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Introduction
Cryptocurrencies are becoming increasingly popular among individuals and companies every year. This digital asset attracts attention not only with its innovative technology but also with the possibility of significant income. It is important to understand how cryptocurrencies affect tax obligations. In this article, we will look at the main aspects of cryptocurrency taxation, focusing on taxes such as personal income tax (PIT), corporate income tax (CIT), value-added tax (VAT), and civil law transaction tax (PCC). We will also discuss the specifics of accounting for cryptocurrency transactions in various types of deals.
Since 2019, individuals no longer recognize income from the sale of cryptocurrencies as business income, except for organizations managing stock exchanges or virtual currency exchange points.
This change means individuals conduct cryptocurrency transactions privately, outside of business activities. Individuals must pay taxes on any source of income, including cryptocurrency sales. They settle with the tax office by filing an annual PIT-38 declaration from February 15 to April 30 of the year following the reporting year. They do not pay advances on income from cryptocurrency sales, only the final declaration.
If a limited liability company (spółka z o.o.) trades cryptocurrency, it settles within the company. The company does not consider income from cryptocurrency sales as business income. Even if the company qualifies for the 9% corporate income tax (CIT) rate, it still taxes income from cryptocurrency operations at a 19% CIT rate.
Now let’s move on to the impact of cryptocurrency on the main types of taxes:
- personal income tax (PIT)
- corporate income tax (CIT)
- value-added tax (VAT)
- civil law transaction tax (PCC).
We will also cover how to calculate cryptocurrency transactions when using cryptocurrency to purchase services or goods instead of cash.
Cryptocurrency and Personal Income Tax (PIT)
When and which declaration to submit?
Individuals cannot classify cryptocurrency transactions as business income. Legislation specifies that income from selling virtual currencies should be treated as capital income, similar to income from selling shares. Therefore, the appropriate form for calculating income tax (PIT) on cryptocurrency transactions is PIT-38. The annual report must be submitted between February 15 and April 30 of the year following the reporting tax year.
How to calculate tax on income from cryptocurrency sales?
Tax on income is calculated as the difference between revenue and expenses. However, cryptocurrency income calculation differs. It represents the difference between revenue from the paid sale of virtual currencies and tax-exempt expenses incurred in the current year, plus tax-exempt expenses from previous years that were not deducted.
What is the tax rate on income from cryptocurrency sales?
According to Article 30b 1a of the Personal Income Tax Act (Ustawa o PIT), the income tax on revenue from the sale of virtual currencies is 19% of the obtained income. This income is subject to solidarity tax (Danina solidarnościowa), which is collected by the tax office on income exceeding 1 million PLN at a rate of 4%. Thus, the total tax on income from the sale of cryptocurrencies can be 23% (19% + 4%).
What is considered revenue?
Revenue comes from:
- exchanging virtual currency for legal tender (e.g., PLN, EUR, USD);
- exchanging virtual currency for goods;
- exchanging virtual currency for services;
- exchanging virtual currency for property rights other than virtual currency;
- settling other obligations with virtual currency.
For example, converting cryptocurrency to fiat currency or paying with cryptocurrency for coffee or a consultation generates income. The date of income generation is the transaction date.
Income from the sale of cryptocurrencies is not aggregated with other income from capital (e.g., from the sale of shares). Income from the sale of cryptocurrencies cannot be reduced by losses from investing in shares or vice versa.
Exchanging one cryptocurrency for another (including stablecoins) is neutral from a tax perspective, i.e., in such circumstances, no income is generated. This information is important for your internal accounting.
What can be considered expenses related to acquiring cryptocurrency?
Expenses for generating income from the paid sale of virtual currency are documented costs directly incurred for acquiring virtual currency and expenses related to its realization. Examples of expenses:
- costs of purchasing cryptocurrencies
- fees for buying and selling virtual currencies.
It is important to properly document expenses. The documents should clearly show that you incurred expenses. If you buy virtual currency at an exchange point, make sure you get a transaction confirmation with your details for tax purposes.
Converting cryptocurrency to another cryptocurrency or the fee for such conversion is not tax-deductible. When exchanging one cryptocurrency for another, no income is generated, and hence, no income tax.
If you took a loan to buy cryptocurrency, the penalty interest on this loan is not a firm expense. Also, training on financial pyramids and activities of financial exchanges cannot be accepted as expenses.
Purchasing equipment for mining cryptocurrency and the electricity consumed by it is not a firm expense unless it is one of the main activities.
Cryptocurrency and Corporate Income Tax (CIT)
For CIT taxpayers (e.g., limited liability companies – spółka z o.o.), if the organization does not operate as a stock exchange or a virtual currency exchange point, the settlement of transactions involving cryptocurrencies will not be conducted as business income but as income from capital gains.
This means that if a company is eligible to apply a 9% corporate income tax (CIT) rate, income from cryptocurrency operations will still be taxed at a 19% CIT rate. Taxation of income from the sale of cryptocurrencies under CIT occurs when filing the annual declaration, not on an ongoing basis in the form of tax advances.
