Taxation of trading in cryptocurrency on the basis of personal income tax in the light of the amendment of 23 October 2018

The article presents the approach of Polish legislation and interpretations of tax authorities in the virtual currency market, as an example of the amendment made Act dated 23 October 2018 the amendment of the Personal Income Tax Act, the Corporate Income Tax Act, the Act – Tax Ordinance and some other laws [1] . The focus was on tax interpretations of Polish tax chambers. The number of interpretation queries submitted indicates that the problem of legal use of cryptocurrency is still updated.

The emergence of cryptocurrency in the economy is a major challenge for all existing legal systems. Their extraction and creation, and in the end, their turnover, cause many legal and tax problems. [2] . It turned out that by purchasing the cryptocurrency, it could later be resold with profit, which should in principle be taxed.

The trend of extraction, and consequently the trading of cryptocurrency, has grown to such a size that world economies have begun to wonder what the cryptocurrency really is and how it should be taxed.

The approach of different countries' legal systems to alternative currency issues varies. In Poland it is referred to by the Electoral Order, as well as increasing tax interpretations in this area. We are looking at a bill that amends the law in this area, in terms of whether it sufficiently protects the issue of cryptocurrency taxation and, if not, what other changes could be made.

Definition of cryptocurrency

The Polish dictionary defines cryptocurrency as a contractual monetary unit operating in an accounting system based on encrypted digital communication technology, identified by a unique code, serving as a means of payment only in an electronic system [3] .

In turn, the European Central Bank already In 2012 defined virtual currencies as "non-regulatory money type issued in an electronic environment ..." [4] . Then In 2015 considers it a ‘digital representation of the value not issued by the central bank [...], which may in certain circumstances be used as an alternative to money’ [5] .

Definition developed by the Financial Action Task Force and subsequently expanded and developed by the European Banking Authority In 2014, provides that ‘virtual currency is a digital representation of the value that can be transmitted through IT technology and used as a means of exchange, settlement unit or storage, but does not have the status of official means of payment – i.e.

its value is not guaranteed by any government or Central Bank, but may be subject to state regulation’ [6] . This definition generally reflects the ideas of virtual currencies.

1. According to the author, Ryfa defines a specific category of electronic money with at least a few subcategories based solely on the trust of users, so that there is no official institution which is its guarantor, acting as a means of exchange and preservation of values. This money is highly flexible (beneficiary for improvements and modifications), often adapted to the latest online technologies, ensuring high mobility and free movement of value without intermediaries third (e.g. online banking) [7] . A specific definition of virtual currencies, on the example of Bitcoin, was also built by the Court of Justice of the European Union for a preliminary ruling. The TEU stresses that virtual currencies are currencies with a two-way flow which constitute a direct means of payment between parties that accept them, with the only purpose of the virtual currency being the function of a means of payment. In short, the TEU calls currencies a virtual contractual tender [8] , but it does not use the concept of cryptocurrency. Further synonyms of this concept can be found in literature: cyber-money, digital money, etc.

Qualifying Cryptocurrency revenue and revenue source

On 1 January 2019 entered into force of the Amending Act of 23 October 2018, which has made significant changes in the tax on the trading of cryptocurrency with income tax on individuals and corporate income tax. Before the mentioned amendment, there were no specific tax rules in Polish tax law. Doubts as to the correct classification of revenue from the trading of cryptocurrency arose under the Act of 26 July 1991 on personal income tax [9] and addressed the following issues:

• • what degree of ‘professionalisation’ of trading in virtual currency means that income from this currency should be taxed on terms appropriate to business income;
• • how to classify revenues that could not be taxed on terms appropriate to business revenue.

first The issue is closely linked to the highly assessed nature of the definition of economic activity under the Personal Income Tax Act [10] .

The economic activity within the meaning of that Act is a gainful activity, including manufacturing, construction, commercial and service activities, carried out “in its own name, irrespective of its outcome, in an organised and continuous manner, from which the revenue obtained is not included in other revenue from the sources listed under Article 10(1)(1), 2 and 4–9” [11] .

Therefore, it is impossible to establish precise conditions which result in the taxation of income according to the rules applicable to business income.

A good example is the individual interpretation of the Director of the Tax Chamber in Warsaw with 26 June 2014 [12] , in which it was considered that the revenue from the trading of cryptocurrency, achieved by the taxpayer, which in the tax year realised ‘about a dozen one thousand cryptocurrency transactions shall be taxed on terms appropriate to income from property rights rather than from business activities.

The action against this interpretation was dismissed by the Provincial Administrative Court in Warsaw by judgment with 11 September 2015 [13] Importantly, in the legal state in force at the time, the court was not bound by allegations of the complaint, which means that, while dismissing it, it shared the view of the tax authority that income generated under the conditions indicated should not be taxed on the basis of the principles applicable to income from economic activity [14] .

In this light, the question arises as to what kind of activity would fulfil the conditions for its recognition as an economic activity within the meaning of the Personal Income Tax Act, if several one thousand transactions do not meet the conditions for the organisation and continuity of business [15] .

