Is Vietnam, known as a "tax haven," a fertile ground for the development of the cryptocurrency industry?

Original Title: 《How is Crypto Tax in Vietnam?》

Authors: Chi Anh & Yoon Lee, Tiger Research

Compiled by: Felix, PANews

TL;DR:

• According to current regulations in Vietnam, cryptocurrencies are not considered legal means of payment, currency, assets, or foreign currency.
• The ambiguous classification of cryptocurrencies and the diversity and non-standardization of investment activities make it difficult for the government to tax these entities.
• Therefore, due to the lack of a clear regulatory framework, the Vietnamese crypto market is not affected by taxation. However, the difficulties in trading cryptocurrencies using fiat currency hinder explosive market growth.

1. Introduction

Taxation plays a critical role in any industry, stimulating or deterring retail investor participation. For example, in Japan, despite government initiatives to promote the Web3 industry, high taxes of up to 50% on crypto transactions have suppressed trading volumes. India imposes a 30% tax on crypto gains and an additional 1% tax at source, similarly hindering investor participation.

In contrast, Vietnam faces different challenges characterized by ambiguous tax regulations that bring uncertainty to market prospects. This report will delve into the crypto taxation environment in Vietnam, assessing the potential opportunities and challenges posed by these policies (or lack thereof).

2. Current Crypto Regulatory Landscape in Vietnam

• In April 2016, the Ministry of Finance, Document No. 4356/BTC-TCT
• Announced that cryptocurrency trading is not prohibited and defined cryptocurrencies as "property" and "liquid commodities."
• In July 2017, the State Bank of Vietnam (SBV), Document No. 5747/NHNN-PC
• Clearly stated that cryptocurrencies such as Bitcoin and Litecoin are not recognized as legal tender or means of payment within Vietnam.
• Explicitly prohibited the issuance, supply, and use of cryptocurrencies as currency or means of payment, with violators facing administrative or criminal sanctions.
• In April 2018, the Prime Minister, Directive No. 10/CT-TTg
• Issued directives to the General Statistics Office, Ministry of Finance, Ministry of Public Security, and other departments.
• Ordered to strengthen the management of activities related to cryptocurrencies like Bitcoin and enhance control over related transactions to prevent harm.
• In April 2018, SBV, Decision No. 02/CT-NHNN
• Instructed financial institutions, payment intermediaries, and SBV to control and strengthen measures related to crypto trading.
• In May 2020, Prime Minister Phạm Minh Chính instructed the SBV to initiate a pilot project exploring the use of blockchain in cryptocurrencies.
• In July 2021, Prime Minister Phạm Minh Chính urged the SBV to study and evaluate cryptocurrencies, with expectations that the bank would develop guidelines on taxation and consumer protection, although no specific timeline was announced.
• In March 2022, the Vietnam Blockchain Association, centered around the Ministry of Home Affairs, was established as the first legal entity focused on crypto assets in Vietnam, tasked with creating and nurturing a development framework for cryptocurrencies.

Vietnam faces significant regulatory and adaptive challenges regarding cryptocurrencies. According to current Vietnamese legislation, cryptocurrencies are neither considered legal forms of payment nor classified as currency. Furthermore, cryptocurrencies are not categorized as assets or foreign currency.

Under Vietnamese law, cryptocurrencies are explicitly excluded from recognized legal means of payment, indicating that the government has imposed restrictions on their use. The SBV, responsible for regulating crypto laws, issued a clear statement: "Cryptocurrencies, including Bitcoin and/or Litecoin, are not legal means of payment in Vietnam. The issuance, supply, and use of Bitcoin and/or Litecoin, as well as other similar cryptocurrencies as payment, are prohibited." Therefore, issuing or using cryptocurrencies as a means of payment may be subject to penalties.

Key points from the Ministry of Finance Document No. 4356/BTC-TCT, Source: Vietnam Legal Library

According to the Ministry of Finance's directives, transactions involving the buying and selling of digital currencies were initially classified as taxable commercial activities. However, due to the lack of clear legislation defining cryptocurrencies as assets or commodities, this directive remains ambiguous. The absence of a clear legal classification creates vagueness, making compliance and enforcement related to crypto trading relatively complex.

