The General Financial Directorate (GFD) issued Information on the tax assessment of cryptocurrency transactions. This Information, which follows the already issued Communication of the Ministry of Finance on accounting and reporting of digital currencies from 2018, summarises the relatively settled position of the Czech Tax Administration towards cryptocurrencies, but does not bring any major innovations. Let us therefore summarise the existing approaches and rules for transactions in digital currencies.
Cryptocurrencies can be viewed from three different angles: from a VAT perspective, from an income tax perspective and from an accounting perspective.
Cryptocurrencies from a VAT perspective
From a VAT point of view, it is necessary to take the European legislation as a starting point. The CJEU case law considers the exchange of cryptocurrencies for fiat currencies, i.e. legal currencies, as an exchange activity that is exempt from VAT. For VAT purposes, cryptocurrencies are alternative means of payment which are used in a similar way to legal tender.
The GFD divides cryptocurrency mining into two types: mining through the verification of network operations and mining through the provision of computing power to another entity (so-called pool mining). The mining itself, consisting of the use of computing power to verify network operations, is not subject to tax under Section 2 of the VAT Act, as there is no direct relationship between the provider of the cryptocurrency and its recipient (the miner). However, mining in the form of renting cryptocurrency mining equipment is a different situation. If someone provides their computing power and receives a reward in the form of cryptocurrency (e.g. mining in a pool), this is a supply of services for consideration, which is subject to VAT.
Another situation that the GFD Information addresses from a VAT perspective is the purchase and sale of goods/services for cryptocurrency. If a taxpayer performs a taxable supply in the domestic territory and receives payment for it in whole or in part in cryptocurrency, the tax base is determined in accordance with Section 36(6)(d) of the VAT Act. This means that the tax base is the normal price for the services or goods supplied.
The last aspect mentioned in terms of VAT is cryptocurrency trading. If someone trades in cryptocurrencies for the purpose of generating regular income, i.e. not just for the purpose of managing their own assets, they are carrying out an economic activity. This trading (speculation on the stock exchange) is considered a financial activity that is exempt from tax but nevertheless enters into turnover under the conditions set out in Section 4a of the VAT Act.
Cryptocurrencies from an accounting and income tax perspective
From an income tax and accounting perspective, cryptocurrencies are not considered a means of payment and the exchange of cryptocurrencies is not considered an exchange activity. Private law treats cryptocurrencies as a thing in the legal sense of the word, namely as intangible, movable and fungible. This is also how income tax views cryptocurrencies. From an accounting perspective, it is then recommended to account for cryptocurrencies as inventory "of a kind". Cryptocurrency acquired is therefore valued at the acquisition price, while cryptocurrency mined is valued at cost. The mining and purchase of cryptocurrency is not taxable income, only the sale or exchange of cryptocurrency is. Thus, the exchange of fiat currency is not an exchange activity for income tax purposes, but taxable income (sale of intangible movable property). The value of the cryptocurrency recorded in the accounting records is then applied as a tax-deductible expense. Inventories "of a kind" are not revalued to fair value at the balance sheet date, and a valuation allowance (not tax deductible) is made for any temporary impairment.
For personal income taxpayers, income from cryptocurrency transactions is taxable income as these transactions are not exempt from tax. Such income may be income under Section 7, Section 9 or Section 10. To determine the correct category of income, it is necessary to assess whether the individual is considered to be a business (within the meaning of the Civil Code) in cryptocurrency transactions. If so, i.e. if the person carries out the activity in question deliberately and consistently for profit (on his own account and responsibility), then the income from cryptocurrency transactions is treated as income under Section 7 of the Income Tax Act. If the taxpayer has a trade licence for this activity, they can claim expenses at a flat rate of 60% of the income (as per the law) in addition to the actual expenses. If the taxpayer does not have a trade licence, they may (in addition to the actual expenses) use expenses at a flat rate of 40% of the income (according to the law).
If the individual is not regarded as a business in cryptocurrency transactions, the income from these transactions is income under Section 10 (it is income from the transfer of another item for consideration under Section 10(1)(b)(3) of the Income Tax Act). A tax expense can be claimed against this income, which is the price at which the taxpayer demonstrably acquired the item.
If an individual rents out movable or immovable property and receives income in cryptocurrency in return, this is rental income. If the rented property is part of business property, it is income under Section 7, if it is not business property, it is income under Section 9 (except for occasional rentals under Section 10(1)(a)). For both variants (i.e. income under Sections 7 and 9), if the taxpayer does not claim actual expenses, they can claim expenses as a percentage of income (in both cases 30% of income, max. CZK 600,000).
It can be concluded that the GFD Information confirms the already established practice in assessing certain transactions with cryptocurrencies but does not bring much new information. For VAT purposes, cryptocurrencies are a means of payment and their exchange and trading are considered financial activities (exempt from VAT). Beware, however, of pool mining, which is regarded as the supply of a service, which in turn is subject to VAT. Unfortunately, alternative forms of cryptocurrency mining are not further addressed in the GFD Information. For income tax, the approach of the Tax Administration is different. The purchase of cryptocurrencies is not a taxable transaction, but any other transaction with cryptocurrencies that generates some form of income (exchange, sale) is taxable income. For individuals, this is most often income under Section 10. Therefore, there is an obligation to report this income, even if the transactions are loss-making.