Taxation of income from crypto assets and foreign structuring

Taxation of income from crypto assets is one of the most talked about regulatory topics in the crypto space. Issues such as (i) what are the tax optimization opportunities, (ii) why health levies must also be paid or (iii) what are the chances that it will be examined by the tax authorities are questions that are asked in a very high frequency. Our role is thus to advise clients in this area to make an informed decision. In addition, we also act as an advisor to the state for the development of legislation in this area, and therefore it is our endeavour to improve the legislative environment, at least in small steps.

One of our significant and relevant legislative proposals has been the proposal to tax staking or trying to resolve the problem of double taxation when receiving payments for goods or services supplied in a crypt. The amount of taxation (and health levies) is unfortunately not the only major problem of inefficient tax legislation in Slovakia. This problem is also the threat of double taxation when receiving payments for the provision of goods and services in the crypt. The Income Tax Act seems unambiguous on a mechanical interpretation and other than a mechanical interpretation it seems difficult to apply.

We advise clients on the taxation of crypt income and potential foreign structuring in the following areas:

• Tax optimization for income from crypto assets (hodler, but also trader);
• Foreign structuring (i.e., changes of residence, use of foreign companies);
• Taxation of specific income from staking, liquidity mining or yield farming;
• Setting up an ESOP structure at Airdrops from a tax perspective;
• When do I commit a tax offence when optimising taxation at the crypt and what is the practice?

We continue to comment on these topics in the media, write articles and give lectures or organise training and webinars. We’ve even hosted a few conferences about it, where crypto assets and tax issues have been an essential part of the content.

AML, reporting and crypto assets

In this area, we set up the necessary administration for our clients, both in terms of AML and expected reporting. However, we also aim to act as a business advisor, so it is not our purpose to necessarily complicate these elements of compliance. As we also provide a range of other advisory services to clients in the crypto space, it is also in our interest to ensure that the project in question is functional and efficient.

AML is an area that has been a staple in the lives of compliance departments for a number of years. It is the crypt phenomenon that is gradually revealing new regulatory challenges in this area. In addition to purely executive and interpretive challenges, there are also legislative challenges with spillover into other areas of law and tax. On several occasions we have presented these problematic points in our lectures at the level of the Ministry of Finance or the Slovak Chamber of Tax Advisors. We often lecture on these topics and we have devoted a large space to this at our legal and tax conferencededicated to technology companies. We comment on this topic in the media, write articles and give lectures or organise training sessions and webinars.

In the area of reporting, tax reporting is currently the predominant topic, initiated by the DAC 8 Directive. In 2020, the European Commission adopted a new tax package : the “Action Plan for Fair and Simple Taxation in Support of the Recovery Strategy” (hereafter “the Action Plan”), which strengthens the fight against tax abuse. In particular, the Action Plan aims at updating the DAC Directive (a Directive which aims to combat tax fraud and illegitimate tax optimisation more effectively) in order to broaden its scope and strengthen the framework for administrative cooperation. As a result, the DAC 8 initiative and the related public consultation launched by the European Commission seek to ensure adequate tax transparency and proper taxation of income from investments or payments in crypto-assets and e-money. This initiative would ensure consistency with ongoing work at EU level in this area, such as the forthcoming legislative proposal on anti-money laundering and combating the financing of terrorism. You can read more about these topics on our page dedicated to legal and tax topics on crypto.

VAT in the crypt

It has become a popular view in society (including among some advisers) that VAT does not apply to crypto assets at all. However, this is not true. Indeed, the 2015 judgment of the Court of Justice of the European Union in question held that a company that purchases units of virtual currency from third parties and resells them through its exchange carries out activities exempt from VAT. However, this court decision only mentions BTC as payment tokens (virtual currency). It therefore refers to the type of crypto-assets that seek to act as legal tender. Therefore, neither crypto-assets with different characteristics (NFTs, security tokens or utility tokens) nor ancillary services (even if they are labelled as financial services) can be considered exempt from VAT without any qualification.

We are intensively working on the VAT issue at the crypt. We have lectured on it, for example, at the methodological days of the Slovak Chamber of Tax Advisers and we have also helped the state to grasp this topic for the purpose of issuing methodological instructions. The topic is very complex and, as we say in this interview with TA3, it is still not comprehensively grasped. This creates a number of problems in practice, which are currently being ignored by practice, for natural reasons.

If you are interested in the topic of VAT and cryptos, read our articles on our platform dedicated to legal and tax topics in the cryptos area. We continue to comment on this topic in the media, write articles and give lectures or training and webinars.

Financial regulation at the crypt

The backbone of legal advice on crypto assets centres around financial regulation. As we are very much involved in fund regulation, securities or payment services in our practice, even outside of crypto, it is natural that we deal to a large extent with financial regulation when setting up crypto projects, in addition to the tax and accounting elements, and this includes MiCA regulation as well. In addition, we are relatively active in advising the state in this area.

Regulation of crypto assets today is more complicated than it may seem at first glance. Although the NBS has indicated in several statements the lack of substantive scope of the existing financial regulation on transactions and projects in the field of crypto assets, in practice this may not be entirely the case. As an example, various intermediary business models involving, for example, the management and administration of crypto assets may interfere with existing regulation of payment services. For example, the issuance of certain types of “asset referenced tokens” or “security tokens” may also seem problematic from a collective investment or securities regulation perspective, despite the fact that crypto assets are generally not considered securities and, to a large extent, are not considered financial instruments.

Another problematic issue is the regulation of the provision of investment services, where in some situations Slovak providers of services in the area of crypto-assets meet the characteristics of the provision of regulated investment services. This also exposes them to the risk of criminal prosecution for the offences of unauthorised business activities and legalization of the proceeds of crime. In addition to these areas, AML, e-money regulation or banking regulation (especially for DeFi) should not be forgotten for “crypto projects”. Thus, it is currently not possible to give a clear answer on the compliance with financial regulation and the related practical risks (in particular asset freezing or criminal prosecution) without a deeper analysis of a specific “crypto project”. The involvement of the NBS in the area of supervision is also questionable.

You can read more about these topics on our page dedicated to legal and tax topics on crypto: www.cryptotaxlaw.sk.

Accounting for cryptocurrencies

Although the Ministry of Finance of the Slovak Republic has issued a methodological guideline on the basic accounting regimes for cryptocurrencies, the economic and functional diversity of cryptoassets is moving in leaps and bounds. Therefore, in practice, we encounter a number of questions and inconsistencies, which are addressed not only by clients, but also by accountants and tax advisors.

The topic of accounting for crypto assets receives a great deal of attention in our office. In April 2022, we published the first Slovak (and so far the last) e-book on cryptoasset accounting. We lecture on crypto asset accounting on various forums and write numerous articles. We try to understand our clients’ businesses and for this reason we have encountered a lot of interesting accounting situations (such as)

• Issues of utility or financial tokens;
• Hybrid Token Issues;
• Trading crypto assets;
• Staking, liquidity mining or yield farming;
• Accounting for the so-called. Airdrops;
• Accounting for service providers in the field of crypto assets (so-called brokers);
• Paying employees and contractors in crypto assets;

Since Slovak accounting regulations do not provide answers to many topics, we have to use IFRS standards and inspiration from abroad.