|Malta is aiming to become a
leader in cryptocurrency by creating a sound regulatory
environment for virtual financial assets and distributed
From asset registration to the financial industry, iGaming
and blockchain-based platforms, jurisdictional innovation has
always been securing Malta's economy and allowed the country to
specialise in niches that the majority is sceptical of.
Blockchain and cryptocurrency regulations will likely repeat
that success and create a safe space for operators in these
industries to function.
On July 4 2018 the Maltese Parliament approved three bills
establishing the first regulatory framework for blockchain,
cryptocurrency and distributed ledger technology (DLT).
Although there were countries that had passed legislation in
relation to initial coin offerings (ICOs), Malta is the first
country to provide a regulated environment for operators in the
blockchain, cryptocurrency and DLT space.
The first law, known as the Malta Digital Innovation
Authority Act, establishes the Malta Digital Innovation
Authority (DIA) and certifies DLT platforms. This law focuses
on internal governance arrangements and outlines the duties and
responsibilities of the DIA to certify DLT platforms to ensure
credibility and provide legal certainty to users wishing to
make use of a DLT platform.
The second law, known as the Innovative Technology
Arrangement and Services Act, deals with DLT arrangements and
certifications of DLT platforms. This bill is primarily
concerned with the setting up of exchanges and other companies
operating in the cryptocurrency market.
The third law is known as the Virtual Financial Assets Act
and establishes the regulatory regime governing ICOs,
cryptocurrency exchanges, wallet providers, etc.
The brave new world of cryptocurrency is surrounded by a
number of questions and ambiguities. This is only to be
expected given its relative infancy and the speed with which it
is evolving and gaining ground.
Cryptocurrencies are generally categorised as follows:
- Coins – these are
cryptocurrencies that are designed specifically to be used as
a means of payment. These have a similar use as fiat money,
however they would be digital instead of physical.
- Investment tokens – these tokens
are similar to equities, debentures or derivatives. They
grant rights to a form of return, similar to dividends in the
case of equities.
- Utility tokens – these are tokens
used to access goods and services offered in the platform of
the issuer who has a contractual obligation to exchange these
tokens with a good or service or allowing the use of the
platform offering various services or goods.
- Hybrid – these would have the
characteristics of two, or all, of the above.
A central issue in this unfolding debate, crucial in terms
of exactly how regulation is to be established and enforced, is
how our current tax regimes should factor in cryptocurrencies.
Do these need to be radically reinvented or are there
fundamental doctrines and concepts in tax law that can, without
being stretched too far, be applied pragmatically to the crypto
Accepting cryptocurrencies as a means of payment does not
change the way businesses' taxable profits are calculated.
However, when cryptocurrencies are used as tokens and their
holders are involved in cryptocurrency exchanges, the tax
implications are likely to become more complex.
Many jurisdictions are using the working principle that
cryptocurrencies can ultimately be treated as "intangible
property" and that therefore general tax principles applicable
to property transactions could also be applied to
cryptocurrency exchanges. If such a transaction results in a
gain or profit, then how are taxation rules, particularly
Maltese tax law in this case, best applied?
The first aspect that must be established is whether the
gain resulting from a crypto exchange is of a capital or income
nature. Although the Maltese Income Tax Act contains no
provisions on how to differentiate between income and capital,
there is a significant body of case law that provides a basis
on which to classify a gain as capital or income with some
Just like trading in bonds, company shares or
commodities, cryptocurrency transactions considered to
be of an income nature are taxable in terms of the
Income Tax Act
A rather clichéd but extremely effective analogy that
is often used is that of a fruit-bearing tree, where the tree
represents the capital property and the fruit is the business
income resulting from that asset. However, it is well known in
tax circles that some ambiguity can arise when seeking these
classifications and very often specific cases are not
clear-cut. This is where the question of intent becomes
all-important, that is, the intention at the time the
transaction took place, and this remains one of the leading
tests used by regulators and courts to decide whether any form
of revenue is income or capital in nature.
In general terms, proceeds will be income in nature if the
assets were acquired with the intention of selling it at a
profit. However, if the asset is acquired and held with the
intention of producing further income from that asset then it
is treated as capital in nature.
The "badges of trade" are widely accepted indicators to help
determine the intention and nature of a transaction. These
include the quantity and nature of the goods; the incidence of
transactions; supplementary work on the asset being sold; and
the interval of time between when the asset was acquired to
when the asset was sold. Also of note is the method of
acquisition and disposal, because an asset acquired through
inheritance or as a gift is less likely to be the subject of
As with any other transaction, this framework can be applied
to gains resulting from cryptocurrency transactions to classify
this as income or capital and it is this assessment that will
determine the applicable tax rules.
A person buying and selling cryptocurrencies on a
significant scale by investing significant sums of their own
and/or other people's money, and also investing considerable
amounts of time and energy is very likely to be considered as
Just like trading in bonds, company shares or commodities,
cryptocurrency transactions considered to be of an income
nature are taxable in terms of the Income Tax Act, which
includes a blanket provision requiring gains or profits derived
from transaction of an income nature to be taxed, irrespective
of the type of asset.
On the other hand, if the gain is derived from a capital
transaction this would only be taxed if it arises from an asset
listed in Article 5 of the Maltese Income Tax Act. This list,
however, is clearly specified in the Act and is limited to
transfers of immovable property, securities, intellectual
property, beneficial interest in a trust and partnership.
Therefore, if the capital gain in question is derived from an
asset that is not listed in Article 5, no tax will apply.
