A Quick Guide to Malta’s Taxation of Distributed Ledger Technology (DLT) Assets
This November saw Malta’s Commissioner for Revenue (CFR) issue guidelines on the taxation of Distributed Ledger Technology (DLT) assets in terms of VAT, income tax and stamp duty.
Although a strict definition of coins and tokens is given, the classification is of limited value for tax purposes since the tax treatment of any type of DLT asset will be determined by the purpose of use, as well as the context.
The guidelines state that generally applicable tax principles will apply to DLT Transactions with due attention being given to:
- The nature of the transaction;
- Status of parties; and
- The specific circumstances of the case.
DLT assets can be split up as follows:
Much like any other means of payment, coins act as a medium of exchange and are not connected to the issuer.
Coins are to be treated as other currencies with relevant exemptions as per below:
- Digital Wallets: Fees that are required by digital wallet providers when allowing users to hold and operate cryptocurrencies are exempt without credit (in the case that cryptocurrency qualifies as currency for VAT purposes). Otherwise, the service could be considered as taxable.
- Mining: Considering that there would be no direct link between the compensation received and the service rendered, mining falls outside the scope of VAT. If the miner provides other services, VAT may be applied at the standard rate.
- Exchange Platforms: VAT implications of exchange or trade on online platforms facilitating peer-to-peer trading or exchange of DLT assets in return for commission/transaction fees, etc., are deemed on a case by case basis.
– If the service includes an electronic facility in order to facilitate such trade/exchange, the service should be taxable.
– Any services which go beyond the above, provided by the platform in return for compensation and where the DLT assets being traded classify as ‘currency’ or ‘security’, may be exempt.
- An ICO is outside the scope of VAT on the basis that at the point of the initial offering the service or good is not identified, nor is the compensation.
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.
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.
Coins fall outside the scope of the DDTA.
Financial tokens are similar to those of equities, debentures, units in collective investment schemes, or derivations including financial instruments, in that they may grant rights to dividends, rewards based on performance, voting rights, ownership or rights secured by an asset as in asset-backed tokens.
Raising finance by issuing a financial token does not constitute as a supply of goods or service in return for consideration and therefore, does not fall within the scope of VAT. On the other hand, services supplied on exchange platforms have the same implications of ‘Exchange Platforms’ described above.
Unless the underlying good or service in exchange for the initial offering is identifiable as an ICO is outside scope of VAT.
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.
Where DLT assets have the same characteristics of ‘marketable securities’, transfers shall be subject to duty as prescribed in the applicable provisions of the DDTA.
Value and application of utility tokens is restricted to the acquisition of goods or services within the DLT platform, within a limited network of DLT platforms or in relation to which they are issued, but they have no connection with the equity of the issuer.
Where a token is exchanged for a good or service, such a token is to be treated as a voucher.
- Single Purpose Voucher (SPV): if at the time of the issue of a voucher representing an underlying good or service, the place of supply as well as the VAT due are known, consideration in respect of such voucher would create a tax point and therefore trigger VAT in terms of the 4th Schedule of the VAT Act.
- Multi-Purpose Voucher (MPV): MPV is one where the place of supply and the VAT due are unknown at the time of issuance. In this case, VAT is due at the time of redemption.
- Unless the underlying good or service in exchange for the initial offering is identifiable, an ICO is outside the scope of VAT.
Taxation of proceeds derived from the transfer of tokens whether financial or utility tokens depends on whether the tokens are held for the purposes of trade or whether they are held as capital assets.
Where the taxpayer trades in tokens, proceeds are taxed as trading income in terms of the ordinary income tax rules and applying the badges of trade test where necessarily.
Where the transfer is not a trading transaction, it is necessarily 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.
On the basis that utility tokens have no connection with the equity of the issuer and that these are not considered as similar to securities, utility tokens fall outside the scope of the DDTA.
Tokens may contain characteristics of both financial and utility tokens which are referred to ‘hybrids’ and these are to be treated depending on the context in which they are used.
- For VAT purposes, the place of supply of Electronically Supplied services to a non-taxable person, where the reverse charge mechanism does not apply, is where the customer is established.
- The tax treatment of any type of DLT asset will not necessarily be determined by its categorisation, but will depend on the purpose for and context in which it is used.
The treatment of transactions in respect of VAT, tax and duty concerning any type of DLT asset will not necessarily be determined by its categorisation, but will ultimately depend on the purpose for and context in which the transaction is made according to the applicable Act.
The content of this blog post was derived from the CFR’s Guidelines for the VAT Treatment of transactions or arrangements involving DLT assets.