This article was originally posted on Kluwer International Tax Blog.
“Bitcoin is now considered an investable asset”
– reads the first sentence of the interview with Mathew
McDermott, Global Head of Digital Assets at Goldman Sachs in the
newly-issued report by the bank. With the recent buzz in the news
about cryptocurrencies such as Bitcoin, Ethereum and Cardano we
wanted to discuss how Malta has for a long time now had an
open-door policy on this new class of assets.
Malta was at the forefront of regulating transactions involving
cryptocurrency. Besides providing for a sophisticated regulatory
regime for digital assets, in 2018 Malta also introduced tax
guidelines on transactions involving digital assets, including
cryptocurrencies.
Income Tax
The Malta Commissioner for Revenue has adopted quite a
straightforward approach to the treatment of cryptocurrencies for
income tax purposes. All the old principles and jurisprudence in
relation to income and capital is by analogy applicable to
transactions involving cryptocurrencies. Thus, the same questions
would be posed when analyzing a cryptocurrency transaction as would
be the case have the transaction involved “regular”
assets. Thus, questions as to the intention behind the transaction,
status of the parties, nature of the transaction, and so on are all
still relevant.
The tax guidelines differentiate between coins and tokens with
tokens being sub-divided into financial tokens and utility tokens.
“Coins” are defined by Maltese tax law to be similar to
regular fiat means of payment. To be a “coin” the
cryptocurrency must not have features which would make it
comparable to classic equity, bond or another type of financial
security. Its value should not be related to its redemption for a
service or a good (i.e. it should not be akin to a voucher). When
such a type of coin is involved in the transaction, the tax law
treats it identically to regular transaction involving a fiat
currency.
Thus, for example, any profits made from exchanging coins are
treated just like regular fiat exchange profits would be. When a
company holds coins as part of its trading stock, any gains or
profits are taxed as income. Any coins rewarded from mining
activities are treated as regular income as well.
If an individual realizes a capital gain from long-term holding
of a coin, and he is not doing so as part of his regular trading
activity, that should not attract income tax on capital gains.
In our opinion, staking coins in crypto pools or in proof of
stake algorithms or in liquidity swaps like the ones offered by
Binance, for instance, would also result in any rewards, whether in
the same coin or an alternative one, to be subject to the same
income tax treatment.
This approach is very favourable towards those that often trade
or stake their coins as it means that many business expenses that
these entrepreneurs incur in relation to the generation of income
associated with these coins are deductible for income tax
purposes.
Those tokens that are analogous to classic financial securities
like bonds, shares and so on are treated as such for income tax
purposes. This means that any returns from mere ownership of such
financial tokens which can be considered as an interest, or a
dividend and will be treated as such. This is important because it
means that all the exemptions in tax law found for regular dividend
and interest payments are also applicable to these kinds of
returns. So, for instance, a non-resident individual who receives
returns from merely owning certain coins will be able to benefit
from exemption applicable to non-residents who received dividends
in Malta.
Transactions involving tokens will depend on whether they are of
a trading nature or not. Thus, all the classic jurisprudence will
apply, namely, the “badges of trade” test. This test was
developed by long series of case law and revolves around a number
of questions to determine whether the proceeds from the transaction
are of a trading nature or of a capital one. The questions are:
- Is it a “one-off” transaction or a transaction
capable of being an adventure in the nature of trade? - Are there elements of repetition?
- Is the transaction related to the ordinary trading activity of
the taxpayer? - What is the subject matter of the transaction? Is the
item/consideration something which is often subject to trade and
speculation? - How was the transaction carried out?
- How the was transaction financed?
- Was the item resold, or worked on/improved? Were modifications
made? - Was the item stacked, separated, bundled or somehow itemized or
was it sold “as is”? - What was the intention of the purchaser?
- Was there an element of personal enjoyment?
Even if the transaction is deemed to be of a capital nature, it
is still important to see whether the gains made are covered by a
special provision of the Maltese Income Tax Act, which levies
income tax on certain capital gains. One of the gains included are
gains made from transactions involving financial securities. If it
is apparent that the transaction involves a token that has
similarities to a traditional financial security like a share,
stock, bond or debenture, then it will still be liable to income
tax. If, however, the token has more similarities with a utility
token, then there is no income tax levied on capital gains made in
relation to that transaction, again, provided that it is not of a
trading nature.
Malta also has a rather favourable and straightforward treatment
of ICOs. ICOs are treated just like regular raising of capital by
regular companies– there are no tax liabilities for any of
the parties. However, if the ICO involved issuing utility tokens
which come with an obligation to provide certain services or supply
certain goods, gains or profits derived from the provision of the
said goods or services will be subject to regular income tax rules
and rates.
Value Added Tax
For the purposes of VAT, the Commissioner for Revenue also
differentiates between coins, financial and utility tokens. Those
transactions which involve cryptocurrencies as “coins” as
discussed above are exempt from VAT – Malta follows the
Skatterverket case of the Court of Justice of the European Union on
this matter, and thus transactions involving cryptocurrencies as a
means of payment are generally exempt from VAT.
In the case of crypto wallet providers’ fees for
transactions involving “coins”, those would be exempt
without credit. We also are of the opinion that for this reason,
certain “gas” fees involving regular coins may also be
exempt without credit for VAT purposes, but only where the other
party to whom the gas fees are paid is identifiable.
As for wallet providers, where the fees charged by them are not
directly related to the coin transaction but are for other taxable
services like, for instance, privacy features, then the transaction
would be taxable.
Mining and staking transactions may or may not be subject to
VAT. Usually, mining activities will be considered to be outside
the scope of VAT altogether in the classic mining operations.
However, if coins are received as consideration for the provision
of services such as validation of transactions, whereby it is
possible to clearly identify the recipient of such service, then
the VAT will be due to be paid by the miner.
For crypto exchanges, transactions or fees for the transactions
involving cryptocurrencies that would classify as regular
currencies or a financial security for VAT purposes would be exempt
from VAT. Thus brokerage, exchange, intermediation and negotiation
in these assets would be exempt from VAT. Crypto exchanges which
merely provide a platform for traders to transact and the exchange
is not of itself buying and selling digital assets, would be
considered as providing a platform service, and therefore its
services will be subject to VAT.
Utility tokens are treated differently depending on whether they
are what the guidelines call “single-purpose vouchers” or
“multi-purpose vouchers”. If a utility token is issued
and the token represents an underlining service or good that can
clearly be identified, then that creates a tax point for VAT
purposes, depending on whether the underlining service or good is
taxable or exempt. Multi-purposes vouchers are, on the other hand,
those tokens for which the underlining good or service and its
place of supply is not yet known. No VAT tax point arises when such
a multi-purpose voucher is issued, and the tax point will only come
into question once the supply in exchange for the voucher is
actually made.
For ICOs that involve coins or financial tokens, and these coins
or financial tokens are used for the purpose of raising the
company’s capital, no VAT should arise. If the tokens issued
are utility tokens, then it would be important to see what
underlining goods or services are behind those tokens.
The guidelines on tax and transactions of digital assets are
continuously reviewed to keep up with technological changes.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.