What are the risks of trading cryptocurrency?
In 2013, the European Banking Authority ("EBA") issued an official warning, highlighting the risks of holding and trading virtual currency. The risks were related to the fact that no authority regulates cryptocurrency. However, one interesting point concerned taxation. Although not in the EBA's area of expertise, the matter comprised two different perspectives: tax on capital gains and value added tax.
Two years after the EBA's warning, the European Central Bank ("ECB") also issued a report on virtual currency schemes that analyses all layers of this "ecosystem". The report centres on the drawbacks cryptocurrency presents for users, which are all based on the apparent lack of transparency, clarity and continuity.
What is the Romanian authorities' position on cryptocurrency?
Subsequent to the EBA warning and the ECB report, the Romanian National Bank issued an official communication stating that any form of virtual currency shall not be considered either a national or a foreign currency and that the Romanian law on electronic currency does not apply to cryptocurrency.
In 2018, the Financial Supervisory Authority issued at least three warnings about the exchange rate risk associated with the high volatility and the high risk of investment fraud derived from the lack of transparency.
Due to the absence of any regulations, the lack of transparency of the transactions, the apparent anonymity of the players involved in this "ecosystem" and the constant exclusion from all known forms of currency – along with the delayed and insufficient reaction of the banking and financial institutions in Romania – the Romanian tax authorities are not comfortable with the idea of listing the associated tax risks.
Many advisors have stated their opinions, and the similarities are few and far between. In this context, an official position from the tax authorities would be welcome. However, the reluctance of the tax authorities is unlikely to diminish until the source and nature of virtual currencies is better understood. At this point, regulation is not on the horizon.
What do investors need to know about cryptocurrency taxation in Romania?
Although the business environment has proposed amendments of the tax law to the Romanian tax authorities as regards cryptocurrencies, there is still increasing scrutiny from all types of regulatory bodies in Romania.
In the absence of specific provisions, some specialists have adopted the idea that proceeds from cryptocurrency trading should be treated and taxed as capital gains. Others have stated that without clear regulation – and considering the tentative positions adopted by the Romanian regulators – a more reasonable approach is to tax only income from the sale of cryptocurrency as "income from other sources". Obviously, paying tax on income is far less convenient for the taxpayer than paying tax on profit (i.e. a sale at a loss would result in tax, without the possibility to deduct any expenses, such as the acquisition price).
As far as the VAT treatment of activities related to cryptocurrency is concerned, this question will remain unanswered until Romanian regulators (tax and otherwise) decide how to deal with cryptocurrencies and how to qualify them.
In case C-264/14, on the tax treatment of cryptocurrencies, the Court of Justice of the European Union ("CJEU") ruled on the correct VAT treatment for exchange services performed by a trading platform in favour of its clients. The CJEU found that the commission fees were indeed remuneration for the supply of services within the meaning of the VAT Directive, but ruled that these services were exempt from VAT by virtue of Art. 135(1)e of the VAT Directive, which deals with currency-related transactions. This obviously contradicts the position of the Romanian National Bank.
So what is the VAT treatment of activities related to cryptocurrency?
To attempt an answer to this complicated question, it is first important to distinguish between (i) cryptocurrency mining and trading, and (ii) cryptocurrency exchange services.
When one starts mining for bitcoin, one naturally engages all manner of costs (i.e. electricity, mining rigs, software) for the obvious purpose of generating bitcoins that can later be exchanged for goods and services or turned into cash (in the conventional way). It is reasonable that whoever engages in such an enterprise will be a (VAT) taxable person carrying out a business activity. The second question is if the output of this business activity is subject to VAT or is exempt. For the time being, the above CJEU ruling provides a reason-able approach to exchange services and related fees, i.e. that the respective fees are exempt from VAT without credit. However, we expect the practice to expand and become more nuanced depending on the nature of the tokens being exchanged for cash.
On the other hand, the actual disposal of the cryptocurrency by the person mining it or by the person who had previously acquired the tokens (i.e. trading it for cash or using it to pay for goods and services), raises the following questions, which for the time being remain unanswered: Is the trading for cash a VAT-taxable supply of services, considering how the CJEU released its ruling in case C-264/14 by saying that cryptocurrencies are not securities? Is the trader required to charge VAT on the price of the tokens? Does the exchange of tokens for goods and services qualify as a barter for VAT purposes or as payment?
Cryptocurrencies are closely monitored by the Romanian authorities, especially in the current context of increased efforts at the EU level to ensure fair and effective taxation. Moreover, the lack of clear rules may lead to a loss of income for the Romanian public coffers as many people will see to take advantage of the legislative void concerning the taxation of cryptocurrency, while others will face great obstacles when seeking guidance on how to apply the correct tax treatment.
This article was up to date as at the date of going to publishing on 10 December 2018.
Co-author: Anamaria Tocaci