The recent years will be remembered as the years when the general public first heard of Bitcoins. The term cryptocurrencies was coined years back, but it was not until recently that John Doe first heard of the term and came to terms with this new reality. This article attempts to analyse the tax treatment in Malta of cryptocurrency transaction. From an income tax point of view, my analysis distinguishes between the three main reasons why John Doe would hold a crypto.
Bitcoins were originally conceived as a payment medium alternative to the traditional currencies. When a person gets paid for services rendered or goods sold, by way of virtual currencies, such person is deemed to have received taxable income which would need to be brought to tax in the same manner as if the payment was made in a traditional currency such as USD or EUR. In fact the potential tax evasion using payments in cryptocurrencies, where the payment is not reported for tax purposes, is the main argument utilised by governments to restrict, in certain cases even prohibit, the use of virtual currencies for day to day transaction.
From a VAT point of view, in the European Union, payment for supplies by way of cryptocurrencies is considered to be for all intents and purposes a payment by way of a legal tender as opposed to a transfer of a commodity. This means that payment by way of Bitcoin is exempt from VAT, with the actual service provision or supply of goods falling within the parameters of the traditional VAT laws.
In reality, the popularity and the associated double (and in certain cases triple) digit increase in the price level of cryptocurrencies over the last couple of years came about when virtual currencies started being acquired as an investment or trading instruments. This is where it gets complicated from a tax point of view. Maltese tax law provides for a huge difference between on one hand, acquiring a cryptocurrency, forgetting about it and selling it in three or five years’ time and on the other hand acquiring Bitcoins in anticipating of an upward trend with the intention of crystallising a short term profit.
In order for a capital gain to be brought to tax, such a gain must arise on an asset which is listed in Article 5 of the Income Tax Act. Article 5 of the Act provides for an exhaustive list of assets, the disposal thereof triggers an income tax charge on the capital gain. There is no catch all provision in Article 5, which is in fact is limited to transfers of immovable property, securities, partnership and trust interests and intellectual property. Therefore, just like capital gains arising on the sale of bonds, capital gains on the disposal of cryptocurrencies acquired as a long term investment without the intention to trade, are not brought to tax in Malta.
On the other hand, day trading in cryptocurrencies is no different from trading in bonds, company shares (even when listed on the Malta Stock Exchange), commodities, currency pairs or CFDs – any profits made are deemed to be an income arising from a trade or business which must be reported in the tax return and taxed at the applicable tax rates.
Finally, should a person acquire a mining device with the intention of mining cryptocurrencies over a period of time, in my opinion, one would consider the virtual currencies gained through mining as a taxable profit with a right to deduct depreciation on the mining apparatus and any directly related energy costs.
As the global understanding of cryptocurrencies by states and their tax authorities is still in development stage the above conclusions may change as the regulators and legislators catch up with this new technology.