Source: Vietnam Civil Code

Additionally, according to Vietnam's Civil Code of 2015, particularly Article 105.1, assets are defined to include various items, currency, monetary instruments, and property rights. Digital assets, including cryptocurrencies, clearly do not fall into any of these categories. Therefore, under current Vietnamese law, these assets are not considered tangible assets. This classification (or lack thereof) presents significant legal gaps that affect how these assets are treated and regulated within the legal framework.

Ranking of cryptocurrency ownership. Source: AAA

This ambiguous classification exacerbates the legal uncertainty surrounding cryptocurrencies, placing them in a fundamentally unregulated gray area, posing challenges for both regulators and market participants. Despite these regulatory hurdles, Vietnam has a high ratio of cryptocurrency ownership compared to other countries, indicating a strong interest in the crypto market. In this complex situation, the government warns investors about the risks associated with digital assets and cryptocurrencies, emphasizing the lack of regulatory protection.

3. Cryptocurrency Taxation in Vietnam

Vietnam's crypto regulation is currently in a gray area, complicating the establishment of a comprehensive cryptocurrency tax framework in the country. Currently, there is no taxation on crypto transactions or gains in Vietnam. Generally, the government taxes any investment activity that generates income. However, the crypto sector encompasses a wide range of activities beyond trading.

For instance, Vietnamese investors often trade on international exchanges such as Binance and OKX, which largely fall outside Vietnam's regulatory scope. Additionally, they engage in crypto mining and peer-to-peer (P2P) trading. The diversity and breadth of activities in the crypto industry pose significant challenges for the formulation and uniform enforcement of tax laws. Unlike the stock market (where the tax rate for each stock transfer is 0.1%), activities in the crypto sector currently evade government taxation.

These various forms of profit generation in the crypto sector further complicate tax legislation, which often lags behind technological advancements. Consequently, regulators face the daunting task of ineffectively regulating and taxing these new forms of income, potentially leading to tax gaps and losses.

In Vietnam, this situation has resulted in the emergence of many crypto millionaires who enjoy substantial profits through spot trading, futures trading, airdrop mining, and other means without tax obligations.

4. Impact of Tax Exemption on the Retail Market in Vietnam

Due to the lack of specific regulations on taxing cryptocurrencies, Vietnam is often viewed as a tax haven for crypto income. However, the process of acquiring cryptocurrencies using the Vietnamese dong is quite inconvenient. Crypto exchanges are officially banned, meaning that unlike many other countries where fiat currency can be directly deposited into exchanges, the primary method for purchasing cryptocurrencies in Vietnam is through peer-to-peer (P2P) trading. Platforms like Binance P2P or direct purchases from sellers are the avenues that Vietnamese users must rely on.

However, the government can track and intervene in P2P transactions. These transactions typically involve bank transfers to exchange Vietnamese dong (VND) for USDT. Intermediaries receive VND via bank transfer and then transfer USDT to the buyer's wallet or centralized exchange account. The same method is used to sell USDT in exchange for VND. If bank transfers are identified as related to crypto transactions, authorities may choose to halt the transaction and may require traders to provide relevant receipts or other documentation.

To circumvent this regulatory scrutiny, some individuals opt for cash transactions. Individuals transfer USDT to sellers, who then deliver cash to a designated location. This process can be completed with just a few messages and a transaction. However, this method also carries risks, such as fraud, as transactions conducted in this manner are not legally protected.

While one might think that the lack of strict regulation would encourage retail investors to actively participate in the crypto market, the reality is different. Investors often find it inconvenient to enter the market and face the possibility of being tracked and intervened by regulatory authorities, who may require them to provide evidence of transactions. Additionally, methods used to circumvent regulations expose participants to fraud or other harms.

5. Conclusion

Due to regulatory and taxation uncertainties, the Vietnamese crypto market currently faces challenges. The lack of clear regulations leaves investors confused about tax obligations and exposed to risks such as fraud due to insufficient investor protection.

However, the Vietnamese government has recently been working to establish a regulatory framework to promote the healthy development of the crypto market. Active discussions are underway regarding the management and monitoring of cryptocurrency activities, and the Vietnam Blockchain Association (VBA) has been established. These efforts are expected to encourage investor participation and boost market confidence.

If the Vietnamese government successfully formulates clear regulations and tax systems for cryptocurrencies, along with mechanisms for investor protection, the Vietnamese crypto market may achieve more stable and sustainable growth. This would lay the foundation for Vietnam to play a leading role in the cryptocurrency industry.