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Virtual currencies: How to tax gains?

The Bitcoin exchange rate has been smashing records recently. People who bought this currency at much lower rates may realise significant profits. But the issue of how to tax such income has generated doubts for a long time. A recent change in the statistical classification of trading in Bitcoin has only added to these uncertainties.

What are virtual currencies?

So far no legal definition of virtual currencies has become firmly established. Reference to the European Parliament resolution of 26 May 2016 on virtual currencies (2016/2007(INI)) can be helpful in this respect, however. There the EP cites the position of the European Banking Authority, under which a virtual currency is defined as “a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is used by natural or legal persons as a means of exchange and can be transferred, stored or traded electronically.”

Under Polish tax regulations, it is vitally important that virtual currencies are legal, which means that transactions using them are subject to taxation, as confirmed by the Ministry of Finance in a letter to the Speaker of the Sejm on 28 June 2013 (no. BPS/043-30-1238/13).

Currently the most popular virtual currency is Bitcoin, introduced in 2009, and most of the tax practice centres around that currency. But presumably other virtual currencies should be treated similarly.

How to tax the sale of virtual currencies?

A fundamental problem arising in the sale of virtual currencies by individuals is assigning the revenue from such transactions to the proper source.

In response to parliamentary inquiry no. 6655, the Minister of Finance and Development stated (no. FN7.701.53.2016) that revenue from trading in virtual currencies should be assigned to the source known as “revenue from property rights.” This classification means that the income earned on sale of virtual currencies is taxed under general rules, according to the tax scale.

In our view, however, this does not mean that persons operating a non-agricultural business or partners in a partnership that is not a taxpayer (e.g. a registered partnership) which is involved in trading in virtual currency cannot pay tax on the sale of virtual currencies at the flat rate of 19%. But in that case the activity involving trade in virtual currency must display the characteristics of business activity (organised, continual, intensive and the like). It appears that it is a safer solution to trade in virtual currencies within a separate, dedicated entity which is a non-taxpayer partnership. But to ensure the most extensive protection in this respect, obtaining an individual tax interpretation should be considered.

It should be borne in mind that individual businesses generally have until 20 January of each year to decide whether they will be taxed at the flat rate that year or under the tax scale.

No longer a lump sum on recorded revenue

It was accepted until the end of last year that revenue from trading in virtual currencies could be taxed in the form of a lump sum on recorded revenue at the rate of 3%. This possibility was based on the relevant statistical classification of trading in virtual currencies under no. PKWiU 47.00.89 (retail sale of non-consumption, non-food goods, not elsewhere classified), which was confirmed several times by the Central Statistical Office (GUS).

But on 12 December 2016 GUS issued an interpretation specifying a new classification method for purchase and sale of Bitcoin under the PKWiU system, indicating the classification (other monetary intermediation, not elsewhere classified).

Although interpretations issued by GUS are not a source of law, in practice this classification excludes the possibility of taxing revenue from the sale of Bitcoin, and presumably also other virtual currencies, using the lump sum on recorded revenue.

This change in statistical classification means that the tax authorities will probably dispute the protection provided by individual tax interpretations under which the right to apply the lump sum on recorded revenue was confirmed based on the statistical classification PKWiU 47.00.89 indicated by the taxpayer.

Michał Nowacki, legal adviser, tax adviser, Jakub Świetlicki vel Węgorek, Tax practice, Wardyński & Partners