Whether or not there is a need to pay taxes on bitcoin (or declare it) in Ukraine: legal advice
Natalia Radchenko, partner of the tax law practice “Juscutum”:
Mining is not prohibited on the territory of Ukraine. Basically it is the activity in the area of utilizing equipment in order to obtain assets. Here are some practical tips for miners:
Your mining equipment must be of legal origin. You either bring officially the imported one, or buy components in Ukraine and order the assembly of the miner, which will have Ukrainian origin. It is not the right decision to use for a commercial purpose the equipment, purchased for cash without supporting documents. Because if your equipment is seized during the search process, it will be impossible for you to return it. No documents, no equipment.
The situation is better in case of private entrepreneurs as the equipment does not need to be placed on balance sheets. It is enough simply to have a documentary confirmation of the legality of its acquisition. For enterprises using the general taxation system the placement on balance sheets and commissioning are mandatory.
It is important to have a confirmation of the legality of the money that your equipment was purchased with. When it comes to hundreds of thousands of dollars, you should have a clear explanation for the regulatory bodies where you got them. Because they will ask. Usually they notice the fact that a natural person has not declared the income sufficient to purchase such expensive equipment in the property status declaration. And if you are a private entrepreneur of the 3rd group then you operate with an amount, which does exceed 5 million UAH per year, do not forget about it.
Pay for electricity to the full extent and enter into relevant contracts. Otherwise, you will get into trouble with the law.
Of course, we are very pleased that financial regulators have finally decided what is NOT a cryptocurrency and have excluded from the list “cash equivalent” along with currency, electronic money and securities. We consider that we still have to draw the line under this issue and finally decide whether cryptocurrencies should be classified as products or financial instruments.
Now we adhere to the concept that cryptocurrency bears the marks of intangible assets, which are defined in the Ukrainian Accounting standard No.8 “Intangible assets”. According to the given Accounting standard, an intangible asset is a nonmonetary asset that has no tangible form and can be identified.
Taxation of income received from the sale of cryptocurrency is a complex issue. However, we come to the decision that it can be done more easily by individual entrepreneurs engaged in mining, rather than by an enterprise operating based on the general taxation system. An individual entrepreneur does not maintain accounting records and is obliged to declare monetary funds, constituting the part of his/her income. Therefore, we see no obstacles to declaration for those individual entrepreneurs selling cryptocurrency without cash transfer and receiving money to a bank card. If the sale is on a cash basis, then an individual entrepreneur shall also indicate this cash in a ledger of income and expenditure and pay a single tax thereon.
The most thorny issue is the issue of control. The tax authorities are entitled to inspect the accuracy of calculations of the taxes paid. In theory, as a part of the inspection tax officers may ask to show your wallet content to make sure whether the amount of received income is understated or not. In practice, we don’t know any cases of such monitoring. It is known that some international audit companies certify the legality of purchasing cryptoassets on the basis of the blockchain transactions analysis.
Tokens and ICO
This activity raises the greatest number of suspicions on the part of the controlling bodies. Some representatives see signs of fraud in the sale of tokens for money. Therefore, the tax structuring of ICO occurs, mainly, not under the Ukrainian Tax Legislation. However, do not forget that a natural person, who is a citizen of Ukraine receiving income within ICO, is obliged to declare such an income and file a declaration of property. Build your tax history thoughtfully and in advance.
Nazar Polyvka, partner of Axon Partners, Oksana Kobzar, lawyer and freelance adviser of Axon Partners on cryptocurrenсу taxation:
Despite the ambitious statements of the regulators, there would be no boom in declaring the income received from cryptocurrency operations. The guys from the National Bank of Ukraine, of course, did a great job. They explained what a cryptocurrency does not include. However, they did not give any clues how to deal with it. In fact, everybody avoided the responsibility by having removed cryptocurrency from their competence and having left a huge space for imagination to lawyers and, unfortunately, tax inspectors.
The Tax Code does not comprehensively regulate the issue of paying taxes on mining or trading. That is why there are only speculations. If the cryptocurrency status is not regulated by law, a court will take care of it. In addition, a court shall take into account the presumption of legitimacy of the taxpayer’s actions. If there are gaps in the law, it should be stretched in favor of the payer.
A tax inspector can interpret operations with cryptocurrency in a variety of ways, depending on what the intended purpose is.
