How are cryptocurrency earnings taxed?
Cryptocurrencies marked the previous decade, and a popular trend in the investment world is accompanied by legal regulations. In the Republic of Serbia, from the end of 2020, the Law on Digital Property (“Official Gazette of RS”, No. 153/2020, “Law“) is in force, which regulates the issuance of digital property and secondary trade in digital property, providing services related to digital property, lien and fiduciary right on digital property and the competence of the Securities Commission and the National Bank of Serbia in this area. This Law defines the term cryptocurrency as digital assets: “digital assets, ie virtual assets, means a digital record of value that can be digitally bought, sold, exchanged or transferred and which can be used as a means of exchange or investment, where digital assets do not includes digital currency records that are legal tender and other financial assets that are regulated by other laws, except when otherwise regulated by this law. ”
However, this Law does not regulate certain aspects of digital assets that are very important in practice. It is about the possibility that the salary is paid to the employee in cryptocurrency, which is not a rarity abroad. In the Republic of Serbia it is a unknown novelty. First of all, we need to define earnings. In that sense, the question arises whether the earnings can be paid in the form of cryptocurrency? In this regard, we will refer to last year’s changes in tax regulations. By interpreting certain norms, we can come to a theoretical conclusion and answer the question “How are earnings taxed in cryptocurrencies?”.
Law on Personal Income Tax (“Official Gazette of RS”, No. 24/2001, 80/2002, 80/2002 – other law, 135/2004, 62/2006, 65/2006 – amended, 31/2009 , 44/2009, 18/2010, 50/2011, 91/2011 – decision US, 7/2012 – harmonized din izn., 93/2012, 114/2012 – decision US, 8/2013 – harmonized din izn. , 47/2013, 48/2013 – amended, 108/2013, 6/2014 – harmonized din., 57/2014, 68/2014 – other law, 5/2015 – harmonized din., 112 / 2015, 5/2016 – adjusted dinar amount, 7/2017 – adjusted dinar amount, 113/2017, 7/2018 – adjusted dinar amount, 95/2018, 4/2019 – adjusted dinar amount, 86/2019, 5/2020 – adjusted din., 153/2020, 156/2020 – adjusted din., 6/2021 – adjusted din., 44/2021, 118/2021 and 132/2021 – harmonized din. „Law on Personal Income Tax“) indirectly defines earnings in cryptocurrencies, in Article 74, paragraph 12, when it mentions the tax on earnings received by the taxpayer from the employer in the form of digital assets.
This gives us a basis to think about this potential situation and how the competent tax administration would act in that case. In accordance with the Law on Personal Income Tax: “The taxpayer of personal income tax is a resident of the Republic of Serbia, for income earned on the territory of the Republic of Serbia and in another country. A resident of the Republic of Serbia, in terms of this law, is a natural person who:
1) has a residence or a center of business and life interests on the territory of the Republic of Serbia, or
2) resides in the territory of the Republic of Serbia, continuously or intermittently, for 183 or more days in a period of 12 months beginning or ending in the relevant tax year. ”
Earnings are defined in Article 13 of the Law on Personal Income Tax as follows: “Earnings in the sense of this law are considered wages earned on the basis of employment, defined by the law governing employment and other employee benefits.
For the purposes of this law, earnings are also considered agreed compensation and other income earned by performing temporary and occasional work on the basis of a contract concluded directly with the employer, as well as on the basis of a contract concluded through a youth or student cooperative, except with a person under age of 26, if he is studying in secondary, higher and higher education institutions.
For the purposes of this law, earnings are also considered to be the income received by employees in connection with work with a domestic employer from persons who, in terms of the law governing corporate income tax, are considered related to the employer (hereinafter: related party).
For the purposes of this law, earnings are also considered to be income related to work with an employer that a person realizes on the basis of employment rights upon termination of employment. ”
Usually, the payroll tax is paid by the employer, who is therefore a “taxpayer”.
According to Article 101 of the Law on Personal Income Tax “withholding tax referred to in Article 99 of this Law, for each taxpayer and for each individually paid income, the payer calculates, suspends and pays into the prescribed single account at the time of income payment, in accordance with regulations which are valid on the day of payment of income, unless otherwise prescribed by this law. ”
However, there is an exception to this rule, and if the payer is a non-resident employer, the tax is paid by the taxpayer. In that sense, it is necessary for the taxpayer to submit a tax form “PP OPO”. The tax form with calculated tax is submitted within 30 days from the day of realization of income.
