The legal state of cryptocurrencies is not transparent because whether the cryptocurrency trading is legal or not depends on the approach of the regulatory authorities and the law of individual countries. Furthermore, in countries where cryptocurrencies are legal, they are usually taxed, which also entails the obligation to account for coin trading in the tax return. So the question arises –– how to account for trading cryptocurrencies and what you can actually do with them? We will discuss it on the example of cryptocurrency trading in Poland, the Czech Republic and England.
The approach to cryptocurrency varies from country to country. In Poland, the government has double-edged feelings towards e-coins as on the one hand, trading in cryptocurrencies is allowed and even promoted by economy experts, e.g. professor Krzysztof Piecha, on the other hand, though, many people still consider e-coins a great unknown. This is indicated by the fact that, despite the positive attitude of investment specialists in 2017, the National Bank of Poland and the Polish Financial Supervision Authority jointly issued a warning against investing in cryptocurrencies, citing price volatility and the risk of fraud. On the other hand, it was emphasized that trading in cryptocurrencies does not violate Polish or European law.
The same applies to accounting. On the one hand, regulators report that the purchase, storage and sale of e-coins by financial institutions is inconsistent with the principles of sound and prudent management, and establishing relationships with virtual currency traders may constitute legal and reputational risk. On the other hand, both the purchase and trading of cryptocurrencies are legal in Poland. This is evidenced by the fact that the income from transactions on e-coins is subject to income tax in two thresholds: 18% and 32%. However, the act of selling or buying digital currencies is considered a transfer of property rights, which is subject to a fee of 1% of the transaction value. Therefore, we can say that despite the mixed approach of Polish governments to e-coins, they are not only legal, but also can be accounted for in the annual PIT tax return.
In the Czech Republic, the government decided that the best approach to cryptocurrencies would be to implement additional legal regulations. According to Prime Minister Andrej Babiš, the EU law on cryptocurrencies is not tight enough, so national regulations should include detailed taxation rules. For the sale and purchase of cryptocurrencies in the Czech Republic, taxes are calculated based on the difference between the purchase expenses and the income from the sale of tokens. The tax rate applied in this case is 15% and can be compared with transactions using foreign currencies.
People who operate e-coins for business purposes, e.g. focusing all their activities on cryptocurrencies or trading on cryptographic exchanges, are required to obtain a license for their activity and pay taxes to the Social Fund and the Health Fund. This requires establishing a business. In addition, mining operations are considered business activities and are therefore taxed at 19%.
In the UK, cryptocurrencies are treated as income from “derivatives” and therefore also taxable. Section 2A of the Bank of England Act from 1998 states that the Bank of England is responsible for both the protection and the stability of the UK financial system. In line with this goal, the Bank took into account the risks e-coins pose to the stability of the UK financial markets and concluded that the size of the cryptocurrency market is currently not large enough to pose a significant threat to the monetary or financial stability in the UK. This means that the government will not interfere with the trading of cryptocurrencies with additional regulations. With regard to taxes, cryptocurrencies have a unique identity and therefore cannot be directly compared to any other form of investment activity or payment mechanism. Taxation of income earned from tokens depends on the “activities and parties involved”. For cryptocurrency trading, Value Added Tax (VAT) is levied on suppliers only on goods or services sold in the UK in exchange for cryptocurrency.
The corporate tax rules depend on the profits or losses from the cryptocurrency exchange. Any company that deals with tokens is therefore treated as if it were entering into ordinary transactions in line with applicable corporate tax laws, and any profits made are taxed accordingly. This means that the profit on cryptocurrencies is treated the same as the profit on stocks or bonds.
For unincorporated businesses, income tax is charged on gains and losses that are attributable to cryptocurrency transactions. Cryptocurrencies are treated the same as earnings on stocks or bonds. The United Kingdom also taxes the proceeds of transactions where the profit is made after the transaction with e-coins if an individual user buys and sells coins as an investor.
In all three described countries, there is an obligation to pay tax on the income from trading cryptocurrency. However, only in Poland the tax is levied on the transaction itself, regardless of the profits or losses of the trader. It should be emphasized that all European Union countries are obliged to comply with EU regulations, such as the obligation to confirm the investor’s identity by the cryptocurrency exchange.
No specific regulations have been adopted in the European Union regarding the status of e-coins as currency, but it has been stated that VAT does not apply to the conversion of fiat money into cryptocurrency. In this respect, it is possible to use cryptocurrency as a means of payment. VAT and other taxes, such as income taxes, still apply to transactions made with tokens exchanged for goods and services.
According to the European Central Bank, traditional financial sector rules do not apply to cryptocurrency as they do not cover traditional financial entities. Depending on the situation, the e-coin is treated either as a means of payment or an investment asset. Cryptocurrency as an asset is taxed, and cryptocurrency exchanges are subject to the obligation to confirm the identity of cryptocurrency account owners. There is no law that prohibits keeping or trading of tokens outside of such accounts. However, EU citizens are obliged to account for revenues generated by cryptocurrency trading, strictly regulated by individual Member States.
Depending on the country in which the investor settles taxes, there are different regulations regarding the necessity or lack thereof to establish a business. This is mainly due to whether the regulators of a given country recognize the acquisition and trading of cryptocurrencies as running a business.
In Poland, there is no requirement to establish a business in order to trade e-coins. This is because the income from cryptocurrency transactions is treated as a capital gain even if the taxpayer earns this income as part of a business. Instead of being taxed at rates of up to 32% (progressive tax), income would be taxed at a flat rate of 19% (flat tax). Whether such a situation is profitable for the investor depends on their income as the higher the profit from the cryptocurrency, the more profitable the flat rate. Of course, in the case of a business income tax, the income from cryptocurrency transactions would be treated as capital gains.
Regarding the Czech Republic, as already mentioned, there is an obligation to register a business. This requirement is therefore profitable for investors, as legal entities in the Czech Republic pay 19% capital gains tax, and sole entrepreneurs 15%. Tax is payable only on the income received, excluding turnover. According to the Czech National Bank, transactions with digital cash are not licensed or charged with additional fees.
What about trade and business in England? Things are more complicated here. As in the Czech Republic, it is possible to settle taxes both as a natural person and as a business. The calculation of taxable profits must be made in the currency of the country where the company is incorporated. Note that because HMRC does not consider cryptocurrency a form of money or currency, corporate tax laws such as foreign currency rules do not apply.
Trading in virtual currency in England is exempt from VAT. However, companies are required to pay corporate income tax depending on profits from trading cryptocurrencies. Regulators have issued guides on how to account for e-coin trading, but these rules are not very precise, as, e.g. whether cryptocurrency trading will be considered a “trade” depends on the degree and frequency of activity, level of organization and intention, including risk incurred and commercial use.
It is not hard to see that the Czech Republic has the most liberal and consistent law regarding the independent trading of cryptocurrencies, offering a relatively low and transparent income tax on profits obtained. In turn, the English regulations regarding the classification of cryptocurrencies and what is considered to be a “trade” are extremely unclear, because in order to calculate the tax, many factors must be taken into account, which means that its amount may also be different. In the UK, there is also no regulation recognizing the special status of cryptocurrencies as a virtual means of payment, so they are treated in the same way as derivatives. However, Poland is the worst in terms of the legal system, where the tax on cryptocurrency trading is much higher than in the Czech Republic. In addition, an auxiliary turnover tax was imposed, which means that for a Polish investor it is more profitable to set up a business in a different country than settling in one’s own country.
Thus, despite the fact that throughout the EU, trading in tokens is legal and VAT-free, it is up to individual Member States to tax the economic activity of trading in cryptocurrency.