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Cryptocurrencies and taxes: the latest trends

08/ 02/ 2021
  Authors: Igor Pugaiko, Counsel at Hillmont Partners, Oleksandr Vorontsov, Associate at Hillmont Partners Download in pdf The modern information technology market is developing extremely rapidly. Cryptocurrencies, which are very popular in Ukraine, are no exception. Moreover, according to authoritative publications, Ukraine is among the countries where the use of cryptocurrency is one of the most common in the world. New realities dictate the necessity for any state to regulate the cryptocurrency market and ensure proper development of the new digital economy. However, in Ukraine, due to the actual existence of the cryptocurrency market for at least the last five years, there is no legal regulation. It means that the participants in this market are almost completely outside the legal field of the state. Obviously, there have been attempts to settle this issue. For example, the Verkhovna Rada of Ukraine has the draft laws that are intended to regulate the circulation, storage, possession, use and conduct of transactions by means of cryptocurrencies, as well as to define the general principles of the market functioning. In particular, it is the draft law “On the circulation of cryptocurrency in Ukraine” (№7183); “On stimulating the cryptocurrency market and their derivatives in Ukraine” (№7183-1); “On Amendments to the Tax Code of Ukraine (on the stimulation of the cryptocurrency market and their derivatives in Ukraine)” (№7246); “On Amendments to the Tax Code of Ukraine on Taxation of Transactions with Virtual Assets in Ukraine” (№9083); “On Amendments to the Tax Code of Ukraine on Taxation of Transactions with Virtual Assets in Ukraine” (»9083-1); “On Amendments to the Tax Code of Ukraine and Certain Other Laws of Ukraine on Taxation of Transactions with Crypto Assets” (№2461); “On Virtual Assets” (№3637). So far, however, no attempts to regulate the sector have been successful. One of the most problematic issues is the taxation of cryptocurrencies in Ukraine in the absence of legal certainty. Recently, the State Tax Service of Ukraine has been trying to explain to taxpayers how to act in such situations, although earlier it has generally avoided commenting on this issue. Therefore, we recommend that participants of the currency market pay attention to the following clarifications from the tax regulator: Obligation to declare income. The Tax Code of Ukraine establishes the obligation of a taxpayer to file a tax declaration of which he is a payer, for each established reporting period in which objects of taxation arise, or if there are indicators subject to declaration. The declaration is submitted by May 1 of the year following the reporting year. As a general rule, a taxpayer receiving income from a person other than a tax agent or a foreign income is obliged to include the amount of their income in the total annual taxable income and to file a tax declaration on the results of the accounting tax year, and pay tax on such income. Resident individuals who receive income from both the source of its origin in Ukraine and foreign income must pay the personal income tax and military duty. According to the requirements of the tax law, if the source of payment of any taxable income is foreign, the amount of such income is included in the total annual taxable income of the taxpayer – the recipient, who is required to file an annual tax declaration. In particular, this is stated in the individual tax consultation No. 4907 / IPK / 99-00-04-04-02-09, which the State Tax Service of Ukraine provided to the taxpayer, asked for clarification in connection with implementation of the “mining” cryptocurrency and legal uncertainty in the settlement of these issues. The taxpayer asked for provision of individual tax advice on the procedure for taxation of cryptocurrency transactions and their declaration. The State Tax Service of Ukraine has agreed that as of today cryptocurrency does not have any defined legal status in Ukraine and there is no regulatory framework for its classification and regulation of transactions with it. It explained that taxpayers should reflect such income in section II of the tax declaration when receiving income from cryptocurrency transactions. However, according to the current regulations, the existing legislation does not provide for reflection of cryptocurrency in the tax declaration of the taxpayer. In my opinion, in the absence of clear rules for cryptocurrency circulation in Ukraine, the reflection of a taxpayer’s income from cryptocurrency transactions in the tax declaration depends solely on the tax discipline of the taxpayer. However, the non-disclosure of such income, given that there is currently no single position on the legal nature of cryptocurrency, cannot be classified as a violation by taxpayers of applicable law. Obligation to pay taxes. A slightly broader position of the tax authority is contained in the individual tax consultation № 4928 / IPK / 99-00-04-05-03-06. If the taxpayer asked for clarification from the State Tax Service of Ukraine, as it sells cryptocurrency. He asked to explain the procedure for taxation of income from the sale of cryptocurrency and the reflection of this income in the declaration of property and income. According to the Regulator, the income received by a resident individual from the sale of cryptocurrency to another resident individual is included in the total monthly (annual) taxable income as other income with the corresponding taxation. However, if this income is paid by a non-resident individual, such income is considered foreign and is subject to personal income tax and military duty on a general basis. Individuals receiving income from other individuals who are not tax agents and from foreign incomes are required to include the amount of such income in the total annual taxable income and file a tax return for the reporting tax year, as well as pay personal income tax and military tax on such income. As can be seen from the conclusions of the Regulator, it does not understand at all the difference between receiving income from «mining», direct sale of cryptocurrency and income received for exchange rate differences as a result of the targeted activities of participants in various crypto-exchanges. Conclusions. The positions of the tax authority, which from time to time are reflected in the individual tax consultations on the procedure of taxation of cryptocurrencies and reflection of income from such operations with cryptocurrency in the tax declaration, do not fully comply with the applicable law. Rather, they are a kind of compromise solution expressed by the tax authority, since the solution of the issue is possible only through the legislative definition of the legal nature of the cryptocurrency and, based on this understanding, the complex regulation of circulation, storage, possession, use and operations with the help of cryptocurrency, as well as the definition of common fundamentals of the cryptocurrency market. Regulation of the cryptocurrency market in Ukraine will create a civilized market, and will allow various companies specializing in cryptocurrencies to operate legally and attract foreign investment. At the same time, it will help to protect the rights and interests of cryptocurrency market participants, as they will be able to declare their income and protect their cryptocurrency assets from possible abuse or fraud.

