26th September 2022 - 10 min read
We can all agree that Covid-19 has made 2020 and 2021 particularly challenging, wreaking havoc on businesses and global economies alike. But for some, the turbulent period came as an unexpected opportunity, with one good example being the investment sector.
With financial insecurities plaguing them, many individuals took to investing as an additional source of income, or a way to better secure their financial future. 2020, for instance, saw the retail average daily trading value (ADTV) at Bursa Malaysia grow by 236% – the highest retail ADTV to have been recorded in the stock exchange operator’s history. Investors’ interest in robo-advisors and cash management solutions also escalated.
Amidst all these, there’s also cryptocurrency, which rose to the height of its popularity globally – including Malaysia – during the pandemic years. Given this trend, there are a growing number of local crypto investors who aren’t sure whether their digital assets are subjected to any form of tax. If you’ve been following the topic, you’d know that the earlier guidelines provided by the Inland Revenue Board (LHDN) had been somewhat vague on the matter.
With the recent publication of the Guidelines On Tax Treatment Of Digital Currency Transactions, however, the public will now have better understanding regarding the tax treatment of crypto. Here, we’ll highlight some of the key points in the document that are most applicable to you as an investor.
LHDN’s latest guideline defines digital currencies and tokens as “digital financial assets” that are “recorded on a distributed ledger whether cryptographically-secured or otherwise”. They also function as “a medium of exchange” and are “interchangeable with any money”. Of course, these include the various digital currencies that you’d be familiar with, such as Bitcoin, Ether, and Litecoin – just to name a few.
In terms of tax treatment, the document said that crypto will only be taxed if it is used in business or trading transactions, where the business’ key activities and operations are performed in Malaysia, or if the business has a presence in Malaysia. It further included the following:
As Malaysia does not tax capital gain, only revenue gains arising from the disposal of digital currency is taxable.
A person who trade digital currencies actively may be viewed as generating revenue from the activity, thus gains from this digital currencies trading is taxable. On the other hand, gains derived by individual who trade occasionally may be viewed as capital gains and not taxable in Malaysia.
To clarify, capital gain refers to earnings that you obtain via investments. In other words, if you purchase crypto as a form of investment – holding on to it for a period of time the way you do with other investment instruments – then you will not be required to pay tax. However, if you use crypto as part of your business transactions or trade regularly to earn revenue or income, then it will be taxable.
This explanation echoes what the LHDN had already mentioned in early 2021, where it also mentioned that crypto traders and businesses must use Form B (for individuals with business income) to declare their earnings. Back then, however, the board did not specify the particulars of what would constitute trading and non-trading transactions. This time, LHDN has identified a total of eight “badges of trade” to help the public determine whether elements of trade exist for transactions involving digital currencies. You can read about them in a later section in this article.
Along with the explanation above, LHDN has also shared a list of specific transactions/circumstances to better illustrate the tax treatment that is applicable for each of them. Here’s a summary for your reference:
1) Taxable crypto transactions (business/trading transactions)
|Active trading of crypto||Businesses/individuals that buy and sell digital currencies regularly as part of their business operations to obtain profit||– Taxed on the profit derived from the trading, similar to trading of stock |
– Expenses will be tax deductible, and losses can be set off against income
|Crypto mining||Businesses/individuals who mine crypto for profit (e.g. to trade, or offer crypto mining services for a fee)||– Profit to be taxed if the miner meets the criteria of trading (see next section) |
– Expenses will be tax deductible, and losses can be set off against income
|Business transactions conducted in crypto||Businesses/individuals that use crypto as a mode of payment||– Profit to be taxed in a manner similar to regular business transactions |
– Crypto payments and expenses should be recorded in ringgit
|Salaries paid/received in crypto||– For employers, this will count as an expense|
– For employees, this will count as income
|– Value of the salary or wage will be based on the employment contract and value of employment service performed|
|Crypto conversion||Converting one crypto to another crypto||Profit to be taxed (if the gain is revenue in nature)|
2) Non-taxable crypto transactions (non-business/trading transactions)
|Crypto as an investment||– Businesses/individuals who buy crypto for long-term investments |
– Crypto acquisitions that are not continuous, systematic, or active, and does not carry financial risk or are not aimed at making a profit
|Not taxed as Malaysia does not tax capital gains|
|Acquisition of crypto as currency to make payments||Individuals who purchase crypto to pay for goods and services (in part or full payment)||Not taxed|
|Crypto obtained via free distribution or splitting||– Crypto received for free as part of a promotion |
– Crypto received for free during splits, such as airdrops and hard forks
|Not taxed, unless the recipient subsequently sells the tokens to obtain gains that are revenue in nature (active trading)|
|Crypto conversion||Converting one crypto to another crypto||Profit not taxed (if the gain is capital in nature)|
By now, you’d probably have noticed that the “element of trade” plays a decisive role in determining whether a crypto transaction is taxed or not. But how do we determine if a certain transaction has elements of trade?
