Peter Varga and Anita Péková gave an interview to Hospodársky noviny on the taxation of cryptocurrencies.

In practice, different methods are used. These include, for example, “transfers” of cryptocurrencies to domestic or foreign legal entities, changes of residences or deposits into funds and trusts. The full interview can be found by clicking through to the Hospodárske noviny website or in visual form below.

Although bitcoin has lost nearly a quarter of its value since the beginning of January, it still holds around a 15 percent gain over the past year. Even at a time of historically high inflation, it still offers interesting returns, which has been noticed by Slovaks as well.

Not only bitcoin, but also other virtual currencies are thus finding a place in the investment portfolio of an increasing number of our citizens. While counting the profits is pleasant, every extra euro pleases the ordinary citizen, we should not forget about the obligations – including tax ones.

Least taxes

And this is where the problem arises. According to experts, the tax burden on these earnings is too high in Slovakia. The method of taxation differs depending on whether the cryptocurrencies are traded by a natural person – an ordinary person – or a legal person – a company.

On the income earned after the sale of cryptocurrencies, the individual must pay a health levy of 15 per cent, plus income tax of 19 to 25 per cent depending on the amount of the tax base. If a person earns less than 37,981.94 euros during the year, the rate of 19 percent applies; if the earnings exceed this amount, the rate of 25 percent applies.

However, it is not only the sale of the cryptocurrency that counts towards the tax base, but all of the taxpayer’s income for the taxable period. A legal entity pays tax at the rate of 15 or 21 percent.

To put this in context, it should be noted that the individual behind such a legal entity will probably have to pay a seven per cent tax on dividends – or possibly a tax on the liquidation balance – as well as any levy obligations of that individual.

This also raises the question of the legal optimisation of the payment of taxes on profits in this area. According to tax attorney Peter Varga from the Highgate group, there are several alternatives. “As I advise clients on tax and legal advice on achieving income from cryptos, I also receive various inspirations and ideas from them. Some, however, are more practical than legal. For example, various loan schemes, collateral, gifting or ‘tornadoes’,” said Varga.

Beware of the law

In general, the different options depend on the capabilities of the individual client. “The flexibility of these options is mainly determined by the size of the wealth in cryptocurrencies and the sort of private setting of the particular taxpayer. To simplify it, the more a person has in cryptocurrencies, the more options he has for more efficient taxation,” Varga continued, adding that as far as we are talking about people who have no more than five-digit sums in cryptocurrencies, the offer list is relatively strict.

In practice, different legal methods are used for optimisation. These include, for example, “transfers” of cryptocurrencies to domestic or foreign legal entities, changes of residency, tax-driven transactions with cryptocurrencies, deposits into funds or trusts, recognition of related costs, and so on.

“It is important to note that the legality of any tax optimisation must be assessed separately for each person. It is not possible to say that a particular instrument is always, everywhere and for everyone legal. The well-known German tennis player Boris Becker committed a criminal offence by changing his tax residence, whereas Peter Sagan did not,” added my colleague Anita Péková, a consultant also from the Highgate group.

However, it is still the case that there is no commodity solution. The complexity is complemented by the dynamic development of new types of revenue. For example, with the now widespread staking alone, i.e. the locking up of cryptocurrencies as a deposit for which the investor receives rewards and benefits, it is possible to see potentially different approaches to taxation depending on the technical parameters of the staking in question or the types of cryptocurrencies obtained.

“Some postpone the moment of taxation until the sale of the cryptocurrency acquired, which is certainly a better tax regime than taxing staking income at the time of acquisition of the cryptocurrency in question,” Péková concluded.

If you are interested in this topic, please do not hesitate to contact us.