Recently, the Ministry of Finance published guidance on the Austrian income and value added tax aspects of investing in the crypto space.
Given the recent meteoric rise and subsequent fall of the value of Bitcoins as well as other cryptocurrencies (such as Ethereum, Ripple and Litecoin) and given the resulting interest of the mainstream media and the public at large, it is in principle good that the Ministry of Finance has summarized (and partly reiterated) its views on the tax consequences of investing in this new asset class.
Pursuant to the guidance, the following applies regarding income tax: - For individuals holding cryptocurrencies as non-business assets, any gains (e.g., upon the conversion of Bitcoin into EUR) are tax-free if realized upon expiry of the one-year "speculation period", but are taxable if realized before that point in time (with a tax-exempt amount of EUR 440 p.a. applying).
- These rules shall also apply to the conversion of one cryptocurrency into another cryptocurrency (e.g., conversion of Bitcoin into Litecoin). This is inconsistent, since it has long been held that the conversion of one foreign currency into another foreign currency (e.g., conversion of USD into GBP) normally does not lead to a taxable event; only if the conversion gain is permanently secured (e.g., by converting into EUR or into a foreign currency which is tied to the EUR) are gains realized for tax purposes and thus taxable. In our view, the same should apply to conversions between cryptocurrencies. Apart from this legal argument, there is also a practical aspect to be considered: As every trader in cryptocurrencies knows, exchange rates on the various cryptocurrency exchanges are highly disparate (even more than normal forex rates) and it remains totally unclear which exchange rate is to be used for calculating the taxable gain.
- Where an investor purchases a specific cryptocurrency at different times and then sells a portion of his/her holdings from one wallet, the investor can freely determine which portion was sold, provided that he/she can fully document the acquisition dates and the acquisition costs of the individual purchases; otherwise the FIFO (first in first out) method is to apply when calculating the taxable income.
- The rules mentioned above (taxable within one year, tax-free after one year) shall not apply if cryptocurrencies are "rented out", with "interest" being earned pro rata temporis. In such case, a later sale would lead to capital gains that qualify as investment income, which is taxable at a flat income tax rate of 27.5% (irrespective of the holding period). Yet again, this seems inconsistent to us: Interest is income from capital claims. Thus, only if one qualifies cryptocurrencies as capital claims (such as loans, bank deposits and bonds) could a gain from the sale of cryptocurrencies lead to investment income. Further, even if cryptocurrencies were to be qualified as capital claims, should such gains not be taxable at the flat income tax rate of 27.5% (but rather at the progressive income tax rate)?
- Further, the guidance states that income from the operation of cryptocurrency exchanges, from the operation of Bitcoin ATMs and from the mining of cryptocurrencies will normally be considered as income from an active trade or business, which is taxable at the progressive income tax rate. While we would concur with the first two cases, a more nuanced conclusion is warranted in case of cryptocurrency "mining" (a term which unluckily evokes an association with large-scale heavy industrial operations, which probably led to this classification).
- What is missing in the guidance is an explanation under which circumstances the trading of cryptocurrencies is to be considered as an active trade or business.
- What is also striking is that the Ministry of Finance does not deal with cryptoassets (such as Augur or Monaco). This seems to be an oversight, and we believe there should be no difference whether an investor sells Bitcoins or, for example, cryptographic tokens acquired in an initial coin offering (ICO).
Pursuant to the guidance, the following applies regarding value added tax: - Following the ECJ's case law (cf. ECJ 22 October 2015, C-264/14 – Hedqvist ), the exchange of fiat money into Bitcoins and vice versa is exempt from value added tax.
- Similarly, the mining of cryptocurrencies is not to be seen as a taxable service for lack of an identifiable recipient of the service.
- On the other hand, the supply of goods and services with Bitcoins used as consideration is to be treated in the same way as supplies of goods and services which are sold against fiat money.
In summary, the guidance issued shows that even trading with virtual assets can have real life tax consequences.
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