The Comfort of an Established Fiscal Regime
In this article, our Head of Tax & Corporate Steve Muscat Azzopardi explains the key features of Malta’s tax rules surrounding crypto as used in or through a Malta Company.
Article 96(2) of Malta’s Income Tax Act (ITA) sets in place a clear position on the way holding or trading virtual financial assets in Malta will give rise to a tax liability. The risk in dealing in such emerging assets without clear treatment of tax is that a fiscal authority may at any time implement new tax legislation, that may take effect retrospectively. This renders crypto operations in an unregulated jurisdiction extremely uncertain.
DLT Asset Classification
The first step is to determine the nature of the cryptocurrencies, defined in the ITA as Distributed Ledger Technology Assets or DLT Assets, as summarised below:
- Coins: DLT assets designed to be used as means of payment, medium of exchange or store of value – effectively the digital equivalent of fiat currencies.
- Financial Tokens: any DLT asset that represents, or whose attributes are similar to Financial Instruments, typically referred to as Security Tokens.
- Utility Tokens: these are DLT assets designed to be used within a limited platform or network with the scope of being exchanged for goods or services on that same platform/s.
- Hybrid Tokens: DLT assets that exhibit features of both financial and utility tokens
Despite the definitions above, classification is in fact of limited value for tax purposes since the tax applying to any type of DLT asset will be determined on the basis of the purpose for and the context within which it is used.
The starting point is that in general, applicable income tax principles will apply to DLT transactions with due regard being given to the nature of the transaction, status of parties and the specific details and circumstances of each case.
Valuation of a DLT Asset – Malta
Under the ITA, the reference value of a DLT asset for income tax purposes shall be the market value of the DLT asset in question as determined by the rate established by the relevant Maltese authority. Where such value is not available, it will be determined by reference to the average quoted price on reputable exchanges, on the date when the relevant transaction or event occurs, or such other methodology to the satisfaction of the Commissioner for Revenue (CfR).
Values expressed in cryptocurrencies will need to be converted to the reporting (fiat) currencies in which the legal entity presents its financial statements.
Where a company accepts to be paid in cryptocurrency, this shall be treated in the same manner as payment in any other currency, whereas payment by means of the transfer of a financial or utility token will be treated in the same manner as a payment in kind. Note that the mode of payment will not result in a change as to when revenue is recognised or the manner in which taxable profits are calculated.
Tax Treatment of Coins in Malta
The profits realised from the trading of coins as defined above are treated like the profits derived from the exchange of fiat currency and proceeds from the sale of coins held as trading stock in a business are taxed as ordinary income. Day trading of coins would therefore fall under this definition. Gains or profits from the mining of cryptocurrency also represent trading income. However, capital gains derived on the disposal of coins held as capital assets (or long-term trading) fall outside the scope of capital gains taxation.
Tax Treatment of Return on Financial Tokens
The return derived from the holding of a financial token, such as interest, premiums, payments equivalent to dividends whether in cryptocurrency or in kind is treated as income for tax purposes.
Tax applying to Transfers of Financial & Utility Tokens
The proceeds derived from the transfer of tokens of either type will be liable to tax depending on whether the tokens are held for purposes of trade of whether they are held as capital assets.
Where the taxpayer trades in the tokens, proceeds are taxed as trading income in terms of the ordinary income tax rules and applying the badges of trade test where necessary.
Where the transfer is not a trading transaction, it is necessary to determine whether the transfer of a financial asset could be deemed to be the transfer of a security and therefore would fall within the scope of the provisions on capital gains. Transfers of utility tokens fall outside the scope of tax on capital gains.
Tax Treatment of Initial Offerings
Where any initial coin offering raises capital, the proceeds of such issue are not treated as income of the issuer and are therefore exempt of tax. On the other hand, the offering of utility tokens entails an obligation of the issuer to perform a service or to supply goods or benefits to the token holder. As such, the proceeds of a utility token ICO contribute to the sales revenue of the business and any resulting gain or profit realised from the provision of the services or the supply of the goods will represent ordinary taxable income for the issuer.
Stamp Duty on DLT Assets
Where DLT assets being transferred have the same characteristics as “marketable securities” as defined in the Duty on Documents and Transfers Act (DDT Act), they shall be subject to duty in accordance with the applicable provisions of the DDT Act. This Act defines ‘marketable securities’ as “a holding of share capital in any company and any document representing the same”.
Malta Crypto Tax in Practice The provisions as outlined above make a compelling argument for crypto entrepreneurs to set up in Malta through a Malta Company that may benefit from the existing Tax Refund System & Fiscal Consolidation, or the Notional Interest Deduction mechanism that rewards equity holding.