Cryptocurrencies and taxes - how to deal with them?
The taxation of cryptocurrencies is not yet firmly anchored in Czech legislation. However, there is no doubt that cryptocurrencies are intangible movable property and you should not forget to include a number of transactions in your tax return. How is the possession, exchange or sale of cryptocurrencies taxed? Find out in our article.
Cryptocurrencies are a big topic and, after skyrocketing in value, an investment hit. This is proven by the latest research by Bit.Plus, which states that Czechs bought cryptocurrencies worth about CZK 4.5 billion in 2021. This logically raises the question that more and more people are asking - how are virtual currencies taxed in the Czech Republic?
YOU TAX NOT ONLY THE PROFIT FROM THE SALE
Taxation of cryptocurrencies is not a simple matter, even for seasoned tax specialists. There are many myths and confusions about it, so let's start by summarizing which transactions are taxable and which are not.
WHAT DO YOU HAVE TO TAX?
- Income from the sale or other use of cryptocurrency (exchange, purchase of goods or services with crypto...). Examples: you sell cryptocurrency and transfer the money to your bank account or keep the proceeds from the sale in your app or online wallet. You exchange one cryptocurrency for another or use cryptocurrency to pay for a purchase. You must tax all of these transactions.
- Cryptocurrency mining, or the use of mined cryptocurrency. You must have a trade licence for this activity, specifically free trade No. 81; provision of services related to virtual assets. We do not deal with income tax on cryptocurrency mining in this article.
WHEN DO YOU AVOID TAXATION?
- Possession of cryptocurrency and fluctuations in its value are not subject to tax. Example: you buy and hold bitcoin, its value goes down and up over time, but you do not exchange it for another cryptocurrency or fiat currency*, so there is no taxable transaction.
**fiat currency = current currency (money) in any currency
CRYPTOCURRENCIES ON YOUR TAX RETURN. WHERE TO GO WITH THEM?
Income from cryptocurrencies belongs to other income from transfer for consideration according to Section 10(1)(b) of Act No. 586/1992 Coll., on Income Taxes.
From the point of view of the state authorities, cryptocurrencies are intangible movable property, i.e. they are not recognised as cash, and their purchase and sale is not a payment service. Trading in cryptocurrencies is a continuous activity - managing one's own assets, so it is not an occasional income up to CZK 30,000.
Nor can cryptocurrencies be considered capital income and be subject to the time or value exemption as in the case of securities transactions.
HOW TO TAX A CRYPTOCURRENCY AS AN EMPLOYEE?
As an employee, you don't have to file a tax return if you meet these three conditions:
- you signed the taxpayer's declaration,
- your income comes from employment only,
- other income (e.g. from rent, capital assets or other income including cryptocurrencies) does not exceed CZK 6,000 per year - note that this is income without expenses, not profit.
If you have earned more than CZK 6,000 in income outside of work, you are obliged to file a return yourself and we recommend you contact a tax specialist.
HOW TO TAX CRYPTOCURRENCIES AS SELF-EMPLOYED?
If trading in cryptocurrencies is not your business, you will include these transactions in your tax return as other income under Section 10(1)(b) and claim the related expenses (purchase price, fees, etc.).
Do you use any of the flat-rate plans? Then here's how to proceed:
TAXATION OF CRYPTOCURRENCIES AND FLAT-RATE EXPENSES
If you claim expenses as a percentage of income (usually 60 or 80%), it's important to know that they only apply to business income, not other income - even cryptocurrency income. Therefore, you will report actual cryptocurrency-related expenses on your Section 10 ITA tax return. There is no exception or exemption here; you must always tax income from the sale or other use of cryptocurrencies, no matter how much it is.
TAXATION OF CRYPTOCURRENCIES AND FLAT TAX
The flat-rate regime applies only to income from business activities under Section 7.If you are registered for the flat-rate tax but in the same year you also have other income under Section 8, 9 or 10 totalling more than CZK 15,000 (for example, from cryptocurrency trading, rent or capital assets), you must file a regular tax return and reports for the year to the Social Security and Health Insurance Institutions. Monthly lump-sum tax payments will then be considered as a deposit. If you fall within the limit of CZK 15,000, you do not file a return.
CURRENCY CONVERSION AND CRYPTOCURRENCY PROFIT TAX
If you trade in cryptocurrencies during the tax year, the positive difference between income and expenses is always subject to tax, in accordance with Section 10(4) of the Income Tax Act. According to Section 10(5) of the Income Tax Act, the purchase price at which you acquired the cryptocurrency is an expense, and related costs such as exchange fees can also be claimed.
To convert currencies not listed in the exchange rate ticket, use the third currency conversion. For tax reporting purposes, for example, for bitcoins, you can use the rate per bitcoin (BTC) expressed in the currency of a specific exchange, e.g. US dollars (USD).
The purchase price can be determined in several ways:
- Weighted average of cryptocurrency purchase prices.
- FIFO or first in, first out. The practice of selling cryptocurrencies that you have bought first in the past.
You can claim a loss against the same type of income, i.e. a loss from one bitcoin transaction against a gain from another. The minimum taxable amount is 0 CZK.
What about the tax rate? In addition to the 15% income tax, an increased rate of 23% is introduced from 2022. This applies from 2021 and is intended for individuals whose annual income exceeds 48 times the average wage or gross monthly salary exceeds CZK 141,700. Only the amount exceeding this limit is taxed at the increased rate.
NOT SURE ABOUT THE TAXATION OF CRYPTOCURRENCIES?
The truth remains that the topic of virtual currencies is new and not included in Czech legislation. If you cannot find your way around the topic and are looking for someone who can deal with the taxation of cryptocurrencies or nebo tax returns in general, do not hesitate to contact us.