On the other hand, the ITA 1967 does not explicitly address digital currencies, hence the Inland Revenue Board of Malaysia (IRBM) adopts the existing general tax principles supplemented by guidelines and case precedents to determine the tax implications of digital currency transactions. According to the IRBM’s published Guidelines on Tax Treatment of Digital Currency Transactions dated 26 August 2022, digital currencies are treated as intangible assets for taxation purposes that may generate taxable income or capital gains depending on the transaction context.
Income tax implications
Generally, the taxability of digital currency transactions in Malaysia is governed by S. 3 of the ITA 1967 which provides that income accruing in or derived from Malaysia or received in Malaysia from outside the country is subject to income tax. The IRBM considers transactions involving digital currencies to be taxable where key activities and business operations are carried out in Malaysia or where the business has a presence in the country. However, the determination of taxability ultimately depends on the specific facts and circumstances surrounding each case.
As Malaysia does not impose Capital Gains Tax (CGT) on digital assets, only revenue gains arising from the disposal of digital currencies are subject to tax. The distinction between revenue and capital gains is critical in determining whether gains from digital currency transactions are taxable. An individual or entity that actively trades in digital currencies may be viewed as carrying on a business in line with S. 4(a) of the ITA 1967. In such cases, the gains from the trading activity are likely to be characterised as revenue in nature and therefore taxable under the income tax law. On the other hand, an individual who trades occasionally or holds digital currencies as a long-term investment may be considered to derive capital gains which are not subject to tax in Malaysia.
The expenses incurred by entities that actively trades in digital currencies which are wholly and exclusively in the production of income shall be deductible pursuant to S. 33 of the ITA 1967 and not prohibited under S. 39 of the ITA 1967. Accordingly, gains or losses arising from the disposal of digital currencies or digital tokens that are assessed to be trading in nature would be taxable or deductible respectively. If the allowable expenses incurred in the cryptocurrency business during the basis period exceed the gross income, this will result in an adjusted business loss. Where such a loss cannot be fully absorbed in a particular Y/A, the unabsorbed portion may be carried forward to offset against subsequent Y/A. However, the carry-forward period is limited to ten (10) consecutive Y/A, beginning immediately after the year in which the loss arose. Any remaining unabsorbed loss after the ten-year period must be disregarded. In contrast, disposals that are deemed to be capital in nature would not give rise to any tax liability or entitlement to deduction.
The IRBM applies the badges of trade concept to distinguish business income from capital gains. The assessment of existence of a trade takes into account various factors, including:
- Nature of subject matter
Digital currencies acquired in substantial quantities may be regarded as trading stock.
- Length of ownership
Shorter holding periods are more indicative of trading intent.
- Frequency of transactions
Repeated and similar transactions suggest a trading pattern, unlike isolated transactions.
- Supplementary work
Activities undertaken to enhance the marketability of digital currencies or to attract buyers may point to trading.
- Circumstances of the realisation
Disposals made under special conditions such as urgent need for funds or threat of foreclosure may indicate non-trading motives.
- Motive at point of acquisition
A clear intention to trade evidenced by structured business conduct including preparation of a business plan, maintenance of accounting records and advertising efforts supports a revenue classification.
- Mode of financing
Short-term financing is generally more indicative of trading activity. The company’s overall financial position and its capacity to retain the digital currencies over time will also be taken into consideration.
- Other factors
These may include feasibility studies, internal documentation or other forms of evidence that demonstrate the company’s intention with respect to the digital currency.
It is important to note that no single factor is conclusive on its own, rather all relevant indicators must be assessed collectively to determine the appropriate tax treatment. Where the overall assessment points to the presence of trading activity, the resulting gains will be regarded as revenue in nature and subject to income tax.
The landmark case that established the foundational principles that are relevant to the taxation of digital assets are Lower Perak Co-operative Housing Society Bhd v. Ketua Pengarah Hasil Dalam Negeri (1994) 2 MSTC 3,406. This case established the application of the badges of trade, the set of criteria used to assess whether a transaction gives rise to revenue income or capital gains. Taxpayers involved in cryptocurrency transactions must assess their activities in light of these indicators to determine the appropriate tax treatment.
