A article on understanding Malaysia's cryptocurrency tax and regulatory system

Author: FinTax

1. Overview of the basic tax system in Malaysia

1.1 Malaysia’s tax system

Malaysia's tax types are divided into direct tax and indirect tax. Direct taxes include: income tax, real estate surplus tax and oil income tax, etc.; indirect taxes include: domestic tax, customs and import and export tax, sales tax, service tax and stamp tax, etc. At the same time, the Malaysian federal government and local governments implement a tax sharing system. The federal government manages national taxation and is responsible for formulating tax policies. These policies are implemented by the Inland Customs Office and the Royal Customs Office. The Inland Customs Bureau is mainly responsible for direct taxes, such as income tax and oil tax; while the Royal Customs Bureau is responsible for indirect taxes, including domestic tax, customs tax, import and export tax, sales tax, service tax and stamp tax. The state government levies land tax, mineral tax, forest tax, license tax, entertainment tax, hotel tax and house license tax.

1.2 Main tax types

1.2.1 Corporate Income Tax

All income of a company registered in Malaysia is subject to income tax. For Malaysian local companies with paid-in capital less than 2.5 million RM2.5 million (including RM2.5 million), the tax rate for the first income of RM150,000 is 15%, and the tax rate for the part 150,000 to RM600,000 is 17%, and the income is then paid according to the standard, that is, 24%. For Malaysian local companies with paid-in capital more than RM2.5 million, the tax rate for foreign companies is 24%.

1.2.2 Personal Income Tax

The income obtained by residents in horses and income transferred from abroad to the country, as well as the income obtained by non-residents during their work in horses, are subject to income tax. The tax rate for personal income in Malaysia is 0%-30%, the tax rate for those within 5,000 RM5,000 is 0, and the tax rate for those for those over RM2 million is 30%. The tax rate for foreign citizens is fixed at 30%.

1.2.3 Withholding tax

Withholding tax is withheld directly by the Malaysian payer to the tax bureau. Withholding tax should be paid by non-local companies or individuals: special income (use of movable property, technical services, factory and mechanical installation services, etc.) is 10%; interest is 15%; contract fees are obtained according to the contract: the contractor pays 10% and the employee pays 3%; commissions, deposits, agency fees, etc. 10%. According to the tax regulations on double taxation between the Malaysian government and the country where the payee is located, the withholding rate varies from country to country.

1.2.4 Real estate profit tax

Real Estate Profit Tax applies to the sale of land and any title, option or other rights related to land in Malaysia. Including the profits of the sale of shares of real estate companies. The tax rate is: if sold within 3 years after the purchase, the tax rate is 30%; if sold within the 4th and 5th years after the purchase, the tax rate is 20% and 15% respectively; if sold within 6th or later after the purchase, the tax rate is 5%.

1.2.5 Import and export tax

Most imported goods in Malaysia are subject to import tax, which is divided into adjudication tax rates and adjudication tax rates. Malaysia and ASEAN countries implement preferential tariffs, with the import tax rate of industrial products between 0-5%; implement import tax under the framework of bilateral free trade agreements with Japan; implement import tax under the framework of the China-ASEAN Free Trade Zone and the South Korea-ASEAN Free Trade Zone with China and South Korea; sign a free trade agreement with Australia, and according to the agreement, Malaysia will reduce and exempt tariffs of more than 97% of imported goods from Australia.

Malaysia imposes export tax on the export of resource products including crude oil, logs, sawn timber and palm oil. The export tax rate levied on advancing prices ranges from 0 to 20%.

2. Malaysia's crypto tax policy

2.1 Qualitativeness of cryptocurrencies

At the legal level, cryptocurrencies are not regarded as Malaysia's legal currency. According to the National Bank Act 2009 and the official statement issued by the National Bank of Malaysia in 2014, cryptocurrencies such as Bitcoin do not have legal obligations and cannot be used as official payment methods. Merchants do not have the obligation to accept, which also means that cryptocurrencies do not enjoy legal protection at the payment level.

