According to the European Central Bank’s definition, a cryptocurrency is a digital store of value that is not issued by a central bank, credit institution, or electronic money institution, and in certain situations may be used as an alternative to money. Such cryptocurrency is issued, sold, and stored using distributed ledger technology, and its value is not tied to the value of any other asset or legal tender. Many people do not hesitate to invest significant amounts of money in cryptocurrencies in anticipation of a profit. However, how cryptocurrencies relate to taxation is also a topic we will discuss in today’s article.
According to the Ministry of Finance’s methodological guideline MF/10386/2018-721 of October 2018, income from virtual currencies constitutes income for individuals and legal entities, is subject to taxation, and is considered short-term financial assets. The purpose of this methodological guideline was to ensure a uniform interpretation of income taxation in connection with the sale of virtual currency. Based on the aforementioned methodological guideline, it was also necessary to amend other laws, in particular Act No. 595/2003 Coll. on Income Tax, Act No. 431/2002 Coll. on Accounting, and Act No. 213/2018 Coll. on Insurance Tax.
For the purposes of the Income Tax Act, income includes income from the taxpayer’s activities, income from the disposal of property, and income derived from an exchange, whereby income may be received in either monetary or non-monetary form. Pursuant to Section 2ai of the Income Tax Act, the following are considered taxable events in connection with virtual currencies: for example, the exchange of virtual currency for property, the exchange of virtual currency for another virtual currency, the provision of a service, or the transfer of virtual currency for consideration. The moment of taxation of virtual currency occurs when something is obtained in exchange for the virtual currency that can be used to value said virtual currency. On the other hand, the moment of taxation does not arise in certain exhaustively listed cases, namely the purchase and holding of virtual currency, the transfer of virtual currency from one “wallet” to another, and the mining of virtual currency. Pursuant to Section 17(43) of the Income Tax Act, "Income from the sale of virtual currency realized upon the exchange of virtual currency for property, upon the exchange of virtual currency for another virtual currency, or upon the exchange of virtual currency for the provision of a service in the tax period in which such exchange occurs, shall form part of the tax base, using the fair value of the exchanged virtual currency as of the date of exchange." Valuation for the purposes of this provision means valuation at fair value, which represents the actual market price determined by the taxpayer on the date of the exchange. The Income Tax Act, of course, also allows the taxpayer to claim so-called tax-deductible expenses. Tax-deductible expenses for the purposes of virtual currencies include, for example, the claiming of verifiable expenses incurred during mining, such as electricity consumption, internet fees, etc. In the case of purchasing a virtual currency, the tax-deductible expense is the acquisition cost, and in the case of exchanging one virtual currency for another, the tax-deductible expense is the fair value of that virtual currency.
Current legislation does not define what constitutes the date of exchange for virtual currency. However, practice shows that the date of exchange is considered to be the date the virtual currency is debited from your account or wallet. The taxpayer is therefore required to report this income from virtual currencies on their tax return and subsequently tax it at a rate of either 19% or 25% in accordance with the basic rules of income taxation.
However, a more complicated situation arises for business owners, as they are legally required to maintain accounting records. Virtual currency is a short-term financial asset accounted for in Group 25, with gains from virtual currency recorded in the accrual accounts other financial income / other financial expenses. What, then, is the taxation procedure for a business entity? Such income is considered taxable income for the taxpayer—the business entity—and is not exempt from tax, for example, under an international treaty. When determining their tax base or tax loss, the taxpayer relies on the operating result determined in the accounting records or on the difference between income and expenses. This operating result is subsequently converted into a tax base in accordance with Sections 17 through 29 of the Income Tax Act. An entrepreneur is therefore equally obligated to tax their income from virtual currencies in accordance with applicable legal regulations, while regarding tax expenses, the possibility of claiming deductible tax expenses applies similarly to that for individuals. The entrepreneur includes the settlement of this income in their tax return.
But what about virtual currencies and VAT? In this regard, we refer to the decision of the Court of Justice of the European Union in Case C-264/14 Skatteverket v. David Hedqvist, according to which trading in virtual currencies (specifically Bitcoin in that case) is considered a financial transaction exempt from value-added tax. VAT payment applies if virtual currencies serve as a means of payment for a specific transaction—that is, a person pays for the delivery of goods using cryptocurrency.
The portfolio of the law firm Hronček & Partners, s. r. o., also includes providing legal advice in the area of cryptocurrencies, including with regard to the administrative principles of their taxation. Our experts are always available to answer your questions, not only regarding the taxation of cryptocurrencies, so please do not hesitate to contact us.
