Cryptocurrencies have been a phenomenon in recent years and for many investors and traders it is an attractive profit opportunity. Despite the huge popularity of digital currencies, the Czech Republic does not yet have a special tax arrangement for this sector.
To many avid “traders”, it may seem that cryptocurrencies are not subject to taxes, but the opposite is true. Even according to the existing rules, it is income like any other. Evan Gaye, a tax specialist at consultancy Deloitte, explains how this is done, for example, through cryptocurrency mining, donation and taxation.
In the Czech Republic, we do not yet have a special regulation in the field of taxation of cryptocurrencies. The financial management, as well as the CNB, do not view cryptocurrencies as investments, and therefore do not apply to them even the test of time (The period required to hold the securities necessary for exemption from paying income tax for natural persons. If you own the securities for more than three years, you do not have to pay taxes). So how does an investor tax any cryptocurrency gain to avoid problems with the IRS?
The current wording of the law does not contain any provision to exempt any proceeds from selling or holding cryptocurrencies. Therefore, a natural or legal person is generally taxed both on the profit that they make as part of the sale of cryptocurrencies and on the income that they get from holding cryptocurrencies.
So how do local authorities and CNB view cryptocurrency at the same time, when it is not actually an investment?
According to CNB, cryptocurrencies are neither electronic money nor an investment tool. It is also not a payment service, and if the cryptocurrency is exchanged for CZK or another currency, then in such a case it is not an exchange activity. This was also the basis for the Ministry of Finance, which recommends looking at cryptocurrencies as a stock.
Is there at least a clearer legislative framework for taxation in this sector?
At the moment, no amendment to the law is expected that would address the cryptocurrency field in more detail. The latest document that could serve as a “cookbook” for taxation of cryptocurrencies is a document issued by the Directorate General of Finance in March, entitled “Information on the Tax Assessment of Transactions with Cryptocurrencies (such as Bitcoin).”
Not only cryptocurrencies are classically traded on exchanges, but cryptocurrencies are also traded, for example, the so-called mining or we can sell our services to them. Is this also taxable?
Since there is no income while mining cryptocurrency, there is no need to levy taxes in case a natural or legal person mines cryptocurrency. Only the profit from the sale of cryptocurrency, or the exchange of cryptocurrency for a good, service, or other cryptocurrency, is subject to tax.
Are there any fundamental differences in the way cryptocurrency is taxed for individuals and legal entities?
In general, no. In both cases, the profit made on the sale must be a Transformation To impose a tax on cryptocurrencies.
Does the investor have to file a tax return even if he is in a loss for the year?
The filing of a tax return for natural persons is based on the income earned for the specified period, and not on profit or loss. In general, it can be said that once you have achieved an income of more than 15,000 CZK, you are obligated to file a tax return.
Is it possible to evade taxes?
Are there any circumstances in which a cryptocurrency investor does not have to file a tax return?
Better not. These are very specific cases, for example, if you only have income from your job and the income from cryptocurrency reaches 6000 CZK. However, I point out again that this is income, not profit.
Are there any (legal) ways to avoid taxes? For example, investing through mutual funds…
The classic holding of cryptocurrencies directly and their sale or exchange are subject to taxation. The Income Tax Law does not contain any provision dealing with exemption from cryptocurrency income.
For mutual funds, for example, the tax estimate depends on the specific setup of the mutual funds. Generally, if a stock certificate is sold after the three-year time test has expired, the income from the stock certificate sale must be exempt from income tax.
However, it is necessary to know how the specific investment works, because in practice there may be a situation where the investment funds of the investor are transferred from the higher risk assets to the less risky ones, and in practice this step may mean that the time test of unit ownership is interrupted .
Can a cryptocurrency trader deduct any tax items?
A crypto entrepreneur, i.e. a natural person who earns income from cryptocurrency as part of their ongoing business, can claim either the expenses in the actual amount or the expenses as a percentage against the income from the business. Either 60% or 40% flat rate, depending on whether or not he has a business license.
At the same time, the taxpayer can use the same tax deductions and deductions on the tax return as if he had not traded in cryptocurrency. For more information, I recommend looking at the aforementioned document issued by the Public Finance Department.
Pay attention to financial supervision
Are cryptocurrencies subject to value added tax?
VAT is coordinated at the EU level, so it applies to cryptocurrency transactions It must respect European legislation, including relevant rulings of the Court of Justice of the European Union.
From the point of view of the value-added tax, the purchase and sale of cryptocurrency means the exchange of legal currency, that is, it is a transaction in the value-added tax system, exempt from value-added tax, without the right to tax deduction, similar to the currency exchange activity.
Cryptocurrency mining itself for private purposes may contain an element of chance, when there is no direct connection between the miner and its income, and there is also a lack of contractual arrangements. Cryptocurrency mining for private purposes, that is, if other conditions are met, is not subject to VAT.
And what about the legacy of cryptocurrency?
Inheritance is one of the free incomes that are exempt from income tax for both individuals and legal entities.
However, here it is important to draw attention to the so-called Law Violation Institute, which currently remains a common tool of the tax administrator during tax audits – that is, tax managers are increasingly attacking situations where the taxpayer does everything that was in accordance with the law, however The main reason for his actions was to gain some tax advantage.
Each taxpayer should think about transactions with cryptocurrencies, what is the main purpose of the particular steps and whether it can be a violation of the law in the particular case.
At the same time, I would like to draw your attention to the fact that the Finance Department is currently initiating targeted inspections of tax entities that carried out cryptocurrency transactions for the 2019 and 2020 tax periods, as evidenced by the press release of the Finance Department from July of this year.
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