UAE Crypto Accounting Explained

Cryptocurrencies have recently attracted considerable attention and sparked the interest of investors worldwide. The United Arab Emirates (UAE) is also witnessing an increase in the creation of platforms for crypto trading. However, as a relatively new and evolving asset class, cryptocurrencies do not yet have well-defined guidelines for accounting practices. 

General Taxation Environment in the UAE

The United Arab Emirates (UAE), with Dubai as a prominent emirate, is renowned for its favorable tax environment. The country does not impose personal income tax or capital gains tax on individuals, a policy that extends to those involved in cryptocurrency transactions. As a result, the UAE, and Dubai in particular, has become a magnet for wealthy investors and entrepreneurs seeking these tax advantages.

To qualify for tax residency and fully benefit from these tax incentives, one must reside in Dubai for a minimum of 183 days per year. Obtaining a Tax Residency Certificate is required for this status and comes with conditions, including the residency requirement.

While there is no capital gains or personal income tax, it is important to note that Dubai imposes a Value Added Tax (VAT) of 5%, which may apply to certain cryptocurrency transactions. Additionally, those looking to establish a business in Dubai should be aware of initial costs, such as licensing fees, permits, and the expense of securing office space.

Is Cryptocurrency an Intangible Asset? 

Experts believe that, given the absence of a specific standard for crypto assets in the International Financial Reporting Standards (IFRS), applying the IAS 38 Intangible Assets standard might be more suitable. This recommendation stems from the fact that the nature of virtual currency assets aligns closely with that of other traditional intangible assets. Consequently, IAS 38 offers a relevant framework for accurately accounting for crypto assets, including guidelines on their recognition, measurement, and disclosure in financial statements.

According to IAS 38, an asset is considered identifiable if it can be separated or derived from contractual or legal rights. Additionally, an asset is regarded as divisible from the entity if it can be sold, transferred, licensed, rented, or exchanged either independently or alongside any related contract, identifiable asset, or liability.

Therefore, it seems that cryptocurrency fits the criteria of an intangible asset under IAS 38, as it can be separated from the holder and sold or transferred on its own. Furthermore, according to IAS 21, cryptocurrency does not entitle the holder to receive a fixed or determinable number of currency units. In summary, cryptocurrency qualifies as an intangible asset because it is separable from its holder and can be individually sold or transferred.

Regulatory Framework for Cryptocurrency in Dubai

Role of the Dubai Financial Services Authority (DFSA)

The Dubai Financial Services Authority (DFSA) has established a thorough framework to regulate financial services involving Crypto Tokens, which came into effect on November 1, 2022. This initiative builds on the DFSA’s earlier introduction of the Investment Token regime in October 2021. Within the Dubai International Financial Centre (DIFC), entities can now obtain licenses to offer a broad range of services related to Crypto Tokens. The DFSA’s regulatory strategy is designed to be neutral regarding the underlying technology used in the crypto industry.

The DFSA has implemented comprehensive regulatory rules to address various risks, including those related to financial crime, technology governance, custody, and the necessity of transparent disclosure. They also emphasize the prevention of market abuse and fraud. Over a hundred entities have shown interest in establishing a Crypto Token business within the DIFC.

Several licenses and recognitions have been granted, including five variations of Crypto Token licenses, one for Investment Tokens, and recognition of three Crypto Tokens that represent a significant portion of the total market capitalization.

Additionally, the DFSA is considering proposals to address Custody, Financial Crime, staking for Proof of Stake (PoS) consensus mechanisms, and Fund Management. This underscores the DFSA’s commitment to continuously enhancing its regulatory framework in response to the evolving cryptocurrency market.

Recent Legal Changes Affecting Crypto Investments

Dubai has advanced the integration of digital assets into its economy with the implementation of the world’s first Digital Assets Law and the Law of Security, along with amendments to existing laws. The Digital Assets Law – DIFC Law No. 2 of 2024 – establishes the legal status of digital assets as property. Meanwhile, the Law of Security – DIFC Law No. 4 of 2024 – updates the security framework to align with international standards and clarifies the procedures for securing digital assets.

These laws aim to regulate the use, trade, and oversight of digital assets within the DIFC’s jurisdiction, protecting investors and enhancing the market's appeal. The Dubai Metaverse Strategy, introduced by Sheikh Hamdan bin Mohammad Al-Maktoum, underscores the nation's commitment to transforming its economic landscape through technological innovation and digital assets.

The DFSA’s regulatory measures are crucial in building public trust in digital assets. The authority is responsible for establishing rules for regulating Tokens, including the criteria for a Token to be classified as a Crypto Token and determining when an activity related to a Crypto Token qualifies as a Financial Service.

Tax Obligations for Crypto Businesses

Licensing Requirements for Crypto-Related Activities in Dubai

In Dubai, the cryptocurrency industry is governed by stringent licensing requirements to ensure adherence to local regulations and international standards. If you plan to engage in crypto-related activities, you must navigate a regulatory landscape involving authorities such as VARA, DFSA, and SCA, which oversee different aspects of cryptocurrency operations.

To operate legally, you need to obtain the appropriate licenses from relevant free zones, including DMCC, DAFZA, or ADGM. These zones offer specialized licenses for cryptocurrency trading, consultancy, and data analytics activities. For instance, the DMCC provides a specialized self-proprietary cryptocurrency license, enabling investments in crypto assets.

Additionally, businesses must demonstrate a thorough understanding of the risks associated with cryptocurrencies, including money laundering and terrorism financing. They are also required to implement comprehensive risk mitigation strategies and quality assurance systems (QAS).

Importance of Compliance and Record-Keeping

For cryptocurrency investors in Dubai, following regulations and maintaining thorough records are crucial. VARA requires Virtual Asset Service Providers (VASPs) to maintain comprehensive records and implement policies to address the risks associated with virtual assets. This includes the prohibition of anonymity-enhanced cryptocurrencies and compliance with all relevant regulatory standards.

Failure to comply, particularly with Article 48 of the security law regarding the promotion or advertising of cryptocurrency activities, may lead to penalties. It is essential to keep accurate records and ensure proper licensing for promotional activities. While Dubai supports the growth of crypto and blockchain technologies, investors should also be aware of the potential application of VAT to certain transactions.

Challenges in Accounting for Cryptographic Assets

Given the evolving nature of cryptographic assets, those involved in this field must stay informed about the latest developments to keep up with changes. Some cryptographic assets may exhibit hybrid characteristics, making it challenging to determine the appropriate accounting treatment. 

As IFRS does not offer specific guidance on cryptographic assets, users may need to categorize and account for these assets using existing standards. Additionally, the volatility of crypto asset prices complicates the determination of their fair value.

Conclusion

Accounting for cryptocurrencies in the UAE demands careful attention and diligence. With cryptocurrencies emerging as a new and rapidly changing asset class, organizations must stay informed and vigilant in managing these assets.