Taxation of DLT Assets - Avanzia Taxand Malta

The Maltese Tax Authorities issued guidelines in connection with the income tax, VAT and duty on documents implications arising from transactions or arrangements involving DLT assets.

The following is a list of definitions included in the guidelines:

wdt_ID	Category	Definition
1	Coins	A DLT asset designed solely as a means of payment and used in lieu of fiat currency and serve as an alternative to legal tender
2	Financial Tokens (Security, Asset or Asset backed tokens)	A DLT asset exhibiting qualities that are similar to equities, debentures, units in a CIS, derivatives or Financial Instruments
3	Utility Tokens	A DLT asset whose utility, value or application is restricted solely to the acquisition of a good or service

Taxation

The general income tax principles contained in the Income Tax Act apply to transactions involving DLT assets. The guidelines serve to provide clarifications regarding the income tax treatment of a number of transactions or arrangements involving DLT assets.

The following is a summary of the tax treatment of transactions involving DLT Assets:

wdt_ID	Nature of Payment	Income Tax Treatment
5	Payment made or received in a cryptocurrency	Treated like a payment in any other currency and taxable profits are calculated in the same manner
6	Payment by means of the transfer of a financial or utility token	Treated like any other payment in kind

The following is a summary of the income tax treatment of transactions in coins:

wdt_ID	Transaction	Income Tax Treatment of Realised Profits or Proceeds
6	Business of exchanging coins	Taxable income
7	Sale of coins held as trading stock	Taxable income
8	Mining of cryptocurrencies	Taxable income
9

Coins fall outside scope of Article 5 of the Income Tax Act and therefore they are not considered to give rise to any capital gain for income tax purposes.

The following summarises the tax treatment for the return on financial tokens:

wdt_ID	Return on Financial Tokens	Income Tax Treatment
5	Return equivalent to dividends, interest, premium etc., in a cryptocurrency, other currency or in kind	Taxable income

The following outlines the tax treatment arising from the transfers of financial and utility tokens:

wdt_ID	Type of Transferred Tokens	Transaction	Income Tax Treatment of Realised Profits or Proceeds
6	Financial and utility tokens	Trading nature	Taxable ordinary income
7	Financial tokens that meet the definition of "securities"	Non-trading nature	Capital gains taxable under article 5 of the Income Tax Act
8	Financial tokens that do not meet the definition of "securities"	Non-trading nature	Outside scope of capital gains tax
9	Utility tokens	Non-trading nature	Outside scope of capital gains tax
10	Convertible tokens (not being financial tokens at the time of issue) until they are converted into securities	Non-trading nature	Outside scope of capital gains tax

The distinction between trading income and non-trading income may not always be evident. It may therefore be necessary to refer to the badges of trade to determine whether the income received falls within the definition of trading income or not. Such determination is crucial to assess the tax treatment of transferred tokens.

The following portrays the tax treatment applicable for initial offerings:

wdt_ID	Type of Issued Tokens	Nature of Activities	Tax treatment
5	Financial tokens	Raising Capital	Outside Scope from capital gains tax
6	Utility Token	Entails an obligation of the issuer to perform a service or supply of goods to the seller	Gains or profits realised from the provision of the services or supply of goods represents income

Value Added Tax (VAT)

The general VAT principles applicable to taxable events also apply to transactions or arrangements involving DLT assets. Maltese VAT rules apply only if the place of supply of a transaction or arrangement is deemed to be Malta. Furthermore, the chargeable event would only arise where a supply of service is made for a consideration by a taxable person acting as such and there is a direct link between the consideration payable and the supply made and where there is reciprocal performance between the suppliers and the recipient of the service.

The following is a general overview of the VAT treatment of transactions involving DLT assets:

wdt_ID	Activity	Tax Treatment
1	Coins	Exempt without Credit in terms of para 3(4) of Part Two of the Fifth Schedule to the VAT Act
2	Financial Tokens issued to raise capital	Outside Scope of VAT
3	Financial Tokens issued not for the purpose of raising capital	May be treated as Exempt without credit in terms of para 3(5) of Part Two of the Fifth Schedule to the VAT Act
4	Utility Tokens	Taxable (treated as a voucher in terms of Part Nine of the Fourteenth Schedule to the VAT Act)
5	Transaction fees charged by Digital wallet providers in relation to means of payment	Exempt without credit
6	Transaction fees charged by Digital wallet providers not in relation to means of payment (ex. Technological services)	Taxable
7	Mining for new coins	Outside Scope of VAT
8	Verification of transactions by miners	Taxable
9	Provision of an electronic facility by exchange platforms of coins or security tokens	Exempt without credit
10	Provision of electronic facility by exchange platforms of utility tokens	Taxable

If a token contains features of both a financial and a utility token (also referred to as a hybrid token), then the VAT treatment depends on the use of such token. A hybrid token used as a utility token then it is to be treated as such, while if in another occasion the same token is used as a coin, then it needs to be treated as such.

When treated as a voucher, the consideration paid for a utility token shall be deemed to be gross of VAT due. Another important issue to determine is when the token is subject to VAT:

wdt_ID	Type of Tokens	Taxable Event
5	Underlying good or service, place of supply and value are known at the time of issue of the token - similar to a Single purpose voucher	Time of issue of token
6	Underlying good or service, place of supply and value are NOT known at the time of issue of the token - similar to a Multi purpose voucher	Time of redemption of token

The guidelines provide clarification as to whether initial offerings are subject to VAT or not:

wdt_ID	Type of Initial Offering	Tax treatment
5	An ICO or token generation event where no specific good or service may be identified	Outside Scope of VAT
6	Initial offering of a token where the token issued gives right to identified goods or services for a specified consideration	Taxable

In case of electronically supplied services rendered to non-taxable persons established in other Member States, the supplier may opt to register and account for VAT through the Mini-One-Stop-Shop system (MOSS) to facilitate the administration for the payment of the VAT within the EU.

Duty on Documents and Transfers Act (DDTA)

The following is a summary of the DDTA implications arising with respect to transactions involving DLT assets:

Type of Transferred Tokens	DDTA Treatment	Tax Treatment
5	Coins	Outside scope
7	Financial tokens which possess the same characteristics of “marketable securities” under the DDTA	Subject to DDTA
8	Financial tokens which do not possess the same characteristics of “marketable securities” under the DDTA	Outside scope
9	Utility tokens	Outside scope