Since 2019, LHDN has made it clear that they are taxable in the document titled “Guidelines on Tax Treatment of Digital Currency Transactions”, with the latest version was released on 26 August, 2022.
This guideline covers the following activities:
Taxable Gain: Capital vs. Revenue
Overall, the Guideline states that taxability of gains from or in digital currencies follows the same principle as that of real currencies. A gain is taxable if it is revenue or income, which is gains made from carrying out business activities, which includes service provision. A gain is not taxable if it is capital.
Gains from Trading and Service
Gains from trading (i.e., buying and selling digital currencies for profit as a business) is taxable. Digital currencies received from mining digital currencies are taxable income because they are paid to the miners as compensation for services rendered.
Gain from Sales and Salary
Gains from purchases/ sales made and wages/ salaries paid in digital currencies are as taxable as they would be if done with real currencies. The Guideline further specify the ways in which the transactions may be valued.
Gains from Investments
Lastly, gains from investments in digital currencies and tokens are taxable if they are revenue, that is if they are bought and sold for trading purposes. The Guideline also specify that determining whether an investment was made for trading purposes can be done by examining the “Badges of Trade”.
Badges of Trade
The Badges of Trade is a set of 8 criteria that can be seen as indications of trading. However, the Guideline also specifies that all 8 Badges of Trade are to be given equal consideration as no one criterion can decide whether an investment is done for trading.
Like income in real currencies, taxpayers using digital currencies are to retain records and the Guideline specifies the type records to be kept.
| Badges of Trade | Explanation |
|---|---|
| Nature of subject matter | This refers to the nature of the digital currencies that is being bought and sold. The digital currencies could be regarded as the subject of trading when they are bought in large quantities. |
| Length of ownership | This refers to the holding period of the digital currencies. The shorter the holding period, the more likely it would be regarded as held for trading. |
| Frequency of transactions | High frequency of similar transactions of digital currencies is more indicative of trading than an isolated transaction. |
| Supplementary work | This refers to additional work done on digital currencies to make it more marketable or extra effort made to find or attract purchasers. If this is done, it is more likely that the subsequent disposal would be regarded as trading. |
| Circumstances of the realization | Some circumstances are less likely to indicate trading (e.g. company is forced to sell the digital currencies due to 14 No single badge is a decisive pointer to the existence of a trade. It should be weighed up with all the relevant factors. compulsory acquisition, sudden urgent need of cash or threat of foreclosure by creditors). |
| Motive | This refers to whether there was an intention to trade at the time of the acquisition of the digital currencies. If a person undertakes the activities in a business-lime manners such as developing a business plan, preparing accounting records and advertising the digital currencies business, the intention is definitely to do a business of digital currencies. |
| Mode of financing | This refers to how the purchase of the digital currencies is being financed. Short term financing is more indicative of trading than long term financing. The company’s financial position and ability to hold on to the digital currencies will also be taken into consideration. |
| Other factors | Other factors include whether there were any feasibility studies conducted, the availability of documentation or other evidence maintained by the company to indicate its intention regarding to digital currencies. |
Record Keeping
Records that need to be kept in relation to digital currency include:
Recapping on the Gist of It and How You May Save Tax on Digital Currencies
In the final analysis, the latest version of the Guideline re-iterates that gains from transactions and investments related to digital currencies are taxable, depending on whether they are revenue or capital. Hence, the first step towards saving tax on digital currencies is to determine whether the gain is revenue or capital. The next step would be choosing the correct company structure, either as Sdn Bhd or a Labuan offshore company.
For more information, please refer to LHDN Guideline below:
