Article was originally published in Polish at Bitcoin.pl | Ministerstwo Finansów zadaje cios użytkownikom kryptowalut. Podatek PCC od transakcji na giełdach, trudności z wykazaniem kosztów w DG. It was translated to English by Karol Stańczak (becometa) with a permission from original article author Bitmar. Translated version is also available here.
Article review and language tweaks were made by Grzegorz G. (Greg)
Polish Ministry of Finance deals a powerful blow to cryptocurrency users. PCC (1%) - tax on civil law transactions made on crypto exchanges EVEN IF THEY'RE NOT PROFITABLE, difficulties with proving costs in business economic activity (called Działalność Gospodarcza – DG) and more.
On 04/04/2018 the Ministry of Finance published guidelines on how to settle taxes for cryptocurrencies. Those rules, guidelines are definitely not good for people turning cryptocurrencies equities on crypto exchanges.
Since the beginning 2018, cryptocurrency companies in Poland found their bank accounts agreements being terminated. Some crypto exchanges have been added to the KNF black list – famous list of public warnings which consist of entities suspected of committing a crime. A media campaign against cryptocurrencies including paid YouTubers has also begun. One week ago, the National Tax Administration (called Krajowa Administracja Skarbowa) demanded crypto exchanges and cantors to send detailed data about their clients trading cryptocurrencies. Unfortunately, it turns out that this is not the end of repression of the cryptocurrency industry in Poland.
New statement from the Ministry of Finance begins with the sentences:
"In an annual PIT (called Tax Returns in UK, Form 1040 in USA), one should also mention revenues from sales or exchange of cryptocurrencies such as bitcoin, litecoin or ether.
We need to indicate effects of turning the cryptocurrencies in income tax from individuals, from goods and services and also from civil law transactions.
The Act on Personal Income Tax says that income obtained on this type of economic action is a subject to taxation on general terms.”
To this very point everything is clear and obvious. We’re gaining/getting revenue from turning the cryptocurrency so we pay the tax. This is not a surprise.
Revenue sources
"Revenues from cryptorcurrency turnover may be qualified to the source of revenue from:
property rights
non-agricultural business, if the cryptocurrency is traded as part of an activity that meets certain conditions: it has a commercial character, it is carried out on by its own behalf by the taxpayer, in an organized and continuous manner (and there are no premises indicated in Article 5b paragraph 1 of the PIT Act).”
This is the key issue of the problem in Poland. The Ministry of Finance recognise Bitcoin and cryptocurrencies as property rights if they’re being traded by natural individuals, not businesses. The Ministry of Finance adopted the same assumption in 2013."
If we do it on a continuous and organised basis and it is a commercial one, we’re obliged to set up a business (mentioned earlier as ‘Działalność Gospodarcza’), rather than trading as an individual.
Income
"Cryptocurrency turnover generates income in case:
- sales of cryptocurrency (exchanging it for a traditional fiat currency, for example: złotówki (PLN), euro (EUR), US Dollar (USD)
- exchange of one cryptocurrency into another cryptocurrency, exchange for a goods or services. Exchanging cryptocurrency should be treated as form of it’s paid sale, analogically as exchanging any other property rights, like for example claims."
While the first point is beyond any doubt, the second one is quite controversial. Exchanging for example Bitcoin to Litecoin generates income and therefore tax. Such statements began to appear in individual tax interpretations reported to local tax offices. People who have been trading cryptocurrencies for years have probably not been aware of this fact.
„Income made from paid sale of cryptocurrency through sale or exchange agreement – is being qualified to the incomes made from property rights, which is being referred in art. 18 of the PIT Act – arises at the moment of receiving or placing at the disposal of the taxpayer money (traditional currency), another cryptocurrency, goods or services."
It is extremely important to determine the moment of obtaining the income. According to Ministry of Finance, it arises when the taxpayer receives or has available to his own disposal the money or the other cryptocurrency. So, if during the whole year you’ve been trading cryptocurrencies but haven’t withdrawn money from crypto-exchange you should pay tax anyway. The moment of tax obligation takes place not when you’re transferring money from the exchange to a bank account but the time of the transaction. Unfortunately, many people were not aware of it either.
