On August 23, 2021, the Bureau of Internal Revenue (BIR) reminded cryptocurrency investors, play-to-earn users, and Axie Infinity players to register with Bureau as an income earner and pay taxes or risk penalty and jail time.
To help make sense, Taxumo, a leading online tax compliance tool and PDAX sponsored a crypto tax 101 webinar moderated by Taxumo CEO EJ Arboleda, inviting Atty. Mike David of CEZA and Atty. Kevin Baldonado to answer frequently asked questions about cryptocurrency and taxes. Below is the video and the tax experts’ answers to the tax questions. Atty. Mike David run through a brief background about crypto and taxation before diving into “crypto tax.” We would like to thank PDAX and Taxumo for conducting this webinar.
Brief Background on Currency and Cryptocurrency
Table of Contents.
- 1 Brief Background on Currency and Cryptocurrency
- 2 A run through of Income Taxation
- 3 Q and A portion
- 3.1 Should I just not declare?
- 3.2 How can the government just impose tax whatever it wants?
- 3.3 How will the BIR track my crypto earnings if it’s decentralized?
- 3.4 Do I need to register under DTI/SEC?
- 3.5 How do I know if I am doing tax avoidance or tax evasion?
- 3.6 What if I earn from my job and also from Play-to-earn?
- 3.7 What will I get in return if I pay my tax from my crypto deals? Why should I pay taxes? Will the government support crypto if I pay taxes?
- 3.8 What industry does crypto-trading fall under DTI?
- 3.9 Am I taxed for having NFT?
- 3.10 Can Axie players be compelled to register with the BIR or really risk a penalty?
- 3.11 What if you buy an asset (car, house) using crypto? How will the government tax you if the value is volatile? Should the seller impose any tax?
- 3.12 If you sell an Axie for ETH, is it taxable?
- 3.13 If I already declare now, how about my previous earnings, are they still subject to tax or just future transactions?
- 3.14 Is there an employer-employee relationship between Axie scholars and managers based on the four-fold test? If yes, are managers required to give benefits?
By. Atty. Mike David
Currency – A unit of account, a medium of exchange, a store of value. It is money because it is widely accepted by people to exchange for products and services.
Fiat – A legal tender, backed by the government, printed and minted by the BSP. (Fiat = “by the power of authority”)
E-Money – A digital representation of fiat, a legal tender, convertible to fiat.
Virtual Currency – a type of digital currency created by a community of online users, is stored in electronic wallets (e-wallets), and generally transacted online. May be exchanged with other VCs or fiat.
Crypto – A type of virtual currency, could be decentralized or centralized, uses cryptography and blockchain. Transmission of values and messages are encrypted.
A run through of Income Taxation
What is Revenue and Income:
- Revenue — Gross inflow of economic benefits during the period arising from the course of the ordinary activities of an entity. (Actual “bayad,” not taxable.)
- Income — Any gain derived and realized from capital, labor, or both. In general, it is any flow of wealth or advantage as a return on capital.
- Gain – a return on capital. When you invest and your returns exceed the capital.
- Realized — when the income is received by the income earner. This will trigger taxation.
Who are taxable?
|Taxpayer Type||In the Philippines||Outside the Philippines|
|Resident Citizen (RC)||yes||yes|
|Non-Resident Citizen (NRC)||yes||no|
|Resident Alien (RA)||yes||no|
|Non-Resident Alien Engaged in Trader or Business (NRA-ETB)||yes||no|
|Non-Resident Alien Not Engaged in Trade or Business (NRA-NETB)||yes||no|
|Domestic Corp (DC)||yes||yes|
|Resident Foreign Corp (RFC)||yes||no|
|Non-Resident Foreign Corp (NRFC)||yes||no|
Where is it taxed?
- The place where the income generating activity is conducted or completed(income)
- Domicile/Residence of the owner (intangbles)
How Much is Being Taxed?
- Php 250,000 threshold. If income does not exceed that for the year, then no tax.
- Refer to the table of taxes under Sec. 24(A) of the Tax code as amended.
- 20% for domestic corporations with net taxable income not exceeding Php5 million and with total assets (Refer to 27(A) of the tax code for other particulars.)
- 25% for all other domestic corporations and resident foreign corporations.
Current Tax Schedule:
On the context of Play-to-earn
|Income generating activity||Trigger (When income is realized and therefore taxable)|
|Trading and Gain||Upon conversion to fiat.|
|Mining and generating the coin||When sold for fiat|
|Manager: cut, gain on breeding, and trading|
Scholar: hodl, sale, cut, or compensation
|When it is converted to fiat|
Because crypto is yet to have proper classification from the BIR, SEC, and BSP, then the tax event will only happen upon conversion to fiat.
Expectations likely in the future:
- Income tax
- Capital Gains (if the govt treat crypto as securities(
- Percentage tax
- (Gain here is anything you receive on top of your cost.)
Other Regulations and Expectations
Atty. Mike said regulation surrounding crypto is still ambiguous but progressing, but that the tax power of the government is vast and supreme. Any income is taxable but taxable income should be realized first. It is recommended to seek help from professionals such as Taxumo to help navigate tax laws.
