How are cryptocurrencies and transactions with them regulated in the tax legislation?
Cryptocurrencies and transactions with them are not regulated in the tax legislation of Ukraine. At the same time, having thoroughly and systematically analyzed the civil legislation, we can conclude that for tax purposes cryptocurrencies are goods in the form of an intangible asset. Accordingly, the analysis of the tax consequences of transactions with cryptocurrencies should be carried out on the basis of such qualification of cryptocurrencies.
It should also be noted that the carrying out of transactions with cryptocurrencies without previously received individual tax ruling can lead to tax surcharges and penalties. Therefore, the following comments are solely the personal opinion of the author, the use of which can lead to both positive and negative tax consequences.
Are the transactions for purchase and mining of cryptocurrencies taxable:
By individuals — residents of Ukraine?
Despite the fact that the current legislation of Ukraine does not contain a direct answer to this question, when purchasing and mining cryptocurrencies by individuals who are not registered as private entrepreneurs, they should not have tax consequences.
For private entrepreneurs who purchase cryptocurrencies, the tax consequences will be similar to those for legal entities — residents of Ukraine.
By legal entities — residents of Ukraine?
Mining of cryptocurrencies by legal entities can be equated to the independent creation of intangible assets, the book value of which will be equal to documented mining costs.
If legal entities purchase cryptocurrencies from individuals not registered as private entrepreneurs, legal entities — purchasers should perform the functions of tax agents and withhold 18% of personal income tax and 1.5% of the military charge from the purchase amount.
When purchasing cryptocurrencies from legal entities – residents of Ukraine, legal entities – purchasers do not have to pay taxes in connection with such purchase. Another issue is that it is not easy to find a legal entity — a resident of Ukraine, which has a cryptocurrency on its balance sheet.
At the same time, when purchasing cryptocurrencies from non – resident legal entities, it is recommended to obtain a certificate from the seller in advance, which confirms that he is a resident of the state with which Ukraine has a valid convention on the avoidance of double taxation. Otherwise, it will be necessary to accept the risk that the tax authorities may take a position that cryptocurrencies are not goods, which entails the purchaser's obligation to withhold 15% of the tax on non-residents' income from the purchase amount of the crypt.
Are the transactions for sale of cryptocurrency taxable:
By individuals — residents?
Yes. When selling cryptocurrency by individuals who are not registered as private entrepreneurs, the transaction for the sale of the crypt will be subject to personal income tax at the rate of 18% and military charge at the rate of 1.5%. At the same time, individuals who are not private entrepreneurs under the general taxation system cannot take into account the costs incurred to purchase the sold cryptocurrency. By the way, accounting by private entrepreneurs under the general taxation system of mining costs and the purchase of the crypt is also controversial.
The issue on the person responsible for paying these taxes will depend on the purchaser of the cryptocurrency. In particular, when selling cryptocurrency to another individual or non-resident, the obligation to pay these taxes will have to be fulfilled by the seller by declaring the income received and paying taxes on the results of the tax year in which the income from the sale of the crypt was received.
If cryptocurrency is sold by the entrepreneur under the general taxation system, theoretically he would be entitled to account documented expenses incurred for the purchase of cryptocurrency sold by him. In this case, taxes (18% personal income tax and 1.5% military charge) will be paid from the income received by such individual entrepreneur according to the results of the corresponding tax quarter (year).
The issue of taxation of transactions for the sale of the crypt of private entrepreneurs under the general taxation system with value added tax will be disclosed in the answer to question 3.2. below.
By legal entities?
Yes. Income from the sale of cryptocurrencies will be included in taxable income for corporate income tax purposes. At the same time, legal entities have the right to take into account documented expenses for the purchase (mining) of the sold crypt when calculating the tax base.
The issue of taxation of transactions for the sale of cryptocurrencies with value added tax is controversial. There is court practice where the court referring to the decision of the European Сourt of Justice concluded that there are no grounds for taxation of transactions for the sale of cryptocurrencies with value added tax. At the same time, the probability that such court practice will become permanent is low.
In the issue of VAT, it is important to determine the place of supply of the crypt. If we qualify a crypt as a goods in the form of an intangible asset, the place of supply of the crypt will be the place where the crypt is located at the time of supply. If we can prove that this place is outside of Ukraine, then VAT should not arise.
Are transactions to exchange one cryptocurrency for another taxable?
Since the exchange of cryptocurrencies can be considered as the sale of one cryptocurrency and the purchase of another due to the absence of direct legislative regulation, the probability that the tax authorities will insist on the need for taxation of transactions for the exchange of one crypt to another is high. This risk is significantly increased in case of exchange of a lower value cryptocurrency for a higher value cryptocurrency.
Does taxable income arise if the cryptocurrency grows in value?
If the cryptocurrency grows in value, the tax consequences do not arise until such cryptocurrency is sold.
Can private entrepreneurs under single tax carry out operations on the sale of cryptocurrencies?
According to the explanations of the State statistics service of Ukraine, currently, experts recommend to classify activities of "mining" and the sale of cryptocurrencies in the position 64.19 "Other monetary intermediation", trade (exchange) of cryptocurrencies in the position 66.19 "Other activities auxiliary to financial services, except insurance and pension funding" (Classifier of economic activities).
Pursuant to the Tax code, business entities that carry out activities in the field of financial intermediation cannot be single tax payers of the first or third groups. At the same time, the above-mentioned codes of Classifier of economic activities 66.19 and 64.19 are not specified in the letter of State statistics service of Ukraine No. 4/3-12/636 dated 30.12.2011, which defines codes of the Classifier of economic activities relating to activities in the field of financial intermediation. Thus, when classifying the crypt as an intangible asset, operating on the simplified tax system when carrying out mining operations and buying and selling cryptocurrencies is not prohibited by the current tax legislation.
How are operations on contributing cryptocurrency to the charter capital of legal entities by individuals – residents taxable?
The contribution of cryptocurrency valued at market price in the charter capital of the Ukrainian company with the subsequent sale of corporate rights may seem an interesting option for tax planning. At the same time, it should be noted that when taxing transactions with investment assets, only documented expenses are subject to accounting. So, if the cryptocurrency is "mined" or purchased "by hand", then the cost of acquiring an investment asset will be difficult to take into account. Therefore, when selling corporate rights by an individual – founder, the positive difference between the received amount of sale and the cost of purchasing the crypt may be subject to taxation.
At the same time, if the newly created legal entity once again contribute a crypt in the charter capital of its subsidiary at the price of its receipt and sells the corporate rights of its "daughter" at their nominal value, in this case the parent company can receive funds that will not be subject to taxation. However, such transactions can be considered as obvious abuse and structuring of transactions for the purpose of obtaining tax benefit.
What are the changes in the legislative regulation of transactions with cryptocurrencies?
The working group was created under the Ministry of Finance, which planned to provide a summary tax advice on the taxation of transactions with cryptocurrencies. As of today there is no such tax advice.
Members of Parliament have registered several draft laws providing for the taxation of transactions with the crypt at the rate of personal income tax of 18%, but with a transition period during which such transactions will not be taxed or taxed with personal income tax at the rate of 5%. It is also assumed that such transactions will be directly exempt from VAT (with certain exceptions). One of the draft laws provides for exemption from import VAT of the transactions on the import of mining equipment into the customs territory of Ukraine.
We do hope that the newly elected Parliament will adopt a law on the basis of one of these draft laws or another, even more, favorable for the "crypto maniacs" law, which will stimulate an increase in official transactions with the crypt and fill the state budget with balanced taxes from such transactions.
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.