According to the Trade Ministry, the cryptocurrency transaction volume had increased 470 percent to Rp 370 trillion ($26.4 billion) in only five months. The amount is likely to surge considering the expansion of the digital economy. The cryptocurrency tax has taken on more urgency as the cost of handling COVID-19 increases.

Has Indonesia applied the right approach to tax cryptocurrency transactions? To assess the question, we need to identify the available tax regulation and compliance system in Indonesia. Article 4 of the Indonesia Income Tax Law has included the worldwide income principle that allows taxation on all types of income, irrespective of the locations of their sources. However, clear tax treatment guidance has not yet been provided on cryptocurrencies.

Unlike Italy and Belgium, which classify crypto-assets as currency for tax purposes, Indonesia has adopted a similar approach to China and Canada. The Trade Ministerial Regulation No. 99/2018 considers crypto-assets a commodity, and their trading will be legal when authorization is obtained from the Commodity Futures Trading Regulatory Agency (Bappebti).

The classification as a commodity has advocated crypto-assets’ function as a medium of exchange without ignoring volatility concerns. Consequently, standard property or income tax rules shall apply to any gains derived from cryptocurrency transactions. These standard rules are challenging to use on crypto-assets valuation, as gains or income from asset transfer are calculated on the difference between the assets’ market value and book value. Taking into account the substantial frequency and cycle variation of crypto-asset transactions one may enter per year, the conservative valuation approach may overwhelm taxpayers to establish the positions taken (gain/loss) on tax returns.

Under a regular filing of the annual tax returns, Indonesian taxpayers deriving income from cryptocurrency transactions would report any capital gains based on a self-assessment system. The decision to report and pay taxes is in the taxpayers’ hands. To date, the automatic tax-withholding system has been absent on cryptocurrency gains, although the government owns a list of 13 physical trader candidates of crypto-assets.

The absence opens loopholes for non-compliance because the government cannot effectively detect and deal with the risks of tax avoidance posed by the complexity of a borderless crypto-asset market. Also, it leads to a significant potential loss of state revenue. Assuming that the final income tax rate of share transaction was applied to cryptocurrency transaction volume, the government would gain at least Rp 370 million during the January-May period.

On the bright side, Bappebti is currently working on the crypto exchange establishment and discussing the possibility of applying final withholding tax on cryptocurrency transactions with the Taxation Directorate General. The registration of physical trader candidates of crypto-assets has been closed since May last year and the verification process is still ongoing. The predicted taxation scheme is likely to take an example from shares transactions, where final income tax is withheld by the Indonesia Stock Exchange (IDX) on gross value.

It would seem that a new scheme is required to tax crypto-assets effectively. Nevertheless, taxing transactions based on distributed ledger technologies is not the easiest case to make. A brief overview of tax treatments in different countries indicates that “taxable events” and “tax rate options” are critical issues to be acknowledged by tax authorities when designing regulations on crypto-assets.

To decide the most reflective key taxable events, for example, we need to analyze the creation and disposal events of a unit. In Japan, Finland and Norway, receipts of newly mined tokens are generally liable to tax because they qualify as income from assets. By contrast, mining may just constitute a taxable event in Singapore and Switzerland when the activities are business in nature, excluding mining activities as hobby.

The variation of approaches increases when deciding the taxable events vis-à-vis crypto-asset disposal. Many countries place a broader rule by deeming crypto-assets exchanges for all kinds of compensation as a taxable event, such as the United States and Australia. The approach is likely to generate more tax revenue and address the risks of tax evasion. However, suppose the Taxation Directorate General opts for administration simplicity. In that case, it may consider exchanges between crypto-asset for fiat currency or for goods and services to be a taxable event, as applied in Poland and France.

Another critical issue that needs to be observed is the tax rate. The government has implied its interest in imposing a final and flat tax rate on crypto-asset transactions that slightly deviates from the typical approach of progressive income taxation. If Indonesia is aiming for a seamless business process and market growth, adopting a shares taxation scheme will be more straightforward.

However, there should be careful consideration if both transactions are taxed under the same rate. Unlike shares that are directly linked to audited companies, most crypto-assets have no underlying value and bear a high level of volatility. Hence, applying an identical tax rate could send the message that the safety offered by shares as an investment is rather ignored. 

On the whole, a clear legislative framework and guidance on crypto-asset taxation is vital to ensure certainty. Amendments to the existing income tax regulation could emphasize the scheme changes, providing details on key taxable events and tax rate options.

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The writer is an official at the Taxation Directorate General with a master’s in international tax from the University of Melbourne. These views are personal.

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