We have written more than once about the taxation of cryptocurrency trading income. But with the development of virtual investments, this issue is becoming more and more relevant as more people are participating in the virtual business by receiving income not only from cryptocurrencies, but also from participation in P2P platforms and the like. When generating income from these investments, not everyone realizes that this income, although virtual, is also subject to declaration to the NRA (Bulgarian tax authorities), as well as taxation, regardless of whether the income is withdrawn from the platform and credited to our bank account.
Our tax laws lack explicit regulation on such transactions, since when they were drafted and enacted, this type of trade was not so active, and possibly not even known. For this reason, when thinking about the taxation of income from such transactions, we need to adapt the existing legal framework to them. This is also the approach taken by the revenue administration in the few issued Guidelines and Clarifications, which can be found on its official website. The case law also does not yet give us sufficient certainty in the tax treatment of these proceeds and respective transactions. This paper has therefore summarised the available case law of the NRA, the SAC and the CJEU, which has also ruled in albeit a small number of decisions.
Shall we pay tax on virtual income received if we have not transferred it as real money to a bank account?
The short answer to the question is “Yes”. Even though this income is virtual, tax is due on the income earned. It does not matter whether this income is withdrawn as real money from the virtual platform or not. It has to be declared and tax is payable on it.
How is it declared?
Individuals file an Annual Tax Return (“ATR”) under Section 50 of the Personal Income Tax Act (“PIT Act”) every year. For income from 2021 onwards, the ATR must be filed by 30 April 2022. If we file the return electronically, have no unpaid tax liabilities as at the date of filing and pay the tax we have declared by 31 March, we can benefit from a 5% discount on the tax due.
Income from virtual investments falls under the category of income from the sale of financial assets and is taxable income under Article 10(1)(5) of the Income Tax Act. They are declared in Annex 5 of the GST – “Income from transfer of rights/property”. However, there are some specifics that should be taken into account when completing the Schedules to the GST. These specifics are that in addition to Schedule 5, which relates to income from the sale/exchange of assets such as cryptocurrencies, if we have acquired income from P2P platforms or sign-up bonuses e.g., Schedule 6 and possibly Schedule 5 must be completed. Accordingly, judgement must be made in each case as to the correct Appendix to be completed.
Another specific feature concerning the ATR and its filing is that for these incomes no special documents proving their realisation should be attached to the return, but in the event of an inspection or audit of the person this evidence should be submitted to the revenue authorities. Pursuant to Article 38 of the Income Tax Code, all documents relating to the realised income should be kept for 5 years after the expiry of the limitation period for repayment of the public debt to which they relate. The natural difficulties in trading virtual currencies arise from the dynamics of the trading itself, i.e. from the large number of transactions carried out in a short time on virtual platforms and the way to keep the necessary information for the tax authorities.
No advance tax is payable on the income from the sale or exchange of virtual currency, i.e. all income earned during the year is declared with the ATR.
What tax is payable on different types of virtual currency income?
To answer this question, it is important to consider several criteria:
- assessing whether this income is derived from a business activity or is incidental
- distinguishing the source of the income or the type of virtual currency from which we received that income: sale/exchange, mining, staking;
- assessing whether we fall within the scope of the Value Added Tax Act (“VAT Act”) and whether we need to register under it.
Income tax under the Income Tax Act
10% or 15% rate?
As we have already stated above, whether an activity is carried on as an occupation for the purpose of deriving regular income from it or whether it is incidental is relevant to the amount of tax payable. The standard personal income tax rate is 10%, but if trading in virtual currency is carried on a business basis, the individual, although not registered as a trader, will owe tax at the rate of 15% and the tax base for determining this tax will be calculated according to the rules for taxable profits formed under the Corporate Income Tax Act (Article 26(1) of the Income Tax Act).
Whether an activity is a trade or not is assessed after analysing all the transactions that the person has carried out, their frequency and the income received (whether it is the person’s main and only income or not). If it is the person’s main income, it is presumed that the transactions are carried out precisely for the purpose of obtaining sufficient income for the person to live on and to be the person’s main source of income. Although there is no legal definition of ‘occupation’ in the legislation, the settled case-law has held that it is more than three regular transactions carried out for the purpose of acquiring a main source of income. To the extent that such a determination is subjective, the revenue administration is entitled to claim the application of the higher rate of tax, while any person is also entitled to argue the contrary. Whether this understanding of ‘trade or business’ is consistent with the specifics of the trading of virtual currencies is debatable, and this dispute should be considered on a case-by-case basis if the revenue authorities adopt a different understanding of taxation from ours.
What exchange rate should I calculate and on what date?
Another important point when declaring and taxing this income is the calculation of exchange rates. Since cryptocurrency income is almost never received in BGN, it is very important to calculate correctly what the prices were in BGN on the days we had any transactions. Here it does not matter the type of transaction, whether it is a purchase, sale, airdrop, interest, etc.
