The classification of USDT (Tether) in tax law has become a critical issue for digital finance stakeholders, particularly regarding whether its exchange should be subject to business tax under Chapter IV, Section 1 of Taiwan's Value-Added and Non-Value-Added Business Tax Act. This article presents a comprehensive analysis grounded in international standards, regulatory frameworks, practical use cases, and judicial precedents to argue that USDT transactions should be treated as financial services and exempt from standard business taxation.
Is USDT a Financial Instrument?
To determine whether USDT qualifies as a financial instrument—and thus falls outside the scope of general business tax—we examine four key perspectives: international accounting standards, financial regulatory treatment, real-world transaction scenarios, and relevant court rulings.
International Accounting Standards (IFRS)
In June 2019, the International Financial Reporting Interpretations Committee (IFRIC) issued an agenda decision stating that cryptocurrencies do not meet the definition of financial assets under IFRS 9 or IAS 32. The reasoning included:
- Cryptocurrencies are not cash due to high volatility.
- They do not represent equity or contractual rights to receive cash.
- They are not issued by central banks.
👉 Discover how global accounting standards shape crypto taxation policies.
However, this assessment was made for general cryptocurrencies like Bitcoin and Ethereum. USDT, as a stablecoin pegged 1:1 to the U.S. dollar, differs fundamentally:
- Stable Value: Backed by reserve assets, USDT maintains price stability.
- Widespread Payment Use: It functions as a medium of exchange in digital asset trading, cross-border payments, and commercial settlements.
Given these characteristics, USDT aligns more closely with electronic money or near-cash instruments than speculative digital assets. Therefore, it should not be grouped with traditional cryptocurrencies for tax purposes.
Regulatory Perspective: Taiwan’s Financial Supervisory Commission (FSC)
Taiwan’s FSC has taken significant steps to regulate virtual assets through laws such as the Money Laundering Control Act and the Regulations on Anti-Money Laundering Registration for Virtual Asset Service Providers (VASPs).
Under these regulations:
- Virtual assets are defined as digitally stored value using cryptography and distributed ledger technology, used for payment or investment but not considered legal tender.
- USDT clearly fits this definition, especially given its role in payments and value transfer.
Moreover, VASPs—including exchanges, custodians, and transfer services—are subject to strict AML/KYC requirements similar to traditional financial institutions. This regulatory alignment indicates that USDT-related activities are financial in nature, not mere commodity sales.
Why USDT Is Not a Traditional Good
Unlike physical goods or digital services taxed under Chapter IV, Section 1:
- USDT isn’t consumed: It circulates indefinitely like fiat currency.
- No value addition occurs during exchange: There’s no production chain or markup, making it incompatible with value-added tax logic.
- It functions as a payment medium: Just like USD or EUR in forex markets.
👉 Learn how financial regulators classify stablecoins globally.
Additionally, the FSC treats USDT exchanges similarly to foreign exchange dealers. In Taiwan, foreign currency trading by financial institutions is taxed only on exchange gains, not on transaction volume. Applying the same principle to USDT ensures tax neutrality and fairness.
Practical Transaction Scenarios
In real-world applications, USDT operates primarily as:
- A trading pair on crypto exchanges (e.g., BTC/USDT), functioning like USD in forex markets.
- A payment method for international e-commerce and payroll.
- A tool for cross-border remittances and hedging, akin to electronic money or prepaid cards.
These uses emphasize its role as a transactional and settlement instrument, not a consumer product. Since no goods or services are sold when USDT changes hands, taxing such transactions as regular sales misrepresents economic reality.
EU Court Ruling in Hedqvist Case (CJEU)
The European Court of Justice ruled in Hedqvist (Case C-264/14) that:
"The exchange of Bitcoin for fiat currency constitutes a financial service related to 'money or currency exchange' and is exempt from VAT under Article 135(1)(e) of the EU VAT Directive."
This precedent establishes that:
- Cryptocurrency-to-fiat exchanges are not sales of goods or services.
- They fall under exempt financial services, just like traditional forex trading.
Applying this logic, USDT exchanges should also be exempt, especially since they mimic dollar-denominated currency swaps. The economic substance—not technical form—should guide tax policy.
Global Tax Treatment of USDT and Stablecoin Exchanges
Countries around the world increasingly recognize payment-focused digital assets as financial instruments:
- EU, UK, Germany, France, Japan, Singapore, Australia, South Korea: All exempt direct USDT-to-fiat exchanges from VAT/GST.
- United States: Varies by state; most treat crypto trades like forex (tax-exempt), though some tax exchange fees.
- Taiwan: Currently lacks clear guidance but leans toward treating USDT as a taxable digital good—potentially at odds with global norms.
This international consensus reflects a shared understanding: taxing basic currency-like exchanges distorts markets and discourages innovation.
Frequently Asked Questions (FAQ)
Q: Why shouldn’t USDT transactions be taxed like other digital services?
A: Because USDT functions as a medium of exchange—not a consumed service. Taxing every transaction would create cascading tax burdens similar to taxing every dollar bill transfer.
Q: If not taxed under general business tax rules, how should USDT gains be treated?
A: Only realized gains (e.g., profit from selling USDT above cost basis) should be taxable, similar to foreign exchange gains for banks.
Q: Doesn’t exempting USDT encourage tax avoidance?
A: No—exemptions apply only to transaction mechanics. Profits from trading or income denominated in USDT can still be subject to income or capital gains taxes.
Q: How does this affect crypto exchanges in Taiwan?
A: Clear classification prevents legal uncertainty. If exchanges know USDT trades are exempt from business tax, they can operate efficiently without fear of retroactive liabilities.
Q: Can Taiwan afford to diverge from global tax standards?
A: Not without risk. Over-taxation may drive platforms and investors to jurisdictions like Singapore or Hong Kong, weakening Taiwan’s position in fintech.
👉 See how leading markets regulate stablecoin taxation today.
Conclusion and Policy Recommendations
USDT is not a consumer product—it is a digital payment instrument with financial characteristics. Subjecting its exchange to standard 5% business tax under Chapter IV, Section 1 contradicts:
- International accounting principles,
- Financial regulatory practices,
- Real-world usage patterns,
- And established judicial precedents like the Hedqvist ruling.
Imposing such taxes would:
- Create unfair competition vs. traditional forex,
- Discourage fintech innovation,
- Risk capital flight to more crypto-friendly economies.
Recommended Actions:
- The Ministry of Finance and FSC should jointly issue a clarifying interpretation confirming that USDT exchanges are financial transactions exempt from general business tax.
- Follow international best practices, treating USDT like foreign currency—tax only on net exchange gains.
- Align with OECD and EU VAT frameworks to ensure tax neutrality and market fairness.
Without timely reform, Taiwan risks falling behind in the global digital finance race. A modern, principles-based approach to stablecoin taxation will foster innovation while maintaining fiscal integrity.