In case of running a business (DG):
“an income made from business operations are all due amounts, even if they have not actually been received. At the same time, date of income arise is being defined at the day of property rights disposal - so the day when cryptocurrency was sold or exchanged - no later than the date of invoice or payment.”
The cost of obtaining the revenues – entrepreneurs’ Armageddon
“At the same time, it should be emphasized that in the case of cryptocurrency trading as a part of business operations, the tax accounting and recording for the incurred revenues and costs depend on the type of tax books kept and managed by the taxpayer (tax book of revenues and expenditures or accounting books).
It’s worth to note that the tax book of revenues and expenditures is a simplified and formalized form of recording economic events, which is why the taxpayer:
can make entries basing on a strictly defined documents such as for example. Invoices or bills. Because of this, documents in a form like for example. cryptocurrency exchange transaction list statement or bank statements with transaction history are not valid accounting documents. What is more is that within the meaning of the regulations, income and tax deductible costs documented only in this way can not be recorded in the tax book of revenues and expenses.”
According to the MF information(statement), if cryptocurrency trades was being done as a part of business with tax book of revenues and expenses (KPiR - Księga Przychodów i Rozchodów) [probably the majority of small businesses), the entrepreneur is not going to have the opportunity to deduct buying costs, because he is unable to document them in the form of bank transfers or an direct extract of transactions from the exchange.
“The inability to record any revenue or expenditure in the tax revenue and expense ledger - because the taxpayer does not have the form required to document it - does not automatically mean that it can not be recognized as income and tax deductible under the PIT. Therefore, if the taxpayer otherwise documents reliably the occurrence of tax revenue or the tax expense, he should take this into account during the tax year in the current tax advance as well as in the annual income tax settlement."
Here comes the paradox, because if bank transactions statements and exchange transaction lists cannot become the main basis for deducting costs. There is no other reliable way to document costs, because stock exchanges do not give other options.
What does this mean practically if one might consider the position/statement of the Ministry of Finance?
For example. If entrepreneur in course of his business was trading with an amount of 10 000 PLN and made daily 10 buys and 10 sells for 10 000 PLN - 300 transactions monthly - and was not gaining any single penny from this trades, he is anyway obliged to pay approx. 500 000 PLN of tax because from 3 milllion PLN income (in terms of month) he is unable to deduct 3 million PLN costs. It’s worth to add that daytraders or transaction bots are already doing tens or hundreds of transactions each day. If they are doing it in course of their businesses then due taxes can be counted in millions of PLNs.
Thankfully natural persons are having easier situation and to properly record and document the costs of income, simply extract of transactions from crypto exchange is sufficient. Unfortunately, it is only easier and lighter in this respect, because by the purchase of cryptocurrencies in most cases they will have to pay PCC tax anyway.
The tax on civil law transactions (PCC tax) – Natural persons Armageddon
"Contract for the sale and conversion of cryptocurrencies, which is a property right, is subject to tax on civil law transactions (PCC). In the case of a sales contract, the obligation to pay this tax - in the amount of 1% of the market value of the acquired property right sold to the cryptocurrency - concerns the one side of transaction: buyer. In the exchange agreement(contract), the obligation to pay tax - in the amount of 1% of the market value of property law, from which a higher tax applies - concerns jointly the both parties of the transaction.
Actions excluded from PCC taxation are contract for the sale or exchange of cryptocurrencies subject to VAT - so far as this actions are subject to VAT, or if at least one of the parties to the transaction is exempt from VAT for performing such activity."
What does it practically mean? In terms of natural person, by buying cryptocurrencies comes PCC tax payment obligation unless we buy from a company that is a VAT payer or VAT exempt. But how can we determine it?
