Peter Varga gave another interview about legal and tax regulation of cryptocurrencies, this time for Trend

Since we have a lot of experience with real projects in the field of blockchain and virtual currencies, our partner Peter Varga gave an interview about the legal and tax regulation of this phenomenon in recent years, this time for the weekly Trend. In connection with crypto and blockchain, we have advised on legal, tax and accounting issues in STO and ICO projects, set up onshore and offshore funds, administered KYC and AML procedures to banks and exchanges, advised on taxation and accounting, provided legal advice in connection with smart contracts as well as set up the legal, tax and accounting structure for a Slovak project that provides a regular savings service through the purchase of selected virtual currencies for retail customers. We are of the opinion that a state such as Slovakia is not able to comprehend the whole issue of virtual currencies and adopt relevant legislation that would not only aim to meaningfully regulate the emerging relationships and contexts in this ecosystem, but also help bring more legal certainty. The inability to grasp this issue in all its complexity is not only due to Slovakia’s size, but also to its membership of the EU. In other words, it is the EU and not Slovakia that has some powers to regulate virtual currencies. Read more in Petr Varga’s interview with Trend.

Last year, the Slovak Ministry of Finance determined that profits from the sale of cryptocurrencies must be taxed. What loopholes or problems does this law have? Can one calculate what needs to be taxed?

Although in Slovakia profits from the sale/exchange of virtual currencies are subject to income tax for any person, neither the Income Tax Act nor the Accounting Act nor any sub-legislation provides a clearer manual on how exactly the taxpayer should actually calculate the profit and when it arises. For example, we do not yet know how we can, or whether we can, set off losses on individual trades at all. In the event of a tax audit, the taxpayer may thus be subjected to excessive arbitrariness on the part of the tax authorities, which is unacceptable in a state governed by the rule of law. The legislator or the tax administration simply needs to take the trouble to describe the rules of the game more comprehensively in a methodological guideline.

Do taxpayers even know how to access taxpayers’ profits data if they use foreign trading platforms? Are they being proactive in their inquiries?

As the handling of virtual currencies is difficult for the tax authorities to track, especially if the virtual currency in question is not transparently tradable, there are practical challenges as to whether the tax authorities can access data on the potential profits of taxpayers at all, unless they convert these currencies into standard currencies. Indeed, in the absence of a global platform for the automatic exchange of information, it seems unlikely that the Slovak authorities would be active in engaging counterparties on a bilateral basis to obtain data on customer account information from platforms such as Coinbase, Kraken, etc., but it is unlikely that the Slovak authorities would be active in engaging counterparties on a bilateral basis to obtain data on customer account information from platforms such as Coinbase, Kraken, etc., in the absence of a global platform for the automatic exchange of information.

Income from the sale of virtual currency exchanged for other virtual currency is also subject to income tax

However, it should be noted that, as was the case with tax and banking havens, this information asymmetry is, in my view, only temporary.

If someone mines bitcoin doesn’t they have to tax it until they sell it?

Yeah.

In Slovakia, it is said that token issuance through civic associations or foundations is happening Why? And is it a tax problem?

I see this as a big tax problem. If the tokens represent a right to an underlying good or service, then receiving money from investors is, in my opinion, taxable activity for both income tax and VAT purposes. Nevertheless, the Slovak legal system is relatively suitable for such token issuance, albeit unintentionally, because it offers interesting legal and tax structuring, which, however, cannot be through civil associations or foundations.

Is there also a problem in taxing cryptocurrencies to distinguish whether it is an occasional transaction or a recurring trade? Do both transactions need to be taxed?

Yeah. But it’s not related to cryptocurrencies. Same problem with the ice cream man who only sells ice cream when it’s over 30 degrees. When there are 10 such days in a year, is it occasional income or recurring business? Either way, both forms are subject to income tax. There are just different rules for calculation and different levy obligations apply.

A more detailed definition of virtual currency in Slovakia would also help with taxation. How could this work?

I do not consider the definition of virtual currency to be sufficient at the moment.

Experts also see further uses for cryptocurrencies in collective investment, where cryptocurrency-sounding securities will be attractive. How should these be taxed?

Cryptocurrencies are global. Can local legislation that is not internationally coordinated effectively regulate them?

Cryptocurrencies are global. Can local legislation that is not internationally coordinated effectively regulate them?

The issue of virtual currencies and blockchain is extremely diverse and the creation of a universal form of regulation requires grasping this issue in all its complexity. It is inconceivable that Slovakia could do this on its own, and not only because it does not have the capacity to do so. Another reason is the fact that several legal areas regulating the area of cryptocurrencies today are not under the standard-setting jurisdiction of Slovakia, but of the EU. However, the latter is also unable to cover this fully. For example, the EU does not have a mandate to regulate a significant part of collective investment, securities, income tax or accounting, and naturally it does not have a mandate to deal with purely national topics such as private law, where we could include, for example, the area of smart contracts. In other words, while in the US the issue of the legal qualification of security tokens is already settled, in Europe the concept is defined by the Member States independently. This is indirect and therefore inefficient. However, the EU is active in the areas where it has received that mandate from the Member States, and that is, for example, in the area of.