Legal Regulation of Taxation of Cryptocurrency Turnover: A Comparative Legal Study of the Tax and Legal Regulation of the Republic of Malta and the Russian Federation

Titorenko Semen Konstantinovich Lecturer, Department of International and Public Law Department, Financial University under the Government of the Russian Federation 125167, Russia, Moscow, Leningradsky ave., 49/2 titorenko96.st@gmail.com Other publications by this author

The Russian Federation has introduced Federal Law No. 324-FZ dated 14.07.2022 "On Amendments to Part Two of the Tax Code of the Russian Federation" ^[1] on Taxation of digital Financial Assets and digital Rights, including both a digital financial asset and a utilitarian digital right (hereinafter referred to as the "CFA").

However, the CFA enshrines the legal concept of a token, a derivative instrument based on distributed ledger technology, but not a foreign currency. Consequently, there is no legal regulation of taxation in the Russian Federation

Based on the provisions of the Tax Code of the Russian Federation, persons involved in the turnover of cryptocurrencies have an obligation to pay tax when conducting transactions with cryptocurrency in any case.

A feature of the legal regulation of cryptocurrency turnover in the Russian Federation is the creation of a separate law aimed at comprehensive regulation of cryptocurrency turnover. So, from January 1, 2021 Federal Law No. 259-FZ dated 31.07.2020 "On Digital Financial Assets, Digital Currency and Amendments to Certain Legislative Acts of the Russian Federation" ^[2] (hereinafter referred to as the "CFA Law") came into force, the introduction of this law confirmed the legal status of the token and as a result became the basis for calculating and paying taxes for transactions made with tokens, in terms of taxation of income received from the turnover of cryptocurrencies, the issue remains debatable, since the concept of "digital currency" is not identical to the scientific and technical concept of cryptocurrency.

The Maltese government actively encourages the development of the cryptocurrency industry and has issued many public reports and other documents discussing the regulation and development of the cryptocurrency industry, in order to provide the necessary legal certainty to allow this industry to flourish.^[3] In 2018, Malta passed the Virtual Financial Assets Act, ^[4] the Innovative Technologies and Services Act ^[5] and the Malta Digital Innovation Act of Malta. ^[6] The purpose of these laws is to provide regulatory certainty, protect those who invest in virtual currencies, and encourage the development of the innovative technology sector in Malta ^[7].

Malta's Commissioner of Revenue has published a guide on the taxation of assets based on distributed ledger technology in 2018, which describes how income tax, stamp duty and value added tax (VAT) should be applied to cryptocurrencies. ^[8] The Guidelines divide tokens into different categories:

• financial tokens, which are assets based on distributed ledger technology that have qualities similar to shares, debt obligations, shares in collective investment schemes or derivatives including financial instruments;

• service tokens, which are assets based on distributed ledger technology, the usefulness, value or use of which is limited exclusively to the purchase of goods or services or exclusively within the framework of the platform based on distributed ledger technology on which they are issued, or in connection with which they are issued, or within a limited network of platforms based on distributed ledger technology registers; and

• hybrid tokens, which are a mixture of both financial and service tokens, the handling of which depends on the way the token is used.

The guide notes that the taxation of any token will not necessarily be determined by its categorization, but will depend on the purpose and context in which it is used.

Any profit received from assets classified as financial tokens should be treated as income for tax purposes. Profit is the value of any transferred assets or remuneration for any transaction related to crypto assets should be determined based on the market value of crypto assets. The market value should be determined by reference to the exchange rate set by the Maltese authorities, and in cases where this is not possible, by reference to the average quoted price on reputable exchanges at the date of the transaction or using such other methodology as the Commissioner of Revenue deems acceptable.

The Income Tax Law requires individuals to keep proper records, and this applies to transactions related to assets based on distributed ledger technology. Any value of these assets should be determined in accordance with the currency that the taxpayer uses to present its financial statements.

