The Commissioner for Revenue today issued guidelines in relation to the taxation of Distributed Ledger Technology (DLT) assets from an income tax and stamp duty.
Whilst the guidelines give definitions of coins and tokens (divided into financial and utility tokens), they very clearly state that classification is of limited value for tax purposes since the tax treatment of any type of DLT asset will be determined on the basis of the purpose for and the context in which it is used.
By means of the guidelines, the Commissioner for Revenue (CfR) has confirmed that generally, 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 facts and circumstances of the case.
Below we present the salient points of the guidelines.
Income Tax Guidelines
The tax reference value of a DLT asset for income tax purposes shall be the market value of the asset in question determined by the rate established by the relevant Maltese authority or where such is not available by reference to the average quoted price on reputable exchanges, on the date of the relevant transaction or event, or such other methodology to the satisfaction of the CfR.
Values expressed in cryptocurrencies will need to be converted to the reporting currencies in which the taxpayer presents its financial statements.
Where a taxpayer accepts to get 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. 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.
Coins
The profits realised from the trading of coins 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. 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 fall outside the scope of capital gains taxation.
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.
Transfers of Financial and Utility tokens
Taxation of proceeds derived from the transfer of tokens whether financial or utility tokens depends 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.
Treatment of Initial Offerings
Where an initial coin offering involves the raising of capital, the proceeds of such issue are not treated as income of the issuer. Where an ICO of a utility tokens entails an obligation of the issuer to perform a service or to supply goods or benefits to the token holder, the gains or profits realised from the provision of the services or the supply of the goods will represent income for the issuer.
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Stamp Duty Guidelines
Where DLT assets being transferred involve DLT assets that have the same characteristics as “marketable securities” as defined in the Duty on Documents Act, they shall be subject to duty in accordance with the applicable provisions of the said.
