Malta, the island country of Southern Europe, has always had a very progressive approach to cryptocurrencies as the government recognizes it as a unit of account, medium of exchange, or a store of value. It has positioned itself as a global leader in cryptocurrency regulations. This article will focus on the cryptocurrency regulations of Malta and will provide you with a solid understanding of the taxes imposed on financial and utility tokens, Initial Coin Offerings (ICO), coins, mining, and digital wallets.
An Introduction to Malta’s Cryptocurrency Tax
The Virtual Financial Regulations Act and the Virtual Financial Assets Act (VFA Act) came into force on 1 November 2018. It was on the same day that the Malta Commissioner for Revenue issued guidelines on the stamp duty and VAT treatment of transactions or arrangements that involve the Distributed Ledger Technology (DLT) assets. Three sets of guidelines were issued covering stamp duty, income tax, and VAT separately. DLT assets were divided into two categories such as coins and tokens and the latter was further subdivided into financial tokens and utility tokens.
The VFA Act brings about a regime to regulate the new class of digital assets known as DLT assets, along with ancillary services and product offerings relating to DLT assets such as Initial Coin Offerings, virtual financial assets, exchanges, and virtual financial asset agents, and service providers. As per the VFA Act, virtual financial asset offerings or initial coin offerings are defined as the method to raise funds where an issuer issues virtual financial assets and offers them in exchange for funds. Utility tokens or virtual tokens are defined as DLT assets that have no application, value, or utility outside of the DLT platform on which they were issued. These can only be redeemed for funds on the platform directly by the one who has issued the DLT asset.
1. Malta’s Cryptocurrency Tax: Financial and Utility Tokens
As per the cryptocurrency regulations of Malta, tokens were categorized into financial and utility tokens and tokens that have the characteristics of both are referred to as hybrid tokens. Financial tokens are the DLT assets that exhibit qualities similar to debentures, equities, derivatives, or units in collective investment schemes, including financial instruments. Utility tokens are those DLT assets value, application, or utility or application, is solely restricted to the acquisition of goods or services either within the DLT platform or in relation to how they are issued.
As per the VAT guideline document, financial tokens issued simply to raise capital, would not give rise to any VAT implications in the hands of the issuer as the raising of finance does not constitute a supply of goods or services. In the case of a utility token, where the token issued has an obligation to be accepted as consideration or partly for a supply of a good or a service, the token would carry the characteristics of a voucher and must be treated just like a voucher for VAT purposes. In this case, it is necessary to distinguish between single-purpose or multi-purpose tokens or vouchers.
For income tax purposes, the returns gained from financial tokens must be treated as income, irrespective of whether it is received in kind or in cryptocurrency. With regard to the transfer of tokens, the tax treatment will depend on whether the transfer is that of a capital asset or a trading transaction. Trading profits are taxable. Capital gains are taxable only if the token fulfils the definition of ‘securities’ in the Income Tax Act.
If a hybrid token is used as a coin, it should be treated as one and if it is used as a utility token, it must be treated as such.
2. Malta’s cryptocurrency Tax: Initial Coin Offerings
In case of income tax purposes, the proceeds gained from raising finance in an initial offering or a token generation event must not be treated as the income of the issuer. The issue of new tokens should also not be treated as a transfer for the purpose of capital gains tax. The VAT guidelines state that based on the assumption that while issuing an initial coin offering no specific good or service is identified, such an ICO may not constitute a chargeable event for VAT purpose and hence, must be treated outside the scope of VAT.
3. Malta’s cryptocurrency tax: Coin transactions
For VAT purposes, the exchange of cryptocurrencies for fiat money or other cryptocurrencies must be exempt from VAT under the exemptions given for transactions in currency and related services. As far as the determination of a coin value if concerned, as per the cryptocurrency regulations of Malta, it must be relevant to the rate published by the relevant Maltese authorities.
For income tax purposes, it is necessary to make a distinction between trading and capital transactions to determine if a transaction involving coins is taxable or not. The guidelines emphasize that the business of exchanging coins must be treated in the same way as the profits derived from exchanging fiat currency. This is subject to income tax while coins must fall outside the scope of capital gains taxation.
From an income tax perspective, as per the guidelines, the gains or profits on revenue account from cryptocurrency mining represent income. With respect to VAT on mining activities, there are two instances provided by the guidelines. One instance is where mining is regarded as a service for which compensation is in the form of newly minted coins, as mining does not have a recipient of such service. This would thus fall outside the scope of VAT as there would be no direct link between the compensation received and the service rendered. There will be no reciprocal performance between a receiver and a supplier. Another instance is that if miners receive payment for activities such as verifying a specific transaction, a chargeable event will be triggered. In this case, Maltese VAT will be applied at a standard rate.
5. Digital Wallets
As per the guidelines, if the providers need to be paid a fee for giving coin users permission to hold and operate a cryptocurrency, the services of digital wallet providers must be exempted from VAT. If the service provided by digital wallet providers does not constitute transactions concerning currency, the services are classified as taxable. A technological service is taxable.
The cryptocurrency regulations of Malta provide clarity on the application of the existing rules and regulations. What the guidelines additionally clarify is that when a payment is made or received in cryptocurrency for income tax purposes, it must be treated just like any other currency.
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