Taxation of cryptocurrencies

How do Czech tax regulations view cryptocurrencies? How are they viewed abroad? If you need advice on cryptocurrency taxation, please contact us.

Profit from cryptocurrencies is a profit like any other and therefore most jurisdictions around the world subject it to tax and other charges. However, approaches vary, and even at the global level you can find so-called crypto-regions where cryptocurrency profits are tax-free and the cryptocurrency owner is spared from excessive regulation.

How are cryptocurrencies viewed in tax havens compared to the Czech Republic? Which typical tax havens can be considered crypto-paradises and which ones, on the contrary, treat cryptocurrencies very strictly? We will try to answer these questions in the following lines. In order to put the taxation of cryptocurrencies in foreign jurisdictions into context, it is first necessary to outline the legislation in the Czech Republic.

Czech Republic

Cryptocurrencies are not yet explicitly regulated in Czech tax laws, so it is necessary to make do with the methodological guidelines of the Ministry of Finance, the General Financial Directorate and the CNB, which only introduce cryptocurrencies into the already established rules.

According to the CNB, cryptocurrencies are not virtual money, a foreign currency and cannot be considered to be similar to a security. They are a mere commodity, which is not subject to any concessions, exemptions or other exceptions that are found, for example, in securities. Income from the sale of cryptocurrencies cannot therefore be classified as capital income. All transactions that take place on and off exchanges fall under the residual category – Other Income governed by Section 10 of the Income Tax Act.

A tax rate of 15% is applied in case of individuals and up to 23% in case of high income earners. The advantages of investing as an individual include: less administrative burden and lower tax rate. The disadvantages are mainly the extent of deductible costs and losses compared to a legal entity, see below.

The subject of taxation for natural persons is all income which results in an increase in wealth, i.e. primarily(1):

• a) Exchange of cryptocurrency for fiat currency
• b) The acquisition of goods or services with cryptocurrency
• c) Exchange of cryptocurrency for other cryptocurrency

Thus, income from cryptocurrencies is not only given when FIAT money arrives in the bank account, as most users think, but in many cases already when exchanging cryptocurrency for another cryptocurrency or when purchasing goods with cryptocurrencies. See examples.

1. User A buys two Bitcoins with fiat currency. Six months later, user A sells his Bitcoins for fiat currency at a 20% profit = taxable income is generated. The resulting amount will be taxable after deducting the purchase price.
2. User A buys two Bitcoins with fiat currency. Six months later, User A exchanges his Bitcoins for Litecoins. At that point, however, the value of the Bitcoins was 20% higher than when they were purchased and User A receives taxable income, just as if he had converted his Bitcoins into fiat currency.
3. User A buys two Bitcoins with fiat currency. Six months later, User A buys a car with his Bitcoins. The value of the Bitcoins is again 20% higher than when he bought them, so user A has again increased the value of his assets and the purchase of the car gives him taxable income.

In the above scenarios, the situation is fairly straightforward and the taxpayer can certainly handle it himself. However, if the user finds himself in a more complex situation, it is recommended to seek the services of a professional.

For example, you ask, how is it possible to control and document every cryptocurrency exchange made for another cryptocurrency within an exchange (or even if a trading bot is used to carry out transactions in higher numbers for you)? Our tax authorities are also looking for a precise answer to these questions, and in the meantime, we have to try to record every single transaction in which our assets are increased. Just because the law is not currently worded correctly does not mean we can ignore it.

Corporations are taxed on all increases in assets just like individuals, but at a higher rate of 19%. We recommend creating an internal guideline for the valuation of cryptocurrencies in order to facilitate the entry of individual transactions and invoices into the accounting system.

The advantages of investing through a legal entity include the possibility of offsetting losses from previous years with the following year’s profits, the possibility of offsetting cryptocurrency profits with, for example, losses from the sale of shares or other business activities (for individuals, this is only within cryptocurrencies with each other), and a wider range of trading-related costs can also be applied.

Cryptocurrencies and VAT

In Skatteverket v. David Hedqvist, the European Court of Justice ruled that the exchange of cryptocurrencies, whether on an exchange or at a bureau de change, is exempt from VAT. Thus, most of us can breathe a sigh of relief and thank the European Court of Justice, at least in the area of VAT. Beware, however, that this does not apply to cryptocurrency mining, where the situation is still not entirely clear.

