Two bills have appeared in parliament that regulate issues related to the circulation of cryptocurrency and taxation of income from the sale of virtual assets. Is there a chance that one of these projects will be voted on, and how will the new legislation affect citizens involved in buying and selling cryptocurrency?
Parliament should consider bills on the turnover of virtual assets. After all, in Ukraine, transactions with cryptocurrency are still outside state supervision, and now deputies are proposing to legalize the circulation of virtual assets. “Today, the crypto sector is in a state of stagnation because the work of fiat gateways with virtual asset service providers, which are registered outside of Ukraine and operated before the outbreak of a full-scale war, has been stopped. One of the reasons is the lack of government regulation in the crypto market,” Yulia Parkhomenko, director of the Digital Economy Directorate of the Ministry of Digital Transformation of Ukraine, recently noted In her opinion, it is necessary to adopt legislation on virtual assets as quickly as possible in order to restore the functioning of fiat gateways for the full operation of market participants and create competitive advantages for businesses. Meanwhile, in November, draft No. 10225 and an alternative draft No. 10225-1 .
“The adoption by the Verkhovna Rada of one of these bills will actually mean regulating the virtual assets market in Ukraine and establishing rules for taxation of transactions with such assets,” says Anastasia Tuz, a lawyer at the Miller law firm. What do legislators propose and will their proposals improve the situation for those who buy and sell crypto in Ukraine?
Cryptocurrencies - regulation: what is proposed to legalize the circulation of virtual assets
Today, the issue of the circulation of cryptocurrencies in Ukraine is not regulated by law, although, as lawyers remind, the main law regarding cryptoassets was adopted more than a year ago, but changes to the Tax Code have not been adopted since that time. And this is the main condition for the law “On Virtual Assets” to come into effect.
“Now we can only talk about the Law of Ukraine “On Virtual Assets” signed by the President of Ukraine on March 15, 2022. The entry into force of this law is associated with amendments to the Tax Code of Ukraine regarding the specifics of taxation of transactions with virtual assets. It is in this law that cryptocurrency is mentioned as a virtual asset, where the legislator interprets it as an intangible benefit that is the object of civil rights, has a value and is expressed as a set of data in electronic form. In fact, relations on cryptocurrency exchanges are not regulated by any regulatory act, which makes it impossible to protect the interests of participants in such relations. Since cryptocurrency is a type of currency, any civil law relations using it as a method of payment are not protected by law Alexander Kuryavyi, managing partner of the law firm Murenko, Kuryavyi and Partners, told Focus
At the beginning of November 2023, project No. 10225 was registered in parliament, the purpose of which is to normalize the issues of circulation of virtual assets. “The draft law, by introducing amendments to the Tax Code of Ukraine, proposes, in particular: the introduction of a mechanism for taxing the profits of virtual assets enterprises, by introducing separate accounting of results and adjusting the financial result; introduction of a mechanism for taxing personal income tax on virtual assets,” says the explanatory note to project No. 10225.
What does bill No. 10225 propose?
- oblige legal entities and individuals to keep separate records of transactions they carry out with virtual assets;
- set the tax rate for transactions with crypto assets for individuals at the level of 18% personal income tax, as well as 1.5% military duty (19.5% in total); they plan to make the tax base the financial result reduced by the cost of crypto assets;
- establish that only positive financial results with virtual assets will be subject to taxation, while in the event of losses due to cryptocurrency trading at the end of the year, it is proposed to reduce the tax base for the next year;
- prohibit transactions with cryptocurrency for individual entrepreneurs who pay a single tax of groups 1-3;
Bill No. 10225 also establishes the rights and responsibilities of regulators of the virtual assets market - the National Commission for Securities and the Stock Market and the National Bank receive powers for state regulation and supervision. But in draft No. 10225-1, the regulators of the virtual assets market are the Ministry of Digital Development and the NBU.
What does bill No. 10225-1 propose?
- establish procedures for the public offering of virtual assets and authorization of service providers related to the circulation of virtual assets;
- implementation of the State Register of service providers related to the circulation of virtual assets offered publicly;
- establish liability in the form of financial sanctions for service providers related to the turnover of virtual assets for violation of the law when providing services.
- taxation with corporate income tax of transactions with virtual assets; introduction of a mechanism for taxing personal income tax on income received by individuals from transactions with virtual assets (that is, a tax of 18%).
- lack of any authorization for mining for both individuals and legal entities.
As Yulia Parkhomenko explained, draft Law of Ukraine No. 10225-1 also proposes preferential taxation of personal income at a tax rate of 5% for the first 3 years, 9% for the next 5 years, after which a general tax rate of 18% is applied.
