Guidance issued on the VAT treatment of cryptocurrency transactions
On 31 March 2022, the Czech tax authorities published guidance on the VAT and income tax treatment of cryptocurrency transactions. The guidance addresses the tax consequences of crypto mining, the purchase and sale of goods and services for cryptocurrency, the exchange of cryptocurrency for traditional currency and other relevant transactions. Existing tax legislation in the Czech Republic generally does not include any special provisions on cryptocurrency.
This article focuses on the VAT aspects of the new guidance.
The VAT treatment of cryptocurrency transactions in the Czech Republic respects the EU concept of cryptocurrency, including jurisprudence of the Court of Justice of the European Union (CJEU), specifically, the court’s 2015 decision in the Skatteverket v. David Hedqvist case. The court was asked to determine whether VAT should be applied to transactions involving the exchange of a traditional currency for bitcoin, or vice versa. It concluded that cryptocurrency is simply an alternative means of payment and, therefore, should be considered currency, which is not subject to VAT.
The new guidance provides for the following rules on the VAT treatment of cryptocurrency transactions:
- Mining of cryptocurrency: Mining is not subject to VAT due to the absence of a contractual relationship between the “miner” and other persons. If the person engaged in the mining of cryptocurrency that is subsequently exchanged for a traditional currency, goods or services does not engage in any other activity, that person does not become a VAT payer. On the other hand, if a VAT payer engages in mining activities, it is not entitled to a VAT deduction from any related inputs (e.g., from technical equipment or electricity consumption used for the mining).
- Rental of technical equipment: The rental of technical equipment for mining purposes is to be regarded as a taxable service provided for compensation and is subject to VAT. Equipment rental is subject to the general rule, i.e., if the recipient is a taxable person (B2B transaction), the place of supply is the country where the recipient has its seat (or alternatively in the location of a fixed establishment). The place of supply of B2C transactions, however, is the seat of the supplier.
- Sale of goods/services for cryptocurrency: When goods or services are supplied in exchange for cryptocurrency, the tax base is calculated based on the market price (value) of the goods or services.
- Liability of recipients of taxable transactions: If the consideration for goods or services is paid in cryptocurrency, the customer (i.e., a VAT payer (B2B transaction)) can bear full liability for any unpaid VAT that should be settled by the supplier.
- Exchange of cryptocurrency for traditional currency or other cryptocurrency: Based on the CJEU decision in the David Hedqvist case and the EU VAT directive, the exchange of cryptocurrency for traditional currency and vice versa is a VAT-exempt service with no right to the deduction of input VAT. The exchange of cryptocurrency for traditional currency or other cryptocurrency, which is typically provided by crypto exchanges (e.g., Binance, Coinbase or Crypto.com) is similar to a currency exchange and, therefore, is a VAT-exempt service.
- Trading: Trading in cryptocurrency with an intention to generate regular profits is considered a business activity. Therefore, any income generated from trading must be included in the threshold for determining whether a person becomes a VAT payer. The threshold in the Czech Republic is currently turnover of CZK 1 million (about EUR 40,000) for the immediately preceding 12 months. The guidance states that trading with cryptocurrencies is similar to other financial transactions, such as transactions with regulated money.