Crypto assets are cryptographically secured digital representations of value that can be transferred, stored, or traded electronically. They use some form of distributed ledger technology, such as blockchain. The growing popularity of crypto assets means that owners and their tax advisors must be aware that tax authorities are also interested in these assets. The accountants at GCS Malta discuss this topic in this article.
When are coins and tokens taxed?
Crypto transactions can qualify as taxable events in several ways, depending on the nature of the transaction. These crypto assets are generally treated like stocks, bonds, or property, meaning they are taxable once they are sold or used. Normal capital gains taxes could apply to such transactions — short-term capital gains taxes if the crypto asset was owned for less than a year; and long-term capital gains taxes if it was owned for more than a year.
- Financial Tokens – A return on financial tokens such as payments equivalent to dividends, interest, and premiums is treated as income and taxed in the hands of the holder at the applicable rates (progressive capped at 35% where the holder is an individual and standard 35% where the holder is a company) subject to available exemptions.
- Utility tokens – While non-business transfers will not be subject to income tax or duty, profits arising from a trade or business in utility tokens will be treated as trading income and subject to tax at 35%, with the possibility of benefitting from the full imputation system.
Transactions involving tokens will depend on whether they are of a trading nature or not. Thus, the classic “badges of trade” test will apply. This test was developed by long series of case laws and revolved around several questions to determine whether the proceeds from the transaction are of a trading nature or a capital one.
Value added tax
For VAT, the Commissioner for Revenue also differentiates between coins, financial, and utility tokens. In the case of crypto wallet providers’ fees for transactions involving “coins”, those would be exempt without credit. We also believe that for this reason, certain “gas” fees involving regular coins may also be exempt without credit for VAT purposes, but only where the other party to whom the gas fees are paid is identifiable.
As for wallet providers, where the fees charged by them are not directly related to the coin transaction but are for other taxable services like, for instance, privacy features, then the transaction would be taxable.
Mining and staking transactions may or may not be subject to VAT and will be considered outside the scope of VAT in classic mining operations. However, suppose coins are received as consideration for the provision of services such as validation of transactions, whereby it is possible to identify the recipient of such service. In that case, the VAT will be due to be paid by the miner.
For crypto exchanges, transactions or fees involving cryptocurrencies that would be classified as regular currencies or financial security for VAT purposes would be exempt from VAT. Thus brokerage, exchange, intermediation, and negotiation in these assets would be exempt from VAT.
For ICOs that involve coins or financial tokens, and these coins or financial tokens are used to raise the company’s capital, no VAT should arise. However, if the tokens issued are utility tokens, then it would be important to see what underlining goods or services are behind those tokens.
Why GCS Malta?
At GCS Malta, our accounting experts offer VAT advisory services relating to crypto assets and more. From VAT registrations and annual returns to bookkeeping, our accounting department is here to help your business grow. Contact us today for more information.
