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Are we facing a tax reform for cryptocurrencies?

LAWAre we facing a tax reform for cryptocurrencies?

The beginning of the year brought news about the draft cryptocurrency law being worked on by the Ministry of Finance. The new regulations are expected to be adopted by the Council of Ministers in the second quarter of this year. “In addition to these regulations, it is also necessary to specify the tax regulations, which are no less important than taking supervision of this market by the Financial Supervision Authority (KNF), as envisaged in the draft law,” notes Izabela Deryło, a specialist in tax matters associated with the Warsaw office of the Wolf Theiss law firm.

Last year, Slovakia adopted income tax regulations offering a more favorable rate for cryptocurrency market participants. Provided that the investor refrains from selling assets for 12 months, they can expect a reduced rate of 7%. If assets are liquidated earlier, however, tax must be paid under general conditions, considering tax brackets of 19% and 25%. Portugal is moving in a similar direction, applying a 28% tax on income from digital assets held less than a year, but if they are kept for more than 12 months, one can expect no tax at all.

“The direction associated with a preferential reduction in rates from the sale of cryptocurrencies for a year is an important trend in Europe. Slovakia has introduced a preferential tax rate for this purpose and a tax-free amount of 2,400 euros. Meanwhile, in Germany, just like in Portugal, if we do not sell the assets for 12 months, we will not pay any tax at all,” emphasizes Izabela Deryło.

Current trends in cryptocurrency taxation worldwide include adapting the rules that apply to the private equity market. For example, in Switzerland, like with bonds or shares, private investors will be exempt from capital gains tax, including for cryptocurrencies, unless the income is related to commercial activity. Similar schemes have been adopted in Singapore. We cannot forget about the United Arab Emirates, where there is no obligation to pay any tax on profits from cryptocurrency transactions at all. But how does the Polish market compare?

“As a rule, in Poland, we settle cryptocurrency tax similarly to capital gains, although we do not treat them jointly, for example, in the case of income generation costs or when settling losses. This means that the rate of 19% applies in our market, and we have no tax-free amount. Regardless of the time that has elapsed since the purchase of the cryptocurrency, we will pay tax on its sale if it results in a profit,” says Izabela Deryło.

There are many controversies in Poland regarding the costs of income generation when acquiring cryptocurrencies, for example, by ‘mining’ them. Both the cost of purchasing a ‘mining rig’ and the electricity consumed to acquire cryptocurrencies will not be deductible. Therefore, the effective tax rate of 19% for the obtained cryptocurrencies will only be reduced by commissions.

“Income and costs incurred from cryptocurrency transactions need to be shown on the annual PIT-38 declaration. We have until April 30, 2024, for the year 2023, with any losses being only deductible in the current year and directly following it. We also do not combine income and costs obtained with shares and bonds, although we can settle them on one form. It should also be remembered that the tax obligation only arises when the cryptocurrency is exchanged for a legal tender, i.e., traditional currency, so exchanging one cryptocurrency for another will be tax-neutral,” explains Izabela Deryło.

Polish tax regulations, although not the most strict in Europe, do not favor the development of this market. The situation probably will not change even with the implementation of the European Union Regulation 2023/1114 of May 31, 2023, on crypto-asset markets – this is the eighth amendment to this directive, commonly referred to as “DAC8″. From the description of the amendment currently being developed by the Ministry of Finance, it appears that the most significant change will be the designation of the Financial Supervision Authority (KNF) as the body that will supervise this market and the granting of supervisory measures to the KNF to counteract violations that could be committed by the supervised entities. There is, unfortunately, no mention at this stage of any adjustment of tax law.

“The new cryptocurrency law will deal with the protection of individual investors from the risk of fraud and concern for their accurate information about investing in cryptocurrencies. This is definitely a market-anticipated change and should be well received – although it is worth waiting for more details before making a final assessment of the changes. However, it is hard not to pay attention to the rather conservative approach of tax authorities to the taxation of cryptocurrency transactions. Many countries in Europe, such as the United Kingdom or Spain, offer taxpayers tax-free amounts of several thousand euros – thus eliminating many tax risks for smaller investors. Currently, there are no such solutions in Poland. There is also a lack of discussion about introducing exemptions along the lines of the Slovak solution, which encourages holding cryptocurrencies for more than 12 months. The lack of requirement for cryptocurrency exchanges, in contrast to brokerage offices, to issue a PIT-8C form, which makes it easier to settle with the tax office, may also discourage participation in the crypto market. In the market’s opinion, all these conditions may be the reason for the growing tax gray area and impede the development of new technologies in this area,” says Izabela Deryło.

According to a study conducted by the Swedish tax firm Divly, only 0.53% of cryptocurrency investors worldwide paid taxes for this purpose in 2022. The study analyzed the situation in 24 countries representing the majority of the world’s regions.

The post “Are we on the brink of cryptocurrency tax reform?” was first published on CEO Magazine.

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