Deputies propose to establish tax control over the cryptocurrency market in Ukraine

All transactions with crypto assets will become subject to taxation: income is subject to personal income tax of up to 18%, as well as a 1.5% military tax. In addition, crypto exchanges will receive permission to officially operate in Ukraine.

Since the beginning of November, two bills have appeared in the Verkhovna Rada that describe the rules for taxation of transactions with virtual assets, as well as the mechanism for authorization and supervision of service providers related to the turnover of virtual assets (crypto exchanges).

The initiator of the first bill No. 10225 is Alexander Sova, a deputy from the Servant of the People party. Although the conceptual development of this document was carried out by the National Commission on Securities and Stock Market (NCSM).

The second, alternative bill No. 10225-1, was formally registered by Servant of the People deputy Anton Shvachko. In fact, this project was prepared by the Ministry of Digital Transformation together with business, as announced by the Minister of Digital Transformation Mikhail Fedorov.

Considering the active development of the crypto industry in Ukraine and the resonance that is caused by any attempts by the state to take control of virtual assets, delo decided to wait until the emotions around legislative initiatives subsided a little and substantively figure out what awaits crypto enthusiasts.

What has already been done to regulate the cryptocurrency market in Ukraine

At the beginning of 2022, the Verkhovna Rada adopted Law No. 2074-IX “On Virtual Assets”. It is a fundamental document that regulates legal relations arising during the circulation of virtual assets in Ukraine, defines the rights and obligations of participants in the virtual assets market, and the basis of state policy in this area.

This law never came into force. In order for this to happen, parliament had to approve changes to the Tax Code on the specifics of taxation of transactions with virtual assets.

Accordingly, if the Rada supports one of the proposed bills (the first, by the way, contains a new version of the law on virtual assets), the regulatory framework for the crypto market in Ukraine as a whole will be ready.

What taxation algorithm do deputies propose?

According to the provisions of Bill No. 10225, virtual assets are equal to investment assets. In turn, investment profits from transactions with virtual assets will be subject to taxation.

The tax base will be calculated as follows:

• the financial result of a transaction with a specific virtual asset (profit or loss) is determined. To do this, the amount of income received from a transaction with a virtual asset must be reduced by the value of these virtual assets;
• income will be considered the price specified in the agreement for the purchase and sale/exchange of a crypto asset, which cannot be lower than its market value, and the value of the asset will be the amount of documented expenses for its acquisition, issue, mining;
• Based on the results of the year, the taxpayer determines the profit or loss on transactions with cryptocurrency, and reports (declares) the final financial result to the tax office.

“If, based on the results of the reporting year, investment profit is received from transactions with virtual assets, its value will be included in the total taxable income,” explains Tatyana Zhuk, lawyer at the ECOVIS Bondar & Bondar law office.

What will the tax rates be?

The taxation scale for virtual assets is as simple as possible.

Deputies propose to tax investment profits from transactions with cryptocurrencies with a personal income tax at a rate of 18% and additionally with a military tax at a rate of 1.5%. VAT is not provided for such transactions. The only exception is the sale of NFTs – virtual assets defined by individual characteristics. Transactions with them will be additionally subject to VAT.

What taxation will look like in practice

To understand how this would work in real life, let's take two example transactions.

The first option: the taxpayer bought Bitcoin on the exchange, sold it a month later and received 10% income due to the fact that Bitcoin increased in price. But there was no exchange of virtual assets for fiat currency (hryvnia/dollar/euro), the funds remained in cryptocurrency.

Based on the fact that the sale of Bitcoin occurred with the receipt of investment profit (income from the sale is more than the cost of acquisition), then from this very 10% of the difference you will need to pay 18% tax and 1.5% military duty.

And it doesn’t matter at all whether the taxpayer received fiat currency or left his money “frozen” in cryptocurrency.

“According to bill No. 10225, for tax purposes, the sale of a virtual asset is both its sale for money and its exchange for another cryptocurrency or any other transactions that result in the transfer of ownership of a virtual asset,” clarifies Tatyana Zhuk.

Second option: the taxpayer exchanges cryptocurrency using a p2p scheme. From his bank card, he transfers a certain amount in hryvnia to the card of another individual and receives cryptocurrency to his wallet. Then, according to the same scheme, the sale of cryptocurrency for hryvnia takes place and it is credited to the taxpayer’s card.

Since the p2p operation involves receiving income in the form of the difference between the purchase and sale rates of cryptocurrency (spread), it is also subject to taxation.

As GLS Law Company lawyer Alina Goryaeva explains, bill No. 10225 introduces the concept of sale (alienation) of a virtual asset for tax purposes. And in the case of p2p transactions, this is precisely the sale that occurs, that is, the exchange of cryptocurrency for fiat money.

Therefore, investment profits from such operations are subject to 18% personal income tax and 1.5% military tax.

How will tax payments be monitored?

Deputies want to make exchange platforms tax agents who will deduct tax from investment profits.

“This means that at the time of a transaction with virtual assets, the exchange must charge taxes and withhold them from transactions carried out by individuals,” comments Alina Goryaeva.

In addition, tax agents are required to keep records of all transactions: reflect the amount of income accrued to users of the exchange, the amount of tax withheld from them and quarterly transfer this data to the State Tax Service (STS).

In order for crypto exchanges to be accountable to the Ukrainian tax authorities, deputies want to oblige them to undergo the registration procedure with the National Securities and Stock Market Commission and the National Bank. In addition, exchanges will pay from UAH 425 thousand to UAH 1.36 million per year for the opportunity to operate in Ukraine.

In addition to this, trading platforms will be required to store transaction history for 5 years, and at the request of the State Tax Service, exchanges will have to provide information about the transactions of specific users.

However, individual taxpayers will also have to control all their transactions with cryptocurrency. Every Ukrainian who carried out at least some transactions with virtual assets during the year will have to reflect the annual financial result from such transactions in the declaration of property status and income. Moreover, it does not matter whether it is profit or loss. If you bought bitcoins, file a declaration anyway!

What are the differences between the bill developed by the Ministry of Digital Development?

Alternative bill No. 10225-1 from the Ministry of Digital Development suggests a slightly different approach to the taxation of transactions with virtual assets.

There will be some grace period. But only for those taxpayers whose annual investment profit from operations with virtual assets does not exceed UAH 7 million.

For the first three years after the law comes into force, the personal income tax rate for investment profits from such operations will be 5%, over the next five years - 9%, and then the rate will increase to 18%.

In addition, the Ministry of Digital Development proposes to create some kind of innovation zone. This will be a special regime that should help crypto projects enter the market and test new products. For the opportunity to participate in such an innovation zone, you will need to pay 100 thousand UAH per year; admission to the special regime is given for three years.

Supervision of the virtual assets market will be carried out not by the National Securities and Stock Market Commission, but by the Ministry of Digital Development. It will make a decision on the authorization of crypto exchanges within 30 days from the date of submission of the application. Moreover, there is no annual payment for work in Ukraine. Instead, there will be a one-time payment for access to the market - from 17 to 51 thousand UAH. The authorization itself is unlimited.