Taxing DLT: does a new reality require a new approach?
The use of distributed ledger technologies (DLT) has expanded to such an extent that it has proliferated into all facets of our society: a veritable big bang, from a peer-to-peer cash system to a whole universe of applications. With progressive law in force, Malta has rolled out the red carpet for innovative technologies while ensuring the continued protection of investors and users. Additionally, Malta has issued guidelines on the income tax, duty and value added tax treatment of DLT assets and transactions.
DLT provide platforms that facilitate transactions and intrinsically generate new currencies. The assets supported by DLT started out as incentives to participate in the processing of transactions or the development of a project. Today, hundreds of different cryptocurrencies exist, ranging from coins to multifarious tokens. Essentially, they are encrypted entries on a distributed ledger. This said, the inherent features of DLT assets generated upon mining, initial coin offerings, token generation events and the like,are of particular importance given that their substantive nature would dictate the tax treatment attributed to them.
Virtual financial assets in the form of coins do not have a fiat equivalent. They only exist online, as a product of their respective blockchain; they represent themselves, are not a debt, and are valued on exchanges. The million Bitcoin question is, are coins money for tax purposes? The European Banking Authority defined cryptocurrencies as ‘a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically.’
Coins serve as a traditional currency, a payment mechanism, though they are not regulated by a central authority and are therefore not dependent on financial institutions. Notwithstanding, coins are a digital representation of value though, like fiat, they have no intrinsic value. The only difference is that they are not legal tender.Otherwise, as with money, they serve as a store of value enabling the future purchase of goods and services, act as a medium of exchange and/or amount to a unit of account to measure the value of an item being traded.It follows therefore that coins fall to be treated for income tax purposes akin to any other currency.
Tokens, on the other hand, do not always meet these characteristics.The operational functionalities of tokens are far broader than those of coins. Tokens, for one, are not tied to a blockchain. They are units of trading which represent a right or obligation valued by the platform which supports it, extinguished upon exchange of the token. For this reason, the tax treatment of tokens would very much depend on the nature of the specific token and the extent to which its characteristics fall within the purview of chargeable provisions, ranging from securities to vouchers.
The positioning of the ever-increasing types of DLT assets and transactions for tax purposes would naturally depend on their unique substantive features.As the DLT sphere matures, linking cryptocurrencies to principles that are already in place will prove smoother and be more suitable to keep up with fast-paced developments. Once these assets and transactions fall within scope of Maltese tax law, general principles are applied.
The universe is ever expanding, so is DLT, bourgeoning into the whole economy. And this is only the beginning. Malta’s regulators are ensuring that the Blockchain Island makes an even bigger bang. By regulating the sphere and embracing innovative technologies, Malta ensures certainty and investor protection while enabling flexibility to avoid harnessing this technological revolution.
Trudy, a lawyer, joined KPMG as a tax advisor in 2013. Trudy focuses on the application and interaction of Maltese and European corporate and fiscal legislation in local and cross-border scenarios. Trudy has worked in tax law with international clients for 7 years, assisting both personal and corporate clients to improve their tax efficiency sustainably. She has assisted individuals and corporates in applying international tax to their business activities, including through the use of legal relationships such as trusts, foundations, partnerships and joint ventures as is suitable to the case at hand. She has attended and given lectures and presentations in connection with local and international tax law, both locally and worldwide, and has just returned from secondment at KPMG’s EU Tax Centre in the Netherlands. Trudy was the first administrator, and a board member, of the Malta Association of Family Enterprises, playing a key role in formulating local fiscal proposals to facilitate the inheritance of Maltese family businesses. During this time, she frequently represented the Association in official working groups and meetings and gave presentations and speeches on the Association’s role and proposals.