Authors: Igor Pugaiko, Counsel at Hillmont Partners, Oleksandr Vorontsov, Associate at Hillmont Partners

Download in pdf

The modern information technology market is developing extremely rapidly. Cryptocurrencies, which are very popular in Ukraine, are no exception. Moreover, according to authoritative publications, Ukraine is among the countries where the use of cryptocurrency is one of the most common in the world.

New realities dictate the necessity for any state to regulate the cryptocurrency market and ensure proper development of the new digital economy. However, in Ukraine, due to the actual existence of the cryptocurrency market for at least the last five years, there is no legal regulation. It means that the participants in this market are almost completely outside the legal field of the state.

Obviously, there have been attempts to settle this issue. For example, the Verkhovna Rada of Ukraine has the draft laws that are intended to regulate the circulation, storage, possession, use and conduct of transactions by means of cryptocurrencies, as well as to define the general principles of the market functioning.

In particular, it is the draft law “On the circulation of cryptocurrency in Ukraine” (№7183); “On stimulating the cryptocurrency market and their derivatives in Ukraine” (№7183-1); “On Amendments to the Tax Code of Ukraine (on the stimulation of the cryptocurrency market and their derivatives in Ukraine)” (№7246); “On Amendments to the Tax Code of Ukraine on Taxation of Transactions with Virtual Assets in Ukraine” (№9083); “On Amendments to the Tax Code of Ukraine on Taxation of Transactions with Virtual Assets in Ukraine” (»9083-1); “On Amendments to the Tax Code of Ukraine and Certain Other Laws of Ukraine on Taxation of Transactions with Crypto Assets” (№2461); “On Virtual Assets” (№3637). So far, however, no attempts to regulate the sector have been successful.

One of the most problematic issues is the taxation of cryptocurrencies in Ukraine in the absence of legal certainty. Recently, the State Tax Service of Ukraine has been trying to explain to taxpayers how to act in such situations, although earlier it has generally avoided commenting on this issue.