LHDN’s guideline has also listed out eight criteria that it considers when determining whether elements of trade exist for transactions:
|Criteria / ”Badges of trade”||Details|
|Nature of the crypto (e.g. quantity)||Crypto bought or sold in large quantities could be flagged as possessing element of trade|
|Length of ownership||Crypto that are held only for a short period will be more likely regarded as having elements of trade|
|Frequency of transaction||High frequency of similar transactions of crypto points to the possibility of trading, as opposed to isolated transactions|
|Supplementary work||Crypto transactions with the following may be treated as possessing elements of trade: |
– Additional work done on crypto to make it more marketable
– Extra effort made to find/attract purchasers
|Circumstances of the realisation||Some circumstances are less likely to indicate trading, such as being forced to sell crypto due to urgent need of cash or threat of foreclosure (for companies)|
|Motive||Individual’s intention when purchasing crypto, such as whether he or she undertook the activities in a business-like manner (e.g. developing business plans, advertising digital currencies business, etc.)|
|Mode of financing||– Purchase of crypto that is financed with short-term financing is more indicative of trading than long-term financing |
– Company’s financial position and ability to hold on to the crypto will also be considered
|Other relevant factors||Other factors include: |
– Whether any feasibility studies were conducted
– Availability of documentation
– Other evidence that indicates a business or individual’s intention
As you can see, the list above is quite comprehensive. But with this, it will also be easier for us to recognise a taxable/non-taxable crypto transaction.
For the purpose of tax calculation, LHDN noted that businesses (or individuals) should record all their acquisition and sale of crypto based on the market value, in ringgit (RM). This includes situations where transactions are agreed based on the number of crypto (e.g. one Bitcoin, or one Ether); the value of goods sold or purchased should be determined based on the crypto’s value at the point of the transaction.
Additionally, the acquisition cost of your crypto should be determined on the basis of the first-in-first-out principle, meaning assets purchased first are disposed of first. This is unless you are able to prove otherwise.
To better illustrate this, here’s an example from LHDN:
A company that trades digital currency as part of its business bought crypto A as per the following schedule:
|Date purchased||Number of units purchased||RM per unit||Total (RM)|
|1 Sept 2021||500 units||10,000||5,000,000|
|1 Oct 2021||300 units||15,000||4,500,000|
|1 Nov 2021||700 units||5,000||3,500,000|
The company then sells 600 units of its crypto, at the value of RM20,000 per unit in January 2022. As such, the company’s calculation of its profit will be:
= (600 units x RM20,000) – [(500 units x RM10,000) + (100 units x RM15,000)]
= RM5,500,000 profit
However, if the company is able to prove that the sold units were among those purchased on 1 November 2021, then the calculation will be:
= (600 units x RM20,000) – (600 units x RM5,000)
= RM9,000,000 profit
If you are unable to determine the exact acquisition cost for any reasons, then the calculation of your crypto will be valued using fair value. This means you will use the rate that is in force on the day of your transactions, based on registered crypto exchanges (namely Luno, MX Global, SINEGY DAX, and Tokenize Technology).
Meanwhile, in the event that you receive payment for goods and services in crypto without published value (as it is not traded on any crypto exchanges), then its fair value will be equivalent to the price of the property or services offered for the crypto.
As a rule of thumb, taxpayers are always advised to keep their tax documents – such as receipts and invoices – for at least seven years. As you can expect, this applies to your crypto transactions too!
Here are several crucial documents and details that you should keep or record in relation to crypto transactions:
While the guideline is dated 26 August 2022, some tax consultants have highlighted the possibility of LHDN imposing retrospective or backdated tax on businesses or individuals trading crypto. The rationale for this is that LHDN is merely clarifying the law as it stands today; it has not implemented a new law, and is merely providing guidance on how crypto should be taxed. As such, LHDN is in its right to do so if it wish to.
Neither LHDN nor its document have highlighted this possibility, but there are some rare examples of LHDN applying even new tax laws retrospectively. As such, it may be a good idea to take some time to compile any existing documents or records that you still have of your previous crypto transactions – just to be safe.
Although the tax season for 2023 is still some time away, it’s always good to be prepared! With this, we hope that you’ll have a better understanding as to how to declare your crypto earnings come next year.
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