Guidelines on the Tax Treatment of Digital Currency Transactions

Guidelines on the Tax Treatment of Digital Currency Transactions

The IRB has published on its website the Guidelines on the Tax Treatment of Digital Currency Transactions (Technical Guidelines), dated 26 August 2022. The new 14-page Technical Guidelines were issued to supplement the Guidelines on Taxation of Electronic Commerce Transactions dated 13 May 2019 (see Tax Alert No. 10/2019) and provide further guidance on the tax treatment of digital currencies or digital tokens. The Technical Guidelines apply to any person that acquires or disposes digital currencies, as well as any person involved in the business of digital currencies such as trading, mining and exchanging digital currencies. The Technical Guidelines comprise the following paragraphs and set out nine examples:

1.0          Introduction

2.0          Interpretation

3.0          Income tax treatments

4.0          Acquisition cost of digital currency

5.0          Digital currency with no published value

6.0          Record keeping

7.0          Enquiries

Appendix A

For the purpose of the Technical Guidelines, “digital currencies” and “digital tokens” refer to digital financial assets that are based on distributed ledger technology (DLT) and cryptographically secured digital representations of value or contractual rights that can be electronically transferred, stored or traded. Both terms are used interchangeably in the Technical Guidelines.

Some of the key points are outlined below.

• The Technical Guidelines reiterate that digital currency or token gains that are revenue in nature will be subject to tax in Malaysia, whereas gains that are capital in nature will not be subject to tax in Malaysia. The IRB’s considerations in determining whether a gain from the disposal of digital currency is revenue or capital in nature are based on the badges of trade, as outlined in Appendix A to the Technical Guidelines.
• The Technical Guidelines explain the tax treatment and provide examples to clarify the treatment for certain types of transactions as follows:

(a)   Carrying on a business involving digital currency or using digital currencies in a business, including the:

-          Trading of digital currencies

-          Mining of digital currencies

-          Receipt of / payments for business transactions in digital currencies

-          Payment of salaries and wages to employees in digital currencies

(b)  Investment in digital currencies and other transactions involving digital currencies:

-          Investment in digital currencies

-          Acquisition and disposal of digital currencies merely to settle payments for goods or services

-          Receipt of digital currencies resulting from free distribution (e.g., airdrop) or splitting of existing digital currencies (e.g., hard fork)

-          Exchange of digital currencies

• The Technical Guidelines stipulate that the acquisition cost of digital currencies is to be determined in Ringgit Malaysia (RM) on a First In, First Out (FIFO) basis, unless proven otherwise by the taxpayer. If the acquisition cost cannot be determined, the fair value (i.e., rate in force on the day of the transaction, based on acceptable and verifiable digital currency exchanges) will be used. The list of approved digital currency exchanges are available on the Securities Commission Malaysia (SC)’s website at the following link: List of Registered Digital Asset Exchanges
• The Technical Guidelines outline the details and documents in relation to digital currencies which need to be retained for tax purposes.
  
• The Technical Guidelines do not address the tax implications of Initial Coin Offerings. Further, whilst the Technical Guidelines indicate that “Any person carrying out a business of mining or carrying out mining activities with a profit-seeking motive is subjected to tax according to the existing income tax provisions”, the Guidelines do not elaborate on this. 

The Technical Guidelines are available at the following link: Guidelines on Tax Treatment of Digital Currency Transactions.