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Tax Update: Guide to Crypto Taxation

We can all agree that COVID-19 has wreaked havoc on businesses and the global, economy, making 2020 and 2021 extremely difficult. However, for some people, the difficult time presented an unexpected chance. The investing industry is a prime illustration of this.

Many people turned to invest as a secondary source of income or as a strategy to increase the security of their financial future because they were plagued by financial anxieties. The retail average daily trading value (ADTV) at Bursa Malaysia, for instance, increased by 236% in 2020, making it the biggest retail ADTV ever recorded in the history of the stock exchange operator.

In the middle of all of this, the epidemic years saw cryptocurrency reach the pinnacle of its global appeal, especially in Malaysia. Due to this tendency, an increasing number of local crypto investors are unsure if any taxes are applied to their digital assets. If you have been following the situation, you are aware that the Inland Revenue Board's (LHDN) initial instructions on the subject were a little ambiguous.

However, the public will now have a better grasp of the tax treatment of cryptocurrency thanks to the recent publishing of the Guidelines on Tax Treatment of Digital Currency transactions.

Before we talk about the guideline given by the LHDN,

What is a Cryptocurrency?

Blockchain technology serves as the foundation for the decentralized digital currency known as cryptocurrency. Since they are encrypted, it is nearly hard to counterfeit or double-spend them. For example, transactions involving Bitcoins are recorded using nicknames in order to protect the confidentiality of the parties’ identities. This makes the entire system unknown. A bitcoin wallet is where bitcoins are kept. In essence, a bitcoin wallet is nothing more than a list of bitcoin addresses. A genuine private kay was used to create each of the bitcoin addresses.

So, now you know what cryptocurrency is.

What’s the state of Cryptocurrency in Malaysia?

The use of cryptocurrency is growing both internationally and in Malaysia. With an estimated RM21 billion in cryptocurrency assets, Malaysia ranks rather strongly in terms of cryptocurrency ownership, 20% more than a global average of 15%.

But are cryptocurrencies taxable? Because its earnings would be greatly reduced if taxed, this is crucial to ask. LHDN had previously responded to this query with a straightforward rule that cryptocurrency is only taxed if exchanged (in the nature of trading) but not as an investment (capital in nature).

As of 26th August 2022, LHDN released a detailed guideline on Tax Treatment on Digital Currency.

Is Cryptocurrency taxable or not?

It is taxable when:

1. The person is trading (continuous, systematic, active).

2. Doing business such as mining cryptocurrency.

3. Paying salary in crypto (deductible with business expenses).

It is not taxable when:

1. They are investing.

2. Buying cryptocurrency to pay for goods and services.

What is considered Trading?

LHDN bases its determination of what counts as a trade on eight different factors:

1. Large quantity

2. Short ownership duration

3. High-frequency transaction

4. Work done to make the cryptocurrency more marketable

5. Not force circumstances (e.g. Sudden need for cash)

6. Business as a motive

7. Getting short-term financing to purchase crypto

8. Other factor/documentation (feasibility study, documentation)