A new era in the taxation of cryptocurrencies in Slovakia: amendment to the Income Tax Act

Changes in crypto taxation that have been in effect since the beginning of this year bring Slovakia closer to the status of a “crypto paradise”. On the other hand, however, even these changes do not fully eliminate all the tax risks where the tax authorities can put Slovaks into bankruptcy. At the same time, mainly due to undersized legislative processes, new ambiguities have appeared in this amendment, which again do not contribute to legal certainty for people moving to any extent in the crypto environment.

Peter Varga talked more about this in his podcast: https://highgate.sk/zdanovanie-krypta-na-slovensku-po-novele/

However, the amended law has brought about some major changes that are sure to have a significant (and positive) impact on the use of and investment in cryptocurrencies in the country. The tax regime for cryptocurrencies has been changed, which has the potential to impact cryptocurrency investment and also improve the fair administration of taxes in this area. However, these changes only affect virtual currencies. They do not apply to other forms of crypto assets.

In this article, we take a closer look at the main tax changes and their potential implications for public finances. For more on this topic, follow Peter Varga ‘s Linkedin or watch the podcast mentioned above.

Existing burden on sales revenue

To date, the tax burden on income from the sale of cryptocurrencies to FBOs has been one of the highest in the EU. It has also been less favourable compared to most other financial assets, including shares. Profits from the sale of virtual currencies by individuals (non-business persons) were taxed at a rate of 19% or 25%, depending on the amount of annual income. In addition, health insurance premiums were also payable.

Extremely high tax and levy obligations have not only led to an outflow of cryptocurrency owners to countries with lower tax burdens, but also a higher risk of non-payment of taxes. Conversely, countries such as Malta, Germany and Portugal offer zero tax on cryptocurrency income, which has attracted many investors. It can therefore be argued that there was no direct proportionality: the higher the tax rate, the higher the revenue to public budgets.

The new situation with lower tax rates, at 7 per cent, brought about by the amendment is undoubtedly much more favourable. The lower tax burden could even have a positive impact on public budget revenues. It could motivate investors to stay in Slovakia and fulfil their tax obligations more properly. Moreover, based on our experience, it may encourage young people from abroad to move to Slovakia.

Changes in basic concepts

In addition to modifying certain processes, the amendment also introduced new definitions and concepts. These are key to understanding the new cryptocurrency tax regime and its application in practice. Here are some of the key changes to the amended law:

Virtual currency

According to the amendment to the Income Tax Act, virtual currency is defined as a digital medium of value that meets the following criteria:

• is neither issued nor guaranteed by a central bank nor a public authority,
• is not necessarily tied to legal tender,
• does not have the legal status of currency or money,
• is accepted by certain natural or legal persons as a means of payment,
• can be transferred, stored or traded electronically.

This definition clearly distinguishes virtual currencies from traditional legal tender and allows their identification and classification for tax purposes. However, it also clearly distinguishes them from other types of crypto-assets, thereby subjecting them to different tax treatment.

Stablecoin

Stablecoin means any virtual currency whose price is relatively stable because of its peg to a particular commodity, currency or because its supply is regulated by a specified algorithm.

Staking

Staking refers to the increment of virtual currency obtained by verifying transactions in a virtual network. This means that virtual currency holders can earn a reward for their participation in maintaining and securing the network. Staking has become an important part of cryptocurrency ecosystems and is one of the mechanisms by which the security and trustworthiness of these networks is achieved.

There has also been a definitional change in the concept of “sale of virtual currency“. Previously, the sale of virtual currency was considered to be the exchange of virtual currency for property, other virtual currency, the provision of a service or the transfer of a service for consideration. Today, the sale of a virtual currency is no longer the exchange of a virtual currency for another virtual currency. However, the exchange for stablecoin is already a sale.

Acquisition price

In the previous regulation, there was a lack of a clear rule for determining the acquisition of virtual currency in some cases, frequently occurring in the economy. Such vague/insufficient regulation posed a risk of double taxation. With the amendment, this technical uncertainty has become a thing of the past, at least for the purchase of goods and services. The legislation now explicitly sets out how the purchase price of a virtual currency is to be determined when trading or providing services. This measure marks an important step towards clearer and more precise taxation of cryptocurrencies, which should make life easier for crypto holders and increase legal certainty in this respect.

A time test to encourage long-term investment?

