More clarity once again!
Following the receipt of more tax rulings from the Cyprus Income Tax Office, Crypto Currency Taxation is clear. We will break down the below analysis in two parts; the taxation of Companies and Individuals.
Crypto Tax on Companies
Lets talk about Companies first where it is more straightforward.
Crypto trading is taxed like any other taxable income.
Securities and financial instruments with Crypto Currencies as their underlying principles are subject to Corporation Tax of 12.5%.
Exchange Gains and Losses are tax neutral and Crypro losses, like any other losses can be carried forward for 5 years.
Retained earnings as a result of cryptogams are subjected to deemed dividend tax like any other earnings (applies to Cyprus Tax Residents only).
More Detail on Companies & Crypto Corporate Tax
We have written a detailed articles on Corporate Crypto Taxation:
Cyprus: Cyprus Crypto Tax - Increases In Wallet Gains. Are They Taxed? How?
Cyprus Crypto Tax - Frequently Asked Questions
Cyprus Crypto Tax for Companies and Individuals - click here to obtain access.
Crypto Tax on Individuals
Individuals - How are they Taxed?
Similarly to Companies, it seems that the Cyprus Income Tax Office appetite is to tax Crypto trading for individuals.
Similarly to Companies, it seems that the Cyprus Income Tax Office appetite is to tax Crypto trading for individuals. In the absence of circulars and direct reference to the Income Tac Law our conclusions are based on the various Tax Rulings we have obtained for our individual clients involved in crypto currency activities. Based on the income tax office's written responses (always specific and tailored to the specific questions involving the specific individuals - this is how Tax Rulings are issued) we now know precisely how crypto trading and gains are taxed for individuals.
How Cyprus Income Tax Office Taxes Individuals:
The income tax office will try to tax crypto gains as taxable income and will add it to the individuals gross salary which will in turn be subject to PAYE Tax starting from 20% for taxable income exceeding 19,500 up to 35% for taxable income exceeding 60,000 (more information click here).
Crypto tax as the PAYE level mentioned above will be achieved by the income tax office if it classifies the individuals crypto activities (the purchases as well as the sales - see below budgets of trade) as trading activities. However, in the event it can be argued by the taxpayer that these activities are not trading activities but rather a one off transaction, then there will be no tax on the Cryptos disposal as the sale will be considered of capital nature and not of trading activity and thus not taxable.
So how can one determine whether their activity could be considered as trading activity (taxable) or as a one off capital activity (non taxable)?
So how can one determine whether their activity could be considered as trading activity (taxable) or as a one off capital activity (non taxable)?
Budgets of Trade
Are the proceeds from crypto activity the outcome of trade or of a capital nature?
To determine whether the profits from Crypto activities will be taxed at PAYE level (20% - 35%) or whether the disposal was of a capital nature and thus it is tax free one must apply the accounting definition of what constitutes a trading activity via the use of the universal "budgets of trade".
In Cyprus, the Income Tax Office expects the taxpayer and their accountants / tax experts to ascertain the appropriate treatment based on the budgets of trade. This is the conclusion from our tax experts - as the income tax office will need evidence based on the budget of trades in order to give a written reply to our tax ruling request for the appropriate tax treatment.
So what are these budgets of trade?
Easy reference - refer to the ACCA explanation - click here
The budgets of trade are 6 factors one must consider and evaluate to ascertain if its activity is considered a trading activity and thus taxed as such. Budgets of trade is commonly used in the United Kingdom, Cyprus and other AngloSaxon jurisdictions.
*Golden Nagget*
As far as Crypto trading is concerned (this is also confirmed via various tax rulings obtained), it is irrelevant if the disposal of coins took place at once or in multiple intervals. What is equally important to the determination of trade is prior sale activity of the individual.
What is equally important to the determination of trade is prior sale activity of the individual.
Both, prior sale activity (acquisition of cryptos, conversions, split to other coins and tokens etc) and sale activity will equally determine if the individual performed a trade and will be subject to PAYE Income Tax with (details on how you will be taxed click here) or if it was a one off activity which should be taxed under Capital Tax wich at present , for Cryptos, represents a tax free activity.
List of the Budgets of trade as extracted by the ACCA
More information can be obtained here:
- profit seeking motive
- the number of transactions
- the nature of the asset
- existence of similar trading transactions or interests
- changes to the asset
- the way the sale was carried out
- the source of finance
- interval of time between purchase and sale
- method of acquisition
Below we examine some of the most relevant budgets of trade the Cyprus Income Tax Office will also examine to give their ruling;
Profit Seeking Motive
As you can see, and as it is widely known almost all individuals involved in Crypros are doing it for the profit. And they are active about it. When we say active, we mean they keep buying cryptocoins, they convert or exchange one coin to the other, they position themselves and generally speaking they actively take part in protecting their portfolio and making it more valuable.
In addition the nature of the assets, Crypto coins / assets are highly speculative which means that persons involved are not the ordinary day to day people as not only it requires some sophistication to actually convert FIAT money to Cryptos but also to maintain them.
The way the sale was carried out & interval between sale and purchase
With regards the sale of Crypto coins we must be extremely careful.
The Income Tax Office will consider the way the sale was carried out and the interval of time between purchase and sale not in isolation but in conjunction with the remaining 5 budgets of trade; criteria which will determine the nature of the activity; trading or capital.
Therefore, even if only 1 sale took place to the entire portfolio, this is a fact which will be assessed with the profit seeking motive of the individual, the nature of transactions before the sale, the speculative nature of the asset, the existence of similar transactions and interest, the source of finance and method of acquisition as well as the interval of time between the purchase and sale. All these factors combined will suggest if the individual contacted a one off transaction or if he or she was an educated trader, watching the trends, converting coins, purchasing tokens, continuing to fund the portfolio with own funds to trade.
In Conclusion & In a Nutshell
From our discussions and numerous tax rulings obtained from the Cyprus Income Tax Office, for companies and individuals, the overall consensus should be that Crypto trade is taxed for both companies and individuals.
In the extreme and rare scenario that a person inherits a portfolio of cryptos, or purchases once and sells once then it is likely that this transaction will not be considered as a trading transaction but rather a capital transaction which at present is not taxed.
If you have such cases you should definitely get in touch with one of our team members to obtain a Tax Ruling for you which will explain how this transaction will be taxed; thus you will be able to make an informed decision on how to handle the taxation of the profits.
Want to know More
Read the below detailed articles that cover in detail the budgets of trade, company and individual taxation,
Cyprus Crypto Tax for Companies and Individuals
Cyprus Crypto Tax - Frequently Asked Questions
Watch a video on Crypto currency tax (Video)
Tax Free Crypto Currency Trade (Video)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
