Is this another spark of hope for virtual currencies?
Author: Przemysław Wrzesiński
From the moment when virtual currencies appeared on the market in 2018, they were a topic which has been sparking heated debates. Unfortunately, cryptocurrencies almost immediately started causing problems related to unclearly defined purchase details and the related tax on civil law transactions.
The first legal definition of virtual currencies was coined in Polish legislation in 2018, precisely in the Act of 1 March 2018 on Counteracting Money Laundering and Financing Terrorism. In fact, including the definition of virtual currencies in the Act devoted to combating money laundering and terrorism seems to be completely natural. Yet, it remained an open secret that supervising the legality of fund sources or even verification of purposes for purchasing a given amount in the virtual currencies exchange universe depended exclusively on the goodwill of entities managing individual virtual exchanges.
So the legal definition, which was so long-awaited by enthusiasts of new currencies, seemed to be a warmly welcomed and well-prepared basis the legislator to fully recognize virtual currencies as a means of payment.
But, life writes its own scenarios, and as it frequently happens, they are different from our dreams. In its judgment of 6 March 2018(in Polish), the Supreme Administrative Court of Poland ruled that ‘for tax purposes, revenue from the trade exchange of bitcoin currency is revenue from property rights.’ At the same time, in line with the Act on Civil Law Transactions Tax, the civil law transactions tax (in Polish: podatek od czynności cywilnoprawnych, PCC) amounts to 1% when related to a contract of sale of property rights not listed in the Act. Hence, the tax rate for a cryptocurrency exchange is the same as for other contracts concerning property rights. It was the first occurrence of a real and practical problem concerning the application of the tax to transactions involving virtual currencies.
While no one had any doubts as to the legitimacy of paying the tax on transactions with virtual currency as a means of payment, the obligation to pay 1% of the civil law transactions tax seems to be completely pointless. It is because it is calculated based on the value of the entire sales transaction of the virtual currency instead basing only on the profit made. Let’s assume that someone purchases one bitcoin when its price is currently set at PLN 24,900. Then they sell it when the price rises to PLN 25,100 for a bitcoin. In this case, the transactions generate a profit of PLN 200. At the same time – in line with the explanation provided above – this person (as a buyer) is obliged to pay PLN 249 in tax on each transaction involving virtual currency. If then the buyer performs 100 of such transactions (50 times buying the currency and 50 selling transactions), then the tax will amount to PLN 12,450, with a profit of PLN 10,000. In other words, the tax will clearly exceed the generated profit. The lack of logic behind such a solution is obvious. For this reason, among others, the sale of foreign currencies is exempt from taxation under Article 9 of the Act on Civil Law Transactions Tax.
Following the aforementioned judgment of the Supreme Administrative Court of Poland, on 4 April 2018, the Polish Ministry of Finance published a notice on its website concerning taxation of transactions related to virtual currencies. It included information that each virtual currency purchase is subject to civil law transactions tax. Such information stirred up a real hornet’s nest. After all, the Ministry demanded something that is not only absurd but also simply impossible.
The problem with complying with such regulations results from the blockchain technology itself, software used by the stock exchanges, and, above all, from the methods used in virtual currency trading by the users of the stock exchanges, while the tax regulations remain archaic.
It is important to notice that:
- each cryptocurrency is subdivided into smaller denomination parts (e.g. bitcoin has 8 decimal places, so you can buy one hundred millionth of a bitcoin, the so-called 1 satoshi);
- when trading on cryptocurrency stock exchange, the buyer does not know from whom he or she is purchasing given currency, among other things it is because of the complete automation of the trading process based on the order book;
- ‘professional’ cryptocurrency trading uses bots that automate the trading process on the stock exchange. Such a bot can carry out even several dozen transactions in a second;
- each transaction covered by the tax on civil law transactions requires filling in a form which should indicate, among others, the parties to the transaction.
This practically means that if an application (a bot) makes 100,000 transactions in one hour at the level of 10 satoshi for PLN 25,000/BTC (for the sake of simplicity, let’s assume a fixed price because the price changes practically all the time), it means that the Buyer should:
- identify the identity of 100,000 people with whom he or she has carried out individual transactions (by the way, if the Buyer has made a cryptocurrency purchase from a trader in the field of his or her business, then the transaction is subject also to VAT);
- fill in 100,000 tax returns (let’s say that both parties to the transaction are natural persons only) – on average it takes about 5 minutes to fill in the form, assuming that we have all the data, so the time needed to fill in all the forms is about 1,041 days (while working 8 hours each day).
In the provided example, each of the transactions is worth 0.25 grosz, where one grosz, which stands for 0.01 of one zloty. So, the tax will be 0.0025 grosz on each transaction, which gives the total value of the tax to be paid in the amount of PLN 250. In other words, we traded for an hour, after which we have to spend 1,041 days to pay PLN 250 of tax regardless of the profitability of the trade (the example concerned only the purchase of a cryptocurrency).
We may deduce that having noticed the ‘imperfection’ of this solution, on 11 July 2018, the Minister of Finance issued an ordinance‘on abandoning tax collection on civil law transactions on the contract of sale or exchange of virtual currency.’ The collection of tax was suspended until 30 June 2019. By that time, virtual currencies were to be fully regulated in tax matters, particularly including issues related to the civil law transactions tax. The tax collection discontinuance was first prolonged until the end of 2019, and then, once again, until 30 June 2020.
Taking into account the above-described solution, it may turn out to be a breakthrough that within the framework of the government’s bill on special support instruments in connection with the spread of SARS-CoV-2 virus (the so-called Anti-Crisis Shield 2.0), the legislator envisages expanding the catalog of civil law activities exempt from the tax by adding the case of sales and exchange transactions of virtual currencies.
If the above proposal remains unchanged in the course of current works on the Anti-Crisis Shield 2.0*, its adoption will be considered a success for cryptocurrency enthusiasts. It will also mark the end of two years of legal uncertainty for all those involved in the crypto trade. Hopefully, we are witnessing the introduction to providing further regulations of virtual currencies in Polish law.
* When we are publishing this text, works on the draft continue at the Senate stage.