The Commissioner for Revenue has issued three guidelines in relation to the treatment of transactions involving the use of Distributed Ledger Technology (DLT) for income tax purposes, stamp duty purposes, and VAT purposes (the "Guidelines"). The Guidelines provide a definition of coins and tokens (divided into financial tokens, utility tokens and hybrid tokens), although they state that the categorisation of a DLT asset into one of the above types of coins or tokens will not necessarily determine its tax treatment, since this will depend on the purpose for which the asset is used and the context in which it is used.
Treatment of DLT Assets for Income Tax Purposes
According to the Guidelines, where a taxpayer accepts payment in cryptocurrency, such payment shall be treated, for income tax purposes, in the same manner as payment in any other currency. Payment made by the transfer of a financial or utility token shall be treated as a payment in kind. The Guidelines also provide for the income tax treatment on the following transactions:
Transactions in Coins- The profits realised from the business of exchanging coins is treated for income tax purposes in the same manner as profits realised from exchanging fiat currency, and any proceeds derived from the sale of coins held as trading stock in a business is taxed as ordinary income. Where the disposal of coins held as capital assets gives rise to capital gains, such gains fall outside the scope of capital gains taxation.
Return on Financial Tokens- Where the owner of a financial token derives a return on his holdings in a cryptocurrency or other currency, or in kind, such return is treated as income for tax purposes.
Transfers of Financial and Utility Tokens- The tax treatment of proceeds from the transfer of a token depends on whether the token is held as a capital asset or whether it is held for the purposes of trading. Proceeds derived from the transfer of a token in the ordinary course of business are taxed as trading income. If a financial token is not considered as a trading transaction, it may still give rise to capital gains provided such token satisfies the definition of a "security" in terms of article 5 of the Income Tax Act. Transfers of utility tokens fall outside the scope of capital gains.
Initial Offerings – Where the initial offering of financial tokens involves the raising of capital, the proceeds of such issue are not treated as income of the issuer and the issue of new tokens is not treated as a transfer for capital gains purposes. In the case of utility tokens, the gains or profits realised by the issuer from the provision of the services or supply of goods to the token holder represents income for the issuer.
Treatment of DLT Assets for Stamp Duty Purposes
In terms of the Maltese Duty on Documents and Transfers Act (DDTA), the amount of duty due (if any) is determined by the intrinsic nature and effects of the transaction to which it refers to, regardless of the form or title. The Guidelines outline that where a transaction involves a DLT asset that has the same characteristics as "marketable securities" in terms of the DDTA, such transfer will be subject to duty in accordance with the provisions of the DDTA.
Treatment of DLT Assets for VAT Purposes
Coins - The Hedqvist Decision (Case 264/14) established that payment in cryptocurrency is to be treated for VAT purposes in the same manner as traditional currency used as legal tender. Accordingly, the exchange of cryptocurrency against legal tender falls within the exemption under item 3(4) of Part Two of the 5th Schedule to the Malta VAT Act covering, inter alia, currency, bank notes, and coins used as legal tender. The exchange of cryptocurrencies for other cryptocurrencies or fiat currency is also exempt from VAT.
Financial Tokens – For VAT purposes, it is important to analyse what the investor gets in exchange for the token. Since the token gives rise to dividends or interest payments, one must examine whether the instrument falls within Item 3 of Part Two of the 5th Schedule to the VAT Act (as an exempt without credit supply), which specifically exempts "transactions, including negotiation, excluding management and safekeeping, in shares, interest in companies or associations, debentures and other securities, is treated as an exempt without credit supply". Where a financial token is issued to simply raise capital, such issue does not give rise to any VAT implications in the hands of the issuer, as the raising of finance does not constitute a supply of services or goods for consideration.
Utility tokens – Utility tokens are largely associated with vouchers for VAT purposes, and their VAT treatment is regulated by Part Nine of the 14th Schedule to the VAT Act. Where a voucher is regarded as a single-purpose voucher (the place of supply and VAT due (if any) of the ultimate goods or services is known at the time the voucher is issued), the consideration payable for that voucher represents a payment for the supply of the underlying good or service to which the voucher relates, and VAT will be due in accordance with the rules established in the 4th Schedule to the VAT Act. Multi-purpose vouchers may only be subject to VAT upon the redemption of the voucher.
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.