Q and A portion
Should I just not declare?
Atty. Mike: Remember where you are transacting in this digital economy (online wallets, online banks, GCash, etc) so there will always be a paper trail. You might not want to run that risk
How can the government just impose tax whatever it wants?
Atty. Mike: Because the government’s tax is vast and supreme. Taxation is the most powerful attribute of the government. All income, even illegal income, is taxable.
How will the BIR track my crypto earnings if it’s decentralized?
Atty. Mike: There’s going to be difficulty on this because it’s always on the individual’s declaration of their tax dues (we’re on an honesty system, and that’s why there are many tax evaders.)
When you earn money, where do you store it? Unless you put your money under your bed, then you are surely going to put that in the bank. Especially if you have a credit card, which can be traced back to you. The bank and the government will be surprised where you find the money to justify the change in your lifestyle. This will trigger an audit.
You can always get away with it, but do you really want that hanging behind you? Seek tax professionals so you can get the better chunk and make the entire tax ordeal fair to you.
What they did in the United States is track the exchanges (since it’s hard to track the individuals.)
Atty. Kev: A lot of people do not know the difference between tax avoidance and tax evasion. You can avoid the tax but you cannot evade it.
Do I need to register under DTI/SEC?
Atty Mike: You are only required to get a DTi certification (SEC if a group of people) if you will engage a business that you will offer your service to the public, other people will buy things from you, or get your services.) This will ensure that what you are doing is legal, regulated, and taxed.
If you are just playing (Axie Infinity), you don’t need to register to the DTI or SEC. You are an individual income earner.
How do I know if I am doing tax avoidance or tax evasion?
Atty. Mike: You have to know what are the things that are taxable. If you are performing an income-generating activity, then it is taxable. What’s good is that in our tax laws, there are deductions, expenses and costs that you can deduct (see chart above). For the avoidance aspect, maximize all those remedies that the laws already provide. For what it’s worth, maybe you are actually exempted from paying.
If you are inventing costs and expenses to avoid tax, then that’s evasion.
What if I earn from my job and also from Play-to-earn?
Atty. Mike: You can attribute it to your Tax Identification Number (TIN) and just add your play-to-earn earnings from your other earnings.
What will I get in return if I pay my tax from my crypto deals? Why should I pay taxes? Will the government support crypto if I pay taxes?
Atty. Mike: For example, you get a free vaccine because of your taxes. Paying tax sucks, really, but the government has to earn. If everyone just pays their taxes, we will have an industry leverage that can in fact help the economy.
The government usually gives certain tax benefits when an industry/companies as a whole respects paying taxes.
What industry does crypto-trading fall under DTI?
There is an absence of proper classification, but in the general sense, you can fall under “financial advisor” or “capital markets” if that’s your level of crypto trading.
Am I taxed for having NFT?
Tax comes once you sell the NFT and convert that earnings back to fiat.
Can Axie players be compelled to register with the BIR or really risk a penalty?
Atty. Mke: Yes. If you don’t pay your taxes, you committed a crime. Taxes are real-life burdens, even after death. You cannot escape ths. The only thing you can do is do your proper tax avoidance.
What happens if you do not pay your taxes? Immediately none. BUT once there comes a way to trace this, don’t forget that when it comes to tax evasion, even if that activity was done ten years ago, you will still be liable.
The point of reckoning when it comes to tax evasion cases is the point of discovery, not the point of commission (when the activity is committed). It is when they discovered it, not when you did it.
EJ: If the BIR sees that you have the intention to pay, they would actually be more forgiving towards you.
What if you buy an asset (car, house) using crypto? How will the government tax you if the value is volatile? Should the seller impose any tax?
Atty. Mike: The seller will carry the tax. The valuation is at the point of the transaction. In this case, if the house is for sale for Php2 million but you are paid Php2 million WORTH of ETH, then the value (in fiat) is already “realized” even though the conversion to fiat did not take place. Realized = Taxable.
If you sell an Axie for ETH, is it taxable?
No. (If sold for crypto). The difference from the house example above is that the Axie is for sale for 1 ETH (for example) and you pay 1 ETH (irregardless of how much the value of 1 ETH is).
If I already declare now, how about my previous earnings, are they still subject to tax or just future transactions?
Atty. Mike: You can pay your back taxes. There will be penalties but they are called “compromised penalties” because you volunteered to pay your taxes. Then you can pay moving forward.
It is better to register because the BIR goes after those who don’t and are hiding.
Don’t be antagonistic toward taxes.
Is there an employer-employee relationship between Axie scholars and managers based on the four-fold test? If yes, are managers required to give benefits?
Atty. Mike: They can. You can have a contract with them. And that’s more humanitarian in fact. And if they become employees, then they need to have the mandated benefits.
It’s going to be easier to compute taxes when there’s a contract. For managers, have a contract with your scholars.
This article is published on BitPinas: Cryptocurrency Tax Philippines | Play-to-Earn Tax 101 by PDAX and Taxumo