Copyright brecorder
The government of Pakistan is now in the process of legalizing cryptocurrency and integrating it within the country’s financial and regulatory framework. Introduction of the Virtual Assets Ordinance 2025 (VAO 2025) marks the formal recognition of digital assets as a legitimate investment and trading class, a development long awaited by millions of Pakistani investors operating informally through global exchanges. The legalization process, while timely and necessary, introduces complex fiscal, regulatory, and structural challenges, most probably the question of how to effectively tax virtual asset transactions without discouraging innovation or triggering capital flight. The Federal Board of Revenue (FBR), as the apex federal tax authority, has therefore begun preliminary consultations with experts, freelancers, and major private stakeholders to devise an initial crypto taxation framework that will eventually integrate with Pakistan’s broader fiscal system. The task, however, is immediate and challenging. The comprehensive legislation defining ownership, transferability, and reporting of crypto assets remains under development and absence of detailed subordinate rules under the VAO 2025 creates uncertainty for both taxpayers and regulators. The taxation of crypto assets in this transitional phase requires a calibrated approach that captures revenue without stifling the emerging digital economy. FBR’s consultations, though in early stages, indicate a growing recognition that the crypto sector spanning trading, mining, staking, yield farming, token issuance, and decentralized finance (DeFi) activities cannot remain outside the tax net any longer. The prevailing situation requires development of a taxation mechanism covering all segments of crypto activity. Taxation of capital gains from trading virtual currencies represents the most straightforward component, as these transactions are functionally analogous to securities trading. Taxation of mining income presents a distinct challenge, as mining operations involve both capital-intensive investments in hardware and variable energy consumption patterns. Taxation of staking rewards, yield farming, and decentralized exchange activities introduces additional layers of complexity since such returns are often realized in non-fiat denominations and may not pass through traditional banking channels. Taxation of non-fungible tokens (NFTs) and token issuance (ICOs and IEOs) further broadens the scope, requiring legal definitions of asset classes and transactional triggers for tax liability. Inclusion of these diverse functions within a single taxation framework demands a high level of coordination between FBR, State Bank of Pakistan (SBP), and Securities and Exchange Commission of Pakistan (SECP). Taxation of crypto trading gains should follow the established global practices, more suitably where income tax law is pari materia. Amendments in the Income Tax Ordinance, 2001 (ITO 2001) must first define/classify crypto assets as “specified financial instruments” and elaborate computation of taxable capital gains/loss under a schedule as is the case for listed securities, extending the same principles to digital holdings. Gains on disposals should be taxed on realized basis, following the FIFO (First-In, First-Out) valuation method [section 35, ITO2001], and at rates differentiated by holding period, thereby encouraging long-term investment and discouraging speculative short-term trading. Taxation of mining activities could follow the model used for extractive industries, where net income, after allowable deductions for electricity, depreciation, and operational costs, is taxed as business income under section 18 of the ITO2001. The staking and yield farming rewards could be treated as “income from other sources” [section 39, ITO2001] ensuring comprehensive inclusion of all passive digital returns. The most sensitive area, however, remains taxation of undeclared offshore holdings. The reality is that approximately forty million Pakistanis are estimated to hold crypto assets abroad through international exchanges, with an aggregate value exceeding US$ 25 billion. The absence of a domestic legal framework during earlier years encouraged these investors to register accounts using foreign addresses and wallets hosted in jurisdictions with minimal reporting obligations. Introduction of taxation at this stage, without offering a transitional compliance path, risks capital concealment, asset flight, or permanent loss of tax potential. The government therefore faces a delicate balancing act between ensuring compliance and offering a legitimate route for regularization. The voluntary declaration mechanism offers a policy instrument that can achieve this balance without violating Pakistan’s commitments to the International Monetary Fund (IMF) under the Extended Fund Facility (EFF) programme. Declaration framework can be designed as a compliance adjustment, not as amnesty. The scheme may allow taxpayers to voluntarily declare their existing offshore crypto holdings, pay past obligations at normal tax rates under the ITO2001 along with a moderate surcharge, and regularize these assets for inclusion in future wealth statements [section 116, ITO2001] and foreign assets statement [section 116A, ITO2001]. The mechanism would not grant immunity; rather it would operate under the principle of self-declaration before detection. Legal justification could rely on administrative convenience and voluntary compliance enhancement, consistent with IMF guidance on domestic resource mobilization. Identification of undeclared offshore holdings can be reinforced through international cooperation mechanisms. Organization