Annual company income declaration
The filing period for the annual declaration for companies liable to corporate income tax is by the end of the third month of the following year. If the company’s tax year ends in December, the filing period for the annual declaration is:
- CIT-8 for companies with standard CIT
- CIT-8e for companies listed under Estonian CIT
until the end of March of the following year.
Accounting for cryptocurrency transactions
Calculations for purchasing, holding, and selling cryptocurrencies are carried out similarly to PIT taxpayers. CIT taxpayers fill out the CIT/WW appendix to the CIT-8 declaration instead of PIT-38. The tax (at a 19% rate) will be paid regardless of whether the company reported a profit or loss as capital gains. Income from the sale of cryptocurrencies cannot be offset by losses from investing in shares or vice versa.
Companies that have chosen Estonian CIT will also tax income from cryptocurrencies according to the described principles. They will not apply the rates provided for the Estonian tax and will not be able to pay CIT on this account only when distributing dividends to partners.
Conditions for having cryptocurrency on the balance sheet
When dealing with cryptocurrency, the firm must appoint a person responsible for cryptocurrency transactions and a deputy in case the primary person is absent. This information should be recorded in the firm’s regulations on virtual currency transactions. The regulations should outline the rules for storing and using the digital key used for transactions within the firm.
It should also be noted that the existence of cryptocurrency in intangible assets must be mentioned in the firm’s accounting policy (Polityka rachunkowości firmy).
What is cryptocurrency for the firm, and where to find it in the balance sheet?
The role of cryptocurrency in a firm can be likened to other investments. Considering that virtual currency is just a digital record, it should be placed in the “other investments” (inne inwestycje) section of the balance sheet.
VAT and cryptocurrency transactions
According to the Value-Added Tax Act (Ustawa o VAT), the sale and exchange of virtual currency are exempt from VAT under Article 43 section 1 point 7. Furthermore, the Court of Justice of the European Union (CJEU) in its decision of October 22, 2015, in the case Hedqvist C-264/14 ruled that rights treated in trading like money should be considered for VAT purposes in the same way as transactions with “regular” money, justifying VAT exemption.
Exemption from VAT does not mean that this activity is not subject to the VAT Act. This may be important, for example, regarding the limit for small taxpayers. The annual limit is 200,000 PLN, but this is probably a topic for a separate article.
Cryptocurrency and civil law transaction tax (PCC)
Doubts about the taxation of cryptocurrencies with civil law transaction tax were finally resolved in 2020 as part of the “Anti-Crisis Shield 2.0” (tarcza antykryzysowa 2.0). Article 9 of the Civil Law Transactions Tax Act (Ustawa o PCC) was amended to include section 1a, which exempts the sale and exchange of virtual currencies from tax. This provision came into effect on July 1, 2020.
Exchanging cryptocurrency for goods or services
Let’s consider an example of paying for services or goods with cryptocurrency. Take Jan Kowalski, who buys a service or goods from a company operating within a limited liability company (spółka z o.o.) and pays not in cash but with virtual currency.
First Stage: Jan Kowalski bought virtual currency for 1000 PLN on a cryptocurrency exchange. As you already know, he will indicate 1000 PLN for the purchase of virtual currency in his annual PIT-38 tax declaration.
Second Stage: Jan Kowalski buys a service or goods from a company for 1500 PLN, meaning he earned 500 PLN on his cryptocurrency. In section “E” of the annual PIT-38 report, he will reflect an income of 500 PLN from the sale of virtual currencies.
Third Stage: Let’s consider what happens from the firm’s perspective, which sold the service or goods. By selling the service or goods, the firm receives revenue from operational activities. If the company can apply a 9% CIT rate, it will pay 9% CIT on the income from selling the service or goods.
It is important to note that the above applies to operational income, not income from the sale of virtual currency. Now let’s move on to discussing cryptocurrency settlements.
In addition to selling the service or goods, the company acquired virtual currency from Jan Kowalski for 1500 PLN. This transaction will be disclosed by the company as a tax-exempt amount in the CIT/WW appendix to the CIT-8 declaration.
In the fourth stage, the company sells the virtual currency on the exchange for 2000 PLN, earning on cryptocurrency investments. In tax accounting, the company will report income from the sale of virtual currency, like Jan Kowalski — in the amount of 500 PLN. This will be reflected in the CIT/WW appendix and in section “I” of the CIT-8 declaration. This income will be taxed at a rate of 19%.
Conclusion
Thus, understanding the tax aspects of cryptocurrency transactions is crucial for effectively managing your finances and minimizing risks. If you have any questions or need additional consultation on cryptocurrency taxation, we invite you to schedule a consultation with our experts. Our specialists will help you navigate all the nuances and ensure your activities comply with current tax requirements.
We are also preparing a similar guide on working with cryptocurrency in the American market. We will be happy to provide consultations and assist with filing declarations in the USA at our new office. Contact us for professional help with cryptocurrency taxation and more!
