The Commissioner for Revenue published three sets of Guidelines relative to the treatment of ‘DLT Assets’ for the purposes of income tax (including capital gains tax), transfer duty and VAT. The Guidelines have adopted a principles-based approach, setting out the tax treatment of investments and transactions in DLT Assets with reference to general tax principles.
The Guidelines set out two categories of DLT Assets, namely “Coins” and “Tokens”:
a. Coins: coins are those assets which are designed solely as a means of payment or medium of exchange, used in the same fashion as a fiat currency and therefore an alternative to legal tender (e.g., Bitcoin). Coins’ utility, value and application are not related to the redemption of any goods and services and do not have any characteristic of a security or provide the holder an equity interest in the issuer or a role in a project.
b. Tokens: tokens are further subdivided into two categories: (i) Financial Tokens and (ii) Utility Tokens.
i. Financial Tokens (FT)– As the name denotes, FTs are those tokens which exhibit similar qualities to traditional financial instruments, such as securities, debentures, units in a collective investment scheme, derivatives, and financial instruments. Holders of FTs may have the right to receive a dividend from the issuer or to interest payments similar to bond holders, or to payments linked with the performance of the specific asset. An FT could also grant rewards on performance, voting rights, or represent ownership in the underlying assets.
ii. Utility Tokens (UT) - This category refers to DLT Assets whose utility, value or application is restricted solely to the acquisition of goods or services either solely within the DLT platform on, or in relation to which they are issued or within a limited network of DLT platforms. Tokens not listed on a DLT Exchange, whose utility is restricted solely to the acquisition of goods or services, and which may be transferred peer-to-peer would also qualify as UTs.
Coins are generally considered to be the equivalent of fiat currency for tax purposes. A person who buys and sells Coins in the course of a trade or business activity will be taxed on the trading or business profits in the normal manner. On the other hand, a person who, having bought some Coins and held same by way of investment, decides then to dispose of same is not taxable on the resulting capital gain as Coins are not a chargeable asset for capital gains tax purposes.
Transactions in Coins fall outside the scope of transfer duty. Coins are also considered to be the equivalent of fiat currency / legal tender for VAT purposes and all relative exemptions apply also to transactions in Coins.
Security Tokens
Should the particular security token, being a Financial Token, qualify as a “security” for the purposes of the capital gains tax rules, then any capital gain that the holder of same may realise upon disposal shall be chargeable to capital gains tax in terms of law – always subject to the rule that should it be a foreign-sourced capital gain, that shall not be subject to income tax in Malta should the seller be resident or domiciled in Malta for tax purposes but not both. Should the particular token also satisfy the definition of “marketable security” for transfer duty purposes, transfer duty shall be chargeable thereon in certain circumstances.
