The Inland Revenue Board (IRB) announced that they conducted a special operation to reduce tax leakage in cryptocurrency trading. We speak to SM Thanneermalai, Founder & Managing Director of Thannees Tax Consulting Services as to who and when is a person liable for this based on the guidelines.

Image Credit: fabrikasimf / Freepik.com

Presenter: Wong Shou Ning, Shazana Mokhtar, Philip See

Producer: Jake Lim

Podcast Transcription

Shazana Mokhtar:
We're turning our attention first to the cryptocurrency sector, specifically in Malaysia. In a statement last Saturday, the Inland Revenue Board, or IRB, announced that they conducted a special operation to reduce tax leakages in cryptocurrency trading.

Philip See:
Dubbed Ops Token, the operation was held simultaneously in 10 locations around the Klang Valley.

The IRB also said they will be analysing the data obtained to determine the value of the cryptocurrencies traded, the profits generated and the value of tax leakages.

Wong Shou Ning:
The board further stated that the operation found that several companies and partnerships formed specifically for the purpose of cryptocurrency trade transactions to avoid declaring taxes. Now, with the estimated total value of cryptocurrency transactions in 2024 being RM1.4 trillion, the board's CEO said that individuals trading in cryptocurrencies are subject to income tax.

Having said that, are these operations actually effective in curbing tax leakages?

Shazana Mokhtar:
For some thoughts on this and to answer all our questions on cryptocurrencies and tax, we speak to SM Thanneermalai, Founder & Managing Director of Thannees Tax Consulting Services. Thannee, good morning. Thanks so much for joining us.

Can we start off with just getting an understanding about IRB's stance on cryptocurrencies or digital assets? Is it taxable? And why is there so little awareness about the tax regime on cryptos?

Thanneermalai:
Yeah, good morning and thank you for inviting me. Yes, IRB's position is very simple. It's got to... you've got to look at it and see whether it is actually a financial asset or is it currency.

They certainly, when it comes to Securities Commission, Bank Negara... they don't regard it as currency. They regard it as a financial asset. And as far as the IRB is concerned, they have not come up... and not only IRB, Malaysia itself does not have any specific tax rules or legislation on cryptocurrency. So that's point number one. All they have is guidelines.

And you go back to the common law principles. Basically, are you trading? Are you actually investing? So it's got to be very clear, very simple. Is it a financial asset or currency? It is a financial asset as far as the tax authorities are concerned, and SC and everybody else regards it as a financial asset.

That's number one. The number two principle is very simple. Is it capital or revenue? Are you holding it for investment purposes? And if you can prove it is for investment purposes, then you are not actually taxable because there is no capital gains on such assets.

So our capital gains is extremely limited and it's only on real property and on specific unlisted shares held by companies, etc. So the third point is, are you trading an investment? Unless you're trading, you're not taxed. The fourth thing is, we don't care about whether it's illegal or not illegal.

As far as taxation is concerned, even illegal activities are regarded and you can be brought to tax. So those are the basic principles. So as far as the revenue is concerned, this is a grey area.

It is not exactly cut and dry. So if you are now coming into the Ops Token, the recent one that they have taken, gone to 10 different offices, picked up... I don't know exactly which companies they've actually gone in because you've got the platform providers, Luno... there are six of them actually registered with the Securities Commission who are actually transparent. Then there are others who do peer-to-peer trading who may not be transparent.

So I don't know whether these are all unlicensed by the Securities Commission. If they are, then the question comes to... they'll be earning a fee, of course it will be taxable, but the people who actually use these informal exchanges, particularly the peer-to-peer where you're outside the normal platforms that are approved by the Securities Commission, then those people will now be under scrutiny. And you've got to make a distinction between individuals and companies who are investing money, who intend to make a profit.

So that's where we are coming in from. So those are the kind of basic principles. So it's not exactly cut and dry as to whether you should be taxable or not.

Wong Shou Ning:
So then what do we do? If let's say I'm an individual, and I occasionally buy some cryptocurrencies through one of the licensed platforms by Bank Negara, am I subjected to some form of tax? Do I need to declare it? How do I declare it?

Thanneermalai:
Well, I'll keep it simple. If you're buying this and your intention is just to see if there's a realisation of that profit in time to come, maybe six months, one year later, and your intention is very clear that you want to invest in it, then you are not taxable. As far as an individual is concerned, it's a lot.

But you must have the records: when did you buy and when are you selling it? But if you're doing it 10 times in a year or 20 times in a year regularly, then it'll be subject to tax. It's just like dealing in shares.

If you're going into the stock exchange and you're dealing with it on a daily basis, weekly basis, you're going to be taxable on the gains. But if you're investing in it and keeping those shares and selling it as an investment, then it's not. It's the same principles that come into the picture.

There's nothing funny or illegal about cryptocurrencies. The only problem with cryptocurrencies is when it comes to shares, everything is transparent because you have to go through the stock exchange. Whereas in the cryptocurrency market, there is the formal exchanges where data is available and the Inland Revenue and all these, whether it's UK, India, anywhere else in the world, Singapore, everywhere, they get this data.

They're actually collecting this data and they know exactly how quickly, how often you are actually transacting in it and they come after you. So individuals who are regularly dealing with it, they will be taxed.

And now with crypto, the way they've gone about it is like, if you're dealing in crypto, there's a lot of fear. This Ops Token is actually what has created this awareness, this fear. But at the same time, individuals who have been dealing with it have taken the position also: I may not need to declare it.

And after all, how will they know about it? No, no, that's wrong. If you're dealing in these exchanges, the information is fully available. Now that they visited these 10 locations, now the problem is all these individuals who have been using the companies to actually trade are now going to be called on, and all of them have to be answerable as to whether they are investors or whether they are traders.

And if they have no records, the chances are revenue will take the benefit of the doubt and say you are trading in it and you're going to be subject to tax.

Philip See: Should we improve our guidelines?

Thanneermalai:
Our guidelines were issued in 2022. It's very generic.

It's very similar to what Singapore has issued, perhaps, but Australia and UK and India tax it as capital gains. We don't tax it, but we are very similar to the Singapore one. So we follow the Commonwealth rules, because we follow the common law rules.

We follow what is actually the normal principles of trading versus investment in all Commonwealth countries. So it is not that once you go into cryptocurrencies, you've gone into an area that's black or grey. The only problem with cryptocurrencies is when you enter, your money is actually declared money.

You've earned the money in employment income, you've earned it, you've declared it. But once it gets into the crypto area and you don't use these formal exchanges, you use all these outside the formal exchanges, then the problem comes to: when you start extracting the money out, how do you get that? And the problem is many of them will get it in different forms that don't become declared. So if you want to make it white, then you have to declare it somewhere in the world to the tax authorities.

The problem is many people don't declare it and they tend to keep it undeclared thinking nobody will actually find it. And there are indirect ways of finding it. You see, the last point I'll make is what's going to happen with individuals? They're now already going after... the IRBs are actually going after indirectly by asking for capital statements or the growth in your net wealth year to year.

You can identify if your net wealth has grown, where has it grown from? So sources, that's going to be the issue that's going to come up. And there are other means also, because with the use of AI, etc., you have so many areas where you can actually profile the taxpayer. It's amazing the amount of information that we have in the database on individuals and also companies and transactions that if you put a good AI person, a number of them together, they will dig out information.