Examples of taxable scenarios
- Trading of Digital Currencies
Where a business engages in the purchase and sale of digital currencies as part of its ordinary trading activities, any profits derived shall be treated as taxable business income. Such transactions are to be accounted for in a manner similar to the trading of stock-in-trade. Accordingly, expenses incurred wholly and exclusively in the production of the income as well as trading losses are allowed to be taken into account.
- Mining of Digital Currencies
Digital currency mining operations undertaken with a profit-making intent fall within the ambit of taxable business activities. Income arising from such activities is assessable under ITA 1967. Business-related expenses and operational losses are allowable as deductions.
Where the digital currencies obtained from mining are disposed, the nature of the gain whether capital or revenue shall be determined by reference to the badges of trade. In circumstances where mining is conducted on behalf of a third party and the mined tokens are transferred to that party, the fees earned by the miner for such services shall constitute taxable income.
- Use of Digital Currencies in Business Transactions
Where digital currencies are used as a mode of payment in business transactions whether for sale of goods or services or for acquisition of assets, such transactions shall be recorded in RM, based on the open market value of the digital currency at the date of transaction. These receipts or payments shall be treated as business income or expenses respectively and accounted for in a manner consistent with standard business accounting practices.
- Payment of Salaries and Wages in Digital Currencies
Salaries or wages paid to employees in the form of digital currencies are deductible as business expenditure. In the hands of the employee, such remuneration constitutes taxable employment income. The value of the salary or wage shall be determined based on the contractual terms of employment and the value of employment services performed. Employers remain subject to their obligations under the Monthly Tax Deduction (MTD) Rules, notwithstanding the mode of payment.
Examples of non-taxable scenarios
- Investment in Digital Currencies
Where a business acquires digital currencies for investment purposes, the tax treatment of gains upon disposal shall depend on the nature of the transaction. Gains that are capital in nature, typically arising from long-term passive holdings are not subject to income tax in line with Malaysia’s current position on capital gains. The mere disposal of digital currency held as an investment is regarded as realisation of an investment. Consequently, the income derived from such disposal is not subject to tax and any related expenditure incurred in connection with that income is not deductible.
Conversely, where the investment activities are frequent, systematic and profit-oriented, such gains may be characterised as revenue in nature and accordingly subject to tax. Gains or losses are determined from the difference between the proceeds from disposal and the adjusted cost of acquisition, including all incidental expenses to acquire the digital currency such as fees, commissions and other acquisition costs.
- Use of Digital Currencies Solely for Payment
Where digital currencies are acquired solely for the purpose of effecting payments for goods or services and not for trading purposes, such transactions are not regarded as income-generating and thus do not give rise to a tax liability. However, should it be established that the transaction is part of a broader revenue-generating activity, the gain or benefit arising may be subject to tax depending on the specific facts and circumstances.
- Free Distribution or Splitting of Digital Currencies
Digital currencies received gratuitously and/or for free as a promotion or marketing tool such as through airdrops or hard forks are generally not taxable at the point of receipt, provided there is no corresponding provision of goods or services. Nevertheless, if such tokens are later disposed and the gains are determined to be revenue in nature, the proceeds may be subject to tax. Furthermore, where digital tokens are received in exchange for services rendered, the value of the tokens at the time of receipt shall constitute taxable income to the recipient.
- Exchange of Digital Currencies
Where a business undertakes the exchange of one digital currency to another, the tax implications of any resulting gain or loss will depend upon the nature of the digital currencies held. If the digital currencies are classified as revenue assets, typically due to their use in trading or active commercial activities, any gain or loss arising from such conversions shall be recognised for tax purposes and treated as taxable income or allowable deduction. Conversely, if the digital currencies are held as capital assets, the gain or loss from the exchange would not be subject to income tax under Malaysia’s current tax framework which does not impose CGT on digital assets.