The main law regarding crypto assets was adopted more than a year ago, but changes to the Tax Code have not been adopted since then
Meanwhile, according to this project, the income tax for providers of services related to cryptocurrency will be 18% or 9% tax on withdrawn capital, subject to the use of the special regime of Diya.City. Transactions with virtual assets are exempt from VAT, with the exception of utility tokens, as are transactions of crypto-related service providers, with the exception of consulting services.
We need benefits: how the expert community assessed initiatives to tax income from crypto
Most countries, in their concept of taxation of virtual assets, have prescribed the taxation of transactions with virtual assets as an investment activity; in fact, bill No. 10225 proposes a similar approach , comments lawyer Anastasia Tuz.
“The positive difference between the amount of income received from the sale or other alienation of virtual assets and the value of virtual assets will be subject to taxation. The taxpayer is required to keep separate records of transactions with virtual assets, separately from other income and expenses and separately from transactions with other investment assets. In my opinion, given the specifics of activities with virtual assets, this is quite logical and realistic. The Tax Code of Ukraine already contains similar provisions regarding separate accounting of certain transactions.
For example, a taxpayer determines the financial result of transactions with securities or derivatives traded on a stock exchange, separately from the financial result of transactions with securities or derivatives that are not traded on a stock exchange ,” explained Anastasia Tuz.
Project No. 10225 is supported by the Chairman of the Verkhovna Rada Committee on Finance, Tax and Customs Policy, Daniil Getmantsev. As he previously told Focus, parliament will not delay the adoption of the project, but will certainly hold all the necessary consultations on the content of this project.
“As for determining the taxation model for virtual assets, we must approach related objects of civil law by analogy. These are securities and derivatives. I do not think that the taxation of virtual assets should be significantly different and therefore agree with the approach of the bill. On the other hand, I cannot fully share the approach regarding preferential treatment for transactions with virtual assets due to the fact that the development of financial transactions, during which added value and a large number of jobs are not created, cannot receive incentives from the state. However, undoubtedly, we will continue to discuss all these issues,” says Daniil Getmantsev.
However, the Ministry of Digital Transformation of Ukraine is in favor of project No. 10225-1.
“The Law “On Virtual Assets” was adopted by Parliament in 2021 and signed by the President in 2022. However, due to work on changes to the Tax Code, the legislation on virtual assets has not yet come into effect. In addition, at the EU level, a regulation has already been adopted to regulate the MiCA crypto market, the provisions of which Ukraine must implement into national legislation in order to integrate into the pan-European financial market. During this time, most European countries have already introduced rules of the game in the crypto market, either by developing separate legislation on crypto assets, or by adapting the rules of securities legislation for a new class of assets. Ukraine lost two years to legalize the new industry ,” says Yulia Parkhomenko.
Expert on virtual assets, CEO of Peanut.trade Alexander Momot also told Focus about the lost time
“The only thing that needs regulation in this sector is the fiat gateway, and the proposed legislative regulation initiative will bring cryptocurrency transactions out of the shadows by 10-20% and will help those for whom it is important to carry out transactions in the dark. From the point of view of product startups, unfortunately, there are almost no such startups in Ukraine, they have already left Ukraine for Portugal and other countries, I don’t think that they will be registered in Ukraine, and therefore the effect that even the best legislation will have is will eventually be weak. Ukraine missed the window of opportunity due to regulatory struggles. Now what is proposed by the bills is 10-15% of the ideal bill ,” the expert is sure.
Some economists support alternative project No. 10225-1, because they believe that it is there that is more useful for the development of the virtual assets market. According to Daniil Monin, an economics expert at the Ukrainian Institute of the Future, this project quite successfully spells out the taxation system, when there is no need to tax the internal affairs of trading platforms, and the exchange of some crypto-assets for others is not an object of taxation, while the object is only the sale of a virtual asset and receiving money for it, as well as purchasing goods and services for the asset .
In addition, the expert noted several more important norms of project No. 10225-1 :
- tax grace period;
- The National Securities and Stock Market Commission was completely removed from the market; the commission does not regulate anything. The main regulation and authorization is carried out by the Ministry of Digital Development;
- There are no annual fees for authorization support;
- the audit is carried out by independent auditors and the cost of the audit is payment to the service provider;
- a 10-year period is introduced that consultations on the crypto market can be carried out without obtaining authorization;
- mining by legal entities and individuals does not require any authorization;
- It is proposed to launch an innovation zone - a special startup environment to promote innovation and simplify the testing of new products with virtual assets.
“General verdict. If we adopt the law on taxation of crypto and the new version of the law on virtual assets, then only draft No. 10225-1,” Daniil Monin is convinced.
