Deduction of cryptocurrency – a new source of revenue from 1 January 2019

Year 2019 brought some relief to the cryptocurrency industry. Uncertainty regarding the clearing of the various transactions covered by the cryptocurrency has been replaced by the introduction of completely new rules that at least generally regulate income tax on these transactions.

This is a big step forward, because so far the interpretations of the tax were often contradictory, illogical, issued with misunderstanding of the subject. This Article shall analyse those provisions. Tax payers are currently facing new challenges, in particular with regard to proper documentation of cryptocurrency transactions.

Introduction

The encyclopedic definition, referring to blockchain technology, defines cryptocurrency as a distributed (functioning in peer-to-peer network) accounting system, based on cryptography, storing information about the state of possession in contractual units.

The holding state is linked to the individual node of the system in such a way that the control of the portfolio is exclusively held by the holder of the corresponding private key and it is impossible to issue the same unit twice.

The cryptocurrency concept allows anonymous possession and anonymous transfer of cryptocurrency values within the network by users identified by public keys (addresses) generated from a private key (linked to a wallet).

Statutory definition of cryptocurrency

On 1 March 2018 A definition of a virtual currency has been introduced into the national legal order, which includes both cryptocurrency and centralised virtual currencies. This definition is largely based on the definition used by the FATF[1] and used in the draft amendments Directive 2015/849 to 20 May 2015 on the prevention of the use of the financial system for money laundering or terrorist financing, amending Regulation (EU) 648/2012 and repealing Directive 2005/60 and the Commission Directive Directive 2006/70/EC[2].

As per content Article 2(2)(26) Act on 1 March 2018 combating money laundering and terrorist financing[3], Whenever a virtual currency is referred to, it means a digital mapping of values that is not: legal tender issued by the NBP, foreign central banks or other public administration bodies, an international settlement unit established by an international organisation and accepted by or cooperating with individual countries of that organisation, electronic money within the meaning of the Act with 19 August 2011 on payment services[4], the financial instrument within the meaning of the Law of 29 July 2005 on trading in financial instruments[5], a note or a check – and 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.

Both income tax laws refer to this definition. According to their content, whenever there is a ‘virtual currency’ in the law, this means a virtual currency within the meaning of Article 2(2)(26) Anti-money laundering and terrorist financing laws[6].

Explanation of cryptocurrency

Blockchain (block chain) is a decentralised and distributed database in an open source model on an online network with peer-to-peer architecture (P2P) without central computers and no centralised storage space for accounting for individual transactions, payments or accounting records, encoded using cryptographic algorithms.

Transactions are signed digitally using public key cryptography using elliptical curve cryptography (ECDSA) and are public, although users are anonymous. Transactions are dispersed, meaning they are not monitored by the main intermediary.

They are processed by computers in the peer-to-peer network, which does not verify transactions by using central computers.

Transactions are called nodes and after confirmation of correctness added to a replicated and time-labelled transaction log, called a block. Transaction processing is not free of charge – a percentage commission is charged in a certain amount of the cryptocurrency. Blockchain is a public and public register that anyone can access.

The creation of cryptocurrency (more often used return – extraction – so-called mining) is actually confirming transactions of users who send cryptocurrency among themselves. The entities that ‘distract’ have no knowledge of the consignors and recipients. The trial goes anonymously.

There are only users and entities in the cryptocurrency network that ‘distract’, so-called miners (miners) – by confirming transactions, they control that users do not send more units than they have.

New way of qualifying the proceeds from the cryptocurrency disposal to a specific revenue source

Revenues from trading in virtual currencies are currently eligible according to capital gains income (in terms of the Corporate Income Tax Act – Article 7b(1)(6) point (f) or to income from cash capital and in u.p.d.o.f. – Article 17(1)(11)). The eligibility of revenue from the Cryptocurrency divestment on the grounds of u.p.d.o.f. to the source of revenue ‘cash capital’ occurs regardless of whether the taxpayer achieves these revenues in the course of its business. The proceeds from the sale of cryptocurrency shall not be combined with other income from cash capital (u.p.d.o.f.) or other income from capital gains (the Corporate Income Tax Act). This means in practice that the legislator has identified a new source of revenue. The most significant consequence of such a situation is, for example, the fact that the loss incurred on the trading of virtual currencies cannot be deducted from the taxpayer's other income, e.g. from its business. To the source of ‘virtual currency trading’ revenue (capital gains on land the Corporate Income Tax Act or income from cash capital on the basis of u.p.d.o.f.) are not credited with revenues of economic operators, consisting in the provision of services to:

