Are gains from Bitcoin (and other virtual currencies / cryptocurrencies) taxable?
The Inland Revenue Board Malaysia (IRBM) has not issued any guidelines on cryptocurrency and related businesses. However, IRBM has stated that the provisions of the Income Tax Act (ITA) would apply to all cryptocurrency transactions.
In the absence of written guidelines from IRBM, let’s explore the issues at hand.
IRBM’s stance at the moment
According to IRBM, although cryptocurrency businesses are not regulated, the businesses involving cryptocurrency are still subject to Malaysian tax pursuant to S.3 of ITA. Under S.3 of ITA, income accruing or derived from Malaysia shall be subject to tax.
As such, cryptocurrency traders, investors, exchanges, and miners operating in or from Malaysia should keep proper books of accounting and business records in Malaysia. IRBM may request such information to be produced in the course of tax audit/investigation. Tax and heavy penalty (up to 100%) could be imposed for erroneous tax return and evasion.
Does holding Bitcoins attract reporting obligations?
If a person trade virtual currency frequently, the gains are trading gains and would likely be taxable.
Long-term investors could avoid tax. For example, if an individual has bought some Bitcoins since 2010 as a longterm investment or as a hobby – the taxpayer may argue that he is a long-term investor and the gains are capital in nature (subject to IRBM agreement, of course).
When a service provider accept Bitcoins for services rendered to a client – is the transaction subject to tax?
Yes, the service provided is subject to tax if the services were provided in or from Malaysia.
Question is at what value should the transaction be recorded in the accounts - the normal rate for such services or the market value of the Bitcoin at the date of the transaction?
What are the tax approaches of other countries?
1. Australia
Cryptocurrency could be treated as personal use asset. For example, if an individual acquires some Bitcoins with the intention to use them to purchase a concert ticket online, the Bitcoins are considered as personal use asset, it should not be taxable.
However, if the Bitcoins were acquired regularly for a period of time with the intention of selling them at a favourable exchange rate – they will not be treated as personal use assets. Instead, they would be treated as assets for capital gain tax (CGT) purposes.
Recordkeeping requirements include date of transactions, value of the cryptocurrency in Australian dollars at the time of the transaction (value could be referred to a reputable exchange), purpose of the transaction and who was the other party (even if it’s just their cryptocurrency address).
2. Singapore
Profit from trading of cryptocurrency - taxable
Profits derived from businesses that mine cryptocurrency - taxable
Capital gain from long-term investment in cryptocurrency - not taxable (as capital gain is no taxable).
3. United States
Classify virtual currency as property.
Gains in the value of virtual currency are taxable capital gains.
4. Japan
Virtual currency is considered as an asset for accounting purposes. It should be recorded at book or market rate value.
It is a taxable asset as such any gains would be taxable.
Income from virtual currency is treated as income to individuals and corporations.
Mining of Bitcoins
The business of mining for Bitcoins or other cryptocurrencies could be subject to tax.
Recently, a friend who has made a lot of money from cryptocurrency revealed to me that he has set up a company with a few local investors to mine Etherium (the 2nd most traded cryptocurrency after Bitcoin). The company has rented a factory to house the servers and computers. And due to the high setup costs, the company has registered as a GST registrant and claimed GST input tax for the servers, computers and equipment that were used to mine cryptocurrency. I was then asked whether the cryptocurrency that the company is rewarded from the mining activity is subjected to tax in Malaysia.
My answer to him was:
I reckon the cryptocurrency that the company is rewarded should be treated as revenue and the profit of this venture is subject to Malaysian tax as the company is conducting a business in Malaysia for the following reasons:
a. There is a business entity setup for the business. And the intention of the venture is for profit.
b. The company has claimed GST input tax.
c. This is not a foreign source income as the cyptocurrency mining is done from a factory located in Malaysia.
d. It is an established tax principle that even illegal business could be subject to tax (as some may argue that since cryptocurrency is unregulated at the moment, any gains would be tax free).
Here comes the good news - if the cyptocurrency awarded is a taxable revenue, then the expenses incurred by the business in making the income should be tax deductible. Allowed expenses could include but not limited to electricity (one of the biggest expenses for most cryptocurrency miners), rental, staff remuneration, capital allowance for computers and equipment, upkeep and maintenance, compliance expenses, etc.
The cryptocurrency industry is evolving rapidly. It is not an easy subject to tackle for the regulators and tax authority. Nevertheless, we believe the IRBM would catch up and issue a written guideline soon.
If you are concerned about the tax consequences of the investing, selling or mining of cryptocurrency, get in touch with our tax team for more advice.
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Disclaimer: Every effort has been made to provide accurate information. However, the information and regulations contained in this article are subject to changes and amendments by the relevant authority at any time. As such, the information in this article may not be current.
And the information provided in this article is general commentary only and shall not be considered as advice or recommendation. As all tax situations are specific to their facts and will differ from the situations in this article - if you have specific tax questions you should consult a licensed tax agent.