Any payments made using crypto assets are treated in the same way as any other currency for profit taxation purposes, and there is no difference in how income is recognized or how taxable profit is calculated. This principle applies to all forms of remuneration. Notable:

The income received by the owner of financial tokens from their assets, such as payments equivalent to dividends, interest, bonuses, etc., in cryptocurrency or in another currency, or in kind, is considered as income.

The tax regime for the transfer of financial tokens depends on whether it is an operation for the taxpayer within the framework of entrepreneurial activity or not.. Profits from entrepreneurial activity are taxed, but capital gains are taxed only if the financial token meets the definition of a security in accordance with Article 5 of the Income Tax Law. ^[9] Transfers made in the course of entrepreneurial activity are taxed as a trading operation. To determine whether a transaction is made within the framework of an entrepreneurial activity, income tax rules are applied, and a test for the presence of an entrepreneurial purpose (a set of principles arising from case law) can be used. Any profit received from the sale of crypto assets acquired with the intention of making a profit is considered as trading profit.

If the transfer of crypto assets is not considered as a transaction made within the framework of entrepreneurial activity, then it is necessary to determine whether crypto assets meet the definition of securities in accordance with Article 5 of the Income Tax Law, which defines: securities as shares and units and similar financial instruments that in any way participate in the company's profits and the profitability of which it is not limited to a fixed rate of profit.

If crypto assets meet this definition, they are subject to capital gains tax. Crypto assets that do not meet this definition fall outside the scope of capital gains tax. This analysis is also applicable to the transfer of convertible tokens until they are converted into securities.

VAT is applied to crypto assets in accordance with the general provisions of the VAT Law, there are no special features.

There are no tax laws or regulations in Malta that specifically apply to crypto asset mining. The manual on taxation of assets based on distributed ledger technologies notes that mining is usually not subject to VAT if the miner does not provide other services:

For the purposes of VAT taxation, the object of taxation arises when a miner provides a service for a fee. Moreover, as established by case law, there must be a direct link between the remuneration to be paid and the service rendered, and where, between the contractor and the customer of the services, there is a counter-performance.

Accordingly, in cases where mining is a service for which the miner receives remuneration in the form of newly acquired cryptocurrencies as a result of mining, mining usually does not have a specific customer for such a service, so in this case it goes beyond VAT, since there would be no direct connection between the compensation received and the service provided and therefore, there would not and should not have been a counter-execution between the customer and the contractor.

On the other hand, if miners receive payment for other activities, such as the provision of services in connection with the verification of a specific transaction for which a specific payment is made to a specific client, a VAT object will arise. In this case, since such a service will be considered rendered in Malta, Maltese VAT will be applied at the usual rate. ^[10]

Also, there are no laws or advisory acts of departmental state bodies in Malta regarding the taxation of income received as a result of airdrop. The tax may be levied depending on the circumstances of the airdrop. Also, there are no tax laws or advisory acts of departmental state bodies that would apply to staking or forks in blockchains.

In the Russian Federation, Bill No. 127303-8 "On mining in the Russian Federation" was rejected, but it offered an independent version of the definition of the concept of "mining".

The proposed version of the definition of mining, in general, reflects the importance of this operation for maintaining the functioning of the turnover of cryptocurrencies. This definition indicates that miners carry out paid activities to maintain the turnover of cryptocurrencies in exchange for the received cryptocurrency, in connection with this conclusion, it can be assumed that the received cryptocurrency will be recognized as income for tax purposes at the time of crediting the cryptocurrency to the miner's account.

The issue of taxation of income of organizations and individuals providing mining services for third parties has not been considered in detail, but in fact, organizations engaged in this type of activity exist in the Russian Federation.

The Republic of Malta does not have a special tax and legal regulation of the turnover of cryptocurrencies and tokens, unlike the Russian Federation, where not only the CFA Law has been adopted, but also tax and legal regulation has been introduced in terms of the turnover of tokens.

However, it should be recognized that there are no draft laws in the Russian Federation aimed at introducing legal regulation of taxation of the activities of persons providing services to participants in the cryptocurrency turnover market.

The legal regulation of the activities of this group of persons is especially relevant, since it is carried out not within the framework of a distributed registry system, but through controlled payment systems.