As part of the amendment to the Income Tax Act, which was passed in a rather rapid process, it was proposed to regulate the taxation of income generated from the sale of a virtual currency. This issue has become quite important due to the growing interest in the so-called "cryptovals", "bitcoins" (popular but not entirely correct definition of the virtual currency) 1 in the absence of clear rules on taxation of income from such sales.
Doubts regarding the taxation of virtual currency in 2018
In the initial phase of interest in the trading of virtual currency, there were voices that the trading of this type by its nature was not covered by the provisions of the Income Tax Act and should not be taxed as such.
These discussions were essentially finally cut off by the Chief Administrative Court at the beginning 2018 The NSA clearly stated that electronic money in Poland is not a means of payment, but that cryptocurrency is an activity taxed as a transaction carried out on property rights.
2 Therefore, doubts as to whether the tax should be paid have been clarified, but there remains uncertainty as to how to correctly determine the amount of the tax.
In that judgment, the NSA expressed the view that the virtual currency should be eligible as a source of income as a property right because it has 2 the basic qualities – it is marketable and has a certain (measurable) asset value. 3
According to the intention of the legislator, the amendments adopted have established that the proceeds from the sale of the virtual currency should be included in the cash-capital revenue
In such a situation, there is a real risk of taxation of such income obtained by a natural person using a tax scale and consequently the possibility of applying a progressive rate, respectively 32% rates after exceeding the revenue threshold.
In view of the fact that no provision laying down specific rules for the establishment of the tax base and the rates should be used to combine the proceeds obtained from the sale of the virtual currency with other incomes and to apply the basic principles, i.e. the tax scale. 4
In turn, the Ministry of Finance in an official explanation issued in early April 2018 it indicated that revenue from the trading of cryptocurrency could be classified as a source of income as a property right or as revenue from a paid business activity, where the cryptocurrency is disposed of under an activity of a commercial nature and is carried out in its own name by the taxpayer in an organised and continuous manner (and therefore meets the general conditions for establishing the existence of an economic activity for the purposes of income tax) 5 .
In view of such uncertainty as to the correct application of the tax rules, the amendment became a necessity, as announced by the MF in first half 2018.
Taxation of income from the sale of virtual currency 1 January 2019
According to the intention of the legislator, the amendments adopted have established that these revenues should be included in the revenue from cash capital. 6
Under the newly enacted legislation 7 it was pointed out that the income generated by the sale of virtual currencies on a fee basis was the income tax 19% income earned.
It was also clarified how such income should be determined – this should be the difference between the sum of revenue generated by the sale of virtual currencies and the cost of obtaining revenue.
The legislator also indicates which categories of expenditure should be recognised as the cost of obtaining revenue for the purpose of determining the appropriate amount of income.
Under the new provision, this is to be documented by expenditure directly incurred in the acquisition of a virtual currency and costs associated with the sale of a virtual currency.
As a general rule, costs should be deducted in the year in which they were incurred, unless in a given year the value of the costs incurred exceeds the value of the proceeds from the sale paid for, then the excess costs increase the cost of obtaining revenue from the sale of the virtual currency for payment in the following year.
8 It is also worth noting that these real costs need to be properly documented, and this document does not necessarily need to be invoices – the recently issued judgment of the Gliwice WSA confirmed that the generated set of transactions from the electronic exchange system could also be an appropriate way of documenting the expenditure incurred.
9 second The key condition is the need to have a direct link between the cost incurred and the purchase/sale of a virtual currency – this means that the cost of obtaining revenue will not include financing the purchase of virtual currencies such as loans, loans or investment contract costs.
The introduction of a regulation whereby taxation will be subject to the income directly obtained from the payment of the sale of the virtual currency has its consequences for the developing (actually only emerging) cryptocurrency industry. First of all, this way of formulating the source of revenue means that the newly introduced rules apply only to taxpayers who generate revenue directly from the free disposal of virtual currencies.
In addition to obtaining revenue directly from the sale of virtual currency, various transactions related to the trading of virtual currency are possible. It is a natural phenomenon that, with the growing popularity of virtual currency as an alternative form of investment, there are proposals for tools that will enable you to use, transfer, exchange, sell cryptocurrency.
The explanatory memorandum to the draft amending act explicitly states that the revenue generated by the exchange of currencies will not be included in the revenue of economic operators in the following areas:
- • exchange of virtual currencies and means of payment,
- • exchange virtual currencies into other virtual currencies,
- • the exchange of information referred to in previous points,
- • keeping accounts, i.e. ensuring the possibility of using virtual currency units in the form of electronic collections and conducting virtual currency exchange transactions.
