Observing the numerous falls in the cryptocurrency markets, it is worth checking where and how to tax your profits, and also verify the potential risks involved.
Although current cryptocurrency prices are not at their peak, especially compared to November 2021 when crypto reached its highest market value levels ever – almost USD 3 trillion – this market is still attractive to investors, evidenced by the number of cryptocurrency millionaires, which currently stands at almost 80,000.
The jurisdiction applicable to the cryptocurrency market …
Unlike ‘conventional’ investments, cryptocurrencies are not tied to a specific jurisdiction, as the associated transactions take place on the blockchain network. Therefore, when determining taxation for its tax residents, each country can choose its own rules.
… and the place of tax residence
Tax residency determines the place where we are obliged to fulfil our tax obligations. For example, in order to become a Polish tax resident, it is sufficient to reside in Poland for more than 183 days in a calendar (tax) year or to have a centre of personal and economic interests, i.e. a so-called centre of vital interests in Poland.
Solutions employed by individual countries usually involve placing income from virtual currencies in a currently existing category of income and taxing it in a manner typical of this form.
This is also the case in Poland, where profits from virtual currencies have been classified as capital gains (in CIT) or money capitals (in PIT), subject to a 19 % tax rate and, upon exceeding the threshold of PLN 1,000,000, an additional solidarity levy of 4 % on the excess over this amount.
Factors determining the taxation rate include the frequency of trading, the volume of transactions and the type of trading – private or business.
How crypto is taxed – trends in Europe and worldwide
A review of destinations popular with investors shows some favourable trends, such as:
- Exemption of profits of individuals from taxation (e.g. Portugal, Switzerland, Malta or more exotic destinations such as the Cayman Islands or Singapore),
- A limit up to which the virtual currency trading is tax-free (in the case of our western neighbours, Germany, this limit is EUR 600),
- Favourable conditions for businesses, including those trading crypto-assets – Cyprus, Estonia, Singapore.
Nevertheless, it is not only low tax rates or tax exemptions that make a jurisdiction attractive to businesses or individuals investing in cryptocurrencies, but also the transparency, ease of understanding and, above all, the constancy of the underlying legislation.
Potential risks arising from international tax planning
When considering international tax planning in the context of realising profits from cryptocurrencies, it is worth bearing in mind the Exit Tax and GAAR, which, in the context of any attempt to optimise crypto income, require a thorough analysis of the transaction.
What is Poland’s idea of taxing crypto assets
Although we pale in comparison to other European tax regimes, globally we are slightly above average.
This is primarily due to the fact that mining itself and transactions involving the exchange of one virtual currency into another are not subject to income tax. As a result, trading activities, until the assets are converted into a traditional good, remain untaxed.
However, the topic of cryptocurrencies is quite new and the Polish tax administration are at an impasse, though with at least a few options to choose from.
They may decide to simplify regulations, thereby keeping Polish crypto investors at home and even attracting new foreign players.
They may tighten the existing regulations.
Or – they may do nothing at all, thus leaving many uncertainties which would translate into costly and certainly lengthy tax disputes in administrative courts, while, as we all know, there is nothing worse for business than uncertainty about the applicable rules.
Do you have any questions? Contact the authors
Date: 27 October 2022