Are cryptocurrency profits taxed?
In recent years, cryptocurrencies, the most popular of which is bitcoin, have become a particularly hot topic in both the technological and financial worlds, because of the opportunity to profit from them. The best known altcoins are Ethereum (ETH), Litecoin (LTE), Neo and many others.
Cryptocurrency is a digital currency and medium of exchange based on Blockchain technology. Its use is subject to a number of interpretations and criticisms, and the reasons for this are different – illegal activities, vulnerability of infrastructure, tax evasion and others.
Are cryptocurrencies allowed in Bulgaria?
In different countries, an individual approach is applied to the control over cryptocurrencies and the execution of transactions with them. Some of them are more conservative in terms of digital money and have introduced serious regulations. In our country the possession and payment with virtual currency is legal. As part of the European Union, Bulgaria follows the legal and financial laws set out in it, regulating transactions with this type of instruments. Transactions with cryptocurrencies are treated as transactions with financial assets, respectively the proceeds / revenues from their realization – as income from the sale of financial assets. According to the Revenue Agency, the income of individuals from the sale and / or exchange of cryptocurrency is subject to declaration in the annual tax return, and the realized profit (the difference between the sale price and the acquisition price) is taxed on the total annual tax base.
The profits that legal entities realize from the disposal of cryptocurrencies are subject to taxation under the Corporate Income Tax Act. This type of transaction is exempt from VAT.
Does the legislation differentiate between different cryptocurrencies?
As a decentralized asset, cryptocurrencies give rise to mixed opinions when it comes to when, how they are declared and what percentage of tax is due. In Bulgaria, the National Revenue Agency (NRA) accepts that profits from trading and transactions with virtual currencies (on so-called stock exchanges) are subject to taxation. It is for this reason that the tax authorities carry out inspections to establish whether the legislation is being complied with.
Income from cryptocurrency transactions is included in the annual tax return, and if no such tax returns are made during the tax year, the obligation to declare is waived. When buying one type of digital currency against another, if we make a profit, it is taxed. However, in cases where the value of the cryptocurrency has increased over time and then an asset is directly purchased with it, the NRA decides that the difference is neither declared nor taxed. This only applies when it is for personal use and occurs once, and each subsequent purchase must be documented.
What other regulations exist
According to the law, cryptocurrency services are related to:
Exercising thorough inspection and identification of customers
Clarification of the origin of the funds
Disclosure of information in case of suspicion of money laundering
Risk assessment and adoption of internal control rules
Through flexible regulation of this sector, the European Union can stimulate financial technology, innovation and the efficiency of the market mechanism as a whole. However, it should be noted that this does not mean a lack of measures related to the treatment of cryptocurrencies, but rather a search for options for successful development, detailed research, analysis of how it works and finally the introduction of the necessary restrictions. Imagine that with a systematized regulation we can take advantage of the crypto sector.
What can we advise you
The popularity of cryptocurrencies requires accountants to be aware of their accounting and taxation. They are currently considered part of other financial instruments. The tax legislation does not provide for special treatment of cryptocurrency transactions, the incurred revenues and expenses related to them are tax deductible in the year of their accounting. When selling a cryptocurrency, we can really admit that we had it as an asset and determine how much it costs.
In-depth knowledge and analysis of virtual money is necessary in the preparation of reliable, understandable and relevant financial statements of persons who make transactions with them.
See another useful article with information on the tax treatment of cryptocurrency transactions.