The draft of the Act amending the Personal Income Tax Act and the Corporate Income Tax Act provides for the introduction of separate regulations on taxation of income from virtual currencies. Natural and legal persons will pay 19% of tax on income from disposal of cryptocurrencies. According to the draft, the new regulations shall become effective as of January 1st, 2019, but they will apply to income (revenue) from transactions concluded after January 1, 2018.
Controversial propositions
In April this year, considerable controversy was raised following the explanations of the Minster of Finance regarding the obligation to pay the tax on civil law transaction when trading cryptocurrencies. This solution, which did not include the specificity of the market, would lead to a paralysis of tax authorities, which would be flooded with thousands of tax declarations on civil law transactions and a slowdown in the development of the cryptocurrency trade market in Poland due to a rather unconventional taxation method, where each transaction needs to be taxed (even if it showed loss). In reaction to the pressure of groups involved in cryptocurrency trading pursuant to the Regulation of July 11th, 2018, the Minister of Finance has resigned from taxation of agreements of sales and exchange of cryptocurrencies with the tax on civil law transactions. However, he did not abandon the idea to tax this kind of income.
What is cryptocurrency within the meaning of the regulations?
The latest amendment to the regulations, which, according to the draft, is to become effective as of January 1, 2019, is based on the definition provided for in the Act on Combating Money Laundering and Financing of Terrorism and defines cryptocurrency as a digital image of value, which is exchangeable in business transactions to legal tender and accepted as the means of exchange as well as can be electronically stored or transferred, or can be subject to electronic trade. The scope of this rather wide definition covers both the so-called cryptocurrencies (e.g. Bitcoin, Litecoin, Ethereum) as well as centralized virtual currencies (e.g. WebMoney, Perfect Money).
A particular way to classify revenue
Based on the PIT Act and CIT Act, revenue from cryptocurrency trade shall be classified as revenue from financial assets or capital gains. They will be separate sources of revenue with special taxation rules. As a result, a possible loss from trading in cryptocurrencies cannot be deducted from the taxpayer’s other revenue, e.g. trading of shares or business activity.
Pursuant to the amendment, settlement of liabilities, e.g. paying with a virtual currency for goods or services, will be construed as selling it. In that case, the person paying with cryptocurrencies for another product or service will have to include its value in the tax declaration, with the value of the purchased product or service constituting the revenue. Exchanging one cryptocurrency for another shall be considered to be tax neutral. The same regulations will apply to income from transactions in cryptocurrencies which have been mined.
Tax declaration every year
Taxpayers trading in cryptocurrencies will have to calculate and submit a tax declaration on their own, regardless of whether they gain income from trading virtual currencies. Due to the specificity of cryptocurrency trade, costs cannot be assigned to particular income. As a rule, they should be settled together with income in the year they were incurred. However, if within a given year the taxpayer’s costs exceed income, it will be possible to settle incurred expenses together with income in the following tax year. Only expenses directly incurred on the purchase and sale of virtual currency can be considered to be tax-deductible. These do not include indirect costs, such as costs of loans and borrowings to finance the purchase.
Theoretically, the amendments to the taxation of virtual currencies are supposed to dispel doubts resulting from the lack of clear regulations with respect to the taxation of income from trading in virtual currencies. However, it is important to notice that they actually give rise to further questions regarding, e.g. what should be considered a direct cost related to the purchase of cryptocurrency, or the method to include the value of goods or services financed using virtual currencies.
Example[1]
A taxpayer who is a natural person purchased on his own account shares on the Warsaw Stock Exchange for PLN 10,000.00 within a single tax year. After some time, he sold them for PLN 11,000.00, which means he earned income of PLN 1,000.00. At the same time, he purchased Bitcoins for PLN 10.000,00, which he intends to sell next tax year. In his end-of-year tax declaration, he will report taxable income from shares of PLN 1.000,00 and expenses related to purchasing Bitcoins. The expense related to the purchase of cryptocurrency will be settled next tax year, and will only reduce the value of revenue from the sale of cryptocurrency (not from selling shares).
[1] The suggested solution was based on the draft of the Act amending the Personal Income Tax Act, the Corporate Income Tax Act, the Tax Ordinance Act and some other laws of August 28, 2018, which may undergo some modifications in the course of further works.
