Taxing crypto-currency
Is it possible to devise an effective tax regime for the emerging asset class? By Ahtasam Ahmad
T
he hype around digital assets, especially crypto currency is on the rise as people are embracing the new asset class with an unprecedented enthusiasm. The speculative nature of the said assets is still not deterring investors from pouring in the money. A proof of it is the fact that last year in November, the crypto market capitalization reached $3 trillion as reported by Bloomberg. The article further states, “The little more than a decade old market for digital assets has already roughly quadrupled from its 2020 year-end value, as investors have gotten more comfortable with established tokens such as Bitcoin and networks like Ethereum and Solana continue to upgrade and attract new functionality.” However, given that it has emerged as a parallel asset class, legislators around the globe have started debating on devising a tax system to bring the gains from blockchain based financial products into the tax net and prevent it from becoming a tax haven. Pakistan, on the other hand, still hasn’t officially recognised crypto as an asset class, partially due to fears of it being used for illicit activities leading to repercussions, FATF sanctions being one of them. Yet, like other countries, an opportunity lies for Pakistan to generate much needed additional revenue from an investment source that is particularly popular amongst its population. Pakistan was third in the Global Crypto Adoption Index in 2020-21, after India and Vietnam. While as per the Federation of Pakistan Chamber of Commerce and Industry (FPCCI) around $20 billion of cryptocurrency value was traded by Pakistanis. In a conference, recently held in Islamabad, Rain Financial Inc, a global company operating in the crypto space,claimed that legalizing and taxing crypto based assets would generate around Rs.20 Billion in revenues for the national exchequer. However, as the asset class is new, devising a tax regime for it would not be a child’s play with segregating different subclasses of crypto assets and the approach towards taxation being major challenges.
TAXATION
A question of approach
T
he most notable blockchain based asset, cryptocurrency has multiple uses ranging from a speculative monetary instrument used to earn gains to a digital currency that is fast evolving into a standard medium of exchange. However, the variety of uses means that it is difficult to ascertain which approach to adopt, an Income based or a Capital gain based, for taxing the aforementioned. Muhammad Amayed Tola, a Karachi based Tax expert, commenting on the issue stated, “The approach towards crypto taxation needs to be flexible according to the taxable event. If the transaction is an investment in nature, then a capital gain approach makes sense. However, if for example a company chooses to pay its employees in crypto, then for taxing these employees an income based approach would work better.” Further, the Blockchain technology used in developing crypto currency has also been deployed to create digital assets like security tokens. Basically, these tokens represent a fractional value of a larger asset e.g. a Property. Recently, The Security and Exchange Commission of Pakistan has also issued a concept note on fractionalisation of assets which might suggest that the regulator is interested in developing this asset class. The fact that security tokens derive its value from an underlying physical asset makes it a bit different from completely digital, cryptocurrency. However, as per experts, these can be taxed as they fall under the definition of a derivative as per Pakistani taxation law which states, “Derivative products means a financial product which derives its value from an underlying security or other asset.” Further, in cases where crypto is being used as a medium of payment with non-speculative objectives, a treatment similar to what is in place for foreign exchange gain or loss incurred by the businesses can be used. However, a completely different case would be that of crypto mining operations. Many of which are already based out of Pakistan. The question that arises here is whether
“The approach towards crypto taxation needs to be flexible according to the taxable event” Amayed Tola, Tax expert they constitute a business activity or not. “Every jurisdiction has its own definition of what constitutes business, In the case of Crypto mining the definition of business might need to be established separating habitual miners from those who are operating at a commercial scale. This can be achieved through setting a threshold for ‘Habitual Miners’ above which the mining operations will fall in the ambit of business operations and would be taxed accordingly”, Amayed explained to Profit. Another challenge that legislators will face would be agreeing on the rate of taxation. As in the case of our neighbor, India, which has gone along with a flat rate of 30% on all crypto assets, that as per experts promotes an unhealthy competition within different asset classes given the parity of taxation between them. Further, India has also proposed a one percent tax on every such transaction which as per those involved in the sector will hamper the liquidity of the crypto markets. The effects of an extremely high tax regime, as per the article, ‘ How are Indian crypto industry & investors coping with the new tax regime’ , published in Business Standard, would be a drain of resources from India to more favorable jurisdictions like Dubai and Singapore. The regulators in Pakistan would also need to evaluate what they aim to do with the crypto ecosystem as the world is in consensus that it will be part of the future in one way or another. Further, the economic opportunity here is immense. Across the border, Indian crypto exchanges like CoinDCX and CoinSwitch have turned into a unicorn in no time. Therefore, rather than trailing back, this may be the time for the Pakistani regulators to develop a framework to enable a blockchain ecosystem that will help mobilize resources both human and financial. n
29