• (a) exchange of virtual currencies and means of payment,
• (b) the exchange of virtual currencies into other virtual currencies,

(c) brokering in exchange referred to in point (a) or (b),(d) keeping accounts, i.e. electronically identifiable data sets, ensuring that persons entitled to use virtual currency units, including the conduct of transactions in their exchange[7].

Return on cryptocurrency

On the basis of both laws, the legislator accepted that for revenue from the payment of the sale of the virtual currency (classified as capital gains on the basis of the Corporate Income Tax Act or to income from cash capital on the basis of u.p.d.o.f.) is considered to be the conversion of the virtual currency into a means of payment[8], goods, services or property rights other than virtual currency or the regulation of other liabilities by virtual currency[9].

In the legal state since 1 January 2019, provisions the Corporate Income Tax Act state clearly that revenue does not include the value of the virtual currency received in exchange for another virtual currency (Article 12(4)(27) the Corporate Income Tax Act).

Under u.p.d.o.f., this is due to the definition of revenue from the sale of the virtual currency (Article 17(1f) (u.p.d.o.f.) Consistently, it is not considered to be the cost of obtaining revenue from expenditure incurred in converting the virtual currency into another virtual currency (Article 16(1)(75) the Corporate Income Tax Act, Article 23(1)(66)) Thus, the legislature explicitly states in the Act that the conversion of cryptocurrency into another cryptocurrency is tax neutral and does not give rise to any consequences in income tax.

This has so far been the subject of a number of disputes with tax authorities that have dealt in a disunited way with this issue.

In most individual interpretations so far issued, the National Tax Information claimed that the exchange of cryptocurrency for another cryptocurrency is subject to taxation as is any other barter transaction, and the lack of the possibility of establishing income based on tax rules is a taxpayer's problem.[10]. All the more surprising is the wording, which is included in the explanatory memorandum to the bill: "The exchange between virtual currencies, whether on the stock exchange or individually, will remain indifferent in income tax".

Importantly, in recent judgments, administrative courts share the view of fiscal neutrality of cryptocurrency exchange.

In one of the judgments of the Provincial Administrative Court stated that ‘the point of origin of the revenue from the exchange one cryptocurrency to another is only the moment they are converted into traditional currency or paid cryptocurrency for goods or services’[11].

The Court of First Instance explained that, in a situation where there is no method to determine the actual value of the income for the moment of the replacement transaction, only an estimate of it is possible. However, only the tax base is eligible to be estimated.

In the judgment of the court, the taxpayer cannot be required to estimate the value of the revenue due when the provisions do not entitle him to it.

Revenue costs — eligibility of specific expenditure

In case of trading in cryptocurrency, the taxable person's income shall be taxed. The taxpayer is to be able to take account of expenditure related to this on a general basis resulting from the content, respectively Article 15(1) the Corporate Income Tax Act and Article 22(1) u.p.d.o.f.

Given the specific feature of the cryptocurrency market, which is anonymity, it is particularly important to document these expenses properly.

As a result of the amendment, the two laws contain a provision that the costs of obtaining revenue, from the payment of cryptocurrency, constitute documented expenditure directly incurred for the acquisition or disposal of the virtual currency, including documented expenditure incurred for the entities in question under Article 2(1)(12) u.p.p.f.t.

(e.g. cryptocurrency exchange, cryptocurrency exchange)[12].

The tax costs are therefore documented expenditure on the acquisition of virtual currencies incurred in a given tax year, but only directly related to the acquisition and sale of virtual currencies. The cost of obtaining revenue is not, in particular, as the legislator intended, the cost of financing the purchase of virtual currencies.

In the light of the above regulations, it should be clear that in the case of transaction confirmation entities, the so-called miners (miners) who, in return for making the computing power available, receive a remuneration in the form of cryptocurrency (the so-called cryptocurrency) as the cost of obtaining revenue, among other things, the cost of used electricity. This is confirmed directly by the tax authorities, considering that the expenditure on electricity incurred in obtaining the original cryptocurrency, which after the sale will constitute income from business activities, is the cost of obtaining revenue[13].

