Cryptocurrencies and taxes in the Czech Republic – a brief overview of the implications for legal entities and natural persons
Corporate Income Tax
- From an accounting point of view, it is recommended to book cryptocurrencies as inventories “of their own kind”, i.e., cryptocurrencies are not considered money, but goods which are traded, which are bought, and which can be exchanged on the real market.
- The Income Tax Act does not provide for special rules for crypto transactions; therefore, for the purposes of determining the tax base, the correct accounting of the respective transactions is of crucial importance. The corporate tax base will be determined based on the net profit/loss for the year.
- No taxable income is generated when the cryptocurrency is mined. Rather, income arises only at the moment of the sale of the cryptocurrency (i.e. its exchange for a fiat currency), the exchange of cryptocurrency for goods or services, or the exchange of one cryptocurrency for another.
- The rules applying to crypto mining for the purposes of corporate income tax are the same as in the case of own production.
- The purchase and sale of goods/services against cryptocurrency is a barter transaction which is treated from a tax point of view as the purchase and sale of a thing. The income from the exchange of a cryptocurrency for another item (or for a service) is taxed as income generated in the financial year in which the exchange took place. The taxation of income from an exchange between different cryptocurrencies follows the same principle.
- Financial income from the sale of cryptocurrency is subject to taxation analogous to income from the sale of intangible movable assets (inventories sui generis). The value of the cryptocurrency recorded in the books of the company represents tax-deductible expenses.
- Cryptocurrencies are not recognized at real value at balance sheet date.
Personal Income Tax
- Income from cryptocurrency transactions is subject to income tax. It is either income from self-employment under Sec. 7 or income from the rental of movable property or real property (paid for by cryptocurrency) under Sec. 9 or other income under Sec. 10 of the Income Tax Act.
- The decisive criterion for the classification of income under the relevant provisions of either Sec. 7 or Sec. 10 of the Income Tax Act is whether the taxpayer systematically pursues the relevant activity for the purpose of generating profits on their own account and responsibility – in such a case, we are looking at income within the meaning of Sec. 7 of the Income Tax Act. If the taxpayer does not carry out the activity in question in this way, the income in question is income within the meaning of Sec. 10 (1) (b) (3) Income Tax Act.
- The income of a taxpayer who has a trade license to carry out the activity in question is taxed in accordance with Sec. 7 (1) (b) Income Tax Act (income from commercial activity); if the taxpayer does not claim actual deductible expenses, they may instead claim a flat-rate deduction of 60% of income.
- If the taxpayer does not have the relevant trade license (despite their obligation under the law), they are considered a taxpayer who is engaged in entrepreneurial activity and their income is then taxed in accordance with Sec. 7 (1) (c) of the Income Tax Act. If the taxpayer does not claim actual deductible expenses, they may instead claim a flat-rate deduction of 40% of income.
- In the case of rental income, we may be dealing with income within the meaning of Sec. 7 (2) (b) of the Income Tax Act (which is treated as part of business assets), or income within the meaning of Sec. 9 (1) (a) of the Income Tax Act (income from the rental of movable property or apartments), or income from the rental of movable property within the meaning of Sec. 9 (1) (b) Income Tax Act (with the exception of incidental, or occasional, rental operations within the meaning of Sec. 10 (1) (a) of the Income Tax Act.
- As at the moment in which the cryptocurrency transaction takes place, the value of the cryptocurrency must be expressed in Czech crowns (CZK). Since cryptocurrencies are not listed on the Czech National Bank’s (ČNB) exchange rate sheet, they are converted using a third currency.
- No taxable income is generated when the cryptocurrency is being mined. Rather, income arises only when the cryptocurrency is used or when the cryptocurrency is exchanged for other goods or services. Natural persons who are not obliged to keep accounting records acquire assets through their own activities when they mine crypto, and the transaction is taxed accordingly.
- Purchase and sale of goods/services for cryptocurrency – these transactions are considered to be an exchange of benefits in kind (barter transaction) between two parties, buyer and seller. Taxable income is generated on both sides, which is assessed on both sides in accordance with the asset valuation legislation. Income derived from the exchange of one cryptocurrency for another is taxed in a similar manner.
- Income of natural persons from the sale of cryptocurrencies may be subject to the taxation of income according to Sec. 7 of the Income Tax Act (income from business activities), provided that it is obtained by an entrepreneur in the course of their business operations (in which case it becomes part of their business assets), or as income according to Sec. 10 of the Income Tax Act (other income).
- For the purposes of VAT, cryptocurrencies are considered an alternative means of payment which is used in a similar way to legal means of payment.
- Where a taxable person “mines” cryptocurrencies for their own purposes, this mining is not subject to tax, because there is no direct connection or contractual relationship between that person and the beneficiary. The situation is different when the taxable person rents out the technological equipment necessary for crypto mining from others (or leases it to them).
- A taxable person whose service consists in the exchange of cryptocurrencies into a fiat currency for consideration (whereas the consideration is an exchange fee or a fee for carrying out the transaction) is engaged in currency exchange operations, which is exempt from tax without the right to deduct input tax. The same tax assessment also applies to the exchange of one cryptocurrency into another.
- If a taxable person trades in cryptocurrencies (i.e. buys and sells them) in order to generate regular income, i.e. not only in the context of managing their private assets, then such person is considered economically active. This economic activity, in the form of trading in cryptocurrencies to generate regular income, can be assessed in a way similar to cash transactions, which are a financial activity that is exempt from tax without the right to input tax deduction.