It was also pointed out that the exchange between the cryptocurrency itself, whether on the stock exchange or on an individual basis, is a tax-free event.
As a result, this situation should be distinguished here 2 different situations:
•
the situation of a person/unit who transactions on an electronic cryptocurrency exchange – in relation to its income, the newly enacted rules on income taxation, which are identical to the principles of taxation of income generated by an individual sale transaction outside the exchange, in both cases the taxable person obtaining such income should calculate and show in the annual declaration the annual income, costs, income, the amount of tax due, is not expected to involve the payers in the collection of that tax;
•
the situation of the person/entity which is the organiser/founder/operator of the cryptocurrency exchange – under the current rules, no separate regime of taxation of income generated by this activity is indicated, it is expected that such activity will be treated as an economic activity and that the proceeds of activities consisting, inter alia, in the operation of a virtual currency exchange or electronic currency exchange exchange should be eligible.
Not just income tax...
The growing virtual currency market implies tax discussions not only on the taxation of investor income and organisers of a trading system but also on the taxation of turnover itself.
As explained by the MF for VAT purposes, the concept of currencies used as legal tender also covers virtual currency, and consequently the business of buying and selling the so-called cryptocurrency is subject to VAT as a service provision.
10 However, since according to Article 43(1)(7) Act of 11 March 2004 the tax on goods and services provides for the exemption in question for transactions relating to currencies recognised as legal tender — VAT is not charged for such transactions.
MF also explained that the sale or swap of cryptocurrency, unless VAT (except for transactions benefiting from the exemption in question), should be taxed on civil acts at a rate of 1% the market value of the acquired property law (and therefore the buyer would have a tax liability in the PCC of 1% the value of the virtual currency acquired).
11 In practice, the enforcement of such an approach by tax authorities would call into question the cost-effectiveness of investing in virtual currencies.
Faced with such far-reaching consequences, with simultaneous difficulties in developing a coherent approach to tax rules (or exemptions from taxation) for trading in virtual currency with turnover taxes, in July 2018 The MF issued a special regulation on the basis of which the collection of tax on civil law acts on the sale contract or the conversion of a virtual currency to apply until 30 June 2019 This means that the MF foresees that new rules on the use of PCC (and VAT) for virtual currencies will be developed by mid next year.
Thus, the situation for those interested in trading virtual currency is still subject to uncertainty as to the tax consequences.
References:
1 For the purposes of discussion on the introduction of new rules for the taxation of trading in virtual currencies, the definition of the Act of 1 March 2018 to combat money laundering and terrorist financing (in short, it is a digital mapping of values that are not a means of payment, an international settlement unit, electronic money, a financial instrument or a bill of lading, but is tradeable to legal means of payment and accepted as a means of exchange and can be electronically stored or transferred or can be traded electronically),
2 NSA judgment of the day 6 March 2018, reference no. II FSK 488/16,
3 Article 10(1)(7) Act of 26 July 1991 on income tax on individuals (hereinafter: ‘updof’), respectively Article 14 Act of 15 February 1992 on corporate income tax (hereinafter ‘updop’),
4 Application should be found here Article 27(1) updof,
5 Article 10(1)(3) in conjunction with Article 5b updof,
6 Article 9(3a) updof, respectively Article 7b(1)(6) lit. f updop,
7 Article 30b(1a)(1b) Personal income tax laws, respectively Article 22d Corporate Income Tax Act,
8 Article 22(14-16) updof, respectively Article.
9 Judgment of the WSA in Gliwice with 11 September 2018,reference no. I SA/Gl 464/18
10 MF message by day 4 April 2018, source: https://www.mf.gov.pl/ministerstwo-finansow/wiadomosci/aktualnosci/ministerstwo-finansow2/-/asset_publisher/M1vU/content/skutki-podatkowe-obrotu-kryptowalutami-w-pit-vat-i-pcc
11 Article 1(1)(1) point (a) in conjunction with Article 7(1)(1) point (b) of the Act of 9 September 2000 the tax on civil law acts.
Author
Leszek Dutkiewicz
Partner at Russell Bedford. From 2011 related to Russell Bedford Poland. In years 2008 – 2011 worked for leading consulting companies (Ernst&Young, KPMG, BDO) providing tax advisory services. He specializes in tax and economic law, primarily in international tax law, tax proceedings, VAT and transaction prices.
Author of a publication on tax, civil and international law issues. Lecturer in tax law training. He has legal education, in 2008 graduated from the Faculty of Law and Administration of the Jagiellonian University.