What is a cryptocurrency? Is it money? Is it an asset? Is it a property, a bond?
The point is that there still is no common understanding regarding what cryptocurrency is. The notion is interpreted differently in different countries. In some countries like Japan, Switzerland, and the United Kingdom, cryptocurrency is considered as payment means, however, they are not considered as currency. In Australia and the United States, they are considered as property, while in Slovakia as a short-term financial asset.
There are a few basic approaches to definition of cryptocurrency for tax purposes today, according to them, cryptocurrency is: an analogue of fiat money, a property or an intangible asset. The Czech legislation does not recognize cryptocurrency as a financial instrument; purchase and sale or exchange of cryptocurrency for classiс fiat money are not considered as a financial service. Cryptocurrency is also not recognized as an investment instrument and, therefore, a special license for purchase, sale, or exchange is not required.
The license is required only if funds are accumulated from individuals/legal entities for the purpose of investing in cryptocurrency (exchanges).
The Ministry of Finance equates cryptocurrency to an intangible asset that can be exchanged for another tangible or intangible asset of money.
Is a license required?
If one manages cryptocurrency as his/her own property, this is not considered as a business activity and is not subject to licensing. As it is described above, cryptocurrency is not recognized as an investment instrument, therefore, a special license of the National Bank is not required.
A license is required only if you manage other people’s assets on a permanent basis, accumulate financial funds from individuals/legal entities for the purpose of investing them in cryptocurrency (exchanges).
At the same time, an approach to mining is completely different. Cryptocurrency mining is considered as a business activity and is licensed accordingly. Mining is equal to providing services, and for this one is to obtain a free license № 56 „Poskytování software, poradenství v oblasti informačních technologií, zpracování dat, hostingové a související činnosti a webové portály“..
How to calculate the income tax on cryptocurrency?
Taxation of purchase/sale/exchange of cryptocurrency:
In case of a one-time sale (non-recurring activity) where the volume for the year does not exceed 30,000, – korunas, such income can be completely exempt from the income tax.
Income from sales on a permanent basis which exceeds 30,000 korunas per year is subject to taxation and reflection in the annual Declaration as “Other income” according to §10 odst. 3a Zákona o dani z příjmu. This type of income is not subject to deductions to the pension fund and the health insurance fund. The income tax rate is 15% of the profit. Profit equals revenue from sales minus purchase costs. Revenue is recognized when cryptocurrency is exchanged for another cryptocurrency or fiat currency, not when money is withdrawn to a bank account from the exchange.
Digital currency mining:
Is a business activity, subject to taxation and is recorded in the annual Declaration as “business income” according to §7 Zákona o dani z příjmu. This type of income is subject to deductions to the pension fund and the health insurance fund. The income tax rate is 15% of the profit. Profit equals revenue from sales minus real costs or lump-sum costs of 60%. If a loss occurs, it can be used to reduce the tax base for the next 5 years according to §34 Zákona o dani z příjmu.
Since it is impossible to evaluate cryptocurrency before it is sold/exchanged, revenue is recognized only when cryptocurrency is exchanged for another cryptocurrency or fiat currency.
As a real cost, one can use the expenses associated with mining: energy, rent of premises, rent/purchase of hardware and software.
Is cryptocurrency revenue subject to VAT?
The VAT issue is quite a complex one today. There is no consensus in this matter. According to the European court of justice decision, sale/exchange of cryptocurrency on the exchange is exempt from VAT. Cryptocurrency mining should also not be subject to VAT. However, regrettably, practice shows that the Czech tax authorities have a different opinion and there are cases when VAT was added by the tax service. Much depends on the final buyer of cryptocurrency and the place of responsibility for VAT in every case.
It is necessary to keep in mind that the VAT-exempt income cannot be reimbursed for VAT on the cost part.
What is the tax rate?
An important question one can face is an amount of rate to calculate the cost of cryptocurrency and, accordingly, the amount of the tax. In case of exchanging cryptocurrency for fiat currency, everything is simple. Issues arise when one type of cryptocurrency is exchanged for another. Since there is no official exchange rate for the digital currencies, this is considered as a kind of barter. Practically, the exchange rate of a particular exchange on the day of exchange is applied.
In case of selling one’s own services or products for cryptocurrency, an invoice in the Czech korunas or another classic currency is issued, and either the equivalent in cryptocurrency is indicated, or there is a note that it is possible to pay in cryptocurrency. This transaction is considered a barter, the rate is calculated as the exchange rate = the cost of a service/product in korunas / the amount of cryptocurrency received.
Accepting cryptocurrency as payment for services/goods is subject to EET!!! Also a liability or guarantee is introduced for the unpaid VAT by a client if the payment was made in cryptocurrency (full or partial payment).
Should the income in cryptocurrency be recognized?
Everyone asks this question. It is considered, that cryptocurrency and everything associated with it is impossible to control. There is some truth in this belief. Today, tax and other regulatory authorities do not have specific control tools. Still, it may change in the near future.
It is worth mentioning that the cryptocurrency has a digital footprint that will remain forever. Therefore, it would be a mistake to claim that the regulatory authorities cannot get information about cryptocurrency. We already have experience with additional tax collection from UBER and AirBNB over the past years.
All users of cryptocurrencies-traders, ‘hodlers’, individuals and professional companies should be prepared for the fact that the legislation will inevitably change and most likely in the direction of state interests.
A short summary:
- Purchase and sale of cryptocurrency:
– does not require registration as an Individual entrepreneur (IE or OSVČ);
– is not subject to VAT;
– is subject to income tax at the time of sale (exchange);
– the income tax rate is 15%.
Profit equals revenue from sales minus purchase costs. The Declaration is recorded as the remaining income according to §10 odst. 3a Zákona o dani z příjmu. In case of a one-time sale (non-recurring activity) where the volume for the year does not exceed 30,000, – korunas, such income can be completely exempt from the income tax.
- Digital currency mining:
– requires OSVČ registration;
– VAT 21% or 0%: is a controversial question; according to the decision of the European court of justice, VAT is not subject to VAT, but the Czech tax service has repeatedly forced Czech taxpayers to recognize and pay VAT, since every country has the right to make its own amendments to the VAT law;
– is subject to income tax at the time of sale (exchange);
– income tax rate of 15% for individuals and 19% for legal entities;
– acceptance of payment for goods or services in cryptocurrency is subject to EET.
Our company is ready to help you with your application and answer your questions. We have been providing accounting and tax consulting services in Prague for more than 10 years.