a. Would only be chargeable on revenue gains 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.

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:

 

• The nature and the intention of holding the digital asset

 

• It is an investment holding

 

• Its intention was to hold the digital asset as

 

• 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.

 

• Period of ownership

 

• The digital asset has been held for a considerable amount of time prior to its 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.

 

• 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.

 

• 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.

 

• 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
• Nevertheless, engaging digital asset experts or agents to carry out or advise on trades could again fall under IRB’s radar.

 

• 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 tax@lh-ag.com.

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REFERENCES:

¹ Guidelines on Tax Treatment of Digital Currency Transactions, which can be accessed here:

https://phl.hasil.gov.my/pdf/pdfam/GUIDELINES_ON_TAX_TREATMENT_OF_DIGITAL_CURRENC Y_TRANSACTIONS.pdf?fbclid=IwAR0QLEMO2m96pYKvOr0302XuI2riMqbRdJFUBqFEkOmCzRvqh l9LUPgkF14

² Guidelines on Taxation of E-commerce Transactions (e-CT)

³ Page 3 & 4 of this Alert.

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