Sale of cryptocurrency - VAT taxation


Cryptocurrencies are becoming more and more popular. At the outset, it should be remembered that trading in "virtual currencies" in Poland does not infringe the national law. Moreover, it does not infringe EU law either. Owning a cryptocurrency carries many types of risk that their users should be aware of.They are associated with the possibility of losing committed funds, as well as the risk of failure to settle accounts with the tax office. It should be emphasized that the tax regulations do not say anything about how to tax cryptocurrency trading.

What are cryptocurrencies?

Cryptocurrency is most often called a digital currency. Digital currency is a distributed accounting system based on cryptography. Cryptocurrencies use it to create new currency units. Cryptography is also used to secure and manage all cryptocurrency related transactions.

It should be emphasized that digital currency does not physically exist. It is created and managed by appropriately designed computer software. The creation of new units is based on a built-in algorithm (so-called mining new currencies). Most digital currencies are programmed so that the final amount of a given currency is known (the amount of the currency is limited).

The most popular cryptocurrency is bitcoin. There are many others besides it. The amount of cryptocurrencies increases every year. The above technology is becoming more and more popular, more and more people are buying and trading them. Trade takes place on the so-called cryptocurrencies.

Risks related to trading in cryptocurrencies - warning from the Polish Financial Supervision Authority and NBP

Risk related to trading cryptocurrencies:

  • rrisk related to the possibility of losing funds due to theft. Virtual currencies may be the subject of theft, for example as a result of a cyber attack on an entity that exchanges virtual currencies or the user's infrastructure. For example, in October 2016, in unexplained circumstances, one of the largest virtual currency exchange services in Poland ended its activity. Users may not be able to pursue claims and recover funds in such a situation,

  • risk related to the lack of warranty. Funds kept in "virtual currencies" are not guaranteed by the Bank Guarantee Fund, as they are not bank deposits,

  • risk related to the lack of universal acceptability. Virtual currencies are not universally accepted in retail and service outlets. They are also not legal tender or currency. This means that economic entities are not obliged to accept payments in virtual currencies, even if they have previously accepted them,

  • the risk associated with the possibility of fraud. Some of the offered forms of investing in virtual currencies may be in the form of a financial pyramid, which - additionally due to the specific types of risk described above - may quickly lead to the loss of the investor's funds. If such a situation takes place in Poland, the only form of protection will be criminal proceedings, as no Polish investor or consumer protection institutions (Office of Competition and Consumer Protection, Polish Financial Supervision Authority) have legal possibilities of providing assistance. A significant obstacle in pursuing claims is the fact that entities trading "virtual currencies" operate in different countries, with different levels of user protection,

  • the risk associated with a large change in price. So far, the prices of "virtual currencies" have been characterized by high volatility. Single transactions in virtual currencies may significantly affect the price formation.

How do we buy cryptocurrency?

There are two types of virtual currency purchases. The first way is primary acquisition through the so-called mining, excavation. As a result of the calculation process, the excavator receives a certain number of new virtual currency coins. The received coins are saved in the user's virtual wallet. The amount of new virtual currencies that will be created is recorded in their algorithm. The second way of acquiring, definitely more popular, is to buy already dug coins of virtual currency from their owners. The above usually takes place on active currency exchanges that are run on the Internet. You can also become the owner of virtual currencies by accepting payment for goods or services in these currencies.

Taxation of "mined" cryptocurrencies with VAT

We will use examples to illustrate the problem. In the first example, we will describe the acquisition of a cryptocurrency through the so-called excavation or extraction.

Example 1.

The taxpayer will make the so-called the acquisition of the primary cryptocurrency. The mining of the currency will take place through the use of an algorithm built into the system, which is used by the machines purchased by the applicant. The appropriate program will mine more cryptocurrencies. This method of their initial acquisition was envisaged by the designer of the cryptocurrency system. After the excavation, the taxpayer plans to start selling them as part of his business. He will introduce the newly excavated currencies to the market via the Internet. In connection with the above description, the following question should be asked, is the first introduction of a cryptocurrency on the market subject to VAT?