In the light of the new regulations, eligible revenue from the depreciation of cryptocurrency to a separate source of revenue (these revenues do not combine with revenue from other sources), the properly documented cost of extracting cryptocurrency (e.g. the cost of purchasing electricity) should be the cost of that source.

Otherwise, an economic operator exclusively engaged in ‘copying’ cryptocurrency would only record losses from the source of revenue — an economic activity — while taxing revenue and not revenue from the source of revenue — the divestment of cryptocurrency.

The legislator does not indicate exhaustively, which expenditure may be considered as income costs. The possibility to include a specific expenditure in the category of revenue costs depends on the existence of a causal link, i.e.

the incurred expenditure has or may have an impact on the formation or increase of that revenue, or the operation of that source.

There is no doubt that there is a direct link between the expenditure incurred on the acquisition of electricity used to supply the so-called excavators (as well as the acquisition of these equipment (ASIC), the purchase price of which represents the cost through depreciation write-offs) and the acquisition of cryptocurrency.

Documentation of expenditure

The cryptocurrency trading activities are mainly carried out through so-called cryptocurrency exchanges, most often located outside the EU. The specificity of virtual exchange activities is that the taxpayer does not have access to any identification information second transaction pages.

Transactions without the use of this type of platform are not excluded, but here too the parties to the transaction remain anonymous. The exception is that the parties to the transaction, when concluding barter contracts, clearly define the subject of mutual benefits, in particular their value.

The purpose of such actions is to later be able to document the cost of acquiring cryptocurrency in a way that would not raise any doubt for the ficus. However, such situations are rare.

It is customary to enter into transactions in the purchase or sale of cryptocurrency when payments are made or received through stock exchanges, exchange exchanges. The transaction page receives immediately payment in the form of other virtual or traditional currencies.

The only evidence of the transactions carried out is statements from the exchange accounts, including purchase operations (FIAT -> crypto), sales (crypto -> FIAT) or exchange of cryptocurrency (crypto -> cryptocurrency), but also confirming the transfer of cryptocurrency to private wallets or transfer of traditional currency to accounts, e.g.

in banks. In the latter case, the taxpayer has a bank account statement.

There is a legitimate concern among taxpayers about the correctness of documenting operations that are covered by cryptocurrency. Concerns are exacerbated by the position of some tax authorities, which, in the author's opinion, mistakenly consider that the Regulation on the keeping of a tax statement of revenue and expense sets out a closed catalogue of documents underlying the accounting of the costs of obtaining revenue and revenue, and do not provide for expenditure to be recorded in the tax account book for the purchase of cryptocurrency on the basis of, inter alia, confirmation of bank transfers and statement of accounts held by the stock exchanges[14].

The absence of the possibility to record the expenditure in the tax revenue and income books, given the lack of the form of proof required by the abovementioned Regulation, does not mean that it cannot automatically be regarded as a cost of obtaining income within the meaning of the Personal Income Tax Act.

Therefore, if the taxpayer otherwise documents the tax cost fairly, it should take this into account during the tax year in the current tax advance as well as in the annual income tax settlement.

If the document meets the requirements for recognition as an accounting proof under the provisions of the Act of 29 September 1994 on accounting[15] or a regulation of the Minister of Finance from 26 August 2003 on the keeping of a tax revenue and expense account[16], it will also be an appropriate document for income tax purposes.

However, the specificity of the trading of cryptocurrency implies that, apart from the exceptions mentioned above, there is no access to information related to second the transaction party. There is also no central conversion rate for cryptocurrency, which is an important problem when switching one the type of cryptocurrency on another.

In such a situation, the judicature thesis is of fundamental importance that the failure of the document does not automatically result in the loss of the right to charge expenditure for tax costs.

The expenditure shown by a defective accounting document cannot be disregarded solely because of the defects of the document, unless it is beyond doubt that such expenditure has not been incurred at all.

The taxpayer may provide other evidence showing that the costs have been incurred and the purpose of the expenditure was to obtain revenue. This is due to the provisions of the Act of 29 August 1997 - Tax Ordinance[17].

