|Malta is aiming to become a leader in cryptocurrency by creating a sound regulatory environment for virtual financial assets and distributed ledger technology|
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 space?
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 confidence.
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 trade.
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 trading.
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 as follows:
- 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 instruments".
- 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 place.
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 this sector.
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 member states.
Ewropa Business Centre, Level 3 – 701
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 sectors.
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 issues.
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 level.
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 advisory.
Nicky is also a member of the Society of Trust and Estate Practitioners (STEP) and the Investment Migration Council (IMC).
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.