LHDN has started to ‘go after’ players who have been making hefty profit from the cryptocurrency investments

by AFIQ AZIZ / pic by BLOOMBERG

THE historic rise of bitcoin may have left its players with a fat wallet, but they may choose to lay low about their profits to avoid being under the tax regulator’s radar, industry players said.

A digital asset holder told The Malaysian Reserve (TMR) that the Inland Revenue Board (LHDN) has started to “go after” crypto players who have been making hefty profit from the cryptocurrency investments since the last couple of years.

“But it is still vague on how they would come with the tax rate,” the source said.

“It does make sense to tax someone, if the person has made hundred times of profit through whatever investment, including (one that is) generated by the digital asset,” an investor who spoke under the condition of anonymity told TMR.

According to the source, there are many cryptocurrency holders in Malaysia, but most would prefer to remain silent due to issues of tax and safety.

The investor was commenting on a recent LHDN letter to a taxpayer sighted by TMR, stating that the person is required to declare a total RM108,560 of income which was earned from cryptocurrency. TMR has reached LHDN for comment.

Bitcoin’s price has skyrocketed this year, passing the RM266,000 mark last month compared to only RM30,000 year-on-year based on value stated by the registered cryptocurrency exchange, Luno Malaysia Sdn Bhd.

In 2013, the digital coin cost slightly above US$1,000. The price spike in bitcoin, followed by other alternative coins, has attracted the attention of the taxmen, but due to the limitation of “access” to the digital assets, which is governed through a decentralised blockchain network, there is no single formula for regulators around the globe to tax crypto asset traders.

In January, LHDN told TMR that digital asset investors in Malaysia would not be spared from paying tax.

LHDN said it will require cryptocurrency traders to declare their gains via their annual income tax declaration.

However, this will only apply to those who are actively trading the digital currency, and income generated from the digital platforms will be treated similar to income generated through conventional businesses, as stipulated in Section 3 of the Income Tax Act 1967.

LHDN said the key elements that will be taken into consideration to tax cryptocurrency users are: If they are actively selling and buying the token, which will lead to a pattern of trade, or badges of trade.

A tax expert believes there will be few ways through which the LHDN would be able to trace and tax those who are benefitting from cryptocurrency trade.

Tricor Services (M) Sdn Bhd non-executive chairman Dr Veerinderjeet Singh said one way could be to check the money transacted from digital asset exchange’s (DAX) accounts to users’ accounts.

“If they find some huge amount transacted, then maybe they can ask for data from the DAX. This is where they can see the element of the ‘badges of trade’ to justify whether one is taxable or not,” he told TMR.

Veerinderjeet, however, said there is no single formula to determine the pattern. “It merely signs, which can lead to telling that you are an active player, hence a dealer or a trader of the currency.

“An example is when you sell a position so fast, it is a sign you are a trader. Or, you sell and buy so many times, that may give a sign you could be a dealer.

“Thirdly, if you use the money to buy crypto from a loan you take, then the earnings are used to pay back the loan.

“This shows that you have an intention to be a trader because you are borrowing the money, hence the profit from the crypto is being used to pay back the loan,” said the tax expert.

“The last point is, that you have an intention to make profit. If all these elements exist, at a considerable rate, then there is a higher chance for you to be taxed. But if there is one trade at a time or merely part time, I do not think it fulfils the badges of the trade element,” he added.

Nevertheless, Veerinderjeet said cryptocurrency holders can always argue their case with LHDN or to some extent at the court because there is no threshold so far for cryptocurrency taxes and because it is not a capital gain tax (which currently only applicable for disposal of property in real estate and stocks).

“Unless LHDN, through a law amendment, describes digital assets in this bracket, then only we would have a proper threshold,” he added.

Besides money transactions, Veerinderjeet said the tax collector could go after transactions of assets, like land, houses and cars.

If there is any suspicion, LHDN would ask where the money came from and if it is from cryptocurrency trading, then the law explained earlier would be applied, said Veerinderjeet.

As of now, governments around the world have a different approach to taxing cryptocurrency.