Gifting cryptocurrencies

Cryptocurrencies are once again becoming a mainstream topic, mainly thanks to the rising price of the strongest of them – Bitcoin. Some time ago, we brought you an article on doing business with cryptocurrencies in Slovakia. But how does it work here when such a virtual currency is given as a gift to an individual or a legal entity? And how should it be taxed? You will find out in this article.

TAXATION OF VIRTUAL CURRENCY ACQUIRED FREE OF CHARGE (AS A GIFT) BY INDIVIDUALS AND LEGAL ENTITIES

Under the Income Tax Act, personal income tax does not apply to income received as a gift. For individuals, it is necessary to distinguish whether the person is an individual who is not an entrepreneur or an individual who is an entrepreneur.

INDIVIDUAL – NON-ENTREPRENEUR

An individual (non-entrepreneur) who acquires virtual currency as a gift does not receive taxable income at the moment of acquisition. Tax only arises when this virtual currency is sold, which under the Income Tax Act means “the exchange of virtual currency for property, the exchange of virtual currency for another virtual currency, the exchange of virtual currency for the provision of a service, or the transfer of virtual currency for consideration.” (The definition of a sale of virtual currency applies to all persons, not only to non-entrepreneurs.) For an individual (non-entrepreneur), income from the sale of virtual currency is other income under Section 8 of the Income Tax Act. The tax base, or the partial tax base if the individual also has other income, such as employment income, is calculated as the difference between the income from the sale of the virtual currency and the expenses demonstrably incurred to generate the taxable income. One such expense may be, for example, a notary’s fee paid when the virtual currency was gifted.

This means that an individual who is not an entrepreneur and receives virtual currency as a gift will, if they later sell or exchange it, have to pay tax on the entire value of the virtual currency at the time of sale, reduced by actual expenses. When selling the virtual currency, an individual therefore cannot claim a tax-deductible expense equal to the acquisition cost of virtual currency acquired as a gift.

INDIVIDUAL – ENTREPRENEUR

In the case of an individual (entrepreneur) who acquires virtual currency as a gift and includes it in their business assets, such virtual currency likewise does not constitute taxable income for the self-employed person (SZČO) at the moment of acquisition. Tax only arises when the virtual currency is sold. The difference is that, for an individual (entrepreneur), income from the sale of virtual currency included in business assets is business income (Section 6(1) and (2) of the Income Tax Act), against which it is possible to claim either flat-rate expenses of 60%, up to a maximum of EUR 20,000, or actual expenses. This means that the advantage of acquiring virtual currency as a self-employed person is the option to claim expenses.

TAXATION OF VIRTUAL CURRENCY ACQUIRED FREE OF CHARGE (AS A GIFT) BY A LEGAL ENTITY

Under the Accounting Act, virtual currency acquired free of charge is measured at the time of acquisition at fair value, meaning the market price on the chosen public virtual currency market. The legal entity includes such virtual currency in its current financial assets. At the same time, virtual currency acquired as a gift represents revenue for the legal entity at the time of acquisition, which affects the profit or loss from which the income tax base itself is derived. However, since income received as a gift is not subject to income tax for legal entities either, the legal entity excludes such revenue from its profit or loss when adjusting it to arrive at the tax base (an item deducted from the tax base).

The legal entity includes the revenue relating to virtual currency acquired as a gift in its tax base only at the time the virtual currency is sold. At the same time, the legal entity books an expense for the removal of the virtual currency from its assets, measured at the fair value at which the virtual currency was measured when it was acquired free of charge. Under the Income Tax Act, “tax expenses are expenses (costs) equal to the total acquisition cost of virtual currencies under Section 25b in the tax period in which they are sold, up to the total income from their sale.” Since the Income Tax Act (Section 25b) does not set an acquisition cost for virtual currency acquired as a gift, it is not possible to claim a tax-deductible expense equal to the acquisition cost when such virtual currency is sold. This means that the expense equal to the fair value at which the virtual currency was measured when acquired free of charge will, at the time it is removed from the assets, be an item added to the tax base.

CONCLUSION

At the moment virtual currency is acquired as a gift, neither an individual nor a legal entity is required to pay tax on the gift. Tax is paid only for the tax period in which the person concerned sells the virtual currency acquired in this way, and the entire income (revenue) from the sale is taxed. This is because, under the Income Tax Act, the acquisition cost of virtual currency acquired as a gift cannot be claimed as a tax-deductible expense. So if you have received virtual currency as a gift, or are planning to transfer cryptocurrency to another person, pay attention to the tax rules. If you have any questions, do not hesitate to get in touch and we will be happy to advise you.