Are taxes due and what are they?
It is a well-known fact that the gaining and trading of cryptocurrencies (crypto-assets) have considerable popularity in recent years. This is a motif to consider the question: if I possess cryptocurrencies, will the income from them affect my tax obligations, and how?
In fact, the legal regulation of these relations is almost a zero – there is not even a definition in the law of the term “cryptocurrency” (or “crypto assets”) – therefore, in this case, rules that are well-known are in action – in the Personal Income Tax Act (PITA), the Corporate Income Tax Act (CITA) and the Value Added Tax Act (VATA).
Taxation of income earned by individuals
According to Art. 12, para. 1 PITA is the income from all sources acquired by the taxable person during the tax year, with the exception of income that is tax-free by law. Income from the sale or exchange of cryptocurrencies should be taxable, so as not to fall under those listed in Art. 13 PITA as non-taxable income.
In tax law transactions with crypto assets are treated as transactions with financial assets – cryptocurrencies are perceived to fall into the group of “financial assets”. This is the basis for the application of the rule in Art. 33, para. 3 PITA when we determine the amount of taxable income -the number of profits made during the year, determined for every specific transaction, reduced by the number of losses made during the year for every specific transaction.
The profit or loss for each transaction is determined by reducing the sale price by the acquisition price of the financial asset (Art. 33, Para. 4, PITA). It is important to take into account that it is not necessarily a sum of money to be received for the sale or exchange – the sale price includes everything acquired by the person with regard to the sale/exchange, including remuneration besides money (Art. 33, Para. 5 PITA). The acquisition price is calculated by the order of para. 6 of the same article – most often that would be the documentary-proved acquisition price (Art. 33, para. 6, item 1 PITA). The income tax which we own would be 10% of the amount received in the above method – a size of taxable income.
However, This way is inapplicable to income received from the economic activity of a person who is a sole trader, as well as when these transactions are made regularly, “by occupation”. The expression “by occupation” applies to cases when transactions with crypto assets are not a one-time occurrence, but are done frequently in order to be a permanent source of income for the person. In this case, the taxable income is formed via the rules for the income of sole traders the rules of CITA.
(Art. 26, Para. 1 PITA). An individual person who makes the transactions “by occupation” will be considered a sole trader, even if he/she is not registered as that one. The tax in that case would be in the amount of 15% of the taxable income.
Besides paying tax, it is also necessary to declare this income in the Annual Tax Return (“ATR”) submitted by us. In the case of a person who owes a tax of 10% on income, the declaration is made in Appendix 5, table 2, with code 508 of the ATR. For those who owe a tax of 15% on income, the declaration is in Appendix 2 of the ATR.
And how is the regime of legal entities?
Regarding the legal entities, the regulations in CITA must be taken into account. This law does not contain special rules for the tax treatment of income from the sale of cryptocurrencies so the general ones will be clarified.
Initially, the tax base for corporate tax is the taxable profit (Art. 19 CITA ). Taxable profit means a positive tax financial result (Art. 18, Par 2 CITA). The tax financial result is determined by converting the accounting financial result in a specific way following the order of CITA, accompanied by permanent tax differences, temporary tax differences, and other amounts of sums (Art. 22 of CITA).
Income from cryptocurrency transactions is taken into account when we calculate the tax financial result. They are assumed to be recognized for tax purposes, i.e. they do not convert the accounting financial result (Art. 25 CITA). The corporate tax is in the amount of 10% of the value of the taxable profit (Art. 20 CITA).
Do NOT forget the VAT!
It is also worth discussing the Value Added Tax when we operate via transactions with cryptocurrencies. The National Revenue Agency (“NAR”) had the opportunity to speak on this issue several times, examining it even from the point of view of the practice of the Court of the European Union due to the lack of legal regulations in our country.
The general conclusion from the NRA’s analysis is that VAT itself, regarding the sale of cryptocurrencies, is a delivery of a piece of service, more specifically said – a financial one. By Art. 8 of VATA, a service, from a legal point of view, is everything that has value and is different from goods, money in circulation, or a foreign currency used as means of payment. In the current hypothesis, this delivery is within the coverage of Art. 46, para. 1, it. 3 of the VATA. Therefore it is free of tax and no VAT is charged. This applies both when the place of performance of the delivery is on the territory of our country and on the territory of the European Union or outside it (Art. 86, Par. 3 VATA).
However, an obligation for the person making the transactions could always arise – e.g. to register via the order of VATA if: a turnover of BGN 50,000 is reached from cryptocurrency transactions for 12 subsequent months. If by chance, this turnover has reached 2 months, the registration must be done within 7 days of reaching the amount sum.
Income from cryptocurrencies does not leave unnoticed in taxation, despite the lack of explicit regulation for that purpose. Therefore, Following the rules described above is highly required, so if you need assistance you could contact us.