However, it is important to remember that if your income is not subject to VAT, then you cannot even claim VAT on the cost of that income. If you are in a situation where you have several incomes, some of which are VATable and some of which are VAT exempt, you must reduce all costs by a so-called coefficient (see the VAT Act for details).

Cryptocurrencies vs. anonymity and tax authority control

Cryptocurrencies are not nearly as anonymous as most of their users think. All transactions for most cryptocurrencies are traceable on the blockchain and the movement of funds can be tracked. (An exception is some alternative cryptocurrencies that have modified source code to increase anonymity, such as Monero.)

The still low level of regulation makes it relatively easy for users to obtain their cryptocurrency address anonymously, but the problem comes at the point of converting cryptocurrency into FIAT currency, purchasing goods, etc. Thus, in most cases, the anonymous address will be linked to a person, creating a trail that can be easily traced by the tax authorities later on.

The tax authorities are trying to keep up with the new technology and are slowly adopting to the emerging industry. However, the reality today is that if someone really takes the trouble to conceal their cryptocurrency income the likelihood of detection is minimal.

However, the user needs to keep in mind that in terms of tax laws, everyone is required to declare their income and tax that income. The fact that today the tax authorities are not always able to check cryptocurrency income does not mean that the situation will not change over the coming years. The tax authorities can assess tax up to several years in arrears, and the user may find himself in a situation in a few years where he will have to repay all the tax plus a fat penalty along with interest on late payments.

Rather than hoping for incompetence on the part of the tax authorities and trying to hide your funds behind the law, it is advisable to seek professional advice. He or she can help you find a solution that complies with the law and saves you many sleepless nights.

Our knowledge of foreign jurisdictions in the field of international taxation allows us to find the most optimal solution for our clients working with cryptocurrencies, allowing our clients to “get the most out” of cryptocurrencies. If you find yourself in a situation that you do not know how to handle yourself, do not hesitate to contact us.

UK

Before describing the cryptocurrency taxation system in the UK, it is useful to introduce the so-called Capital Gains Tax, which is different from the Czech capital gains tax and is crucial for understanding the taxation of cryptocurrencies in the UK.

Capital Gains Tax

Capital Gains Tax is a tax on the gain to individuals arising from the sale (or other transfer2) of an asset held by you that has appreciated in value during your holding period. You are taxed on the amount by which your estate has increased after the sale compared to when you bought the asset.

For the 2021/2022 tax year, the capital gains tax rates are:

• 10% (18% for residential property) on all Capital Gains if your total annual income is less than £50,270.
• 20% (28% for residential property) on the whole Capital gain if your total annual income is above the GBP 50,270 threshold

Individuals get tax relief on Capital gains up to GBP 12,300. If your Capital gains are then below GBP 12,300, your gains are tax free.

UK and cryptocurrencies

At the outset, it is important to note that HMRC3 does not consider any of the current types of cryptocurrencies as money or currency, but only as a form of asset or commodity (the same as in the Czech Republic). However, HMRC goes further than the Czech institutions in this respect and divides crypto assets into several groups: exchange tokens, utility tokens, security tokens and stable tokens. However, for the sake of introduction, it is not important to go into the differences between them now, the basic rules apply to all of them similarly.

Taxation of cryptocurrencies for individuals

The conversion of cryptocurrency to fiat currency, the exchange of cryptocurrency for other cryptocurrency and the purchase of goods or services with cryptocurrency (same approach as in the Czech Republic) are all taxable transactions subject to Capital Gains Tax according to HMRC, see above for rates. Unlike the Czech legislation, individuals here can set off losses up to four years back.

In the case of mining, transaction confirmation fees, donations or wages paid in cryptocurrency, individuals are subject to income tax, just as if the earnings were in fiat currency. As well as earnings in fiat currency, they will be required to pay a so-called national insurance contribution.

Income tax may also apply where an individual operates a cryptocurrency business that generates taxable trading profits.

Personal income tax in the UK is progressive and ranges from 20% upwards.