International tax perspectives for treatment of capital gains in relation to digital asset transactions
The treatment of capital gains arising from digital asset transactions varies significantly across jurisdictions, reflecting a broad spectrum of regulatory approaches. A number of countries including United Kingdom, Australia, India, France and Canada have implemented CGT regimes applicable to digital assets. In these jurisdictions, profits derived from the disposal of cryptocurrencies and similar digital assets are subject to taxation.
In contrast, other countries adopt a more lenient approach. Malaysia, Singapore and United Arab Emirates do not impose CGT on digital asset transactions under ordinary circumstances. In these jurisdictions, digital assets held for investment purposes are generally not taxed when sold at a profit. However, if such transactions are conducted as part of a trade or business, the resulting profits may be subject to income tax instead.
Some countries such as Germany and Portugal adopt a hybrid model. In these jurisdictions, capital gains may be exempt from taxation if certain conditions are met. Gains realised outside of these conditions may still be taxable. These variations illustrate the evolving global landscape of digital asset taxation.
Valuation methods
For Malaysia income tax purposes, the acquisition cost of digital currency must be determined in RM, reflecting its treatment as an intangible asset under the prevailing tax framework. The standard method for determining acquisition cost is the First In, First Out (FIFO) basis, unless the taxpayer is able to justify the use of an alternative method with sufficient evidence. In instances where the acquisition cost cannot be determined, the digital currency is to be valued at its fair value based on the prevailing exchange rate on the date of the transaction sourced from a recognised and verifiable digital currency exchange.
In cases where digital currency is received in exchange for goods or services, and the currency in question is not traded on any established exchange or lacks a published market value, the fair value of the digital currency is taken to be equivalent to the fair value of the goods or services exchanged at the time the transaction occurs. This ensures that such transactions are appropriately valued and accounted for in the determination of taxable income, even in the absence of an observable market price.
Tax reporting obligations
A cryptocurrency that was purchased and has appreciated significantly in value will not be subject to tax on unrealised gains as long as it remains held by the taxpayer and is not disposed or used in any transaction. Taxation only arises upon the disposal or use of the cryptocurrency, especially if the transaction is deemed to be of a revenue nature.
Where digital currency transactions are conducted frequently or with a profit-making intention, such activities are regarded as being trading in nature. The resulting gains from disposal are taxable under the ITA 1967 and must be reported in the annual income tax return using Form B for individuals with business income or Form C for corporate entities in the relevant basis period, irrespective of when the actual payment is received. Business-related expenses that are wholly and exclusively incurred in the production of income such as transaction fees and platform charges are deductible in computing taxable income.
Conversely, gains arising from the disposal of digital currencies held for long-term investment purposes are generally regarded as capital in nature. As Malaysia does not presently impose CGT on digital assets, such gains are not subject to tax and accordingly need not be declared in the taxpayer’s income tax return.
Potential tax disputes and audit risks
The increasing use of digital currencies in Malaysia has heightened IRBM’s audit focus, especially given the complexity and volatility of these transactions. To strengthen its oversight, the IRBM has implemented several strategies to trace cryptocurrency activities. These include collaboration with third parties involved in digital asset operations, participation in global Exchange of Information (EOI) initiatives with foreign tax authorities and professional bodies, and routine monitoring of social media, cryptocurrency platforms and related websites. Additionally, exchange operators and businesses providing financial services are subject to anti-money laundering and counter-terrorism financing regulations which enhances the transparency of digital currency transactions. Exchange operators in Malaysia are required to collect Know Your Customer (KYC) data including personal identification. This information enables the IRBM to cross-reference reported income of the said individual with actual transactions and to identify any unreported income from cryptocurrency activities.
In this context, several key areas have emerged as potential sources of tax disputes involving digital currency activities:
- Classification of income is a primary concern, particularly where taxpayers treat gains as non-taxable capital in nature, however IRBM re-characterises them as taxable business income based on trading frequency and intent. Thus, maintaining clear transaction records and documenting investment purpose is essential.