Despite not recognizing its monetary status, the Malaysian Securities Commission regards a portion of cryptocurrencies (especially cryptocurrencies with financing or investment characteristics) as "digital assets" and incorporates them into the securities regulatory framework under the Capital Markets and Services Act (CMSA). According to the relevant regulations on digital assets issued in 2019 and the subsequent "Digital Asset Guide", any token with the nature of an investment contract, operated by a third-party management team, and expected to make profits will be recognized as a securities token, and issuance and trading activities must be approved by the securities regulatory authorities. Eligible digital asset trading platforms also need to register as "Recognized Market Operators". Currently, platforms such as Luno, Tokenize and SINEGY have obtained compliance licenses.

2.2 Cryptocurrency Tax System

2.2.1 How to collect taxes

Malaysia does not regard cryptocurrencies as capital assets, and the country’s Revenue Agency has not issued any clear guidelines on taxation of cryptocurrency transactions. But this does not mean that all cryptocurrency transactions do not require taxes.

Malaysia currently does not impose capital gains tax on cryptocurrencies held by individuals, but if it is engaged in related business (such as businesses or individuals who buy and sell cryptocurrency), the relevant income may be regarded as operating income and must be taxed.

If the applicant is actively trading cryptocurrency, or is somehow identified as a "Day Trader", he will be subject to personal income tax. A tax authority may be identified as a day trader when cryptocurrency activity meets any of the following conditions:

1. Large amounts of cryptocurrencies
2. Short hold time
3. High transaction frequency
4. Cryptocurrencies have been processed, packaged or promoted to increase their market appeal
5. Selling cryptocurrency is not for forced reasons (such as not for urgent need of funds or property confiscation, etc.)
6. The transaction motivation is for commercial purposes
7. Get short-term financing for buying cryptocurrencies
8. Other relevant factors or supporting documents

Since Malaysia does not have capital gains taxes, the Malaysian Taxation Agency may try to classify the applicant as a day trader—even if he is not engaged in active trading himself. But if the applicant can prove that he is only holding (stocking coins) for a long time and not for trading profits, he will not be taxed.

2.2.2 Tax calculation method

Under the current tax framework in Malaysia, only entities engaged in intraday trading of cryptocurrencies must fulfill their tax declaration obligations, and the calculation of their taxable income follows a relatively concise rule: that is, the difference after deducting their cost base (i.e., obtaining costs) at the cryptocurrency disposal price is recognized as taxable income.

Taxpayers who receive transaction considerations in cryptocurrencies must confirm taxable income based on the fair market value of the cryptocurrency at the time of acquisition in accordance with the relevant provisions of the Income Tax Law, and declare and pay income tax based on it.

If the tax authority determines that a taxpayer engages in cryptocurrency transactions constitutes a "risk commercial activity" defined in Article 33(1) of the Income Tax Law, all exclusive expenses incurred in generating such income (unless expressly listed as non-deductible by Article 39) may be deducted before tax under this clause. This provision extends to interest expenses and other cost expenses directly associated with cryptocurrency holdings, thus broadening the scope of application of compliance cost deductions.

It should be noted that although the current tax law has a theoretical distinction between the tax treatment of capital holdings and operating transactions, there is a significant ambiguity in practical operations. For example, when a taxpayer initially purchases Bitcoin for investment purposes and subsequently uses it for debt repayment and other transaction scenarios, it may trigger the re-determination of the nature of the tax, which will lead to a dynamic adjustment of the tax basis.

3. Establishment and improvement of Malaysia's crypto-regulatory

framework

Malaysia is actively committed to establishing a comprehensive regulatory framework for the cryptocurrency industry. With the development of the market and the evolution of international trends, Malaysia has gradually formed a dual-track parallel regulatory system with the Securities Commission (SC) and the Bank of China (BNM) as the core, which is responsible for the supervision of securities attributes of cryptocurrencies and the management of financial stability fields such as payment and anti-money laundering.