Therefore, we recommend that participants of the currency market pay attention to the following clarifications from the tax regulator:

Obligation to declare income

The Tax Code of Ukraine establishes the obligation of a taxpayer to file a tax declaration of which he is a payer, for each established reporting period in which objects of taxation arise, or if there are indicators subject to declaration. The declaration is submitted by May 1 of the year following the reporting year.

As a general rule, a taxpayer receiving income from a person other than a tax agent or a foreign income is obliged to include the amount of their income in the total annual taxable income and to file a tax declaration on the results of the accounting tax year, and pay tax on such income.

Resident individuals who receive income from both the source of its origin in Ukraine and foreign income must pay the personal income tax and military duty.

According to the requirements of the tax law, if the source of payment of any taxable income is foreign, the amount of such income is included in the total annual taxable income of the taxpayer – the recipient, who is required to file an annual tax declaration.

In particular, this is stated in the individual tax consultation No. 4907 / IPK / 99-00-04-04-02-09, which the State Tax Service of Ukraine provided to the taxpayer, asked for clarification in connection with implementation of the “mining” cryptocurrency and legal uncertainty in the settlement of these issues. The taxpayer asked for provision of individual tax advice on the procedure for taxation of cryptocurrency transactions and their declaration.

The State Tax Service of Ukraine has agreed that as of today cryptocurrency does not have any defined legal status in Ukraine and there is no regulatory framework for its classification and regulation of transactions with it. It explained that taxpayers should reflect such income in section II of the tax declaration when receiving income from cryptocurrency transactions. However, according to the current regulations, the existing legislation does not provide for reflection of cryptocurrency in the tax declaration of the taxpayer.

In my opinion, in the absence of clear rules for cryptocurrency circulation in Ukraine, the reflection of a taxpayer’s income from cryptocurrency transactions in the tax declaration depends solely on the tax discipline of the taxpayer. However, the non-disclosure of such income, given that there is currently no single position on the legal nature of cryptocurrency, cannot be classified as a violation by taxpayers of applicable law.

Obligation to pay taxes

A slightly broader position of the tax authority is contained in the individual tax consultation № 4928 / IPK / 99-00-04-05-03-06. If the taxpayer asked for clarification from the State Tax Service of Ukraine, as it sells cryptocurrency. He asked to explain the procedure for taxation of income from the sale of cryptocurrency and the reflection of this income in the declaration of property and income.

According to the Regulator, the income received by a resident individual from the sale of cryptocurrency to another resident individual is included in the total monthly (annual) taxable income as other income with the corresponding taxation.

However, if this income is paid by a non-resident individual, such income is considered foreign and is subject to personal income tax and military duty on a general basis.

Individuals receiving income from other individuals who are not tax agents and from foreign incomes are required to include the amount of such income in the total annual taxable income and file a tax return for the reporting tax year, as well as pay personal income tax and military tax on such income.

As can be seen from the conclusions of the Regulator, it does not understand at all the difference between receiving income from «mining», direct sale of cryptocurrency and income received for exchange rate differences as a result of the targeted activities of participants in various crypto-exchanges.

Conclusions

The positions of the tax authority, which from time to time are reflected in the individual tax consultations on the procedure of taxation of cryptocurrencies and reflection of income from such operations with cryptocurrency in the tax declaration, do not fully comply with the applicable law.

Rather, they are a kind of compromise solution expressed by the tax authority, since the solution of the issue is possible only through the legislative definition of the legal nature of the cryptocurrency and, based on this understanding, the complex regulation of circulation, storage, possession, use and operations with the help of cryptocurrency, as well as the definition of common fundamentals of the cryptocurrency market.

Regulation of the cryptocurrency market in Ukraine will create a civilized market, and will allow various companies specializing in cryptocurrencies to operate legally and attract foreign investment. At the same time, it will help to protect the rights and interests of cryptocurrency market participants, as they will be able to declare their income and protect their cryptocurrency assets from possible abuse or fraud.

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