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Living in Malta - Crypto Taxation

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Malta is a base for several big market players in fintech, virtual assets, and crypto space. It is also one of the few European jurisdictions which have a fully-fledged regulatory and tax framework surrounding these new industries.

For this reason, in 2018, the Maltese Commissioner for Revenue (CfR) issued guidelines on income received from blockchain technologies. The adopted guidelines provide a straightforward approach regarding the treatment of cryptocurrencies for income tax purposes as existing principles are applicable by analogy to transactions involving virtual currencies.

In this respect, the tax implication of transactions or payments involving virtual assets depend on the classification of the virtual asset. For tax reasons, virtual assets are classified as follows:

  1. Coins which are treated as a medium of payment and constitute the cryptographic equivalent of fiat currencies. It is important here to clarify that for tax purposes Coins do not need to be recognised or regulated by the Virtual Financial Asset Act (VFAA) or any other act, to fall under such definition. As long as the features and function of a coin can be classified as an equivalent to fiat currency it would be considered for tax purposes to be a Coin.

In this respect, profits realized 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. We should note that to be treated as a “coin” virtual currency, it should have features that allow it to be comparable to a classic equity and not, for example, to a voucher. When Coins are involved in transactions, the Maltese tax law treats them in the same way as transactions involving fiat (e.g., profits from exchanging Coins would be treated as regular profits; when holding a Coin as part of trading stock, any gains are taxed as profits; mining of Coins is also considered income and taxed accordingly).

This being said, if a person realized capital gain from long-term holding of a coin (more than 24 months) it is not considered a regular trading activity that attracts income tax on capital gains. Transactions which involve virtual currencies considered as Coins are exempt from Value Added Tax (VAT) as Malta follows the Skatterverket case (Case C-101/05) of the Court of Justice of the European Union on this matter.

  1. Financial tokens for Maltese income tax purposes are treated by analogy as classic securities such as shares or bonds. In this respect, any return from mere ownership of a financial token which may give interest or dividend income will be able to apply exemptions under Maltese law regarding the holding of such investment. Once such investments are liquidated, depending on the tax situation of a particular taxpayer, regular dividend and interest payments may be subject to an exemption under Malta law.

To be more specific, for example, if the transfer of a financial token is not a trading transaction, the taxpayer must see if it falls within the definition of “securities” definition in the Maltese Income Tax Act (ITA) and whether the investment would be subject to capital gains taxation. ITA defines “securities” as shares and stocks and such like instruments that participate in any way in the profits of the company and whose return is not limited to a fixed rate of return, units in a collective investment scheme as defined in the Investment Services Act, and units and similar instruments

In this respect, if the token has similarities to a classical security such as giving the rights to profits of the company, or units in a collective investment scheme these would be subject to the standard tax rate of 35%. Therefore, constant trading in cryptocurrencies is no different from trading in bonds, company shares, commodities, currency pairs or CFDs – any profits made would be deemed to be an income arising from a trade or business and therefore, taxable.

  1. Utility tokens, which are tokens used solely for the acquisitions of goods or services. Such tokens are subject to regular income tax and VAT rules. In this regard, Utility tokens’ treatment depends on whether the utility is a "single-purpose voucher" or "multi-purpose vouchers". If a Utility token is issued and the token represents a service or good that can clearly be identified, then that creates a tax point for VAT purposes. VAT at this point would depend on whether the underlining service or good is taxable (at a standard rate of 18%, or reduced rates of 7% or 5%) or exempt (e.g., intra-community supply of goods).

Multi-purpose vouchers are, on the other hand, those tokens for which the underlining good or service and its place of supply is not yet known. No VAT tax point arises when such a multi-purpose voucher is issued, taxation will come into question once the supply in exchange for the voucher is done.

Initial Coin Offerings (ICOs)

ICOs in Malta are treated just like a regular raising of capital by companies. This means that such transactions are not liable to tax in Malta for any of the parties. Yet, if the ICO issues utility tokens which provide services or goods, any gains from the provision of services or goods will be subject to regular income tax rules. Where ICOs involve Coins or financial tokens, no VAT should arise.

Liability to tax in Malta would only arise when the coins of the ICOs are disposed of (e.g., traded or sold), so in this respect capital gains made on the selling of the ICO tokens would be charged at standard tax rates in Malta.

Transactions that involve cryptocurrencies and virtual assets must be accounted for as per the general rule under the ITA and their values are determined by reference to the market value of the cryptocurrency in question.

Coupled with the right corporate structure and the virtual asset regulatory regime, Malta can offer great solutions that provide access to European markets. If you are looking for your next business and home destination, Malta is the next best place to be.

MK Fintech Partners LTD is one of a few licensed companies with the Maltese Financial Services Authorities (MFSA) that can provide advice and guide you through the licensing process of crypto and virtual assets.

The content of this article is valid as at the date of its first publication. It is intended to provide a general guide to the subject matter and does not constitute legal advice. We recommend that you seek professional advice on a specific matter before acting on any information provided.

For further information, please contact us at MK Fintech Partners via email at infomalta@kyprianou.com or by telephone +356 2016 1010.