Indonesia to impose up to 2% VAT and up to 0.2% income tax on crypto under major tax reform

An Indonesian official confirmed the government was working on detailed legislation expected to go into effect on May 1.

Following a tax system reform passed last year, the Indonesian government plans to levy a 1% - 2% VAT on crypto transactions and a 0.1% - 0.2% income tax on capital gains made from crypto investments, according to a document issued by the Ministry of Finance on March 30.

As confirmed by a Directorate General of Taxes (DGT) official in a media briefing, the government was treating crypto assets as commodity, not currency, hence the decision to impose VAT.

The proposed rate is much lower than the one applicable to goods and services, which rose from 10% to 11% on April 1. It’s unclear how the government would collect the new taxes. Officials said they were still working on the details, but the Ministry of Finance has already issued an outline of the proposed measures.

Exchanges and wallets to collect VAT

According to the published document, the upcoming legislation will apply to “digital assets using cryptography, peer-to-peer networks, and distributed ledgers.” Both VAT and income tax will be collected by “electronic communication facilities used for crypto asset trading,” a definition that appears to include exchanges and electronic wallet providers.

Income tax will also be imposed on miners, at a rate of 0.1%. Applicable to block rewards and transaction fees, the tax will have to be paid by the miner in Indonesian rupiah according to the assets’ value at the time they were earned.

Crypto adoption in Indonesia hits record levels

The new regulations are expected to provide “legal certainty, simplicity, and ease of administration of tax collection,” recognizing that crypto assets have “developed widely in the community.” Indeed, 28% of Indonesians describe themselves as crypto-curious, and 41% claim they already own crypto, as shown by a Gemini report on global crypto adoption.

Cryptocurrency ownership by country. Source: Gemini

However, those statistics should be taken with a grain of salt. Other, more extensive research shows that the level of digital literacy in Indonesia, a country of over 270 million people, is barely above the world median.

GCI 4.0: Digital Skills Among Population, 1-7 (Best). Source: World Bank

Still, the growing popularity of crypto is evident.

Execution?

It’s unlikely that the government in Jakarta will find a foolproof way to collect taxes from peer-to-peer transactions. At the time of writing, none of the major crypto exchanges had reacted to the news.

If the new legislation does upend the future of crypto in Indonesia, it could deal a particularly painful blow to Binance, which partnered with the Indonesian telecommunications giant Telkom to enter the Indonesian market in December 2021.