The operations of legal entities should be viewed in two contexts. First, the financial result of transactions is the subject to profit tax, and secondly, the transactions themselves are the subject to value-added tax.
If tax inspectors check the transactions where the resident of Ukraine paying VAT sells crypt and decides to assess an additional VAT, it will be more advantageous for them to call this operations for the supply of products or services. The supply of products or services is the subject to VAT only if it occurred on the territory of Ukraine or when importing products. In this case, the key issues are whether cryptocurrency is a product or a service and where the movement of products occurred, what should be considered as the place of service supply.
Intangible asset, derivative, service and tweaking
In the Tax Code, a product is understood as tangible or intangible assets or securities or derivatives. Our regulators have already expressed their opinion concerning securities and did not recognize cryptocurrency as a security. Based on the International Accounting Standards, cryptocurrency is the closest to the concept of intangible asset. Nevertheless, it is possible to talk about an intangible asset only when an object is recorded on the balance sheet of the enterprise as an intangible asset.
In fact, cryptocurrency is often similar to such a variety of goods, in the understanding of the Tax Code, as a derivative. But according to the formal criteria, it is not always suitable for this definition and if a regulator denies the status of cryptocurrency as a security, then it hardly recognizes it as a derivative. A crypt can also be called a service, but such a definition will be tweaked as well, since the subject in question is the one providing service and the nature of the service itself lies elsewhere. Although the Tax Code calls a sale of services essentially all transactions with other property objects, except for goods. In other words, it can hardly be said whether cryptocurrency is a product or a service.
Where is the delivery and how to tell heads or tails?
Now the second question is where the delivery takes place. If we have bought cryptocurrency on a foreign exchange and consider it as a product, so it was the import of products including VAT? But if we have sold it to a foreign exchange later, it is the export and 0% VAT? Say, a crypt is not a product, but a service, how to tell heads or tails then. VAT on services is available when the place of services delivery is on the territory of Ukraine. In order to determine the place of services delivery, it is necessary to choose what type of services is the operation with cryptocurrency.
There are four categories of services in the Code. The place of services delivery, depending on category, can be the location of the property related to the service (it is not our case), place of actual delivery of the service, location of the buyer, or location of the supplier according to the residual principle. Nothing can be applied to cryptocurrency except for the residual principle. It means that when buying cryptocurrency from a non-resident, VAT is excluded, and when selling it to a non-resident or resident, VAT is included.
Base for VAT
This is not the end of these terrible reflections. The base for VAT is determined at a rate not lower than a normal price, the question arises how to determine this price. But if you still can accept the idea of VAT theoretically, then the brain will explode having reached practical questions – how to issue and register a tax invoice for the operation with cryptocurrency, for example.
In the context of taxation of income received from the operations with cryptocurrency, the reasoning is the following. In theory, if tax authorities call cryptocurrency a product or a service and VAT is included, then the financial result of such operations for a resident seller will be subject to income tax at the rate of 18%. In this case, tax authorities will have to recognize the right of the payer to deduct the costs of cryptocurrency purchasing or “mining” (by the way, where are your purchasing supporting documents?) for electricity payments, right to the mining equipment amortization. It could be a very high-margin business, by the way. Everything is fine, but the income from the operation with cryptocurrency runs counter to the definition of income according to the Accounting Standards. It is difficult to estimate the amount of such an income and calculate costs reasonably, and there is no certainty in obtaining economic benefits as required by the rules of accounting.
In the meantime, if the law on the tax on the withdrawn capital is adopted, at least, this will greatly facilitate the situation of the income tax, and then there will be no need to consider incomes and expenses at all, but only the dividends withdrawn from circulation will be the subject to taxation. However, those are sentiments.
Things are easier for those who are not required to pay VAT
Let us assume that the seller is a person, who is not required to pay VAT. Then it makes no sense for tax officers to prove whether it is a product or a service. You can make it easy on yourself. You have received money from the sale of cryptocurrency on non-commercial operation. You cannot prove that this is an operation of transfer or a loan? Then you have received other income or irrevocable financial assistance. The list of types of income in the legislation is non-exhaustive and includes other incomes, in case a legislator forgot something.
If the seller is a natural person, then of course there will be no VAT on the operation, and most likely, they will also call the revenue from the sale “other income” and try to subject it to tax at a rate of 18% and military duty of 1.5%. In this case, it is possible for a natural person paying taxes to take the position that cryptocurrency is a movable property, information or property rights, for example. The proceeds from the sale of cryptocurrency in this case will be the subject to income tax of natural persons at a rate of 5% and military duty of 1.5%.