By buying cryptocurrencies on the crypto exchange we’re unfortunately unable to determine whether we’re buying from or selling to natural person or a company because our contractors are totally anonymous and invisible for us during the trading process. It all does lead to a question whether such explanation of our behaviour would be enough to not pay the tax and penalty for not meeting the tax obligation. If a situation where polish crypto exchanges might give transaction history of its users to the National Tax Administration (KAS - Krajowa Administracja Skarbowa) happen, KAS is going to know exactly who bought from who and when they should (but didn’t) pay PCC Tax. But users, tax payers wouldn’t know it....
The question remains whether such a translation is enough to not pay tax and penalties for non-compliance with the tax obligation. PCC tax example clearly shows that treating cryptocurrencies as a as property rights is very it is very unfair and that the law does not keep being up-to-date with the realities of new technologies.
For example, if someone does make several dozen or even several hundred transactions per month while every transaction on the exchange can consist of a couple of more smaller ones (selling 1BTC on exchange actually we can sell it to 10 person for 0.1 BTC each), it all can lead to a situation where we’re going to be obliged to fill many kilograms of PCC-3 forms. It's scary to think what to do if someone has a transaction bot running in the background. Tax Offices may be flooded with tons of "waste paper". Similarly, PCC tax amounts may exceed our income from the transaction.
All this also leads to a question whether we are also obliged to pay PCC tax when buying cryptocurrencies on the foreign exchange. As one interpretation says:
„the contract of sale of property rights carried out abroad when the activity is performed is subject to tax on civil law transactions, if all this conditions are met: the buyer is a resident or registered party in the territory of the Republic of Poland and the civil-law act was carried out on the territory of the Republic of Poland.”
„If the property law is being acquired through online portals (Cryptocurrency exchanges) the location of the activity is determined by the article 70 § 2 Act of 23 April 1964 r. – Journal of Laws (Code of Civil Rights) (logbook 2017, pos. 459, with changes), according to which if the offer is being submitted electronically, the contract is considered to be concluded in the place of residence or at the current seat of the offeror at the time of conclusion of the contract.”
As we can see, it’s not important whether we’re trading on local or foreign crypto exchange. In both cases we’re theoretically obliged to pay PCC tax anyway.
Trading one cryptocurrency into another is a very similiar case. One thing to note is when such event occurs, both transaction parties (buyer and seller) are obliged to pay 1% PCC tax from cryptocurrency value.
It is worth to note that MF statement or rather informational leaflet does not declares any laws and nothing has changed prior and before it’s publication. Therefore, it can not be said that we will not pay tax, because the law is not retroactive. The law on property rights has existed for many years before cryptocurrencies, but its clash with cryptocurrencies makes it difficult to interpret it, leaving many ambiguities and absurdities.
The next part of absurd – pay tax on your forked coins
In one of the individual tax interpretation we can find a statement that:
„Income on the Applicant part will arise not only when the cryptocurrencies are sold or exchanged into traditional currency, but also when there is a change of one cryptocurrency to another cryptocurrency, or when it comes to branching (so-called hard-fork).”
The interpretation also exposes the fact that the income will also be created when fork action happens on the cryptocurrency we’re holding. The problem is that there are lots of forks being created right now and we do not have to be aware of any of them or even interested in them. While in the case of sale or exchange of cryptocurrencies it is our conscious decision, then when fork happens we do not have influence on it. It’s also impossible to measure forked coins value in a moment when fork is happening.
Cryptocurrencies should become regulated as it already is in lots of countries across the globe. Definitely, they should not be treated as a property right. Treating them as such is highly harmful and even dangerous for citizens who use them. Unfortunately, we haven’t seen tries from the government to simplify tax settlements. Even the people issuing the interpretations are completely unaware of the specifics of the trading rules on cryptocurrency exchange and the general realities of the cryptocurrencies world.
At this stage overall cryptocurrencies situation in Poland looks very bad, but the case is being analyzed by lawyers and tax experts. Perhaps within the time, there will be a ground for questioning certain statements, issues and interpretations of the Ministry and tax offices. It may also be that MF might understand the nonsense and absurd of treating the cryptocurrencies as property law and will issue more lenient guidelines.
This text is not, by means, a professional elaboration of legal situation. That kind of work might need more time to examine the legal aspects in detail!