Tax Implications & Treatment of Distributed Ledger Technology Assets

For Malta, the race to regulate is over. It has become the first country in the world to introduce a feasible and rational regulatory framework surrounding ICOs, cryptocurrencies and tokens which will help protect investors and further develop this new era.

Following the issuance of the Financial Instruments Test which aids in determining the classification of a Distributed Ledger Technology (DLT) Asset, the Commissioner for Revenue has now issued a set of guidelines in relation to the tax treatment of these DLT Assets. These Guidelines include:

  1. Direct Tax treatment of transactions and arrangements involving DLT Assets
  2. Indirect Tax treatment of transaction and arrangements involving DLT Assets
  3. Duty on Documents and Transfers in relation DLT Assets.

DIRECT TAXATION

  1. COINS

Coins are solely cryptocurrencies designed to be used as a means of payment and their functionally constitutes the cryptographic equivalent of fiat currencies. They are in no way directly related to the redemption of goods or services and have no connection to any particular project.

Profits derived from the trading of such coins is treated the same as profits derived from the exchange of fiat currencies and the proceeds from the sale of this DLT asset is taxed as ordinary income. Gains derived from the mining of such coins is considered to be of a trading nature and are taxed accordingly, whilst gains from the sale of coins held as capital assets fall outside the scope of Capital Gains Tax.

  1. TOKENS

Financial Tokens

The characteristics of such tokens are similar to equities, debentures, units in a CIS or derivatives including Financial Instruments. They would grant rights to dividends or interest payments like bonds or alternatively could grant performance rewards.

Utility Tokens

Utility tokens restrict the token holder solely to the acquisition of goods and services solely within the DLT platform they are issued. They do not have any connection to the equity of the issuer and do not have the characteristics of a security.

Ultimately, the tax treatment of any type of token will depend on its purpose for and context in which it will be used; trading or capital nature. Proceeds derived from the trading of tokens are taxed as trading income in terms of the ordinary tax rules. Where the proceeds are not of a trading nature, one must determine whether the transfer is deemed to be a transfer of a security whereby it falls within the provisions of Capital Gains Tax, or a transfer of a utility token, which would then fall outside the scope of tax. Returns derived from the holding rights of financial tokens such as payments of dividends and premiums are treated as income.

  1. INITIAL COIN OFFERINGS (ICOs)

The issuance of an ICO of Financial Tokens typically constitutes the raising of capital, whose proceeds are not considered to be of an income nature. On the contrary, gains and profits derived from the provision of services or supply of goods being entitled to Utility Tokens holders will represent income and gains and profits are subject to tax.

INDIRECT TAXATION

  1. COINS

Coins, whose purpose in none other but to act as a form of payment, must, for VAT purposes be treated like traditional currency used as a legal tender. They are therefore considered as Exempt without Credit. The act of coin mining does not constitute a taxable service since there is no particular recipient. On the other hand, the payments to miners for services in connection with the verification of transactions is considered to be taxable in nature.

  1. DIGITAL WALLETS

The payment of fees for services offered by digital wallet holders to coin users who hold and operate a cryptocurrency would be exempt without credit under the provisions for transaction in currency. On the other hand, transactions not concerning currency by digital wallet holders are classified a taxable.

  1. EXCHANGE PLATFORMS

Exchange platforms are online platforms which allow the peer-to-peer trading of DLT assets where such exchanges involve virtual currencies with fiat and virtual currencies for virtual currencies

The regulation’s make a distinction between the services offered by the exchange. The mere provision of the exchange platform for a transaction fee or commission is considered to be a supply of services and would fall within the scope of VAT. Where the services go beyond the latter and the level of involvement in the transactions is more than simply a technological one, the services fall within the exemption and are considered to be Exempt without Credit services.

  1. TOKENS

The issuance of Financial Tokens for the raising of capital falls outside the scope of VAT as it does not constitute the supply of a good or service.

The rights and obligations of a Utility Token Holder and a Utility Token Issuer can give rise to Voucher characteristics.

The issuance of a Single-Purpose Voucher, whereby the underlying good or service and supplier of such underlying good or service are known at the time when the consideration was paid would give rise to VAT immediately.

The issuance of a Multi-Purpose Voucher, where the place of supply, the good or service is not known at the time of issuance would give rise to VAT which is due on redemption of the voucher.

  1. ICOs

An ICO event may not necessarily constitute a chargeable event for VAT purposes since at the time of acquiring, the investor has no guarantee that the specific good or services will be delivered by the Issuer. Such a transaction would be Out of Scope for VAT.

Where however upon issuance, the Coins offerings would give rights to identified goods and services, a chargeable event for VAT purposes might arise and its proper VAT treatment would need to be applied.

DUTY ON DOCUMENTS TRANSFERS ACT (DDTA)

The Guidelines for the Duty on Documents Transfers Act explain the treatment of duty in relation to any transaction involving DLT Assets which shall be in accordance with current tax provisions, jurisprudence and principles. The characteristics of the asset is not the determining factor for the treatment of duty, but it ultimately depends on the purpose and context in which the transaction is made.

All Cryptocurrencies and Utility Tokens fall outside the scope of the DDTA, however the transfer of Financial Tokens which have the same characteristics of “marketable securities” will be subject to tax in accordance with the applicable provisions of the Act.

The obligation under the DDTA to keep proper records shall apply to transactions involving DLT Assets.

SOME FURTHER POINTS TO NOTE

When taking into consideration DLT Assets in relation to Direct and Indirect Taxation and Duty on Documents Transfers, the equivalent value in fiat currency of the asset is determined by reference to the rate established by the Maltese Authority, and when this is not provided, the average quoted price of three reputable exchanges is taken into consideration.