Corporate taxation of cryptocurrencies

In the case of corporations, Capital Gains Tax does not apply to profits from cryptocurrency related activities, but Corporate Tax, which is at 19%. The crypto activities generating profits will include mainly:

• buying and selling cryptocurrencies,
• mining,
• the provision of goods or services in exchange for cryptocurrencies,
• proceeds from the resale of cryptocurrencies.

For accounting purposes, cryptocurrencies must always be converted into fiat currency and HRMC recommends keeping thorough records of transactions and invoices.

UK and VAT

The same conditions apply as in the Czech Republic

Hong Kong

Before discussing the taxation of cryptocurrencies, it is useful to outline the Hong Kong tax system as such again.

Hong Kong does not have a Capital Gains Tax and therefore, in normal circumstances, gains from the sale of assets held as capital assets are not subject to tax. In the case of other income, it will be income tax for individuals and profit tax for corporations.

Under Hong Kong tax law, “gains arising from the sale of capital assets” are outside the scope of income tax and profits tax. In other words, if a commodity has been acquired as a long-term investment and will fall under the term capital assets, the gain on sale will not be subject to tax. On the other hand, if the purchase and sale of the commodity was in the nature of trading/trading, the gain will be assessable to income tax or profits tax.

In determining whether the asset was acquired as a capital asset or in the course of trading on a stock exchange, the tax authorities will examine:

(1) the taxpayer’s intent at the time of acquisition,

(2) the length of possession of the commodity prior to the sale.

Generally, if a taxpayer buys a commodity and sells it within a short period of time, say within 2 years, the proceeds are more likely to be subject to income tax. However, even a long holding period is not always the determining factor.

Hong Kong and the taxation of cryptocurrencies

As Hong Kong does not have special tax categories for cryptocurrencies, the above applies.

The taxation of gains (and losses) arising from cryptocurrencies will depend (as outlined above) on the determination of how the assets are used in the hands of the taxpayer. Taxpayers who conduct business with cryptocurrencies, receive them for the purpose of selling goods or services or merely trade them on exchanges will always be subject to income/profit tax4.

In contrast, investors holding cryptocurrencies for long-term investment purposes will save their returns from tax. In what cases a crypto asset will be considered a capital asset and when only an article of commerce is not entirely clear and it is up to the Hong Kong tax authorities to define this line through their practice.

Importantly, however, in terms of Hong Kong tax rules, only gains arising in Hong Kong are subject to income tax and profits tax. Profits generated outside Hong Kong are not subject to tax. Therefore, if a Hong Kong offshore company trades on a Czech crypto exchange, the profits from the trading will not be subject to Hong Kong tax.

Again, this is a factual issue and each individual case may require an analysis of where the profit-generating activities were carried out.

Gibraltar

Despite the relatively well-developed legal regulation of cryptocurrencies in Gibraltar, Gibraltar’s tax legislation does not specifically address the treatment of cryptocurrencies. Taxpayers must then rely on the guidelines and methodologies of the tax authorities in conjunction with the general principles of the current tax laws.

There is currently no capital gains tax, value added tax, gift tax, inheritance tax or withholding tax in Gibraltar. Only corporation tax will then be relevant to the taxation of cryptocurrencies within companies, which is a 10% tax payable on profits derived from income derived from or derived in Gibraltar. A company that derives income from a foreign source that is not connected with a business in Gibraltar cannot tax that income under Gibraltar tax laws.

In the case of individuals, cryptocurrency-related profits are subject to personal income tax, the rate of which is calculated on the basis of the amount of income. For the purposes of this article, it is sufficient to know that the rate is around 20%.

Unless the taxpayer can prove that the cryptocurrency was acquired as a long-term investment and exempt from tax as a so-called capital asset, its profits derived from cryptocurrency-related activities will always be predominantly subject to corporate tax (corporations) or income tax (individuals).

1 The cost of cryptocurrencies needs to be determined using accounting methods, namely FIFO or weighted arithmetic average. The investor will, in its own interest, choose the calculation method that will result in the highest valuation of the cryptocurrency being sold.

2 For example, donation, exchange, acquisition for consideration, and other

3 HM Revenue and Customs

4 For individuals, income tax in Hong Kong is progressive and ranges from 2% to 17% depending on the amount of income. Corporations are subject to profits tax, which is 8.25% for smaller companies and 16.5% for larger companies.