The trade in cryptocurrency is a growing trend that is gaining in popularity. Although cryptocurrency has been used worldwide for more than a decade, trading virtual money can still be considered a new way of earning income.
At the same time, many traders may not know how the income thus generated is taxed. This article explains how a natural person is required to declare income received in cryptocurrency or earned from trade in cryptocurrency.
Cryptocurrency can generate income in a variety of ways – for example, by buying, exchanging, mining, and then selling or trading, accepting as payment the goods or services sold. Although the virtual currency is developing rapidly and is increasingly used as a means of payment, there are no specific rules for the taxation of transactions involving cryptocurrency. Consequently, all transactions involving crypto assets must be treated in accordance with the law in force.
The most popular trade was in cryptocurrency. In trading, it must be borne in mind that the virtual currency is treated as property within the meaning of Article 15, Part 1 of the Income Tax Act, which means that the income tax must be paid with the benefit derived from the sale and exchange (alienation) of the currency. The benefit is equal to the difference between the price of purchase and sale of the cryptocurrency (article 37, part 1, of the Income Tax Act), for which the value of the virtual money should be converted into euros at the exchange rate in effect on the date of receipt of the income or expenditure. Conversion uses either the common exchange rate of cryptocurrencies or, in the case of a market-based transaction, the exchange rate of the medium in which the transaction was made.
The benefit derived from the disposition of the cryptocurrency should be reflected on lines 6.3 or 8.3 of the income declaration table as the benefit of disposition of other property separately for each transaction.
Only sales or exchange transactions from which a benefit has been obtained should be declared. From the taxable benefit, that is, the difference between the price of buying and selling in euros, it is possible to deduct the transaction payments, but unlike securities, in the case of cryptograms, the loss from the foreclosure cannot be deducted. In addition, in the case of cryptocurrency, it is not possible to use an investment account system that would allow the deferral of the income tax obligation.
Mining a cryptocurrency is considered an entrepreneurial activity in which taxable income arises when the cryptocurrency acquired by mining is alienated, that is, exchanged for an ordinary or some other cryptocurrency, or if it is used to pay for certain goods or services. In the case of private individuals, the taxable income is the value of the currency received in exchange in euros. Payment for goods or services in cryptocurrency is based on the euro exchange rate in effect on the day of the transaction.
Since mining cryptocurrency usually involves significant costs, it is important to note that an individual is unable to deduct them from his taxable income.
If a natural person wishes to engage in the business on a permanent basis, he or she must register as an individual entrepreneur in the Business Register or register a business partnership. This gives the right to declare the costs incurred in obtaining business income and deduct them from taxable income. At the same time, tax liabilities associated with relevant forms of business need to be taken into account. The income generated by the commercial mining of cryptocurrency should be declared as business income in form E of the income declaration.
Earnings in virtual currency
Employers already often want to pay workers in virtual currency. In this case, the tax is based on the same principle as in the payment of ordinary wages, i.e., the employer must deduct all taxes on labour from wages. The payment must be converted to euros on the basis of the market price on the day the salary is paid, and the amount is declared in the appropriate annex of the declaration on the form TSD. The taxable income already paid to the employee does not create an additional tax burden, even if the market price of the virtual currency increases after the payday.
If an individual receives remuneration for work from which taxes have not been withheld, the income is converted to euros on the basis of the exchange rate in effect on the date of receipt and the income is declared as business income.