Cryptocurrency trading is gaining popularity, and buyers may wonder whether it is necessary to pay taxes on cryptocurrency, and if so, when? The Tax and Customs Board clarifies this issue.
In terms of cryptocurrency, only those transactions from which income is received are taxed, and each transaction should be assessed separately
In general, we can say that the tax liability arises in three cases:
- when converting cryptocurrency into regular currency;
- when exchanging cryptocurrency for any other cryptocurrency;
- when using cryptocurrency to pay for goods and services.
Thus, the earned income is the difference between the acquisition cost and the selling price of the cryptocurrency. In this case, the purchase and sale price or the income received should be converted into euros, taking into account the cryptocurrency exchange rate in effect on the day the income was received or the expense was made. If the trade was made on market terms, you can use the exchange rate in the trade environment. If the euro is not used in the transaction environment, the income must be converted.
When exchanging one cryptocurrency for another, one should also proceed from the market price and earned income, that is, profit.
When paying for goods or services with cryptocurrency, you should calculate the earned income, that is, the difference between the purchase price of the goods or services received and the cryptocurrency used for this.
It is important to note that the conversion of income received in cryptocurrency and previously taxed (for example, salaries, dividends, board member’s fees) into regular currency, or the use of such income for the purchase of various goods and services does not entail an additional tax liability: for example, if a person receives from a mutual partnership X a salary for February in the amount of 0.05 bitcoin, which is declared by the company and from which labor taxes have already been paid based on the market price, into an electronic wallet with a cryptocurrency. If a person has used the salary received in his electronic wallet in the amount of 0.05 bitcoin for the purchase of various goods and services, he does not have the obligation to declare it. The above rules count for various crypto purchases too, even if the tax payer has used a peer to peer exchange to buy dogecoin with PayPal.
If an individual is engaged in the development of cryptocurrency, the income should be declared as business income. The development of a cryptocurrency is an entrepreneurial activity and in taxation it is equated to the production of goods. The tax liability arises from the benefits received from the alienation of the cryptocurrency at the time of its sale or exchange. A person who is constantly engaged in the development of virtual currency must register with the Commercial Register and act as an individual entrepreneur (FIE) or through a commercial partnership. A registered FIE can deduct from business income and declare also expenses incurred to generate business income (for example, equipment costs, electricity costs, etc.). An individual cannot deduct from income the expenses incurred to generate income from the development of cryptocurrency. The FIE should note that cryptocurrency cannot be transferred to a special account used to defer tax liability. It is also possible to invest in cryptocurrency through a partnership, in which case the partnership’s tax rules should be taken into account.