- Record-keeping deficiencies are another common issue. Inadequate tracking of acquisition costs, disposal values and exchange rates can lead to income being reassessed based on estimated figures. Consistent use of software tools and retention of supporting documents are recommended.
- Valuation and exchange rate discrepancies also arise due to inconsistent methods or underreported values. The IRBM expects the use of fair market rates, preferably from registered DAX platforms at the time of transaction.
- Undisclosed income from offshore exchanges may trigger investigations and significant penalties under Malaysia’s tax laws. Cryptocurrency transactions via foreign DAX are taxable if trading indicators exist, and mining income remains taxable if the activity occurs in Malaysia regardless of server location. Full disclosure and cross-border compliance are therefore essential amid increasing international data-sharing efforts.
- The tax treatment of mining rewards and airdrops is another audit area. Mining income is generally taxable upon receipt, while airdrops may be taxable upon disposal. Accurate recognition and proper documentation are necessary.
- Claims for deductions related to digital asset activities such as equipment and transaction fees must be substantiated. Only expenses wholly incurred for income generation are allowable.
Non-compliance may result in significant penalties in addition to unpaid taxes, interests and even prosecution actions. A recent enforcement action by the IRBM, Ops Token, which was conducted last year, demonstrated the IRBM’s extensive powers under S. 80 and 81 of the ITA 1967. These provisions empower the IRBM to access documents, request information from any person and obtain access to digital devices including disclosure of passwords and related credentials. Taxpayers’ refusal to cooperate may constitute an offence under S. 116 of the ITA 1967.
Compliance guidance for taxpayers
It is essential for taxpayers to adopt a proactive and structured approach for compliance. This includes conducting annual self assessments to evaluate the nature of their activities against the badges of trade to determine the appropriate tax treatment. Taxpayers should implement consistent and well-documented accounting and valuation methodologies, and fully declare all income arising from trading or mining activities. The maintenance of comprehensive and audit-ready records clearly distinguishing between personal and business expenses and properly substantiating all deductions is crucial. Contemporaneous documentation that reflects the intent behind each transaction will serve as critical support in the event of an audit or review by the IRBM. The key records for taxpayers to retain includes:
- Documentation that evidences the nature of each transaction (such as whitepapers).
- Records indicating the value of the digital currency at the time of transaction, based on prevailing online exchange rates.
- The date on which each transaction occurred.
- Identification details of the counterparty involved (such as their digital currency address).
- Receipts relating to the purchase or transfer of digital currency.
- Exchange platform transaction records.
- Other relevant supporting documents, including those pertaining to agents, wallet keys and software used.
- Bank statements.
- Receipts or invoices for business expenses paid using digital currency.
In view of the evolving tax treatment and regulatory oversight of digital currencies in Malaysia, it is imperative that taxpayers engaging in such transactions exercise a high degree of care and diligence in fulfilling their tax obligations. Robust compliance practices not only facilitate accurate reporting but also significantly reduce the risk of tax adjustments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Pugaleshwaran Raja Kumaran is the Executive Director, Tax at ThinkTx Consultants Sdn Bhd. He is a Licensed Tax Agent specialising in a full range of taxation services from corporate and personal tax advice to estate planning and special taxation litigation support. His focus area also includes expatriate tax compliance, planning and advisory. Additionally, he manages all manner of engagements from complex high-stake deals to single transactions and multi-jurisdictional matters.
Steffi Manisha Arokiam is the Associate Director at ThinkTx Consultants Sdn Bhd. An experienced tax adviser with more than 5 years in the industry, Steffi has managed a diverse portfolio of clients including MSMEs and public listed companies. Her focus area includes tax advisory, transfer pricing and international tax. She is also a Chartered Accountant, member of Chartered Tax Institute of Malaysia (CTIM) and a Certified HRDC Trainer.
