Digital Tokens (DTs)

"A digital token is a cryptographically-secured representation of a token-holder's rights to receive a benefit or to perform specified functions. A virtual currency is one particular type of digital token, which typically functions as a medium of exchange, a unit of account or a store of value."
Source: Simmons & Simmons, last revised 15 Aug 2017

There are three kinds of digital tokens recognised by IRAS, and their definitions are as follows:

According to IRAS (e-Tax Guide)
last revised 9 October 2021

3.1 Digital token
A digital token refers to any cryptographically-secured digital representation of value that can be transferred, stored or traded electronically.

3.2 Payment token
A payment token represents a digital right that can be used or is intended to be used as a means of payment for goods and/or services. Common payment tokens include Bitcoin and Ether.

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3.5 Security token
A digital token that represents a stake or an investment in an underlying asset e.g. shares in company, bonds, etc.

3.6 Utility token
A digital token that represents a right to a good or service.

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2.3 The general tax treatment for transactions involving the use of payment tokens, utility tokens and security tokens are as follows:

Type of digital token	Tax Treatment
Payment token	Payment token is regarded as an intangible property. Consequently, transactions involving the use of payment tokens as payment for goods or services are viewed as barter trade and the value of goods or services transferred should be determined at the point of transaction.
Utility token	The use of a utility token to exchange for goods or services is unlikely to create an income subject to tax on the user at the point of exchange. It may, on the other hand, give rise to a deductible expense subject to usual deduction rules.
Security token	The taxability of the return derived from a security token depends on the nature of the return, for example, whether it is in the form of interest, dividend or other distributions.

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2.5 For guidance on GST treatment of transactions involving digital payment tokens, please refer to the IRAS e-Tax Guide “GST: Digital Payment Tokens”.

Regulated: Digital tokens that fall within the definition of “digital payment tokens” under the Payment Services Act 2019.

"Digital tokens that fall within the definition of “digital payment tokens” under the Payment Services Act 2019, which refer to any digital representation of value (other than an excluded digital representation of value) that —

(a) is expressed as a unit;
(b) is not denominated in any currency, and is not pegged by its issuer to any currency;
(c) is, or is intended to be, a medium of exchange accepted by the public, or a section of the public, as payment for goods or services or for the discharge of a debt;
(d) can be transferred, stored or traded electronically; and
(e) satisfies such other characteristics as the Authority may prescribe."

Section 2(1) of the Payment Services Act 2019

Unregulated: Digital tokens which fall within the definition of “limited purpose digital payment token” under the Payment Services Act 2019.

Digital tokens which fall within the definition of “limited purpose digital payment token” under the Payment Services Act 2019, which refers to "any non-monetary customer loyalty or reward point, any in-game asset, or any similar digital representation of value that —

(a) cannot be returned to its issuer, transferred or sold in exchange for money; and

(b) may only be used —

(i) in the case of a nonmonetary customer loyalty or reward point — for the payment or part payment of, or in exchange for, goods or services, or both, provided by its issuer or any merchant specified by its issuer; or

(ii) in the case of an ingame asset — for the payment of, or in exchange for, virtual objects or virtual services within an online game, or any similar thing within, that is part of, or in relation to, an online game."

Paragraph 3 of the First Schedule, Payment Services Act 2019

"In line with general tax principles, the tax treatment of the gain/loss on disposal will depend on whether the digital token is considered a capital or revenue asset to the owner. In determining whether the digital tokens are capital assets or trading stock, the usual approach would be adopted – i.e. regard would be had to the facts and circumstances, applying well-established tax principles like the “badges of trade”. The timing of taxation is when the income is realised and has accrued to the person disposing the tokens."

Source: PWC, last revised 22 May 2020

According to the ML Regs, a cryptoasset is a cryptographically secure digital representation of value or contractual rights that uses a form of distributed ledger technology and can be transferred, stored, or traded electronically; cryptoassets include both those that are centralized, i.e., issued by an administrator, and those that are decentralized.

Co-written by Merkle Science & FinReg 

The UK framework of cryptoassets consists of "regulated tokens" and "unregulated tokens". Regulated tokens include "security tokens" and "e-money tokens" only, while unregulated tokens include everything else including "utility tokens", "exchange tokens" and NFTs.

According to FCA,

Regulated tokens
Security tokens: These are tokens that amount to a ‘Specified Investment’ under the Regulated Activities Order (RAO), excluding e-money. These may provide rights such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits. They may also be transferable securities or other financial instrument under the EU’s Markets in Financial Instruments Directive II (MiFID II). These tokens are likely to be inside the FCA’s regulatory perimeter.
E-money tokens: These are tokens that meet the definition of e-money under the Electronic Money Regulations (EMRs). These tokens fall within regulation.

Unregulated tokens
Any tokens that are not security tokens or e-money tokens are unregulated tokens. This category includes utility tokens which can be redeemed for access to a specific product or service that is typically provided using a DLT platform.
The category also includes tokens such as Bitcoin, Litecoin and equivalents, and often referred to as ‘cryptocurrencies’, ‘cryptocoins’ or ‘payment tokens’. These tokens are usually decentralised and designed to be used primarily as a medium of exchange. We sometimes refer to them as exchange tokens and they do not provide the types of rights or access provided by security or utility tokens, but are used as a means of exchange or for investment.

You can find out more about which cryptoasset activities we regulate in PS19/22: Guidance on Cryptoassets. Any firm carrying on a regulated activity will need to be authorised by us. Find out more about the authorisation process.

According to FCA (Guidance on Cryptoassets)
last revised July 2019

34. Unregulated tokens are those tokens that do not provide rights or obligations akin to specified investments (like shares, debt securities and e-money).

35. These tokens can be centrally issued, decentralised, primarily used as a means of exchange, or grant access to a current or prospective product or service. They might be used in one or many networks or ecosystems. They can be ‘privacy tokens’, ‘fungible utility tokens’, ‘non-fungible tokens’, ‘access tokens’ etc. They can be fully transferable or have restricted
transferability.

36. The key thing to note is that any token that is not a security token, or an e-money token is an unregulated token.

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2.2 Our consultation broadly described exchange tokens as those types of cryptoasset that are usually decentralised and primarily used as a means of exchange. These tokens are sometimes known as ‘cryptocurrencies’, ‘crypto-coins’ or ‘payment tokens’. These tokens are designed to provide limited or no rights for tokens holders, and there is usually not a single issuer to enforce rights against.

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2.21 Our consultation described utility tokens as those tokens that provide consumers with access to a current or prospective product or service and often grant rights similar to pre-payment vouchers.