This article was originally published on the Kluwer International Tax Blog.
“Bitcoin is now considered an investable asset” – is the first sentence of the interview with Mathew McDermott, Global Head of Digital Assets at Goldman Sachs, in the bank’s newly published report. With the recent buzz on the news about cryptocurrencies like Bitcoin, Ethereum and Cardano, we wanted to discuss how Malta has long had an open door policy on this new class of asset.
Malta has been a leader in regulating cryptocurrency transactions. In addition to a sophisticated regulatory system for digital assets, Malta also introduced tax guidelines for transactions in digital assets, including cryptocurrencies, in 2018.
Income tax
The Maltese Revenue Commissioner has taken a fairly straightforward approach to treating cryptocurrencies for income tax purposes. All old principles and case law regarding income and capital apply analogously to transactions with cryptocurrencies. Thus, when analyzing a cryptocurrency transaction, the same questions would arise as with a transaction with “regular” assets. Thus, questions about the intent of the transaction, the status of the parties, the nature of the transaction, etc. are still relevant.
The tax guidelines differentiate between coins and tokens, with tokens being divided into financial tokens and utility tokens. According to Maltese tax law, “coins” are similar to regular fiat means of payment. In order to be a “coin”, the cryptocurrency must not have any properties that would compare it to classic stocks, bonds or any other type of financial security. Its value should not be related to redemption for a service or good (ie it should not be comparable to a voucher). If such a type of coin is involved in the transaction, it treats tax law the same as a regular transaction with a fiat currency.
For example, all winnings from exchanging coins are treated the same as normal fiat exchange winnings. If a company holds coins as part of its trading inventory, any profits or gains will be taxed as income. Any coins that are rewarded through mining activities are also treated as regular income.
If an individual makes a capital gain from long-term ownership of a coin and does not do so in the course of their regular trading activity, it should not result in income tax on capital gains.
In our opinion, the staking of coins in crypto pools or in proof-of-stake algorithms or in liquidity swaps such as those offered by Binance, for example, would also lead to any rewards, whether in the same or an alternative coin, are subject to the same income tax treatment.
This approach is very beneficial for those who trade or use their coins frequently as many of the business expenses these entrepreneurs incur in connection with generating income related to these coins are income tax deductible.
Such tokens, which are analogous to classic financial instruments such as bonds, stocks, etc., are treated as such for income tax purposes. This means that any proceeds from the mere possession of such financial brands, which can be viewed and treated as interest or dividends. This is important because any tax exemptions for regular dividend and interest payments also apply to these types of returns. For example, a non-resident individual who receives income from the mere possession of certain coins can benefit from the exemption that applies to non-residents who have received dividends in Malta.
Transactions with tokens depend on whether they are of a commercial nature or not. The entire classic jurisprudence applies, namely the examination of the “Badges of Trade”. Developed from long case law, this test revolves around a series of questions to determine whether the proceeds from the transaction are commercial or capital proceeds. The questions are:
- Is it a “one-time” transaction or a transaction that can be a trading adventure?
- Are there repeating elements?
- Is the transaction related to the normal commercial activity of the taxpayer?
- What is the subject of the transaction? Is the item / consideration often trade and speculation?
- How was the transaction carried out?
- How was the transaction financed?
- Has the item been resold or edited / improved? Have modifications been made?
- Has the item been stacked, separated, bundled, or somehow broken down, or was it sold “as is”?
- What was the buyer’s intention?
- Was there an element of personal enjoyment?
Even if it is a capital transaction, it is still important to check whether the profits made are covered by a special provision of the Maltese Income Tax Act that imposes an income tax on certain capital gains. Among other things, it includes profits from transactions in financial stocks. If the transaction can be seen to be a token that bears similarities to a traditional financial asset such as a stock, stock, bond, or note, it is still subject to income tax. However, if the token bears more resemblance to a utility token, no income tax will be levied on capital gains in connection with this transaction unless it is of a commercial nature.
Malta also has a rather cheap and straightforward handling of ICOs. ICOs are treated like regular capital raising by regular companies – there is no tax liability for either party. However, if the ICO included the issuance of utility tokens associated with an obligation to provide certain services or to deliver certain goods, any gains or profits from the provision of those goods or services will be subject to regular income tax rules and rates.
value added tax
For VAT purposes, the Commissioner for Revenue also distinguishes between coins, financial and utility tokens. The transactions involving cryptocurrencies as “coins” as described above are exempt from VAT – Malta follows the Skatterverket case of the Court of Justice of the European Union on this matter and therefore transactions involving cryptocurrencies as a means of payment are generally VAT exempt.
The fees of the crypto wallet providers for transactions with “coins” would be exempted without credit. We are also of the opinion that for this reason certain “gas” charges can be exempted for VAT purposes with regular coins even without crediting, but only if the other recipient of the gas charges can be identified.
For wallet providers, where the fees they charge are not directly related to the coin transaction, but apply to other taxable services such as data protection functions, the transaction would be taxable.
Mining and staking transactions may or may not be subject to VAT. As a rule, mining activities in the classic mining operations are generally not considered to be subject to sales tax. However, if coins are received in return for the provision of services such as the validation of transactions, whereby the recipient of this service can be clearly identified, the VAT must be paid by the miner.
With crypto exchanges, transactions or fees for transactions in cryptocurrencies that would be classified as regular currencies or financial collateral for VAT purposes would be exempt from VAT. Thus the brokerage, exchange, brokerage and negotiation of these assets would be exempt from VAT. Crypto exchanges, which only offer traders a platform for transactions and the exchange itself does not buy and sell digital assets, are considered a platform service and are therefore subject to VAT.
Utility tokens are treated differently depending on whether they are so-called “single-purpose vouchers” or “multi-purpose vouchers”. If a utility token is issued and the token represents a clearly identifiable underlining service or product, then a tax point is created for VAT purposes, depending on whether the underlining service or product is taxable or tax-exempt. Multi-purpose vouchers, on the other hand, are tokens for which the underlying goods or services and their place of fulfillment are not yet known. When such a multi-purpose voucher is issued, there is no sales tax point, and the tax point is only considered when the delivery has actually taken place against the voucher.
ICOs, which are coins or financial tokens and those coins or financial tokens are used for the purpose of raising capital for the company, should not incur VAT. If the tokens issued are utility tokens, it would be important to see what goods or services are hidden behind those tokens.
The policies on taxes and transactions of digital assets are continuously reviewed to keep pace with technological changes.
The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.