Taxation of and accounting for virtual currencies
To ensure a unified interpretation of legislative requirements in relation to taxing income from a sale of virtual currency, the Ministry of Finance of the Slovak Republic has issued Methodological Guideline No. MF/10386/2018-721.
According to this guideline, a virtual currency (or crypto-currency) means a digital carrier of value which is neither issued nor guaranteed by any central bank and/or public authority and is not necessarily linked to any legal tender, has no status of a currency or money, but is accepted by some natural or legal persons as a means of payment, and which may be transferred, stored and/or purchased/sold electronically.
Virtual currencies in relation to Income Tax Act
Any income (earnings) resulting from a sale of virtual currency is subject to tax, is not exempt from the tax, and is therefore considered taxable income pursuant to Act No. 595/2003 Coll., on Income Tax, as amended by the amendment effective from 1 September 2019 (hereinafter referred to as the “Income Tax Act”). For the purposes of taxation under this guideline, a sale of virtual currency means any exchange, e.g. an exchange of virtual currency for any assets or an exchange of virtual currency for a provision of service and/or for another virtual currency, as well as its transfer for consideration.
For taxpayers who are natural persons and have not included the virtual currency in their business assets, any income from its sale is considered other income pursuant to Section 8 of the Income Tax Act. The taxable income earned can be decreased by any demonstrably incurred expenses related to earning the income; if the expenses are higher than the income earned, however, the difference is not taken into account.
For taxpayers who establish their tax base pursuant to Section 17(1) of the Income Tax Act, i.e. whose taxation is based on accounting, the income resulting from the sale of the virtual currency is taxable income and is reasonably viewed as income resulting from financial assets. When calculating their tax base or tax loss, such taxpayers determine their profit/loss based on accounting and/or the difference between income and expenses. The resulting profit/loss or the difference between income and expenses shall then be transformed into the tax base using the provisions of Sections 17 through 29 of the Income Tax Act. Based on those provisions, taxable expenses may be deducted from the income earned from the sale of virtual currency in accordance with Section 19 of the Income Tax Act, up to the amount of income from the sale, on a reasonable basis in accordance with the provisions of Section 19(2)(f) of the Income Tax Act.
Virtual currencies in relation to VAT Act
Trading with virtual currencies is considered a financial transaction, and as such is exempt from value added tax in the EU, based on the judgement of the European Court of Justice. Notwithstanding the above statement, VAT may be applicable to virtual currencies if they are used to pay for purchased goods and services, since such transactions are subject to VAT as if the euro was used as the transaction currency.
Virtual currencies in relation to Accounting Act
Virtual currencies are valued as follows:
- Acquisition price, if the currency was acquired by means of a purchase
- Fair value, if the currency was acquired by exchange for another virtual currency
For accounting purposes, virtual currencies acquired for consideration are viewed as other current financial assets. Any increase/decrease in a virtual currency is accounted for using the accounts of the Current Financial Assets group of accounts (25) created by the accounting entity, e.g. account 258 – Virtual Currency.
Sub-ledger accounts are created for individual virtual currencies. For the virtual currency acquired via mining, a dedicated sub-ledger account is created as at the day of its exchange for other assets or services. To account for any decrease in the virtual currency as expense, account 568 – Other Financial Expenses is debited. To account for any increase in the virtual currency as income, account 668 – Other Financial Income is credited.
When calculating the fair value of a virtual currency according to Section 27(13) of Act No. 431/2002 Coll., on Accounting, as amended by the amendment effective from 1 October 2018 (Accounting Act), nominated in foreign currency to euro, the procedure pursuant to Section 24(2)(a) of the Accounting Act shall be used. Any differences in value resulting from the valuation of the virtual currency and the conversion of the virtual currency to euros shall, based on their characteristics, either be debited to account 568 – Other Financial Expenses, or credited to account 668 – Other Financial Income.
As at the date of the financial statements, virtual currencies are not valued at fair value and/or market value.
Author: Lukáš Mokoš
