Taxation of Electronic Commerce Transactions (e-CT) including Digital Currencies or Digital Tokens
Digital currencies and digital tokens are digital financial assets based on distributed ledger technology (DLT) and cryptographically secure digital representations of value or contractual rights that can be transmitted, stored or traded electronically.
Digital currency means a representation of value recorded on a distributed ledger, whether cryptographically protected or otherwise, which serves as a medium of exchange and is interchangeable with any currency, including credit or debit of accounts. Digital token means a representation recorded on a distributed ledger, whether cryptographically protected or otherwise.
The use of the terms digital currency and digital token also refers to digital currencies such as Bitcoin, Ethereum (Ether) or any other digital currency having similar characteristics to those described above. The terms digital currency and digital token are used interchangeably.
General Income Tax Treatment of Digital Currency Acquisitions and Disposals
Generally speaking, the taxability of digital currency transactions in Malaysia is based on Section 3 of the ITA 1967, whereby any person is taxable on income generated in or sourced in Malaysia or received in Malaysia from outside Malaysia.
Transactions involving digital currencies will be deemed subject to Malaysian tax if the principal activity and business operations are carried out in Malaysia, or if a business conducts business in Malaysia. Notwithstanding, all facts and circumstances must be considered when determining whether the source of income is taxable in Malaysia.
Since Malaysia does not tax capital gains, only revenue gains arising from the disposal of digital currencies are taxable.
A person who actively trades digital currency may be deemed to generate revenue from that activity, and therefore gains from that digital currency transaction are taxable. On the other hand, gains earned by individuals who trade occasionally may be considered capital gains and not subject to taxation in Malaysia.
Gains/losses on disposal of digital currencies or digital tokens assessed as trading in nature will be taxable/deductible. On the other hand, gains/losses on the disposal of digital currencies or digital tokens that are of a capital nature are not taxable/deductible.
The following is the tax treatment of certain transactions involving digital currencies:
Carrying out a Digital Currency Business or using Digital Currency in Business
1. Digital currency trading
Businesses that buy and sell digital currencies in the ordinary course of business will be taxed on profits from digital currency trading, similar to stock trading. Any expenses arising from production of taxable income or losses arising from digital currency trading activities are tax deductible.
The sale of digital currency should be reported as a sales amount, and the cost of purchasing digital currency is deductible. If the company incurs losses, such losses are tax-deductible.
2. Mining of digital currency
Anyone who engages in a mining business or engages in mining activities for profit is liable to pay taxes under the prevailing income tax rules. Business-related expenses are tax-deductible and losses are allowed.
The taxability of miners' profits from disposing of payment tokens depends on whether the gains are capital or revenue, and is based on badges of trade. In determining whether such gains are taxable, badges of trade such as profit motive, nature of assets and changes in assets are considered.
It is also possible to hire miners to mine payment tokens on behalf of another person (client). Instead of keeping payment tokens received from the system for successful mining, miners hand them over to clients. Miners will charge a mining service fee. Fees charged by miners for providing services are taxable.
3. Payment and receipt of commercial transactions in digital currency
If the taxpayer is engaged in commercial activities and uses digital currency as a method of payment in its business, transactions involving digital currency should be accounted for similarly to normal business, such as recording digital currency payments received for the goods or services provided as sales to this business.
Generally, businesses that accept digital currencies as payment for goods or services should record sales in Ringgit Malaysia (RM) based on the open market value of the goods or services. The same applies to businesses paying expenses and purchasing assets.
Digital currency received as the price of goods or services (RM) is recognized as sales of the business.
In the case where the transaction is agreed on the basis of the amount of digital currency, the value of the goods purchased or sold or the service contract is based on the value of the digital currency at the point of the transaction.
Under section 33(1) of the ITA 1967, any expenses incurred in the use of digital currencies in generating taxable income will be allowed as a tax deduction.
4. Salary and wages paid to employees in digital currency
When salaries and wages are paid using digital currencies, these payments can be deducted to businesses as expenses. In the hands of employees, salary and wages received are taxable. The value of salaries and wages will be based on the employment contract and value of the employment services provided.
When the employment contract signed by the employee requires that his salary be paid in the form of digital currency to pay the equivalent of the month, the employee's employment income is taxable, and the business has the right to claim tax deduction for the monthly salary paid.
Existing employer responsibilities under the Monthly Tax Deduction (MTD) rules apply.
Digital currency investment and other transactions involving digital currency
1. Investment
A person's investment in digital currencies and digital tokens is considered to constitute that person's business activity if the investment activity is continuous, systematic, active, financially risky and aimed at making a profit.
Businesses that purchase digital currencies for long-term investment purposes may realize capital gains from the disposal of these digital currencies. However, such gains are not taxable as there is no capital gains tax in Malaysia.
The taxability of investment profits depends on whether the gain is of a capital or revenue nature and is based on badges of trade. In determining whether such gains are taxable, trade indicators such as profit motive, nature of assets and changes in assets are considered.
