Taxation of crypto asset transactions

The development of crypto assets (“CA”) unavoidably changes the landscape of the financial industry sector. In Indonesia, CA are becoming a type of commodity which is tradable in the futures market to the extent that it follows the prevailing trade laws. Furthermore, CA transactions as well as the income resulting from such transactions are regulated specifically in the Ministry of Finance Regulation No. 68/PMK.03/2022 regarding value-added tax (VAT) and income tax on crypto assets transactions (“PMK 68”) that came into force on 30 March 2022.

This important recent tax development should be relevant for both individuals and corporates doing business involving CA in Indonesia.

1. Terms used in PMK 68

Crypto assets (“CA”) are defined as intangible commodities in the form of digital assets, using cryptography, peer-to-peer networks and distributed ledgers, to enable the creation of new units, verify transactions and secure transactions without interfer­ence from other parties. The CA transaction involves at least 4 (four) parties, they are:

• CA seller: individual or corporation that sells and/or exchanges CA.
• CA buyer: individual or corporation that buys and/or exchanges CA.
• CA physical trader: a party that has obtained approval from the competent authority in accordance with the prevailing laws and regulations on commodity futures trading, to conduct CA transactions either on its own behalf or to facilitate the transactions for CA sellers or CA buyers.
• CA miner: individual or corporation that verifies CA transactions in order to obtain compensation in the form of CA, either individually or in a group of CA miners (min­ing pool).

The CA transaction is highly reliable with the use of an “electronic system” (Sarana Elektronik). Such electronic systems facilitate communication, electronically, used in CA trading, and among others include statements, declarations, demands, notifica­tions or requests, confirmations, offerings or acceptance of offerings, which contain the agreement of the parties for the establishment or implementation of the agree­ment. The systems are maintained by “system operators” (Penyelenggara Perdagan­gan Melalui Sistern Elektronik), including CA physical traders, to accommodate CA transactions.

2. VAT

VAT is imposed on the following deliveries:

• Intangible goods in the form of CA by CA seller, covering local delivery through an electronic system operated by system operator.
• Services in the form of the provision of an electronic system used for CA trading transactions by a system operator.
• Services in the form of a CA verification service and/or management service of a CA miners group (mining pool) by CA miners.

The above-mentioned CA deliveries cover the:

• Sale-purchase of CA using fiat money,
• Exchange of CA with another CA (swap), and
• Exchange of CA with goods other than a CA or service.

For VAT valuation and collection purposes, if a transaction uses currency other than the rupiah, the value shall be converted into rupiah using exchange rates as determined by the Ministry of Finance. If the transaction value takes the form of CA, the conversion rate shall follow either (i) a value as determined by a futures market maintaining CA trading, or (ii) a value in the system owned by the system operator, which either way shall be implemented consistently.

a) VAT treatment of CA delivery (being intangible goods)

VAT on CA delivery is collected, remitted and reported by the system operator. The system operator should at least perform the following activities:

• Sale-purchase of CA using fiat money,
• Exchange of CA with other CA (swap), and
• E-wallet includes deposits, withdrawals of funds, transfer of CA to other party accounts and provision and management of CA storage.

VAT is collected by means of the so-called “final VAT” mechanism at the following rates:

• 1% of the 11% standard VAT rate multiplied by the CA transaction value, if the system operator is a CA physical trader. Thus, the effective VAT rate is 0.11%.
• 2% of the 11% standard VAT rate multiplied by the CA transaction value, if the system operator is not a CA physical trader. Thus, the effective VAT rate is 0.22%.

