLT.

Blockchain is one form of DLT.

As we are only in the early stages of DLT we are still discovering all the potential applications that it could be used for.

Decentralised Finance (DeFi)

DeFi is, simply put, a term that covers a large range of applications within the public blockchain world that are distributing traditional economies. It refers to the financial applications that utilise blockchain technologies. This is in contrast to the centralised financial markets where all the risks and control are with the central system, such as the banks and financial institutions.

Smart contracts are contracts that are automated in programming languages so that they are accessible by anyone using the internet. They allow individuals to engage in financial applications without relying on an intermediary.

DeFi now provides a fully functioning economy that is accessible to users across the globe via the internet. This allows individuals and businesses to buy and sell, lend and borrow, and invest with digital currencies.

Decentralised Exchanges

One of the central functions of DeFi is decentralised exchanges. This means that users can exchange their assets without needing to rely on a centralised system or intermediary. Two examples of decentralised exchanges are the UniSwap and the Pancake Swap.

The Uniswap allows users to swap their tokens even if there is not a user on the other side of the trade.

The Pancake Swap is essentially a newer alternative option to the Uniswap, with a very similar user experience. It is driven by strong marketing strategy that has rapidly built community engagement and dedicated followers.

Binance Smart Chain

In September 2020 a blockchain service was introduced that allows developers to use smart contracts in order to build their own decentralised apps. This is Binance Smart Chain.

It is one example of how DLT is rapidly expanding and increasing in functionality as the world continues to embrace this technology.

Wallets

A wallet is an app that functions essentially like a virtual wallet for your virtual currency. While you don’t have to have a wallet, it helps keep all your digital assets in one place. Just like a real wallet with physical cash.

Staking

Staking is where the owner of cryptocurrencies locks their holdings into their crypto wallet in order to receive rewards.

While blockchains typically rely on the process of mining to add new blocks to the blockchain, staking involves locking up your cryptocurrency coins so that they can be randomly selected to create a block. Larger stakeholders typically have a higher chance of being selected as the next block validator.

Different blockchain networks then reward staking accounts in different ways and using different factors.

Some coin holders also pool their resources in order to create a staking pool and increase their chances of being selected for validating blocks and rewards.

Stablecoins

To help reduce volatility around cryptocurrencies, stablecoins offer digital assets that are tied to a stable, physical asset, such as gold or fiat currency. This keeps the value more stable.

To The Future

With rapid growth occurring in digital assets, this complex world gives users around the globe the tools to partake in a decentralised system of finance. We are still watching to see how this economic system will continue to be shaped and how it will influence the economy around it. While there are many potential advantages to the decentralised system, there are also many issues to be addressed.

One of the issues is how these digital assets are taxed. We consider this issue in the blog on International Taxation of Digital Asset Transactions. 

Digital Assets: A Window Into the New Economy has been written by our Founder, John Marcarian 

John is an Australian Chartered Accountant with over 25 years of experience.

He has a deep understanding of digital assets and the Fourth Industrial Revolution presently underway around the world in the area of blockchain and digital assets. 

John’s passion for digital assets has led him to co-found, NeoFlow Asset Management Limited, (with Joshua Boles and Richard Stromback), a funds management business that seeks alpha for its investors in all classes of digital assets and decentralised finance.

A recognised tax specialist in digital assets, John has a qualification from the MIT Sloan School of Management in BlockChain technologies. 

John regularly works with companies issuing tokens and other forms of digital assets, and is one of the very few global tax specialists that has founded a funds management business in digital assets. 

This unique blend of skills gives John a practical day to day knowledge of the business challenges faced by entrepreneurs in the digital asset market.

NEED ASSISTANCE FOR YOUR SITUATION?

Contact us today
Contact Us
By providing us your information you agree to our privacy policy

More articles by John

 

Taxation Issues for Security Token Offerings


2nd Nov 2021
John Marcarian

One of the most exciting developments of the Fourth Industrial Revolution presently underway, due to the emergence of digital assets, is the long overdue prospect that there will be a global...

 

International Taxation of Digital Asset Transactions


13th Jul 2021
John Marcarian

The Growth of Digital Asset Transactions Digital assets have become a rapidly growing phenomenon over the past decade With this new growth comes the question of how to tax these...

 

Our Founder – John Maracrian – wins Expatpreneur Award


4th May 2019
John Marcarian

https://wwwyoutubecom/watchv=6Rm3CjdahVw The Finder - Insider's Guide for Expats in Singapore has awarded its prestigious Expatpreneur Longevity award to John Marcarian, founder, Expatland...

 

Taxation Issues for Security Token Offerings


2nd Nov 2021
John Marcarian

One of the most exciting developments of the Fourth Industrial Revolution presently underway, due to the emergence of digital assets, is the long...

 

International Taxation of Digital Asset Transactions


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John Marcarian

The Growth of Digital Asset Transactions Digital assets have become a rapidly growing phenomenon over the past decade With this new growth comes...

 

Our Founder – John Maracrian – wins Expatpreneur Award


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John Marcarian

https://wwwyoutubecom/watchv=6Rm3CjdahVw The Finder - Insider's Guide for Expats in Singapore has awarded its prestigious Expatpreneur...