The dispute that has been ongoing so far is likely to have found its finale in the NSA’s judgement of 22 March 2022 (ref. II FSK 1688/19), which resolved the doubt of taxpayers trading in cryptocurrencies before 2018. This judgement is a confirmation once again of the fact that the exchange in a cryptocurrency relationship for another cryptocurrency should not generate a personal income tax obligation even before 2019, when the changes in the tax legislation took place.
Regulations applicable until 2018
Let’s remined that income from the paid disposal of cryptocurrencies until the end of 2018 did not have specific provisions in laws and, thus, no special regulations relating to the taxation of income from cryptocurrency transactions and their definition were provided for. However, it is worth noting that taxation issues were applied differently to entrepreneurs and individual cryptocurrency investors who were not carrying out business activities.
In the practice of the tax authorities, cryptocurrency was assumed to be a property right, which resulted in an analogous reference to the regulations defining them. This approach, until 2018, resulted in the disposal of a cryptocurrency being treated as income from the disposal of a property right. In the context of understanding the concept of disposal of a property right, it was also understood to mean its conversion into another property right. In this case, it was therefore considered that the exchange of a cryptocurrency for another was itself treated as a disposal of that right. This means, therefore, that the taxpayer was in fact required to recognize two transactions (it’s purchase/exchange and it’s sale).
Settlement of such transactions before 2019 did not meet with an unambiguous position among both tax authorities and administrative courts. It is worth mentioning that some of the courts considered that when one cryptocurrency is exchanged for another, income and expenses arise for the taxpayer. In contrast, other positions of the courts with a different view on the matter were also noted.
Changes from 1st January 2019
Since the beginning of 2019, however, the practice and, most importantly, the regulations, have changed somewhat on this issue. All due to Article 17 (1f) of the PIT Act, which resolved the previous doubts of taxpayers. The regulation introduced a clear moment of tax obligation on paid disposal of cryptocurrency, as well as qualification to the source of income. The regulation explicitly states that this should be understood as the exchange of virtual currency for legal tender, goods, services or property rights other than virtual currency or the settlement of other obligations with virtual currency. This means that, for example, a payment with card that is powered by cryptocurrencies should be reported accordingly in the PIT return.
Futhermore, by Article 2 (2) point 26 of the AML Act, the practice of using the concept of virtual currency, by which is meant a digital representation of value that is not:
- a legal tender issued by the NBP, foreign central banks or other public administrations,
- an international unit or account established by an international organization and accepted by individual countries belonging to or cooperating with that organization
- electronic money within the meaning of the Payment Services Act of 19th August 2011,
- a financial instrument within the meaning of the Act on Trading in Financial Instruments of 29th July 2005,
- a bill of exchange or a cheque,
- and is exchangeable in business for legal tender and accepted as a medium of exchange, may be electronically stored or transferred or be the subject of electronic commerce.
This concept, although rather broadly framed, certainly facilitates the consideration of cryptocurrency in light of legal and tax issues to date.
Cryptocurrency exchange for another
The current approach in the relation of cryptocurrency exchange to another, does not create problems of taking them into account as non-taxable ones if the taxpayer made the transactions after the 2019 changes. However, it has been questionable to treat cryptocurrency exchange transactions with transactions made before this period. As mentioned earlier, an ambiguous position could be seen among the tax authorities as well as the administrative courts due to the lack of a tax provision defining the moment of taxation explicitly.
Thus, the judgement of the NSA of 22 March 2022 (ref. II FSK 1688/19) may prove to be very favorable for cryptocurrency investors making transactions before 2018. For, according to the NSA’s position presented, since there is no real benefit from the transactions in question, they should not be taxed. The NSA added that it is inly when the cryptocurrency is exchanged for money or bused to purchase goods and services that it’s true value can be determined.
It is worth mentioning here that the case cited in the judgement concerned a taxpayer who was not engaged in non-agricultural business activities, incl. trading in cryptocurrencies. He also did not provide any third part with services for their trading. The taxpayer only sources cryptocurrency units on the secondary market by purchasing from third parties (in particular, by entering into transactions on cryptocurrency exchanges to exchange one cryptocurrency for another). He traded through online exchanges.
For such frequent and continuous changes in the value of cryptocurrencies, it is undoubtedly important to recognize and determine the point at which taxable income arises only at the time of a sale transaction to a traditional currency. The authority’s previously accepted position suggesting that the exchange of cryptocurrency for another should be taxed would be significantly prejudicial to taxpayers due to the frequency of such transactions, which in no way result in a benefit for the taxpayer. Moreover, assuming such a practice, it would sometimes be impossible to precisely determine the value of the income and the costs incurred for them.
The real nature of the benefit can therefore only be spoken of at the time of the sale of the cryptocurrency to one of the traditional currencies (even before 2018), as assumed in the NSA’s position.