Cryptocurrency Tax Treatment in Cyprus

Over the last few decades Cryptocurrencies have entered our lives and are being more and more popular. There are currently over 18,000 different cryptocurrencies in the crypto world.

Definition: Cryptocurrencies are defined a digital medium of exchange or a virtual currency that are designed as a decentralised network based on block chain technology. Cryptocurrencies usually operate independently and without any government interference.

Currently in Cyprus, there is no specific legal framework in place for cryptocurrencies. Cyprus Income Tax Law and the Cyprus Tax Department has also not provided guidance on how such currencies should be recognised, treated and taxed upon. There is however regulation on the activities of companies who offer services related to cryptocurrencies in block-chain.  The 5th Anti Money Laundering directive published in the Official Gazette of the Republic of Cyprus on the 23/02/2021 made amendments to the 4th Anti Money Laundering directive to extend control on exchange providers and custody providers and ensure that providers are registered, fit and proper.

The first key point to discuss is under which financial reporting category cryptocurrencies fit in. Unfortunately cryptocurrencies do not currently fit perfectly under a specific financial category in financial reporting. One can argue that they are a form of account receivable, a currency, an intangible asset, a commodity or even an investment. However since all criteria of each class of asset are not fully met, cryptocurrencies cannot be confidently placed under a specific category of asset.

The second key point to address is whether income from trading of cryptocurrencies, the act of buying and selling with the aim of a making a profit, will be taxable under Cyprus tax law. Currently income from trading of cryptocurrencies is taxed under corporation tax at a rate of 12.5% since they are recognised as a taxable asset. Such income is exempt from deemed dividend tax, withholding tax, capital gains tax and special contribution of defence tax. Income received from the trading of cryptocurrencies can be reduced by expenses incurred for the production of such income.

There are cases however that one may argue that income from such cryptocurrencies are wrongfully taxed under corporation tax since such profit can also arise from a capital nature transaction.

In order for an income to be considered to be of capital nature, it is important to take into consideration the badges of trade and the substance of the transaction. The frequency of such transactions, the motive, the subject matter, the length of ownership of the cryptocurrency, the method of acquisition and financing and the experience and knowledge of the parties involved are all important factors to take into consideration. For example if a company is constantly purchasing and selling cryptocurrencies and their method of financing is obtaining funds from other third parties, then the possibilities of such a transaction being classified under capital nature are slim.

In any case, if a transaction is believed to be of capital nature, a tax ruling is advisable since if it proven that profit from cryptocurrency has resulted from a transaction of capital nature, then no corporation tax will be payable. It can also be argued that since income from the trading of securities are exempt from Cyprus tax then income from trading of cryptocurrencies should be exempt as well.

In regards to VAT treatment, again there is very limited guidance of the correct handling. A general guidance is received from the European Court of Justice that state that the treatments of an exchange of traditional currencies for cryptocurrencies are exempt from VAT.

The third point to consider is the process of how the funds from cryptocurrencies enter into the Cyprus banking system. Currently the Cyprus banking system is quite sceptical and conservative when it comes to such cryptocurrencies mainly due to the difficulties and obstacles they may face when trying to identify the source of funds. Funds derived from the sale of such cryptocurrencies are not transparent to meet the Anti Money Laundering Law criteria. Also the banking system may face challenges due to high level of compliance and due diligence that will need to be performed to authorise such transactions. All the points mentioned above lead to the common occurrence of Cyprus banks denying the transfer of funds from cryptocurrency exchange platforms.

As cryptocurrencies are becoming more and more popular in Cyprus there have been examples of companies using such currencies to execute their employee’s payments. However keep in mind that when it comes to the monthly social insurance payments, these must be made in local currencies. In addition to this, it is even becoming more popular for cryptocurrencies to be used in the real estate market as well. Developers are selling their property in exchange for cryptocurrencies. If for example the developer prefers to immediately transfer their cryptocurrencies to local currency, this can be done in a few different ways. They can either use a cryptocurrency exchange; use a cryptocurrency debit card of even a cryptocurrency ATM that is available in over 76 countries.

We are living in an era where cryptocurrencies trading are accelerating. It is important that for accounting purposes the difficulties and challenges with recognition are met, clear tax guidance is provided and that the banking systems slowly close down their barriers of entry.

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