In turn second from the indicated doubts was settled in the aforementioned judgment of the Provincial Administrative Court in Warsaw of 11 September 2015 and in the dismissing cassation of that judgment of the Supreme Administrative Court of 6 March 2018 [16] The courts of both instances considered that revenues which could not be taxed under the terms applicable to business income should be taxed in accordance with the rules applicable to property rights revenue.

In the light of the Amending Act of 23 October 2018 from 1 January 2019 the proceeds of the cryptocurrency trading are classified as income from cash capital – under personal income tax.

Importantly, in the light of the new legal situation, it is irrelevant for taxpayers to see whether the actions of the taxpayer concerned exhaustive business characteristics.

Superstition of this added by the Amending Act Article 30b(5b) u.p.d.o.f., according to which ‘the proceeds from the free sale of virtual currencies shall not be combined with revenue taxed on a specified basis Under section 1 and under Article 27 or Article 30c”.

As a consequence, the income generated by the free disposal of virtual currencies will always be the income tax 19% income earned [17] .

The above changes should be assessed positively, in particular, in view of the removal of uncertainty as to whether the income achieved under the conditions in question is taxable in accordance with the rules applicable to business revenue, or in accordance with the rules applicable to other types of income [18] .

Note also that no change Article 17(2) u.p.d.o.f.

through the Amending Act dated 23 October 2018, while extending the catalogue of income from cash capital, it leads to the conclusion that, if the market value of the tradable virtual currency is higher than the price of its disposal, there will be no basis for determining the return on that account at the level of the market value of the cryptocurrency sold.

However, different rules are based on corporate income tax, where there is a ‘wider’ basis for determining income at market value.

Costs of obtaining income and time possibilities of settling them

Before 1 January 2019 the method of accounting for the cost of obtaining revenue depended on the qualification of revenue from the sale of the virtual currency to the source of revenue.

In the case of the cost of obtaining revenue linked to revenue taxed on the basis of the principles applicable to income from property rights, the application should be found. Article 22(4) u.p.d.o.f., according to which revenue costs are deducted only in the tax year in which they were incurred.

However, the interpretation by the tax administration differs from the position presented above, namely in the personal interpretation of the Director of the National Tax Administration dated 20 March 2017 [19] a position was presented that the cost of obtaining revenue should be shown on a proportionate basis with revenue.

The Director of the National Tax Administration indicated in the above-mentioned interpretation that ‘The Applicant has made In 2016 the acquisition of cryptocurrency (...) because the applicant has obtained revenue from the sale of cryptocurrency (...) In 2017, cannot demonstrate in the statement 2016 the cost of obtaining income (losses) on the acquisition of a bitcoin cryptocurrency.’ Such a position is more favourable to the taxpayer than to settle costs ‘on an ongoing basis’, that the need to account for losses is no longer necessary, which would be less favourable to some taxpayers, since In one year can be settled up to 50% loss.

Loss settlement is also limited in time [20] . This could lead to taxation, not income, but income. The appointed position of Director of National Tax Information should therefore be evaluated positively. It is an expression, permitted in the present case, of the "breakdown" of the results of the linguistic interpretation [21] .

This entails the problem of identifying the sold cryptocurrency for the purpose of allocating expenditure for its acquisition with the revenue obtained.

The tax authorities consider that the FIFO principle should apply in this respect [22] .

As the Director of the Tax Chamber in Warsaw stated in an individual interpretation dated 26 June 2014 [23] : „when it is not possible to identify sold bitcoins The applicant may use the method ‘first came, first it came out.’ Although this is not explicitly expressed in the resolution of the authorities, it is possible to see here a solution to this problem per analogy to the rules for determining the cost of obtaining the proceeds from the sale of capital funds.

[24] .

As regards the method of accounting for expenditure linked to revenue taxed on the basis of the rules applicable to business income, the legal status applicable to 31 December 2018 – the tax authorities initially held that the rules in this respect were identical to the rules on the accounting of expenditure included in the source of the income of the "proprietary rights"; other is only the source of revenue [25] .

In turn, at some point an interpretative line began to develop, in the light of which the virtual currency is a commercial commodity, so the rules on the taxation of cryptocurrency trade in economic activities should be identical to those on the taxation of trade in other commercial goods.

In this light, expenditure on buying a virtual currency should be deducted on an ongoing basis [26] .

The consequence of this position is the need to make an annual inventory of the nature in which the value of the unsold virtual currency should be taken into account and the obligation to adjust income by the value of the retention differences [27] .

Valuation of virtual currencies in the inventory by nature, according to the authorities, should take account of the FIFO method already mentioned [28] . However, this view of the tax authorities began to be questioned by administrative courts.

For example, the Provincial Administrative Court in Olsztyn in judgment of 9 May 2018 [29] allowed the clearing of costs from cryptocurrency trading in the FIFO business method – i.e. according to the initial approach of tax authorities, which subsequently changed.