Gain or loss is the difference between the amount received in exchange for digital currency and the adjusted digital currency basis.
The adjusted basis is the amount spent to acquire digital currency, including fees, commissions and other acquisition costs.
If the digital currency held by the business meets the capital gains standard, then gains from the disposal of digital currencies are not subject to ITA 1967.
Profits from digital currency transactions conducted by non-active persons for long-term investment purposes are of a capital nature and are not taxed.
The mere disposal of digital currency held as an investment is considered a realization of the investment, so the income received is not taxed. Any expenses related to this income are not deductible.
2. Mere acquisition and disposal of digital currency
When a person buys digital currencies such as bitcoin and ether only as part or full payment for any goods and services, the situation does not give rise to taxation.
For example, when a seller offers a discounted price for goods and services if digital currency is used for payment, a person buys digital currency equivalent to the discounted price for goods and services and pays the seller.
Any disposal of payment token may be subject to taxation if IRBM finds that the intention of the purchase is related to trading or any other revenue making purpose.
3. Receiving digital currency due to free distribution or split
One can receive digital currency for free as a promotional or marketing tool, or for splitting existing digital currencies such as airdrops and hard forks.
These tokens are not income of the recipient and therefore are not taxable upon receipt. However, the above may be subject to income tax if the tokens are offered in exchange for certain goods or services.
Gains on future disposals of these tokens will be taxed if the gains are revenue in nature.
4. Digital currency exchange
The taxability of a gain or loss from converting one digital currency into another will depend on whether the digital currency is a capital asset or a revenue asset, so that the gain or loss resulting from the conversion is capital or revenue in nature.
Determining the Existence of Trade
The general tax treatment of trading gains/losses arising from the disposal of digital currencies is based on whether they are capital or revenue in nature. In determining whether such gains are taxable, badges of trade such as profit motive, nature of assets and changes in assets are considered.
The following are considerations for determining whether there is a trade element in transactions involving digital currencies:
BADGES OF TRADE | EXPLANATION |
1. The nature of the subject matter | This refers to the nature of the digital currency being bought and sold. When buying digital currency in large quantities, it can be regarded as the trading subject. |
2. Length of ownership | This refers to the holding period of the digital currency. The shorter the holding period, the more likely it is to be considered held for trading. |
3. Trading frequency | High frequency similar transactions of digital currencies are more indicative of trading than isolated transactions. |
4. Supplementary work | This refers to the extra work done on a digital currency to make it more marketable, or to find or attract buyers. If it is done, subsequent disposals will be more likely to be considered trading. |
5. Circumstances of the realization | Some situations are less likely to indicate a trading (e.g., a company is forced to sell digital currency due to a forced acquisition, a sudden need for cash, or the threat of foreclosure from creditors). |
6. Motive | This refers to whether there is a trading intention when purchasing digital currency. If a person conducts activities in a commercial manner, such as developing a business plan, preparing accounting records, and advertising a digital currency business, the intent must be to engage in the digital currency business. |
7. Financing methods | This refers to the method of financing the purchase of digital currency. Short-term financing is more indicative of trading than long-term financing. The company's financial status and ability to hold digital currency will also be taken into consideration. |
8. Other factors | Other factors include whether any feasibility studies have been conducted, and whether there are documents or other evidence retained by the company indicating its intentions for the digital currency. |
No single badge is a conclusive indicator that a trade exists. All relevant factors should be weighed.
Acquisition Costs of Digital Currency
For tax purposes, the acquisition cost of digital currency must be determined in Malaysian Ringgit (RM). Since digital currencies are considered intangible assets for tax purposes, any digital currency owned by a company needs to be denominated in Malaysian Ringgit (RM).
The cost of acquiring digital currency is determined on a first-in, first-out (FIFO) basis, unless the taxpayer can prove otherwise. If the acquisition cost of current assets cannot be determined, the digital currency will be valued at fair value, that is, at the exchange rate in effect on the transaction date and based on acceptable and verifiable digital currency exchanges.
In the absence of other evidence, a company that buys and sells digital currency as part of its business acquires digital currency at a cost of acquisition determined on a first-in, first-out basis.
Digital Currency with No Published Value
If digital currency is received in exchange for property or services and the digital currency is not traded on any digital currency exchange and has no published value, the fair value of the digital currency received is equal to the fair value of the property or service exchanged for the digital currency at the time of the transaction.
Keeping Records
Records related to digital currencies that need to be kept include:
Records identifying the nature of the transaction - including white papers
Records to determine the value of digital currencies based on online exchanges
Date of transaction
The counterparty’s name i.e. the digital currency address
Receipts for purchase/transfer of digital currency
Exchange records
Other records such as agents records, wallet keys, software
Bank statement
Receipts/invoices for business expenses
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For all inquiries regarding tax treatment of digital currency transactions, please contact Bestar.