They allow recognition as proof of anything that may contribute to the clarification of the case, and not contrary to the law. Since the provisions do not provide for a form of documenting the acquisition of cryptocurrency, it is appropriate to take as proof of their acquisition any document submitted by the taxpayer.

However, it will not be sufficient to use your own internal proof, it should come from an external entity – a seller or a stock exchange.

Accrual of costs

The lack of any regulation in this area has caused the biggest problems so far. The methods used for the settlement of trading in financial instruments, as the most closely to the specificity of trading in cryptocurrency, were not supported by any legislation.

Solutions in this area from the start 2019 They therefore seem to be a real revolution.

Content Article 15(12-13) the Corporate Income Tax Act (by Article 22(15-16) (u.p.d.o.f.), the costs of obtaining revenue related to the acquisition or disposal of cryptocurrency shall be deducted in the tax year in which they were incurred, with a possible excess of these costs over the revenues generated in the tax year in question increasing the costs of obtaining revenue incurred in the following tax year.

With this method, it is not necessary to identify specific expenditure with specific revenue.

All costs incurred by the taxable person in a given tax year shall be shown in the annual statement, whether or not he receives income in the same year. The costs of a given tax year, which will exceed the revenues generated this year, will increase the tax costs of the following tax year. In case of cryptocurrency, according to content Article 7(6) the Corporate Income Tax Act and Article 9(3a) u.p.d.o.f. do not apply general tax loss accounting rules

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1 FATF (The Financial Action Task Force) – Special Group on Money Laundering. 2 Official Journal of the European Union L, No. 141/73. 3 Journal of Laws of 2018, item 723 as amended, Further u.p.p.f.t. [4] i.e. Journal of Laws of 2017, item 2003. [5] i.e. Journal of Laws of 2018, item 2286.

[6] Article 5a(33a) Act on 26 July 1991 on income tax on individuals, i.e. Journal of Laws of 2018, item 1509 as amended, Further: u.p.d.o.f.; Article 4a(22a) Act on 15 February 1992 corporate income tax, i.e.

Journal of Laws of 2018, item 1036 as amended, Next: the Corporate Income Tax Act 7 Appropriate Article 7b(3) the Corporate Income Tax Act, Article 17(1g) u.p.d.o.f. Examples include entities operating cryptocurrency exchange and cryptocurrency exchange.

8 On the ground the Corporate Income Tax Act This refers to the conversion of a virtual currency to a 'payment measure', whereas under u.p.d.o.f. the provision provides for the conversion of a virtual currency to a 'legal tender'. 9 Cf. Article 7b(1)(6) point (f) the Corporate Income Tax Act and Article 17(1f) u.p.d.o.f.

10 For example, in an individual interpretation, the Director of National Tax Information from 2 October 2017, reference no.

0112-KDIL1-3.4012.237.2017.2.PR, considers that ‘the market value of cryptocurrency is determined by the free market mechanisms for demand and supply in virtual currency exchange services, on the basis of which their current exchange rate is determined in relation to traditional currencies.

Thus, in this case, there is a remuneration for the units of virtual currency exchanged (sold) for other virtual currencies whose value is calculated on the basis of their current exchange rate against traditional currencies (it is possible to indicate the value of the transaction in PLN) and this means that there is a tax base, according to Article 29a(1) Act’.

Similarly, the Director of National Tax Information stated in the interpretation of 6 April 2018, reference no. 0112-KDIL3-1.4011.88.2018.2.AN. This is an obvious example of a lack of understanding of the subject. 11 Judgment of the WSA in Szczecin 19 December 2018, reference no. I SA/ Po 802/18. Improprietary sentence.

12 Appropriate Article 15(11) the Corporate Income Tax Act, Article 22(14) u.p.d.o.f. 13 Individual interpretation of National Tax Information from 4 July 2018, reference no. 0113-KDIPT2-1.4011.234.2018.3.RK. 14 Cf. individual interpretation of the Director of National Tax Information from 9 March 2018, reference no.

0113-KDIPT2-1.4011.532.2017.1.MD. [15] i.e. Journal of Laws of 2018, item 395. 16 Journal of Laws of 2017, item 728. [17] i.e. Journal of Laws of 2018, item 800.