Since it is about the salary that is paid on the so-called “Wallet”, i.e., through the platform on which digital property is traded, is a question of when earnings become “taxable”. More precisely, when and whether the tax event occurs? We believe that there is no room for positive discrimination here, and that a taxpayer who receives income in cryptocurrencies cannot be exempted from paying income tax. Everyone who earns money in the sense of the Law on Personal Income Tax is obliged to pay the corresponding tax. Considering that this specific issue related to earnings in digital assets is still not explicitly regulated by the Law on Personal Income Tax, we believe that the interpretation of the provision of Article 14, paragraph 2, which defines the moment of earning earnings expressed in securities of which reads: “Securities, except for shares acquired in the process of ownership transformation, which the employee receives from the employer or from a person related to the employer are considered earnings at the time of acquiring the right to dispose of these securities” may be applied to the case of acquisition earnings in digital assets. In that sense, the taxable event occurs at the moment of acquiring the right of disposal, i.e., at the moment when the employer transferred the digital assets to the “wallet” of the taxpayer. Although such an event is the subject of direct insight by the tax authorities, we believe that a tax liability arises at that time. On the other hand, the owner of digital property may or may not sell the said digital property, and transfer the funds obtained from the sale to his resident account.
If he does, the question of capital gain arises. We believe that if the transfer is made immediately, there will be no capital gain. However, if the transfer is made a few days, months or years later, the digital assets that the taxpayer received from the employer are unlikely to have the same market value. By selling cryptocurrency on a digital asset trading platform, the holder can generate capital gains. In that case, the holder becomes a taxpayer of capital gains tax on the sale of the said digital assets, at the time of the transfer of funds obtained from the sale of cryptocurrency to a resident account in the Republic of Serbia. The tax rate is 15% on the basis of the difference between the purchase and sale price of the cryptocurrency. Both prices are documented and in that way the profit of the taxpayer is proven. However, if the taxpayer is unable to document the purchase price, which will often be the case in practice due to the nature of cryptocurrency trading, the tax administration will determine the purchase price. Namely, we believe that the principle for estimating the value of a share can be applied analogously here, so the lowest price at which the cryptocurrency was traded in the previous year can be taken as the purchase price of a specific cryptocurrency. In this regard, we highlight the part of the Opinion of the Ministry of Finance of the Republic of Serbia: “… Pursuant to legal provisions, as well as allegations from the request and oral explanation, made a capital gain that is not taxed in the country of origin), in the case when a natural person cannot document the price actually paid, determines as the lowest recorded price at which it was traded in the period of one year from the day preceding the sale of shares. there was no trade, the purchase price is considered to be the lowest recorded price in the first previous year in which there was trading, provided that the taxpayer may in this case provide information at his disposal on the price of shares at which they were quoted at the time period of one year from the day preceding the sale of shares, i.e., the lowest recorded price – in the first previous year in which there was a trade).
The purchase price is revalued in accordance with the Law. ” The taxpayer is obliged to file a tax form in accordance with the Law on Personal Income Tax, which stipulates in Article 95, paragraph 2: he is obliged to submit a tax form no later than 120 days from the end of the year quarter in which the income was realized on the basis of the transfer of digital assets. “. The tax form is submitted to the tax authority on whose territory the taxpayer has a permanent or temporary residence. The tax authority issues a decision determining the tax. Here we return to the mentioned problem of proving the purchase price of digital assets. Since in this case it represented earnings, partly modified rules apply. Article 74, paragraph 12 prescribes: “Notwithstanding paragraph 10 of this Article, in the case of transfer of digital property acquired by the taxpayer from the employer or from a person related to the employer free of charge or at a preferential price, whose income was subject to taxation in in accordance with Article 14 of this Law, the purchase price is the sum of the amount of the documented price at which the taxpayer acquired digital property and the basis on which the payroll tax was paid in terms of Article 14 of this Law. “.
In practice, this means that the purchase price of cryptocurrency in that case will be the sum of the value of the base on which the taxpayer previously paid payroll tax and the value of the salary itself, which the taxpayer received from the employer in the form of cryptocurrency, and which should be expressed in dinars, euros or some third currency.
We conclude that the lack of clear legal solutions, but also the practice in this domain certain, and that we can take a reliable position only when the Tax Administration does the same. We expect that this will happen soon, because given the growing interest in digital assets, there will be more and more such cases in the future.