In today's WH Insights video, Aleksandr Belugin, Junior Associate at WH Partners talks about tax and NFTs. WH Insights is a video series discussing key legal concepts, trending legal topics, news and legal updates.
If you as a foreigner relocate to Malta and sell an NFT you might not have to pay taxes.
Persons that relocate to Malta would be considered as resident but not domiciled and will not be subject to tax on capital gains arising outside of Malta. This is because Malta taxes non-domiciled but resident individuals on a remittance basis. By “remittance” we mean things like sending the money to a Maltese bank account or buying things in Malta using proceeds from foreign capital gains.
Additionally, when a person is a resident but not a domiciled individual, and he generates income outside of Malta, so long as that person does not remit it to Malta, he will not be subject to income tax in Malta.
This is why it is important to determine if selling some NFTs would be considered as income or capital gain. Now, NFTs are not mentioned in our Maltese tax laws and therefore we should refer to the general principles of taxation.
Only certain capital gains are taxed, NFTs not being explicitly mentioned by the law. This means that if a person realizes a capital gain, he might not need to pay tax on it. On the other hand, if the person is trading in NFTs, then he will be subject to income tax in Malta. So how does one determine whether the transaction is one of trading income or of capital gain?
Well, it depends on a series of factors we call in the jurisprudence “badges of trade”. They help us understand if the transaction would be seen as making a trading income or realizing a capital gain.
Here are some of the most important badges of trade:
1. How often the person buys and sells? If a person does it frequently he might be considered to be a trader.
2. Was there an element of personal enjoyment? Did the person buy the NFT to enjoy it and have pride of possession and then later has decided to sell it? Purchasing something for personal pleasure can point towards the transaction being considered a capital gain rather than a trading one.
3. How has the person financed the purchase of the NFT? Did the person use a loan for instance? If one has financed the transaction instead of paying out of their own pocket this could point towards the transaction being of a trading nature.
Badges of trade are used as guiding tools, not as a checklist. One must look at the entire picture and see what a reasonable person would conclude.
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.