The absence of a uniform interpretation of the correct method of clearing the costs of acquiring the virtual currency in the course of business has ended the Amending Act. In her light from 1 January 2019 The costs of acquiring a virtual currency will always be settled on an ongoing basis. As added Article 22(15) u.p.d.o.f.

the costs of obtaining revenue from the sale of the virtual currency ‘are deducted during the tax year in which they were incurred’. This is a change that should be assessed positively.

However, the second rule introduced by the Amending Act raises doubts, according to which the excess cost of obtaining revenue from the payment of the sale of the virtual currency over the proceeds of the payment of the sale of the virtual currency obtained during the tax year increases the costs of obtaining revenue from the payment of the sale of the virtual currency incurred in the following tax year [30] .

The question arises whether this surplus "passes" for the next year only once or more. For example, whether a taxpayer purchasing a cryptocurrency in year x and selling it in year x+2 (assuming no other transactions) will be eligible for settlement in year x+2 expenditure on acquisition of cryptocurrency incurred in year x?

In my opinion, the result of the linguistic interpretation of the provision in question should be the affirmative answer.

If the excess costs over the revenues of the year x ‘passes’ in the form of the costs of obtaining revenues for the year x+1, In the case of ‘non-consumation’ of these costs, there is an excess of costs over revenues in the year x+1, which should increase the cost of obtaining revenue of the year x+2.

The result of language interpretation is also confirmed by the internal system interpretation [31] . Negatively, the failure to resolve this issue directly in the amending law should be assessed.

Taxation of exchange one cryptocurrency on another

In the past legal state, the taxation of cryptocurrency swaps also raised considerable doubts, i.e. virtual currency swap operation one of a kind per other type of virtual currency [32] .

According to the tax authorities, such a transaction did not remain tax neutral, whereas administrative courts considered such a position to be incorrect [33] . The subject matter of the dispute was whether it was possible to calculate the tax base for such an activity.

It should be stressed that the case law favouring taxpayers is based on complaints against individual interpretations. The courts were, in effect, forced to repeal interpretations which were unfavourable to applicants, considering the description of the facts made by those applicants.

As the Provincial Administrative Court in Olsztyn stressed, ‘The tax authority should justify its interpretation with reference to the factual circumstances set out in the request, in this case, in the light of the applicant's lack of technical ability to determine the actual taxable amount of the replacement transaction’.

It is therefore possible that in a dimensional case a court would take a different position. The lack of technical possibilities to calculate the tax base in this situation seems obvious. Importantly, the Amending Act introduced the tax neutrality of virtual currency swap transactions.

As it is Article 17(1)(11) u.p.d.o.f., income from the sale of a virtual currency shall be taxed, and the ‘forgone of a virtual currency’ shall mean the exchange of a virtual currency into a legal tender, commodity, service or property right other than a virtual currency.

No axiological justification can be found for excluding from the cost of obtaining revenue from the conversion of virtual currency to another virtual currency [34] , because such a swap – in the end – serves to obtain more revenue (reduction of loss) from the sale of virtual currency.

Summary

As a general rule, the adoption of the Amending Act, the purpose of which was to regulate the tax treatment of cryptocurrency on the basis of personal income tax, should be positively assessed. It has been realised, although it is possible to see areas where the law does not dispel existing doubts and even multiply them.

It is therefore appropriate to propose to amend the provisions in this respect or to issue a general interpretation (or tax clarifications) in which questionable matters will be clarified, including in particular clarification of the rules for the accrual of the costs of obtaining revenue from virtual currency trading, as well as determining whether it is acceptable to recognise the costs of obtaining revenue in the form of ‘copying’ of a virtual currency.

Summary

The emergence of cryptocurrency is a major challenge for all existing legal systems. Trade, digging and creating cryptocurrency generates many legal and tax controversy. The problem of non-taxing cryptocurrency was generally recognised at the time of their appearance.

It turned out that by buying cryptocurrency, it could later be resold with profit. Profit should normally be taxed. The trend of digging, and hence of trading cryptocurrency, has grown to such a size that the economies of the world began to wonder what the cryptocurrency really is and how it should be taxed.

The rapid development of global virtual currency systems makes the issue of their regulation a necessity, especially on the grounds of personal income tax.

Summary:

The maturity of cryptocurrencies is a major challenge for all existing legal systems. Trading, mining and creation of cryptocurrencies raises many legal and tax issues. The problem of black of taxation of cryptocurrencies was noted fundamentally at the time of their retirement.

It turned out that by purchasing a cryptocurrency, you can later resell it with a profit. Profit in principal should be taxable. The trend of mining and consecently trading in cryptocurrencies has grown to such offers that the world's economies have begun to wonder what cryptocurrence really is and how it should be taxed.

The rapid development of virtual currency systems with a global Reach makes the issue of their legal regulation a necessity, especially on the ground of personal income tax.

https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf (access: 22 May 2022)

[5] European Central Bank, Eurosystem - virtual currency schemes February 2015

https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemesen.pdf