One of the main points of this amendment is the introduction of the so-called. A time test. Investors who hold cryptocurrency for more than one year prior to the sale (and it was not part of the business assets) will be able to include this income in the special tax base at a favourable rate of 7 per cent. The move is intended to incentivise long-term investment, stabilise the market and move closer to countries that are described as crypto havens. If an individual sells their cryptocurrencies after one year of their acquisition (and they were not part of business assets), they will include this income in the special tax base, which will be subject to a reduced tax rate of 7 percent.

Should a person decide to sell the cryptocurrency before the end of the year, such income will be included in the tax base (sub-base) together with other income and the same tax treatment as today, i.e. 19% or 25%, will apply, depending on the amount of the total taxable income.

The fact how long the cryptocurrency has been in the taxpayer’s possession is called. The burden of proof is on the taxpayer. i.e. it is the taxpayer’s burden to prove this fact. In a particular situation, it then depends on the manner in which he acquired and held the cryptocurrency. For example. if he uses custody services, then a statement from the service provider may serve as proof. For a self-hosted address, identification of the wallet and an entry on the blockchain should be sufficient. A receipt for payment for cryptocurrency can also be proof, although it will only be sufficient on its own in some situations.

Health levies for cryptocurrencies

Another pleasant change is that health insurance premiums will no longer be paid. This applies to all income from the sale of cryptocurrency, unless the cryptocurrency was part of a business asset, regardless of the time test. This exemption applies to all income from the sale of cryptocurrencies after 1. January 2024, but does not apply to other types of crypto assets. This change will have a major impact on short-term investors and cryptocurrency traders who will no longer be burdened by the health levies. This exemption will also not apply to legal entities and natural persons conducting business who hold virtual currencies in their business assets.

Further changes to the law

Under the new legislation, income from the sale of cryptocurrencies acquired by a person through mining or staking will be included in the tax base (partial tax base) only in the taxable period when the sale of the virtual currency was made. This will allow for the positive results to be set off against any losses from other operations.

However, when exchanging virtual currency for another, there is an apparent contradiction with what was announced as the purpose of the amendment. The amendment was intended to make the exchange tax-free, but in the context of a non-standard legislative process, a vague provision has been created that leaves somewhat of a status quo.

The amendment also added the method of valuation if the virtual currency was acquired by selling goods or services. The entry price from 1. January 2024 will be the real value of the virtual currency. Income from the sale of a virtual currency is part of the tax base in the tax period in which the sale takes place (e.g. exchange of virtual currency for property, etc.) using the valuation of the exchanged currency at its fair value on the date of the exchange.

Cryptocurrency payments up to EUR 2,400 per year

The amended law comes with a tax exemption that applies to cryptocurrency payments. Under the new legislation, cryptocurrency payments of up to €2,400 per year will not be taxed. This is a positive signal for those who use cryptocurrencies for current payments and small transactions. This removes the need to track and record these smaller payments on tax returns. Should a taxpayer receive income in excess of €2,400 in a tax year from the exchange of virtual currency for property or services, only the difference between the income and expenses above this amount will be taxed. This means that tax will only be payable on the net income above this limit, which will facilitate small-scale cryptocurrency payments and increase their use in current transactions.

Standardisation and technical challenges

There is some standardisation through the adoption of various legislative measures, especially at EU level, but each country sets its own policy on direct taxes. With this amendment to the Income Tax Act, we can see that Slovakia has decided to take its first step and move taxation to a higher level. Overall, the adoption of new legislative measures in the area of cryptocurrency taxation in Slovakia is an important step towards standardisation and improvement of the legal framework. While the amendment to the Income Tax Act has brought positive changes and shows a willingness to adapt, it should be borne in mind that there are also risks associated with the weak legislative process and long-standing shortcomings in the taxation of cryptocurrencies.

Going forward, it is essential to continue with the technical adjustments that have now been overlooked, in particular, to take into account the needs of cryptocurrencies and to ensure fair and efficient taxation. Making crypto-enthusiasts more attractive and attracting new crypto-enthusiasts is a first step, but the long-term goal should be to create clear and uniform rules that ensure effective taxation and minimise legal uncertainty.

A video podcast on the topic “Taxation of cryptos in Slovakia after the amendment” can be viewed below the article.

If you are interested in this topic, please do not hesitate to contact us.