The profit or gain derived from cryptocurrency transactions may be subject to tax as trading income if the activity exhibits ‘badges of trade’ or characteristics indicative of trading. This differs from capital gains tax, which typically applies to profits from stock transactions.
Dr. Mohd Fairuz A Razak, Deputy President of the Malaysian Institute of Accountants (MATA), explained that the concept of ‘badges of trade’ is used in tax law to determine whether an activity qualifies as trading or business, thereby affecting how profits from such activities are taxed.
He said, “The ‘badges’ are a set of indicators that help differentiate between trading and investment, with six factors commonly used as determinants.”
“The first factor is the frequency of transactions. If the taxpayer frequently buys and sells cryptocurrencies, it may indicate trading rather than investment.”
“Secondly, the intention to make a profit. If the taxpayer’s primary purpose in buying cryptocurrencies is to make a profit from long-term investment, it tends towards trading.”
“Thirdly, the nature of the asset, as cryptocurrencies are generally seen as speculative assets, transactions involving such assets tend to be considered trading.”
“Fourthly, involvement, where the time and effort put in by the taxpayer in trading cryptocurrencies may show more than casual investment.”
“Additionally, if a taxpayer’s cryptocurrency trading activity is conducted in a business-like manner, with fixed strategies and monitoring, it may indicate trading.”
“Lastly, transactions with the intention to make short-term profits. If a taxpayer’s transactions are structured to achieve short-term gains, it is more likely considered trading rather than investment.”
“In many jurisdictions, if a taxpayer’s activity shows these ‘badges of trade,’ the profits or gains derived from cryptocurrency transactions may be taxed as trading income, rather than capital gains tax as typically applied to investments,” he said.
Therefore, he emphasized the importance for taxpayers to consult with tax advisors or accountants proficient in cryptocurrency tax law within the relevant jurisdiction to understand how these principles apply specifically to their situations.
Meanwhile, LHDN has identified individuals and companies involved in cryptocurrency trading to enhance tax compliance and minimize revenue losses.
Datuk Dr Abu Tariq Jamaluddin, CEO of LHDN, indicated that they are scrutinizing transaction data to assess tax liabilities based on transaction frequency.
The updated Electronic Commerce Taxation Transaction Guidelines, applicable since May 2019, govern digital currency activities in Malaysia. These guidelines stipulate that income derived from digital currencies within Malaysia or received from abroad is taxable under Section 3 of the Income Tax Act (ITA) 1967.
Recent data from Chainalysis revealed that Malaysian investors gained RM848 million (US$180 million) from the cryptocurrency market last year.