Until new models are presented, the current "income vs.
profit" rules for determining the taxability of gains in this
sphere remain the determining factor. This awareness should
guide any individual or business entering the crypto space and
inform their decisions in this regard.
Although there are no provisions in the Maltese VAT Act that
deal with cryptocurrencies, as an EU member state Malta can
rely on the EU VAT Directive.
In terms of the EU Directive, cryptocurrencies are treated
- Income received from mining activities
will generally be outside the scope of VAT on the basis that
the activity does not constitute an economic activity for VAT
purposes because there is an insufficient link between any
services provided and any consideration received.
- Income received by miners for other
activities, such as for the provision of services in
connection with the verification of specific transactions for
which specific charges are made, will be exempt from VAT
under Article 135(1)(d) of the EU VAT Directive as falling
within the definition of "transactions, including
negotiation, concerning deposit and current accounts,
payments, transfers, debts, cheques and other negotiable
- When cryptocurrencies are exchanged for
fiat money, no VAT will be due on the value of the
cryptocurrencies – charges made over and above the
value of the cryptocurrencies for arranging or carrying out
any transactions in cryptocurrency will be exempt from VAT
under Article 135(1)(d) as outlined above.
The European Court of Justice (ECJ) issued a judgment ruling
in October 2015 that the exchange of traditional currencies for
units of the 'bitcoin' virtual currency are not subject to VAT.
In this case David Hedqvist, a Swedish national, requested a
preliminary decision from the Swedish Revenue Law Commission to
establish whether VAT should be paid on the purchase and sale
of bitcoin. Following a commission ruling that bitcoin should
be exempt from VAT, the Swedish Tax Authority appealed to the
Supreme Administrative Court, submitting that the transactions
that Hedqvist intended to effect were not covered by the
exemptions in the VAT Directive. After referring to the ECJ, it
was decided that transactions to exchange traditional
currencies for units of bitcoin and vice versa constitute the
supply of services for consideration within the meaning of the
VAT Directive. However, the ECJ also held that the transactions
are exempt from VAT under the provision concerning transactions
relating to 'currency, bank notes and coins used as legal
tender'. This is a key ruling, since it not only obliged member
states to exempt transactions relating to 'currency, bank notes
and coins used as legal tender', but it also defined bitcoin as
a currency, rather than a commodity.
This judgment dealt with currency exchange transactions.
Nevertheless, in all instances, VAT will be due in the normal
way from suppliers of any goods or services sold in exchange
for cryptocurrency or fiat currencies. The value of the supply
of goods or services on which VAT is due will be the value of
the cryptocurrency at the point the transaction takes
It appears that that certain parameters are now being
established and ground rules acknowledged, as various
jurisdictions are setting out clearer rules of engagement with
The G20 Summit held in Argentina last March issued a clear
statement that cryptocurrency is a key area, with many leaders
and industry experts agreeing that effective regulation is
needed sooner rather than later to prevent money-laundering,
tax evasion and other financial crimes. Beyond this consensus,
however, countries are taking a decentralised approach to the
issue and views on cryptocurrency regulation can differ from
state to state.
Guidelines are expected to be issued by the Maltese Tax
Authorities to clarify the tax treatment of cryptocurrencies
both from an income tax and VAT perspective – we are
hopeful that these would answer questions such as how the
taxable profit or gain on a cryptocurrency exchange is
determined, whether any crypto transactions would fall outside
the scope of Maltese tax, what happens in the case of losses,
what records need to be kept and what would need to be reported
to the Maltese Tax Authorities. The coming months will tell
whether common strands will begin to emerge in the tax
treatment of cryptos between countries, particularly among EU
Ewropa Business Centre, Level 3 – 701
Dun Karm Street, Birkirkara, BKR 9034
Tel: +356 2549 6000
Nicky Gouder, tax & private clients partner of
ARQ Group, completed his Association of Chartered and
Certified Accountants (ACCA) course in 2010. Following
that, he specialised in taxation and completed a
diploma in taxation offered by the Malta Institute of
Taxation in 2011 and read for the advanced diploma in
international taxation provided by the Malta Institute
of Management. He also graduated in business management
from the University of Malta in 2007.
Nicky is specialised in international taxation with
a focus on domestic legislation and has significant
experience in handling a wide portfolio of local and
international clients operating in various industry
He is also very much involved within the investment
migration industry and advises a number of clients on
residence and citizenship opportunities both in Malta
and beyond, and participates in a number of
international conferences discussing migration
He is also a lecturer of the advanced taxation
module for the Association of Chartered Certified
Accountants course provided through the Malta Institute
of Accountants and participates in a number of tax
conferences both on a domestic and international
He is one of the three founding partners of the
Capstone Group, which was set up in 2010 and
specialises in accountancy, tax, audit and
Nicky is also a member of the Society of Trust and
Estate Practitioners (STEP) and the Investment
Migration Council (IMC).
Ewropa Business Centre, Level 3 – 701
Dun Karm Street, Birkirkara, BKR 9034
Tel: +356 2549 6000
Luana Scicluna, head of tax at ARQ Group, is
specialised in international taxation and has
considerable experience on corporate restructuring
projects and succession planning. She assists several
local and international clients with handling their tax
affairs in Malta and provides advice on the tax
implications of a wide range of transactions.
Luana is an accountant by profession, concluding her
bachelor of accountancy (hons) at the University of
Malta in 2009, following which she furthered her
studies in taxation through a diploma in taxation
offered by the Malta Institute of Taxation and an
advanced diploma in international taxation offered by
the Chartered Institute of Taxation (UK).
Luana is also a lecturer at the Malta Institute of
Taxation and participates in a number of Maltese and
international tax conferences.