Last month, on 1st November, the Commissioner for Revenue has issued the new tax guidelines in relation to Distributed Ledger Technology (DLT). The guidelines come in a set of three different documents being:
- Guidelines on Income Tax Treatment in Relation to Distributed Ledger Technology
- Guidelines for the purpose of the Duty on Documents & Transfers in Relation to DLT
- Guidelines on VAT Treatment in Relation to Distributed Ledger Technology
Distributed ledger technology (DLT) is a digital system for recording the transaction of assets in which the transactions and their details are stored in more than one place at the same time1.In other words, the data is decentralised. Such type of DLT is Blockchain, however, not all DLTs are Blockchains.
There are a few types of DLT Assets (for the purposes of Duty on Documents and Transfers Act.) The first type is coins; old but gold as we like to say. These are DLT Assets whose utility, value or application is not directly related to the redemption of goods or services. Just like any other currency, they have intrinsic value. These are cryptocurrencies which fall outside the scope of the duty on document and transfers act (DDTA).
Another type is tokens; these are once again subdivided into a few different types of tokens. Financial tokens are DLT assets known as security, asset or asset backed tokens. These can grant rewards based on performance, on voting or based on ownership rights. This is comparable to shares in a company, or rights secured by an asset as in asset-backed tokens, or a combination of both.
Utility tokens, on the other hand are assets whose utility, value or application is restricted solely to the acquisition of goods or services either solely within the DLT platform, or in relation to DLT platforms. One can also have the best of both worlds and combine the features of both financial and utility tokens – these are referred to as ‘hybrids’. The new legislation, known as the Duty on Documents and Transfers Act (DDTA) obliges proper records to be kept, which applies to all transactions involving DLT assets. This is like an accountant keeping track of credits and debits to an account. There would be applicable penalties when records are not kept as should be and where there is failure to report and pay any liability to tax. Since there are different DLT assets, there are different VAT conditions, depending on the type of transaction. For VAT purposes, assets are divided as above.
With coins, one can exchange cryptocurrencies for other cryptocurrencies or for fiat money. (Fiat or fiduciary money – has no intrinsic value but serves merely as a medium for exchange) A coin’s value may in turn be determined by reference to the rate established by the relevant Maltese authority to the satisfaction of the corporate family rating (CFR).
Digital wallets in turn, require the payment of fees for allowing coin users to hold and operate a cryptocurrency.
As established by case law, there must be a direct link between the consideration payable and the supply made. This happens if the platform’s services involve a technological service that enables and is a component of the execution of a transaction in DLT Assets by the holders or users. However, where the DLT Assets being traded are classified as “currency” or “securities”, then for VAT purposes, such services may potentially be exempt as they would fall under:
i. transactions concerning currency
ii. transactions in securities Act or
DLT assets then differ in turn when it comes to income tax. Coins just like euros or pounds, do not have any security characteristics; purely intrinsic value and are used as means of payment. Financial tokens are known as securities, asset or asset backed tokens. These can be debentures (a long-term security yielding a fixed rate of interest, issued by a company and secured against assets), equities, units in collective investment schemes or derivatives like bonds. They can also grant rewards based on performance. Utility tokens are DLT assets which are restricted solely to acquire goods or services within DLT platforms.
In general, with income tax, each transaction needs to be analysed within its particular context. The market value of the DLT asset will be established by the relevant Maltese authority, or alternately by the commissioner for revenue. Meticulous records must be kept, as under the Income Tax Acts. Values expressed in a cryptocurrency will need to be translated to the reporting currency. Sanctions will apply where proper records are not kept and where there is failure to report and pay any liability to tax. When it comes to payments, cryptocurrency payments are treated like a payment in any other currency for income tax purposes.