In November 2018, the Commissioner for Revenue issued guidelines concerning the income tax treatment of transactions or arrangements involving distributed ledger technology (DLT) assets. Existing provisions were interpreted within the framework of this emerging asset class, as no specific tax regulations were established for the cryptocurrency domain.

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DLT assets are principally categorised by the Revenue, in alignment with the Virtual Financial Assets Act (VFAA), as either 'coins' or 'tokens'.

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Coins are recognised as lacking any attributes of a security and functionally represent the cryptographic equivalent of fiat currencies.

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Tokens are further subcategorised into 'financial tokens' or 'utility tokens':

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• Financial tokens are defined to resemble equities, debentures, units in collective investment schemes, or derivatives.

• Utility tokens are classified as DLT assets whose utility, value, or application is exclusively restricted to the acquisition of goods or services, either solely within the DLT platform they are issued for, or within a restricted network of DLT platforms. This encompasses all DLT assets functioning as tokens whose utility is confined solely to the acquisition of goods or services, irrespective of listing on a DLT exchange, peer-to-peer transfer capabilities, or potential conversion into another form of DLT asset, albeit only until conversion occurs. Such tokens lack ties to the issuer's equity and possess no characteristics of a security.

Furthermore, the Revenue acknowledges the potential existence of hybrid tokens. In the case of a hybrid token, the Revenue evaluates the token's usage. If the token predominantly functions as a utility token, it is treated accordingly. Conversely, if the token serves as a coin in certain instances, it is treated as such for tax purposes. Thus, the tax treatment of any DLT asset is contingent upon its intended use and context, rather than mere categorisation.

Does this categorisation of token have any specific tax implications?

From an income tax perspective, the implications are notable as coins and utility tokens are not included among the list of capital assets in the Income Tax Act, the disposal of which triggers taxation on capital gains. Conversely, securities are included, implying that gains derived from the transfer of crypto assets categorised as security tokens are subject to taxation.

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However, given Malta's remittance-based taxation system, only security tokens considered to be situated in Malta would be taxable if the transferor is a resident but not domiciled in Malta.

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Regrettably, the Revenue's written guidance does not extend to the determination of the situs of crypto assets. Nevertheless, it is reasonable to presume that if the private keys of such security tokens are exclusively stored in a wallet or cold storage located in Malta, these assets would likely be deemed situated in Malta. Conversely, if coins or tokens are held on a foreign-based centralised exchange, their situs would likely be determined by the location of the exchange.

How would I know whether my profits generated on crypto assets are to be treated as a capital gain, or as a trading income?

In order to determine the categorisation of a profit between a capital gain or as a trading income, the concept of “Badges of trade” is utilised.

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This is a concept used in tax law to determine whether an activity constitutes a trade or business. These badges help distinguish between activities carried out with the intention of making a profit (which would be subject to taxation) and those pursued as hobbies or one-off ventures (which might not be taxed in the same way).

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The concept of badges of trade was first established by case law in the United Kingdom and has been influential in many common law jurisdictions, including Malta. The badges of trade include various indicators or characteristics that can help determine whether an activity constitutes a trade or business. These indicators are not exhaustive, and no single badge is determinative on its own. Rather, they are considered collectively to assess the overall nature of an activity.

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The following activities would typically fall within the scope of a trading activity within the cryptocurrency space:

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1. Active trading of Cryptocurrencies;

2. Leverage trading;

3. Airdrop farming;

4. Active trading in Non-Fungible Tokens;

5. Running of nodes and mining of cryptocurrencies; and

6. Performance of ordinary trading activity, with receipt of payment in Cryptocurrency assets

Differentiation in Tax Treatment between Income and Capital Gains