Cryptocurrencies, notably bitcoins, have been making headlines in the news since the beginning of the year. Read on to find out what you should know about cryptocurrencies from a tax and company law perspective, as well as the associated risks.
Definition on Cryptocurrency
The term cryptocurrencies refers to virtual currencies, i.e. money in a digital form. The most well-known cryptocurrencies are Bitcoin, Ethereum and Ripple. The (ambitious) objective: using cryptography (the science of encryption) to create a wide-spread, decentralised, and secure digital payment system. Cryptographically secured protocols and decentralised data retention are intended to enable digital payments to be made without the need for central institutions such as banks. As such, holding a cryptological key is the equivalent of owning credit, which is also cryptologically signed, in a common blockchain (= encrypted database for all past transactions).
Cryptocurrency in Austria
In the view of the Austrian Federal Ministry of Finance (BMF), cryptocurrencies are an intangible, non-depreciating economic asset that, however, is not classified as a payment method under income tax law.
1. Cryptocurrency: Mining in focus
The term “mining” refers to the process whereby new units of cryptocurrencies are created. Using special mining software, the so-called “miner” provides validation and encryption services for which, in return for newly generated blocks of cryptocurrencies (known as “block rewards”), it also receives transaction fees. These validation and encryption services serve as a basis for the security and functionality of each cryptocurrency network, adding further “blocks” to the blockchain on an ongoing basis. The maximum number of bitcoins has been set at 21 million units by the network protocol. Around 16.6 million of them were in circulation at the end of August 2017.
1.1 Mining and income tax
If new units of cryptocurrencies are created, this constitutes a commercial activity according to the Income Tax Act (EStG) – if the decisive criteria of self-employment, sustainability, profit-taking and participation in economic traffic exist. The mining of cryptocurrencies is therefore not different from the production of other economic assets, from an income tax perspective. In order to successfully create blocks, the miner receives the newly created cryptocurrency units in the form of a cash-equivalent benefit in return The taxable income from the mining activities is determined by the market value of the units generated in cryptocurrencies less the related operating expenses (e.g. electricity costs and depreciation of the special mining hardware).
1.2 Mining and value-added tax
Due to a lack of identifiable service recipient according to the financial authorities and pursuant to ECJ case law (cf. ECJ 22/10/2015, case no. C-264/14, Hedqvist), cryptocurrency mining is not subject to value-added tax. This means that although companies specialising solely in mining cryptocurrencies (known as mining farms) do not need to pay VAT, the deduction of input tax is also excluded from this activity.
1.3 Mining: Measurement and accounting
The cryptocurrency units created are to be measured at market value or the exchange rate at the time of acquisition. This “market value” may fluctuate at the moment due to the lack of an official exchange rate and depending on the exchange rate source used.
In the case of miners preparing a balance sheet, cryptocurrencies are generally to be considered current assets. On the other hand, they are classified as fixed assets if there is a documented intention to retain the cryptocurrency for a longer period of time. Given that the acquisition of cryptocurrency units is offset by a paid consideration by the miner, we believe that the capitalisation ban pursuant to the Austrian Business Code (UGB) does not apply.
Cryptocurrencies in Balancing (UGB)
The measurement of cryptocurrencies as at the balance sheet date may be summarised as follows for balance-sheet accountants in accordance with the provisions of the Austrian Business Code (UGB):
Exchange rate loss
Exchange rate gain
Mandatory devaluation (strict principle of lower cost or market)
Mandatory write-up up to a maximum of the acquisition value
Mandatory write-up up to a maximum of the acquisition value
TPA Tip to Taxation of Bitcoins
It is recommended to collect evidence of all movements and the exchange rates (e.g. in euros) for measurement purposes and retain this for seven years.
2. Online stock exchange and cryptocurrency cash machines
- Operating an online exchange for cryptocurrencies on which these can be exchanged for other cryptocurrencies or real currencies (“bought and sold”) as well as
- operating a cryptocurrency cash machine where you can obtain cryptocurrencies with money
are generally to be considered a commercial activity.
Note to online stocck exchange & cryptocurrency
Cryptocurrencies are not subject to the regulation or the supervision or the Financial Market Authority. A concession from the Financial Market Authority may be necessary for certain business models based on cryptocurrencies.
3. Transactions with cryptocurrencies
Transactions with cryptocurrencies have been rising steadily this year.
3.1 Transactions and income tax
Trading between cryptocurrencies is to be considered an exchange transaction (the presence of an acquisition and selling action), along with the exchange thereof for legal tender or goods and services, regardless of whether this occurs inside or outside the company. The proceeds of the sale and the acquisition costs of the purchased assets are to be valued at the common value of the economic asset provided or the market value of the service.
In addition, the financial authorities have addressed the issue of an interest-bearing investment of cryptocurrencies. Interest-bearing investment means lending cryptocurrencies to other market participants (according to the principle of a customary loan). Here, corresponding units of cryptocurrencies are transferred to the cryptocurrency address of the recipient (so-called assignment change). In return for the transfer, the lender receives additional units pro rata temporis (in the sense of “interest”) of the cryptocurrency.