For the purposes of declaration and taxation, we should calculate what the price in lev was for each purchase and what the value in lev was on the date of the transaction at the BNB reference rate for that day.
It is clear from the above that income tax is payable on this income as it is taxable income under Art. 10(1)(5) of the Income-tax Act, they do not fall under the non-taxable income under Article 13 and there is no other treatment for them under any other tax law.
There is taxable income when a profit is made on the transaction i.e. the sale price is greater than the acquisition price.
With the proviso made above that it has to be judged in each case whether the activity is a trade or not, we have to proceed to determine the tax base. The principle of Section 33 of the Income-tax Act is that the tax base on which the taxable income is to be determined is to be computed by reducing the sum of the profits made during the year, determined for each particular transaction, by the sum of the losses made during the year, determined for each particular transaction. The realised gain/loss is determined by reducing the selling price by the acquisition cost of the financial asset.
In the statutory definition, there is no difference in determining the tax base on the sale/exchange of a “standard” financial asset (stocks, bonds, shares, etc.) and a virtual one. The difficulty in determining the tax base for the latter, as we said above, comes from the dynamics of transactions with virtual assets.
Income from digging (mining) virtual currencies is always business income, whether the person has registered as a trader or not.
This taxable income is declared in the GST under Article 50 of the Income Tax Act in Annex 2.
The purchase of special computer or other systems for mining virtual currency in order to make a profit from its sale on the relevant exchanges is an argument that the activity will be carried on as a trade, i.e. that the person intends it to become a permanent source of income.
In this case, the activity carried on by a person implies that he is acting as a trader, even though he is not registered as such. Pursuant to Art. 1(3) of the Civil Code, any person who has formed an enterprise which, by its object and scope, requires his affairs to be conducted in a commercial manner shall also be deemed to be a trader, even if his activity is not specified in par. 1.
Therefore, in this case, the tax base will be determined according to the rules for business income as a sole trader (in accordance with paragraphs 1-6), which is the tax profit formed in accordance with the Corporate Income Tax Act (Article 26, paragraph 1 of the Income Tax Act). And not under the provisions of Article 33 of the Income Tax Act described above, which apply to natural persons – non-merchants.
Income received from stevedoring can never be treated as received from a trade or business due to its specific nature and the tax should be 10%. It is declared in Schedule 6 to the GST return where interest received, interest income from P2P, registration bonuses etc. are declared. There are opinions in the literature that individuals owe tax only if they sell the staking income or exchange it for another asset, but not on the receipt of the staking income itself. There is no case law on the taxation of steakhouses to be definite in our opinion, but any assertion is subject to rebuttal and proof in each case.
VAT. Tax treatment of supplies
For VAT purposes, transactions in these supplies are treated as supplies of financial services and are regulated in Article 46 of the VAT Act as exempt from VAT.
This means that no VAT is charged on the sale of virtual assets and none is due to the budget.
Crypto-mining supplies are not treated as supplies for VAT purposes. However, their sale then falls under the hypothesis of an exempt supply of a financial service.
Is a person subject to VAT registration if he/she provides exempt financial services?
The short answer is “Yes”. The turnover that accrues from transactions in virtual currencies must be tracked as turnover for VAT registration purposes.
This means that although the supplies are exempt from VAT, the turnover generated thereto triggers VAT registration obligation.
This is because Article 96(2) of the VAT Act explicitly states that the taxable turnover for registration includes supplies of financial services under Article 46 of the VAT Act.
This rule has its exceptions:
- Persons who supply financial services which are not related to their main activity are not subject to registration under the VAT Act. This brings us back to our reasoning above on when an activity is core and carried on as a trade and when it is not;
- Persons are not subject to registration where the tax on the supply is chargeable by the recipient of the service under Article 82(2) of the VAT Act. In this case, the person is subject to compulsory registration under the VAT Act, but under the special procedure of Article 97a of the VAT Act. Transactions with virtual currencies can not fall under this regime, so we will not consider it here, but who is interested can read our article on this type of registration article.
The legal term to apply for Registration under the VAT Act be submitted
The VAT Act introduces two deadlines for tracking turnover before filing an Application for Registration:
- A period of 12 consecutive months prior to the current month in which a turnover of BGN 50 thousand or more is accumulated. The application shall be submitted within 7 days from the end of the tax period in which this turnover was reached.
- Period of 2 consecutive months, including the current month. The application shall be submitted within 7 days from the date on which the turnover was reached.
Penalties for failure to submit an Application for Registration
For failure to submit the Application for Registration on time, when the conditions for registration have occurred (turnover reached), the person is subject to a fine of 500 to 5000 BGN.
The article above is for information purposes only. It is not a (binding) legal advice. For a thorough understanding of the subjects covered and prior acting on any issue discussed we kindly recommend Readers consult Ilieva, Voutcheva & Co. Law Firm attorneys at law.