Income Tax Treatment of Transactions or Arrangements Involving Distributed Ledger Technology (DLT) Assets

he Commissioner for Revenue has on the 1st November 2018 issued guidelines to clarify its position on the income tax treatment of transactions involving the use of DLT assets. The type of DLT assets covered by the said guidelines are coins (cyrptocurrencies) and tokens where the latter are further classified into financial tokens and utility tokens. […]

Written By ACT Team

On February 16, 2019
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he Commissioner for Revenue has on the 1st November 2018 issued guidelines to clarify its position on the income tax treatment of transactions involving the use of DLT assets.

The type of DLT assets covered by the said guidelines are coins (cyrptocurrencies) and tokens where the latter are further classified into financial tokens and utility tokens. Electronic transactions in fiat currency do not fall within the scope of the guidelines.

Coins are designed to be used as a means of payment or medium of exchange or used as a store of value. Financial tokens are analogous to equities, units in collective investment schemes (CISs), debentures or derivatives, where they grant the same income. On the other hand, Utility Tokens can only be used to buy goods or services within limited DLT platform/s. 

Income Tax Treatment

The transactions involving DLT assets are subject to the current provisions of the Income Tax Act and the Income Tax Management Act. Therefore the same income tax implications applicable to any other transaction will apply to transactions involving DLT assets. The tax related value such as value of profits, value of the transferred asset or value of the consideration should be arrived at by making reference to the market value of the respective DLT asset at the date of the transaction.

Payments made in cryptocurrencies are treated in the same way as payments made in any other currency for income tax purposes. With respect to transactions using financial or utility tokens, such payments will be treated like any other payment in kind.

(i)                 Transactions in Coins

The income from the sale of coins held as trading stock is considered as ordinary income and therefore taxed accordingly. The same applies for any gains or profits on revenue account from mining of cryptocurrency. With respect to coins that are not held as trading stock, the sale of such coins is not subject to capital gains tax.

(ii)              Return on Financial Tokens

The return derived by a holder of a financial token is treated as income and taxed accordingly.

(iii)            Transfers in Financial Tokens and Utility Tokens

The tax implications on the transfer of financial or utility tokens depend on whether such transactions constitute a trade. At this point, one would need to apply what are known as ‘the badges of trade’ in order to determine whether or not it is a trading activity. If it is deemed a trade, the consideration received is deemed to be taxable income.

If the transfer of tokens is not deemed to be a trading activity, one must determine whether it falls within the category of taxable capital gains. Given the nature of utility tokens, such tokens fall outside the scope of capital gains tax. With respect to financial tokens however, these can fall within the definition of securities or units in a CISs, in which case, their transfer will be subject to capital gains tax.

(iv)             Initial Offerings

The issue of new financial tokens to raise capital does not generate taxable income for the issuer. Nor is the issue of new tokens deemed as a transfer for capital gains tax purposes.

With respect to utility tokens, any gains or profits derived by the issuer from the provision of services or goods in relation to the said tokens, constitutes taxable income. 

How can we help?  

For further information, please contact one of the firm’s tax partners, Stephen Balzan on [email protected] or Elaine Camilleri [email protected]. ACT can help you understand the changes to the tax rules and how these can impact your business.  

Apart from its offices in St. Julian’s Malta, ACT operates from a second office in Gozo, which is situated in the capital city of Victoria.  For an appointment in our Gozo office, please call on 00356 21378672 or send us an email on [email protected]. 

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