At the outset, it should be recalled that pursuant to Art. 5 sec. 1 point 1 of the Act of March 11, 2004 on tax on goods and services (Journal of Laws of 2017, item 1221, as amended), hereinafter referred to as the "VAT Act", taxation with tax on goods and services are subject to the paid delivery of goods and the paid provision of services within the territory of the country. From the provision of art. 7 sec. 1 of the VAT Act it follows that through the delivery of goods referred to in Art. 5 sec. 1 point 1 shall be understood as the transfer of the right to dispose of the goods as the owner (...). On the other hand, Art. 8 sec. 1 of the VAT Act provides that by providing services referred to in Art. 5 sec. 1 point 1 shall be understood as any service provided to a natural person, legal person or organizational unit without legal personality, which does not constitute a supply of goods within the meaning of art. 7.

Thus, although the introduction of a cryptocurrency on the market does not constitute a supply of goods, the activity in question is a paid service. Considering the above, the sale of cryptocurrencies is subject to VAT. However, pursuant to Art. 43 sec. 1 point 7 of the VAT Act, the taxpayer has the right to be exempt from taxation under this provision. The above interpretation is confirmed by the judgment of the Provincial Administrative Court in Łódź of March 23, 2016, file ref. no. I SA / Łd 54/16.

Example 2.

The taxpayer conducts business in the field of trading in virtual currencies. Such activities in the field of trade (purchase, sale) via the Internet are classified by official statistics services under the number PKD 64.19.Z "Other financial intermediation". The activity is conducted through online virtual currency exchanges. In order to be able to buy and sell cryptocurrencies, the applicant must make an electronic transfer of his own funds in traditional currency to a bank account owned by the company managing the website. The funds deposited are assigned to the taxpayer's account and remain at his sole disposal. The company managing the website cannot dispose of the values ​​collected by the taxpayer. Therefore, the question should be asked whether the VAT exemption can be applied to the above activity.

Based on Article. 43 sec. 1 point 7 of the Act is exempt from tax transactions, including intermediation, concerning currencies, banknotes and coins used as legal tender, with the exception of notes and coins that are collectors' items, which are gold, silver or other metal coins and banknotes, which are not normally used as legal tender or which have a numismatic value. Taking into account the above provision, it should be checked whether the cryptocurrency can be considered a means of payment within the meaning of the VAT Act.

In the judgment of Velvet & Steel Immobilien, C-455/05, EU: C: 2007: 232, we read:

From the context and purpose of the said Art. 135 sec. 1 lit. (e) it follows that an interpretation of that provision that it covers only transactions involving traditional currencies would deprive it in part of its effect. It is common ground in the main proceedings that the sole purpose of the virtual currency 'bitcoin' is as a means of payment and that certain traders accept it for that purpose. Consequently, it must be concluded that Art. 135 sec. 1 lit. e) of the VAT Directive also covers the provision of services such as those in the main proceedings, which consist in the exchange of traditional currencies into units of the virtual currency "bitcoin" and vice versa, made for the payment of an amount corresponding to the margin resulting from the difference between the price at which the trader buys the currencies and the price at which he sells them to customers (paragraphs 51 to 53 of the judgment).

Thus, cryptocurrencies have been recognized by the CJEU as legal tender (for the purposes of value added tax). Given the above, trading in cryptocurrencies can benefit from VAT exemption under Art. 43 sec. 1 point 7 of the VAT Act.

The above statement is confirmed by the Director of the National Tax Information in the individual ruling of October 3, 2017, number 0114-KDIP1-3.4012.278.2017.

Consequently, it should be stated that the activities consisting in the purchase and sale of the iota virtual currency on internet exchanges constitute activities subject to VAT as the provision of services for consideration, pursuant to Art. 8 sec. 1 of the VAT Act, exempt from tax on goods and services on the basis of the above-mentioned art. 43 sec. 1 point 7 of the VAT Act.