However, this position is suitable only if the money for cryptocurrency is received from the resident of Ukraine. If cryptocurrency is sold on a foreign crypto-exchange, then 5% do not work, and the income will be considered a foreign income and will be subject to income tax at a rate of 18% and military duty of 1.5%. Depending on where the crypto-exchange is located, a different mechanism of tax payment is applied. The trader will either have to declare income (if the exchange is outside Ukraine) and pay income tax of natural persons, or the exchange will withhold this tax as a tax agent (if the exchange is in Ukraine). If the exchange has withheld tax abroad, it will be possible, under certain conditions, to use Double Taxation Avoidance Agreement and deduct the tax in Ukraine. But in general exchanges do not withhold taxes. This is stated in the rules of the exchange.
My regret is that cryptocurrency is not formally qualified as an investment asset. It would not be convenient to subject crypt to taxation as an investment asset.
What to do
If you agree to pay 5% of all proceeds to the account of the sale of cryptocurrency and the turnover will not exceed 5 million hryvnias per year, then you can try operation on a simplified taxation system. But first, select the correct NACE code and prove the tax office that the crypt operations are business activities. Otherwise, you will have to prove that the proceeds from the sale of cryptocurrency are not the income from the sale of property or non-irrevocable financial assistance or other income of a natural person, being the subject to taxation at a rate of 18 + 1.5%.
That is not all
If after all you have read above you are still here, then consider the currency barriers. 50% of currency proceeds from the sale of cryptocurrency are the subject to compulsory sale.
Unfortunately, most of the above questions will have to be answered by business empirically. It is a thankless job to foresee what level of abstraction the tax authorities will reach. By the way, the Ukrainian court once spoke on the cryptocurrency status referring to the practice of the European Court.
In one case that was tried in Kharkiv in 2016, the court, referring to the fact that Ukraine recognized the jurisdiction of the European Court on all issues of application and interpretation of the Convention on the Protection of Human Rights and should apply the judgments of the European Court of Human Rights as a source of law, decided that it is necessary to apply the European Court of Human Rights decision in the case of Hedqvist vs. Sweden. In this case, the European Court of Human Rights decided that operations with bitcoins and other virtual currencies are not subject to VAT on the territory of the EU.
After reading, you are probably very confused. Now the answer to the question of how to pay taxes should be obvious to you. We, as tax consultants, do not have the moral right to write this advice directly. We put reputation to hazard even by giving hints. Only the fact that it is a zugzwang justifies us: a tax office can appeal against any action aimed at paying taxes no matter what option you choose. There is no reason to wait for assistance from tax authorities, you all know or heard that instead of clarifying they just copy quotes from the Tax Code. Therefore, it is safer to just stay in a state of legal uncertainty for some time.
Andriy Tsiatsiak, lawyer of the tax practice Sayenko Kharenko:
A natural person, engaged in mining, and investors of the cryptocurrency market have to declare income from such activities on general grounds, since there is no special regulation for mining of cryptocurrencies and cryptocurrencies are not recognized by financial regulators as money, currencies or means of payment of other countries, currency valuable, electronic money, securities, cash equivalent.
Most likely, as for today, the income of a natural from mining and investment in cryptocurrencies cannot be regarded as any other category of the Tax Code, except to “other incomes”.
Such incomes are the subject to taxation on general grounds at a rate of 18% as well as to military levy at a rate of 1.5% of the amount of income. A natural person is obliged to declare these incomes independently according to the results of the calendar year, except when these taxes were withheld and paid to the budget by the paying party as a withholding agent (a very rare case for cryptocurrency market).
The entire amount of money, received in exchange for cryptocurrency, will be the subject to taxation. In most cases, there is no difference between the receipt of income in the form of cash or non-cash funds.
In addition, in light of the forthcoming start of trading of bitcoins derivative financial instruments (derivatives), it is worth noting that the situation differs somewhat from investing in bitcoin. If such a directive was sold at a higher price than it was purchased for, the financial result of such operations constitutes an investment profit. At the same time, it is an investment income (the difference between the purchase price and the sale price, not all the money earned) that is subject to taxation. The investment income received by natural persons is the subject to taxation at a rate of 18% as well as to military levy at a rate of 1.5%. If the stock trading inflicted investment losses, then there is nothing to impose taxes upon.