Tax treatment of cryptocurrency transactions – compliance provisions and issues that claim clarification
Opinion material by Raluca Bontaș, Partner, and Cătălin Barbu, Senior Consultant, Global Employer Services, Deloitte Romania
The interest in virtual currencies has grown in recent years. According to recent estimates, made by a trading platform, the number of cryptocurrency users increased by over 10 million, globally, between December 2020 – January 2021.
In Romania, too, the community of cryptocurrency users is expanding, so they appear more and more questions about the reporting and taxation obligations of virtual currency transactions. Among the most common are those related to the method of declaration, the amount subject to taxation and the time when the income becomes taxable.
In Romania, transactions with virtual currencies were regulated for the first time in 2019, through Law 30/2019, which introduced in the Fiscal Code provisions regarding the taxation of income thus obtained.
According to these regulations, revenues from the transfer of virtual currency fall into the category of revenues from other sources and are subject to the specific tax regime for this category, with certain particularities. One of the peculiarities is that the determination of income tax and applicable social contributions is the responsibility of those who make the income, not of the income payers (as in the case of other income in the same category). Even for exchanges made through trading platforms, the reporting obligation remains with the users.
How is the income declared?
Thus, individuals who obtain income from such transactions are required to declare them by submitting the single declaration and pay the taxes due. This year, the declaration must be submitted by May 25, for the revenues obtained in 2020 from cryptocurrency transactions and for those estimated to be made in 2021.
For taxpayers with tax residence in Romania, the obligation to declare cryptocurrency revenues through the single declaration it exists regardless of whether they are obtained from Romania or from abroad. Being in the category of income from other sources, the gains obtained from the transfer of virtual currency are subject to income tax and social health insurance contribution (CASS), but not to social insurance contribution (CAS). With regard to income tax, the 10% rate applies to the gain from the transfer of virtual currency, and not to gross income. Therefore, in order to establish the tax base, the purchase price of virtual currencies can be deducted from the purchase price of virtual currencies. In addition, direct transaction costs can be deducted (in this context, the fees of the various trading platforms or network transaction validation fees for direct transactions between users – so-called “gas fees”) may be relevant.
The current format of the single declaration provides that, for incomes of this type obtained from Romania, the realized gain is to be entered directly (the possible deductions being operated before the data are entered in the declaration). Instead, for income from abroad, deductions must be reflected in the return (by entering the gross income and deductible expenses / amounts). Earnings of less than 200 lei / transaction are exempted from the obligation to declare or pay the tax, respectively, but only if the total earnings in a fiscal year do not exceed the level of 600 lei. Regarding CASS, for 2020 the contribution is due only if the total income generated (either only from transactions with virtual currencies or cumulated with those from other extra-salary sources) is at least equal to 12 minimum gross salaries per country (for 2020, the ceiling is 26,760 lei). The CASS quota of 10% is applied to this ceiling, so that, this year, the amount due on account of the health contribution is 2,676 lei, regardless of the level of earnings (once they exceed the mentioned threshold).
Aspects that claim further clarifications
Compared to the above particularities, a relevant aspect, which still raises difficulties of interpretation, is that of the moment at which the beneficiary of the income must determine the gain to be declared. In principle, the time should coincide with the time when the conversion from cryptocurrency units to units of a conventional currency (lei, euro, dollars, etc.) takes place. However, this is hampered by the complexity of trading platforms that provide users with both electronic wallets in which they can store cryptocurrency units and electronic wallets for storing conventional currency.
Thus, transactions involving the conversion of virtual currency into conventional currencies are usually initially reflected in the platform, the funds (expressed in conventional currency) can then be transferred to personal bank accounts. In principle, the operation of the conversion without the transfer from the platform to the bank accounts does not offer a real, tangible benefit to the beneficiary (as a rule, the funds can only be used to purchase cryptocurrency units as long as they are in the management of the platform). Consequently, the simple conversion made within the platform should not involve income taxation. This moment occurs only when the funds are transferred from the platform to the bank accounts of the holder.
However, the particularities of each platform must be taken into account. The mechanisms behind a simple conversion from cryptocurrency to conventional currency can be complex and not always visible to users in order to be able to determine with certainty when the benefit leaves the virtual realm for the tangible, regulated one. For example, if there is a bank account behind the electronic wallet for conventional currencies available to users, and each conversion is reflected in this bank account (and not just in the application), such an action brings funds into the regulated and visible sphere. for tax authorities. Therefore, the authorities may consider that in this case even the simple conversion and reflection of funds under the platform in conventional currency is a time when income becomes taxable.
A potential counter-argument to this approach is that such an account is not entirely under the control of the beneficiary (but of the platform), including imposing limits on the amounts expressed in conventional currencies that can be withdrawn. But even such a counter-argument raises other questions, which, in the absence of specific provisions of tax law, further complicate the determination of the taxable time. Additionally, we must take into account the continuous evolution of the configuration of the platforms, given the fact that some of them allow the purchase of goods or services directly or with the help of cards issued by these entities. In such situations, we can no longer talk about a lack of tangibility of a benefit.
Therefore, given the frequent changes in this area, the current fiscal framework for cryptocurrency transactions in turn requires a continuous reinterpretation in order to adapt to market developments. Given that the tax obligations related to revenues from cryptocurrencies are placed on the beneficiaries, they have the obligation to ensure that they make a correct determination on the issues mentioned above. The declaration of income obtained from any source and the payment of taxes provided by the legislation in force are obligations for any taxpayer, except for the categories expressly provided in the Fiscal Code. Otherwise, the penalties imposed by law, namely penalties and default interest set by the competent authorities, shall apply. There are already cases of tax audits carried out in the past, which targeted cryptocurrency transactions, some of which even went to court to confirm or deny the tax obligations set by the authorities. And, given the expansion of this financial area, it is expected that such controls will occur more frequently in the coming period.