Generally speaking, income tax:
3
Page 3 & 4 of this Alert.
a) Would only be chargeable on revenue gains i.e., where
the transactions are conducted in the nature of trade.
Similarly, trading / revenue losses would be deductible;
and
b) Would not be chargeable on capital gains i.e., the
realisation of investments in digital currencies.
Similarly, capital losses would not be deductible.
The Guidelines provide guidance and specific examples to
assist taxpayers in determining whether the gain from a
particular transaction is chargeable to income tax or not.
The Badges of Trade
In essence, the taxability of gains from digital currency
transactions should apply a similar test used for real property
transactions and share sale transactions: the badges of
trade.
The badges of trade were established predominantly with
real property transactions in mind and would naturally require
some modification to be applied to shares and digital
currency transactions. For instance, digital platforms are
readily available and commonly used to buy and sell shares
and digital currencies, which may render the method of
disposal a little less important. Further, unlike real properties
which can be renovated, cleared, subdivided, etc., shares or
digital currencies cannot be easily altered or improved.
The badges of trade however remain applicable and have
been successfully applied in the context of share
transactions, including in Director-General of Inland
Revenue v Hypergrowth Sdn Bhd.
4 Recently, applying the
same principles, taxpayers have also succeeded in
establishing an absence of trade in the context of real
property transactions in PFR Sdn Bhd v KPHDN 5
(SCIT)
and Cash Band (M) Bhd v KPHDN 6
(High Court) where the
successful taxpayers were represented by LHAG’s Tax
Practice.
4 Director-General of Inland Revenue v Hypergrowth Sdn Bhd [2008] 4 CLJ 250
5 PFR Sdn Bhd v KPHDN [2022] MSTC 10-151
6 Cash Band (M) Bhd v KPHDN PKCP (R) 564 / 2018 and WA-14-12-08/2021
It can be understood from these cases and taking into
account the necessary modifications for application on digital
assets that the following considerations would be relevant to
determine whether income tax would be payable on
transactions:
(a) The nature and the intention of holding the digital asset
• It is an investment holding company.
• Its intention was to hold the digital asset as investment.
• It has never been shown to be a company or individual
trading in digital currencies and assets, or having the means,
knowledge, or expertise in such areas of business.
(b) Period of ownership
• The digital asset has been held for a considerable amount
of time prior to its disposal. A longer period is indicative of an
intention to hold for investment.
• As stated in the Guidelines, it will more likely be regarded
as held for trading if the holding period is short. However, in
PFR Sdn Bhd v KPHDN, despite parts of the asset being
held for only a year, the SCIT was of the view that this was
inconclusive and must be balanced with other factors.
(c) Frequency of transactions
•The taxpayer did not frequently trade in similar assets as
part of its business in the past.
•The existence of many similar past transactions may give
rise to a presumption of trade.
(d) Supplementary work
• The Guidelines state that supplementary work refers to
additional work done on digital currencies to make it more
marketable. The types of additional work done on digital
currencies alluded to by the IRB remain to be seen, but
experts in digital currency mining could potentially fall under
IRB’s radar.
• Similarly, this factor must be considered together with the
other badges of trade. For example, in the conventional
context of property transactions, the Court in Cash Band
held that rectification and refurbishment work on the property
in question (i.e., a golf club) showed the taxpayer’s genuine
intention to run the golf club and was not an alteration of
property to render it more saleable.
(e) Methods employed in disposing of property
• The Guidelines state that extra effort made to find or attract
purchasers for digital currencies is indicative of trading.
However, as it is broadly known, selling digital assets on
digital platforms or cryptocurrency exchanges is generally a
more straight-forward process when compared to a
conventional sale of land and property. Therefore, the
conventional analysis on methods of disposal of land and
property cannot be directly applied on digital asset
transactions.
•Nevertheless, engaging digital asset experts or agents to
carry out or advise on trades could again fall under IRB’s
radar.
(f) Circumstances responsible for sale
• A forced sale e.g., due to a sudden emergency or
unanticipated need for funds or threat of foreclosure by
creditors would indicate that the transaction is not in the
nature of trade.
Conclusion
Notwithstanding the above, it must be borne in mind that no
single badge of trade is decisive on its own. As such, all the
facts and circumstances would have to be carefully
considered when determining whether the gains / losses from
a transaction (whether involving real property, shares or
digital currencies) are taxable / deductible under the ITA.
It is advisable to seek legal advice at the earliest opportunity,
perhaps even before engaging in trading, to minimise
exposure to taxes and penalties under the ITA.
If you have any queries, please contact the author, Ng Jack
Ming (njm@lh-ag.com) or partners, Dato’ Nitin Nadkarni
(nn@lh-ag.com) and Jason Tan Jia Xin (tjx@lh-ag.com), at
Head Office tax@lh-ag.com.