Until recently, this was a pristine area and, as the Income Tax Act did not regulate the taxation of digital currency, there was uncertainty as to how to tax income from cryptocurrencies. Today, we know that the tax authorities view cryptocurrencies as intangible movable property and, although digital currency is still not regulated in legislation, general tax principles can be applied to assess the taxation of cryptocurrencies.
Cryptocurrencies can be associated with several different types of income depending on the individual’s activities in this area. It can be business income, capital income or other income. In this article, we will focus on an individual’s investment in cryptocurrencies and their subsequent sale. Thus, we will not deal with the systematic mining of cryptocurrencies, which falls under business income and requires a business licence and taxation under Section 7 of the Income Tax Act. We will deal with situations where income from the sale of cryptocurrency will be taxed as other income under section 10 of the Income Tax Act.
An individual holding cryptocurrencies may realise the following income on the sale of the cryptocurrency, the taxation of which we will look at in more detail:
It is important to note that according to the Income Tax Act, income is both monetary and non-monetary income, as well as exchange income.
Taxable income derived from the sale of cryptocurrency for legal fiat currency arises at the time the money is credited to the bank account or other instrument in which the fiat currency is available. It is considered an income under Section 10(1/b)/3 of the Income Tax Act as it is a sale of an asset. Against the income arising from the sale of cryptocurrency, the taxpayer can claim as an expense the price at which he acquired the cryptocurrency sold. The taxpayer will declare in a personal income tax return the amount of the income and the expense and will tax the gain from the sale of cryptocurrency if realized.
In the case of payment for goods or services in cryptocurrency, the individual receives income at the time of purchase of the goods or services. The income is the value of the goods or services acquired by the taxpayer for the cryptocurrency according to the Assets Valuation Act, i.e. the arm’s length price at which the goods or services are usually sold on the market. The taxpayer must determine this value and report it as other income in the tax return, again in accordance with Section 10 of the Income Tax Act. The taxpayer can claim the price at which he acquired the exchanged cryptocurrency as an expense against this income.
It is important to note that income is also accrued to the taxpayer when one cryptocurrency is exchanged for another, at the time of exchange. The income is the value of the acquired cryptocurrency according to the Asset Valuation Act, i.e. the arm’s length price. To determine taxable income, the taxpayer shall use the exchange rate of the cryptocurrency on the date of exchange. It is recommended to determine the exchange rate as an average of the rates from at least three different reputable exchanges for possible proof to the tax authorities. Again, the acquisition price of the cryptocurrency exchanged can be claimed as an expense.
How the acquisition price is determined
The acquisition price shall be determined according to the way in which the individual acquired the cryptocurrency – at his own cost in the case of mining the cryptocurrency, at the acquisition price in the case of purchasing the cryptocurrency or at the arm’s length price according to the Asset Valuation Act in the case of exchange.
An administrative complication in determining the acquisition price of a cryptocurrency sold or exchanged may be that the taxpayer acquired the cryptocurrency sequentially at different prices. According to the Accounting Act, two methods can be chosen when determining the acquisition price, namely the FIFO (first in, first out) method or the weighted arithmetic average method. It is up to the taxpayer to decide which method to use.
Tax exemption cannot be claimed
Unfortunately, income from the sale of cryptocurrencies or the exchange of cryptocurrency for other asset is not exempt under the Income Tax Act in contrast to income from the sale of securities or income from occasional activities. Three years’ exemption test as applied for the sale of securities cannot be used as cryptocurrencies are not securities. Further, exemption of income not higher than CZK 30,000 from occasional activities cannot be used as well as the holding of cryptocurrency is the management of one’s own assets, which by its nature is not an occasional activity.
Usage of a loss from the sale of cryptocurrency
A taxpayer may deduct any loss on the sale of one cryptocurrency from the gain on the sale of another cryptocurrency under Section 10 of the Income Tax Act, but not against the gain on the sale of another item or, for example, the gain on the sale of securities.
Cryptocurrencies are still a relatively new and dynamically developing area. The related legislation is constantly adapting with some delay, as is its interpretation. It is therefore possible that different interpretations may be encountered or that approaches and prevailing interpretations may change in the future.
Source: Deloitte Czech Republic
15th September 2022
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