Bitcoin may be subject to taxes

The legal framework for cryptocurrencies are not clear

The cryptocurrency Bitcoin has recently seen rapidly growing profits, but the currency and others like it are raising legal issues. Just like with shared ride services and shared accommodation services, the legal framework has been one step behind.

A single bitcoin was worth $0.39 in 2010, but now it has risen to over $17,000.

The Czech National Bank (ČNB) holds the position that bitcoins are not electronic money but an intangible investment. Taxes must be paid when the bitcoin is exchanged for goods and services. At that time, the state should get 15 percent of the difference between the purchase price and the sale value.

That means if someone bought a bitcoin for less than a dollar and exchanged it now for a tangible item valued at $17,000, they should pay a tax of $2,550 for the increase in the value of the bitcoin.

Some other experts say that the laws regarding bitcoin are not well-defined. “The taxation of bitcoin and other virtual currencies is undoubtedly problematic and not quite clear,” Jiří Nesrovnal, a member of the Chamber of Tax Advisors (KDP), told daily Hospodářské noviny (HN).

Pavel Gorel of advisory firm KPMG said there are no explicit legal regulations in the Czech Republic for virtual currencies, and no definition of whether they should be considered to be money or a commodity. “A conservative approach would be taxing it as income, on the other hand, clear rules do not exist at the moment, and other interpretations cannot be ruled out,” Gorel told HN.

Jiří Žežulka the tax expert from Czech consulting firm Apogeo agreed that the Czech legislation was gapped, and that people who made a lot of money in bitcoins do not know whether or not to pay taxes. These people can find themselves in legal trouble over the issue.

He told HN that he favors the German legal framework, under which people would be exempt from tax on bitcoin if they held the currency for more than a year.

Financial Office spokeswoman Petra Petlachová told HN that the office has begun to monitor the movement of virtual currencies as of July to try to find financial crimes and cases of unpaid taxed.

The European Union is also currently looking at issues surrounding cryptocurrencies and their use in money laundering and tax evasion.

UK daily The Guardian recently reported that under an EU-wide plan, online platforms where bitcoins are traded will be required to carry out due diligence on customers and report suspicious transactions. The plan should come into effect in the next few months.

The Court of Justice of the European Union in 2015 ruled that exchanging traditional currencies for virtual currency is exempt from VAT, making bitcoin a currency as opposed to being a commodity.

The European Central Bank (ECB) in 2012 also said bitcoin was a convertible decentralized virtual currency.

The ECB in 2012 also said traditional financial sector regulation is not applicable to bitcoin. Not everyone in the EU agrees. An EU paper in 2015 said that existing rules can be extended to include bitcoin and bitcoin companies.

The ČNB is not opposed to bitcoins but offers some caution. ČNB Vice Governor Mojmír Hampl in July said cryptocurrencies had a big following. “In our capital city, we have a strong community of supporters and users of cryptocurrencies. Among libertarians, some of them my ex-colleagues or friends from the University of Economics in Prague, bitcoin is seen as a real, fully fledged alternative to the current monetary order,” he said.

“People … asked me: Aren’t you afraid of bitcoin and other independent, central-bank-free currencies and their power to marginalize traditional money? I said – well, not really,” he added.

He did outline several potential problems with the currency. Including its volatility and the risk a bubble.

“If the money you hold is losing its value, you have every incentive to get rid of it as quickly as possible. If on the other hand, it is gaining value fast, you want to hoard it and store it. In any case, swift changes in purchasing power are the mortal enemy of any good currency,” he said.

“Some bitcoin enthusiasts put forward that this problem will moderate over time. …. I don’t think so since there is no guarantee of purchasing power stability for any commodity-based money,” he added.“From this perspective, bitcoin is the antithesis of our elastic money system, which is based on the notion that to keep the value of money and purchasing power relatively constant and predictable, the amount of money has to change flexibly over time. This is the lesson of the late 19th and 20th century in monetary policy: price stability matters,” he said at a conference in London.

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