Taxation of cryptocurrenciew: Are Bitcoins part of business assets or private assets?
The following summary shows the taxation of possible transactions or the interest-bearing investment, depending on the assignment to business or private assets:
Assignment of the cryptocurrency to
|Resulting income from trading between cryptocurrencies||
Taxation at a rate of up to 55% income tax
Income from speculative activities only within the one-year speculation period1) : Rate of up to 55% income tax
|Resulting income from an exchange for goods, services, and legal tender|
|Income from realised appreciation from interest-bearing investment2)||
Taxation at a special tax rate of 27.5%
|‘Interest income’ from the interest-bearing investment||
Taxation at a rate of up to 55% income tax
1) The time of acquisition of the legal predecessor is to be taken in the case of economic assets acquired free of charge.
2) Cryptocurrencies constitute economic assets as defined by Sec. 27 para. 3 of the Austrian Income Tax Act (EStG).
3.2 Special features in case of cryptocurrencies in private assets
In the case of realising the increase in the value of non-interest-bearing investments in private assets (if within the one-year speculation period), profits can only be offset by losses from other speculative transactions and vice versa. Other profits are taxable and any other losses may not be offset against tax.
If a cryptocurrency with different acquisition times and different acquisition rates is held in what is known as a digital wallet, the important factor during an exchange transaction is which “tranche” of the cryptocurrency is exchanged, as this may constitute a speculative transaction, depending on the tranche used, and the amount of potential speculative income may vary significantly. In this case, an arbitrary assignment can be made, provided that a full record of the acquisition dates and acquisition costs of the cryptocurrencies has been kept.If no records are kept, the oldest part of a cryptocurrency is to be considered as sold first (FIFO method).
TPA tip on Bitcoins: Speculative Transactions
We recommend analysing income from speculative transactions on a regular basis so as to be able to compensate for losses and gains through quick realisation (quick sale, e.g. of cryptocurrencies). It is also recommended to keep a complete record for reasons of optimisation.
3.3 Transactions and value-added tax (VAT)
If legal tender (e.g. euro) is exchanged for cryptocurrencies and vice-versa, this constitutes a tax-free activity according to ECJ case law (c.f. ECJ 22/10/2015, case no. C-264/14, Hedqvist, VAT Regulation 2000, margin no. 759). This means that input tax may not be deducted e.g. for cryptocurrencies on online exchanges.
Cryptocurrencies are equivalent to legal tender with regard to the basis for assessment of value-added tax, i.e. the payment of deliveries and services. Thus it is irrelevant when calculating the amount of the value-added tax, whether, for example, payment is made in euros, in a foreign currency or in bitcoins; the euro value of the “payment” is generally taxed at the time of payment.
3.4 Transactions of cryptocurrencies: measurement and accounting
Exchanging cryptocurrencies for a consideration (goods, services or legal tender) has the following effect for the buyers and sellers of the goods or service:
4. Risks surrounding cryptocurrencies (Bitcoins)
The European Banking Authority has issued warnings for both consumers and the traditional financial sector, and explicitly advises against buying, holding or selling cryptocurrencies (bitcoins).
1. Risk: Main Risk factors
The main risk factors of virtual currencies include anonymity, which leads to the promotion of financial crime and money laundering, as well as globality. In the long run, it will be necessary to develop a comprehensive package of measures to be able to properly regulate the identified risks and the factors driving these.
2. Risk: The bitcoin exchange rate is subject to considerable volatility
Bitcoins are not issued by the central bank of a state. The purchase power and the price stability of the virtual currency remains unsecured and thus subject to major fluctuations. Such drastic exchange rate fluctuations make bitcoins a highly speculative undertaking and may result in total loss.
3. Risk: Trading platforms are not regulated and not subject to any oversight
The software required to trade with bitcoins is not subject to any statutory IT standards or security requirements. This carries numerous risks, such as those associated with hacker attacks, software errors and data loss.
A trading platform may be closed at any time, as has been the case several times in the past, with credit being lost. There is no legal, deposit or investor protection when trading platforms are closed, for example as a result of insolvency or the banning of buying, selling and trading bitcoins in a country. There is no central operator who may be called to account.
4. Risk: Digital wallets can be hacked and emptied
Digital wallets are stored on computers, notebooks or smartphones, and are therefore exposed to hacker attacks. Information is not stored centrally, which means that, if the key for your own digital wallet is lost, it is no longer possible to access it. There is no contact person for complaints, enquiries or support.
5. Risk: No special legal protection when using bitcoins
Unauthorised or erroneous transactions cannot be reversed. The future acceptance of bitcoins as a method of payment is not guaranteed; this is at the discretion of the respective contracting partner. There is no right to force the acceptance of bitcoins as a method of payment or to exchange bitcoins for real currencies. This means that the ongoing existence of bitcoins as a digital method of exchange and payment is not guaranteed.
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