Malta’s tax framework surrounding an individual’s ownership of cryptoassets
Malta's Commissioner for Revenue (CfR) released its guidelines on the income tax treatment of transactions or arrangements involving distributed ledger technology (DLT) assets in November 2018, providing a framework to assess the tax obligations of individuals who hold cryptoassets as an investment. What does it mean, and what could have been addressed?
The CfR's guideline is largely principle based, but the Reveue will also look at the facts of each case rather than just referencing the guideline. In our view, both approaches are welcome.
The guideline states that cryptocurrencies such as Bitcoin and Ethereum – which are designed to function as a means of payment, medium of exchange, or store of value – is to be treated as the equivalent of fiat currencies. Investors holding such cryptoassets by way of investment may therefore freely dispose of these currencies without liability to tax on capital gains, as cryptoassets are not a chargeable asset in Malta.
Conversely, gains realised on the disposal of other types of cryptoassets – such as security tokens or hybrid tokens – are taxed in situations where their features satisfy the definition of a "security". This includes "shares and such like instruments that participate in any way in the company's profits and whose return is not limited to a fixed rate". This is becoming increasingly relevant as a growing interest in security token offerings (STOs) is registered. The source of any such gain is presumably determined with reference to the location of the issuer. This is particularly relevant in the context of Malta's remittance system of taxation, a system where foreign sourced capital gains may be remitted to Malta by a taxpayer that is resident but not domiciled in Malta free of tax in Malta.
The guideline is less helpful with some practical issues relative to capital gains tax computations, a key factor when you consider Malta's income tax system is a self-assessment based system. Some issues worthy of further elaboration include:
Value: The quantum of the capital gain realised following the disposal of a token is determined by referencing its market value, which may be determined by the CfR (highly unlikely for less generally available tokens) or with reference to the average quoted price on reputable exchanges. However, this raises many questions including: how many quotes is one to seek, what range of prices should be considered, and how does one determine a 'reputable' exchange? One may consider a rule that requires all transactions to be converted to euro on the date of the transaction. In the absence of daily spot prices for most tokens, one would advocate 'reasonable care' in arriving at an appropriate valuation using a consistent methodology.
Theft: Is the loss of one's private key tantamount to a disposal? Presumably not. Likewise, what happens if one is the victim of theft or fraud? Presumably, the same applies here too.
Pooling: Presumably, one is to pool transactions per type of cryptoasset involved, in line with general principles.
Deductions: Should new forms of tax deductions (such as transaction fees paid before a transaction is added to a blockchain, or the costs of making a valuation) be considered?
Records: Guidance on the type of records to be maintained would also be welcomed. These could include data as to type of cryptoasset, value of the transaction in euro, details of the valuation methodology, bank statements, and wallet addresses if required for audit.
The CfR's views will surely develop going forward, as will the cryptoasset sector in question.