The determination of transaction value depends on the type of transaction:

• Sale-purchase of CA using fiat money: the amount of money paid by CA buyer, collected upon receipt of payment by the system operator.
• CA swap: the value of each CA exchanged among transacting parties, collected upon the CA swap taking place.
• Exchange of CA with other non-CA: the value of CA transferred to the other party’s account, collected upon the CA transfer taking place.

b) VAT treatment of the provision of CA electronic systems

VAT on the provision of CA electronic systems is collected, remitted and reported by the system operator. The system operator should at least perform the following activities:

• Sale-purchase of CA using fiat money,
• Exchange of CA with other CA (swap), and
• E-wallet that includes deposits, withdrawals of funds, transfer of CA to other party accounts and provision and management of CA storage.

The VAT is calculated by multiplying the 11% standard VAT rate with the tax base. The tax base is the compensation in the amount of the commission (or reward in any name and in any form), including the commission or reward received by the system operator which will be forwarded to the CA miner.

c) VAT treatment of CA mining

VAT on CA verification services and management services of a CA miners group (mining pool) is collected, remitted and reported by the CA miner. The VAT is based on the 10% final VAT rate of the standard 11% VAT rate multiplied by the monetary value of the CA received by CA miners, including CA received from the CA system (block reward), resulting in an effective VAT rate of 1.1%.

3. Income tax

Income earned by the CA seller, system operator or CA miner in relation to a CA trans­action is subject to income tax.

If the transaction uses currency other than the rupiah, the transaction value shall be converted into rupiah using the exchange rate as determined by the Ministry of Fi­nance. If the transaction value is in the form of CA, the conversion rate shall follow either (i) the value as determined by the futures market maintaining CA trading, or (ii) the value in the system owned by the system operator, which either way shall be imple­mented consistently.

a) CA delivery (being intangible goods)

Income earned by the CA seller covers all types of CA transactions, including transac­tions using fiat money, CA swaps and other CA transactions, that are conducted through an electronic system maintained by the system operator. The income is subject to final income tax (Art. 22) at the rate of 0.1% of the CA transaction value (excluding VAT and Luxury Sales Tax/LST). The income tax shall be collected, remitted and reported by the system operator. If the system operator is not a CA physical trader, the final income tax (Art. 22) is 0.2%.

The system operator is exempt from income tax collection (Art. 22) if it only provides e-wallet services, connecting CA buyer and CA seller and/or does not facilitate CA transactions. Income from CA transactions from such system operators shall be self-collected by the CA seller at the rate of 0.1% of the CA transaction value if the system operator has obtained approval to conduct the trading of futures commodities, or 0.2% without such approval. The exemption applies when the CA seller is a resident of a treaty partner and can provide a certificate of tax residency.

Income from CA transactions earned by a system operator acting on its own behalf which is carried out through an electronic system provided by another system opera­tor is also subject to the same income tax.

The determination of the transaction value depends on the type of transaction:

• Sale-purchase of CA using fiat money: the amount of money paid by CA buyer, collected upon receipt of payment by the system operator.
• CA swap: the value of each CA exchanged among the transacting parties, collected upon the CA swap taking place.
• CA transactions other than the above: the amount of payment received by the CA seller, collected upon receipt of payment by a system operator.

b) Provision of CA electronic systems

Income earned by a system operator including the provision of CA electronic systems, fund withdrawal services, deposit services, transfers of CA among e-wallets services, provision and management of CA storage or e-wallet and/or other services in relation to other CA transactions are subject to the normal income tax rate.

c) CA mining

Income earned by CA miners, including income from CA systems in the form of block rewards, transaction verification fees and other income is subject to the final income tax (Art. 22) at the rate of 0.1% and must be self-remitted by the CA miner.

4. Conclusion

PMK 68 attempts to achieve a level playing field between market participants in “conventional” financial industry sectors and those who already utilise CA in their business/activities, by imposition of VAT and income tax. PMK 68 also expands the current tax bases which require taxpayers who are conducting CA transactions to re-evaluate their tax compliance practice. Understanding that Indonesia adopts a self-assessment system, taxpayers are required to manage their tax compliance obligations pertaining to this new tax regulation on CA transactions as part of a risk mitigation plan, particularly in connection with tax audits.

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