NFTs income could be taxed on surge of digital investments


THE rising interest and money in blockchain ecosystems in Malaysia have put digital assets like NFTs (non-fungible tokens) squarely in the sights of the Inland Revenue Board (IRB).

The rapid growth of investments in digital assets around the world has already prompted the South Korean government to put a tax on NFTs, the first country to do so.

Many countries have been reviewing NFTs taxation, whether to impose capital gain taxes based on existing rules or frame new tax regulations similar to cryptocurrency.

Ernst & Young Tax Consultants Sdn Bhd partner Koh Leh Kien said earlier this year, IRB mentioned that active cryptocurrency investors will be required to declare their gains in their annual income tax returns.

“It said that income earned from digital platforms will be treated the same as income from conventional businesses,” Koh said in an email reply to The Malaysian Reserve (TMR).

Recently, Malaysian rapper Namewee became an overnight millionaire following the release of his latest song “Fragile” as an NFT, according to a report by Malay Mail.

Here is how the millionaires are made through NFT: The creator will receive a transaction every time its creation is sold which is trackable on the blockchain system where people can bid for it.

“Applying the same general taxation principles, IRB will likely view the income earned from the disposal of NFTs to be taxable if the NFT owner is actively trading in NFTs or cryptocurrencies,” stated Koh.

NFTs allow people to buy or sell “data” — dubbed as digital assets in the digital platform — ranging from a picture, audio, video, social media post or anything that is considered “unique” to the digital community.

Similar to cryptocurrencies, the supply of NFTs can be limited and is set by their creator.

However, Koh said IRB has not issued any specific guidelines on the tax treatment of digital currency, digital assets and NFTs thus far.

“Given that NFTs are commonly bought using cryptocurrencies and are traded on digital or online platforms similar to cryptocurrencies, it is likely that both NFTs and cryptocurrencies may be viewed broadly as digital assets,” she noted.

Nevertheless, she said the tax for NFT owners needs to be determined on a case-by-case basis as gains of a revenue nature are subject to tax, while capital gains are generally not.

“In order to determine whether gains from trading in NFT or cryptocurrency are revenue or capital in nature, one needs to consider the badges of trade and its respective elements,” she pressed.

According to Koh, several elements need to be considered including profit-seeking motive, frequency of transactions, period of ownership, the subject matter of the transaction, methods employed in the sale and circumstances giving rise to the sale.

“As a general rule, gains realised by an NFT creator or owner who actively sells or trades in NFTs may likely be treated as revenue in nature and subject to income tax.

“Whereas gains on disposal for a long-term investor in digital assets may be seen as a capital gain that is currently not taxable as they do not relate to real property in Malaysia,” she said.

She opined that IRB is likely to scrutinise claims by taxpayers that they are long-term investors in such assets given that digital assets are usually created or acquired for speculative purposes.

Besides, she highlighted that a person who purchases NFT using cryptocurrencies will be “disposing” off cryptocurrencies (in exchange for NFTs), hence the taxability of any uplift in value on the cryptocurrencies needs to be considered as well.

Regardless of whether NFT is viewed as a digital asset or a work of art, Koh pressed that the taxation of NFT would be based on its nature and its usage — whether it is actively traded and elements of the badges of trade exist, rather than the label the NFT takes.

“To draw parallels to conventional non-digital transactions, if a person regularly trades in the art for profit, any gains are likely to be revenue in nature and hence taxable,” she further said.

Separately, TMR had contacted IRB regarding the NFTs taxation, but no response was available at press time.