for Economic Cooperation and Development (OECD) has introduced the Crypto-Asset Reporting Framework (CARF) as an extension of its Common Reporting Standard (CRS). CARF mandates automatic exchange of information among participating jurisdictions regarding crypto transactions, wallet balances, and beneficial ownership data. The alignment of Pakistan’s domestic law with this framework will allow FBR to receive periodic reports from foreign jurisdictions identifying Pakistani residents holding crypto assets abroad. Integration of CARF data with that of Pakistan Revenue Automation Limited (PRAL) warehouse would enable real-time risk assessment, matching of digital income with declared tax returns, and initiation of audits for discrepancies. The OECD framework will, thus, become a basis of crypto transparency and enforcement. Legal implementation would require amending Income Tax Rules, 2002(ITR 2002) to oblige domestic and foreign exchanges operating for Pakistani residents to: • register with FBR; • report user-level transaction data; • comply with Anti-Money Laundering and Counter Financing of Terrorism (AML-CFT) regime; and • implement ‘know your customers’ (KYC) standards aligned with FATF’s Recommendation 15 on Virtual Assets and Virtual Asset Service Providers (VASPs). The SECP, under the VAO 2025, could license these exchanges, making registration conditional on data-sharing obligations. The FBR could further integrate exchange data into the national tax profile, ensuring traceability from wallet to taxpayer. Introduction of scheduler-based taxation offers another structural advantage. The scheduler system long used in Pakistan’s tax law allows separate computation and rates for distinct income classes, simplifying compliance while preventing cross-subsidization of income categories. Creation of a dedicated schedule for crypto assets would specify rates for trading gains, mining income, staking rewards, and NFT transactions. The rates could be benchmarked to securities taxation, adjusted for volatility risk, and linked to holding periods. Scheduler taxation approach would also facilitate automation, enabling exchanges to deduct withholding tax at the time of disposal and remit directly to FBR, mirroring mechanism applied to capital markets. The valuation and audit of declared assets would rely on internationally verifiable price indices. The SECP could designate a panel of recognized global exchanges such as Binance, Coinbase, and Kraken for price referencing. The declared values of crypto assets would be entered into the wealth statement at their market price on the date of declaration. The PRAL database could cross-verify declared holdings with exchange data, enabling transparent audit trails and preventing misreporting. Valuation standardization would further ensure consistency between domestic and international tax records, aligning Pakistan’s system with OECD-compliant jurisdictions. The biggest institutional challenge, however, lies in repatriation of crypto assets held abroad. An estimated twenty-five billion dollars locked in offshore exchanges represents not only lost fiscal potential but also a massive liquidity gap in Pakistan’s domestic financial system. The absence of capital inflow through formal channels contributes to exchange rate pressure and narrows tax base. The policy design must therefore incentivize voluntary repatriation. The government may consider allowing reinvestment of declared crypto wealth into Pakistan’s fintech startups, blockchain infrastructure projects, and digital payment ecosystems, offering limited tax credits or investment matching schemes. Integration of crypto capital into the domestic economy could transform Pakistan into a regional digital finance hub, simultaneously broadening its tax net. Success of this policy framework would depend on strong inter-agency coordination. The FBR, SECP, SBP, and FIA’s Financial Crimes Wing must collaborate under a unified digital finance oversight committee. Adoption of blockchain-based audit and reporting tools can enable real-time transaction monitoring while reducing administrative discretion. Public awareness campaign must emphasize compliance benefits, highlighting penalties and prosecution under Part X and Part XI for non-disclosure, concealment of income and offshore assets [sections182, 191, 192A and 192B, ITO 2001]. This will build a trust that the new system is transparent, and technology driven. The technical structure of the framework must reflect best international practices. The OECD CARF alignment ensures Pakistan’s participation in the global exchange of crypto tax information. The FATF compliance provides anti-money laundering safeguards. Scheduler-based model ensures simplicity and automation. Voluntary declaration mechanism offers a bridge between informality and formalization. Integration of these elements creates a holistic approach capable of capturing both current and future digital income streams. Transformation of Pakistan’s crypto economy from informality to legality represents not only a fiscal reform but also a structural modernization of the country’s financial architecture. Introduction of a pragmatic taxation framework, integrated with global standards and anchored in domestic law, will convert a $25 billion untaxed digital economy into a regulated asset class contributing to national revenue, financial inclusion, and digital competitiveness. The opportunity is historic, and the timing is critical. Alignment of legalization, taxation, and transparency under one coherent strategy can establish Pakistan as a compliant yet progressive digital economy within the next fiscal cycle. Copyright Business Recorder, 2025