This article briefly summarizes the dynamic changes in the cryptocurrency regulatory framework in Malaysia over the past decade:

In 2014, BNM announced that cryptocurrencies are not considered fiat currency and do not regulate their applications. It also warns the public about the risks of cryptocurrency trading.

In 2018, BNM released the Anti-Money Laundering and Counter Financing of Terrorism – Policy on Digital Currencies, which listed the platforms that provide cryptocurrency services as "reporting agencies" and required them to implement strict customer identity verification, transaction record preservation and suspicious transaction reporting systems. This measure marks Malaysia's beginning to include cryptocurrencies in the financial regulatory perspective, and focuses on establishing a basic risk prevention and control mechanism from the aspects of anti-money laundering and financial transparency.

In 2019, SC announced new digital currency regulatory rules, Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019, for the first time, including digital currencies with securities characteristics in the regulatory scope of the Capital Markets and Services Act.

In 2020, SC released a more systematic Guidelines on Digital Assets, which detailed: ICO application conditions, fund use, investor threshold; compliance requirements of digital asset exchanges (DAX), such as KYC, investor protection, technical guarantee, etc.; specific standards are proposed for operators' information disclosure, internal control, compliance reports, etc. This guide fills many gaps in the previous regulatory system, making it possible to follow the law and have strong execution capabilities.

From 2021 to 2022, Malaysian regulators will focus on the integration of platform compliance and international standards. SC strengthens law enforcement on unauthorized encryption platforms and frequently issues an investor alert list to remind users to avoid trading on unregistered platforms. At the same time, it cooperated with international regulatory organizations such as IOSCO and FATF to conduct research and evaluation of emerging asset forms such as DeFi, stablecoins, and NFTs. It was not immediately banned, but it was kept cautious and attention.

On August 19, 2024, the Malaysian Securities Commission (SC) revised the Digital Assets Guide. This update clarifies the status of digital currencies as securities under the Capital Markets and Services Act, and provides detailed provisions on the requirements for fundraising through ICOs and IEOs, as well as the operating specifications of digital asset custody services.

4. Summary and Outlook

The Malaysian government has adopted a prudent and gradual strategy in the regulation and taxation of cryptocurrencies, emphasizing that it is moderately open to innovation space while ensuring the stability of the financial system and the safety of investors. Malaysia has gradually established a clear crypto regulatory framework through the Securities Commission and the National Bank, including digital assets with securities nature in the supervision of the Capital Markets and Services Act, requiring crypto trading platforms to obtain licenses and strictly fulfill anti-money laundering (AML/CFT) obligations. For ICO, IEO and digital asset trading activities, the Digital Asset Guide provides specific legal basis and operational specifications, promoting the compliance development of the crypto market.

In terms of taxation, although Malaysia has not imposed capital gains tax on cryptocurrencies so far, the tax authorities have clearly stated that individuals or enterprises involved in profit-making activities such as active transactions, crypto remuneration, and mining must include the relevant income in the income tax declaration. While maintaining the tax base, this "purpose-oriented" taxation method also provides policy buffers for long-term holders and maintains market flexibility and attractiveness.

As the acceptance of cryptocurrencies continues to rise in Malaysia, the number of users of compliant trading platforms such as Luno and Tokenize continues to grow, the market is showing a steady expansion. At the same time, regulators have also begun to pay attention to emerging forms such as NFT, stablecoins, and DeFi, and have participated in regional regulatory cooperation and CBDC exploration projects to lay the foundation for future policy iterations.

In the future, the development of Malaysia's crypto market is expected to further evolve towards "deepening compliance and regional coordination". With the promotion of international regulatory standards (such as FATF recommendations and MiCA architecture), Malaysia may strengthen cross-border data exchange, stablecoin reserve supervision and platform audit mechanisms. At the same time, tax compliance digitalization will also become a trend, promoting the formal integration of cryptocurrencies into the mainstream financial system. Under such a policy tone, Malaysia is expected to steadily release the growth potential of the crypto economy while ensuring controllable risks.