Malta Introduces Income Tax Treatment Guideline On Scope of Digital Ledger Technology

; posted on
November 6th, 2018

The Maltese Commissioner for Revenue has issued three sets of guidelines on transactions involving DLT, which includes the income tax treatment guideline.

Scope of Digital Ledger Technology (DLT)

The objective of DLT is to provide a new way of handling digital assets, such as recordkeeping, storing and transferring. In relation to the tax treatment, the guideline categorizes DLT as follows: 

  • Coins - these are cryptocurrencies that are designed to be used as a means of payment or equivalent of fiat currencies.
  • Financial 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 whose value or application is solely restricted to the acquisitions of goods or services.
  • Hybrid - these would have the characteristics of two, or all, of the above.

Generally, the tax treatment of any type of DLT asset will not necessarily be determined by its categorisation but will depend on the purpose and context in which it is used.

Income Tax Treatment

In order to determine the tax treatment for the transaction involving DLT, each transaction needs to be analyzed in the same way as any other transaction, i.e., by reference to the nature of the activities, the status of the parties and the specific facts and circumstances of the particular case. In particular, the guideline provides the following examples of applying the general tax principles to the transaction involving DLT asset:

  • Transaction in coins - the profit realised from the business of exchanging coins are treated like the profits derived from the business of exchange of fiat currency. However, transactions in coins of a capital nature fall outside the scope of tax on capital gains.
  • Return on financial tokens - return derived by owners of financial tokens on their holdings (e.g. dividends, interest, etc.) in a cryptocurrency or in another currency or in kind is treated as income for Income Tax purposes.
  • Transfer of financial and utility tokens – if the transfer is a trading transaction, the profit will be taxed as ordinary income under the general rules of the Income Tax Act. However, if the transfer of financial tokens is not a trading transaction, it must be determined whether such tokens meet the criteria of ‘securities’ in terms of the Income Tax Act, and – if so – they would be subject to tax on capital gains.
  • Initial offerings – an initially offering generally is not treated as income since it involves raising capital. However, if it entails to an obligation of the issuer to perform a service or to supply goods, gains or profits realized from such activities will represent income.

Similar to other types of transaction, the income tax treatment of transaction involving DLT, including the mentioning examples, is also regulated within the Income Tax Act.

Source: Maltese Government

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