In this article we will be explaining various tax implications related to cryptocurrencies regarding the applicable tax regime in Cyprus in order to assist the public to grasp a basic idea of its tax exposure when submitting its annual tax returns whether on a personal or a corporate level.
Regarding the legislative framework of cryptos it has been analyzed in a previous publication, please press here.
The issue with cryptos is that due to the lack of a dedicated legislation in Cyprus which would address specific matters such as the applicable taxation for various types of crypto-assets, there is room for ambiguity and speculation on whether they are taxed or not and under what circumstances.
When we talk about crypto-assets, one must first identify the type of crypto-asset he is looking in for taxation purposes. For example, a security token which represents an underlying asset can well fall within MiFID II categorization on financial instruments (ANNEX I – section C) and therefore taxable on a capital gains and income tax basis. Other type of tokens such as utility tokens, payment tokens and non-fungible tokens (NFTs) may also be subject to taxation because they can be traded through crypto coins such as Bitcoin or Ethereum on their dedicated blockchains or become a substitute of fiat currency. For example selling and purchasing goods and services via payment tokens or utility tokens in AIFs triggers CGT from point of sale A to point of sale B and ultimately income tax. So to that end those realized earnings via tokens will be subject to taxation in the same way as receiving income via fiat currency.
Cryptos are more likely to be considered as investments and if held for a considerable amount of time, a gain would be generated when sold. That gain would likely be classified as a capital gain. In Cyprus Capital Gains tax exists only on property and therefore the gain on cryptos would be tax exempt.
The challenge here is that unlike traditional investments, cryptocurrencies are not attached to a specific jurisdiction as the transaction occurs on the blockchain network. Therefore each country may choose its own rules when applying tax for its tax residents. In the absence of a specific legislation to regulate these matters it is not easy to identify if, when and what type of taxation is triggered on crypto trading in Cyprus. Other countries such as the United Kingdom, Canada and the USA have established advanced taxation rules which clear the field to this respect. To this end we expect Cyprus to follow the European legal framework that will be put in place under the long awaiting MiCA Regulation.
The above principles can be summarized in the following case study example: Mr. X holds crypto coins as an institutional investor where his main business activities are not crypto-trading related and he does not engage in regular trading activities (i.e holding a crypto position for 5 years without engaging in trading); Therefore when/if Mr X decides to sell his positions, any gain arising could be considered as being fully tax exempt. On the other hand, Mr. Y (Y being a physical person or a legal entity) who engages in regular and/or periodical crypto trading activities could be considered as a professional investor in the eye of the Cyprus Income Tax Authorities and therefore taxed on his earnings (arising from sales and/or revaluations of Mr. Ys positions at year end), i.e 12,5% as a corporate entity and scalable as a physical person, the same way one is taxed on their worldwide income when filing his annual tax returns. Now, should Mr. Y choose to trade his crypto portfolio under a Cyprus legal entity and become a non-domicile Cyprus tax resident (applies for individuals who have and maintain their domicile of origin or choice outside Cyprus and were not tax residents in Cyprus for any continuous period of at least 20 consecutive years prior to the tax year in question) Mr. Y would then be completely exempt from Special Defence Contribution tax (“SDC”) which is payable on dividends for a maximum of 17 years.
Trading frequency, volume of transactions, type of trading i.e buying & selling cryptos, converting them or even staking cryptos to receive high yields in the form of interest or dividends and overall incoming earnings are critical factors taken into consideration from the Income Tax Authorities when making an assessment on applicable taxation. In such an instance, the preferable venue (i.e to trade under a company or as an individual) will depend on the expected annual earnings from crypto-trading for tax optimization purposes. We would like to remind the public at this point that Cyprus tax residents who make false declarations on their annual earnings when submitting their tax returns, are subject to penalties, interests, monetary fines and even imprisonment in case of a conviction in a criminal court.
It is of interest and great importance whether the Cyprus Income Tax Authorities view cryptos as an alternative form of currency for the purpose of imposing or exempting them from income taxation. Article 8 (24) of the Income Tax Law 2002 (119(I)/2002) provides that any earnings stemming out of currency exchange rates’ fluctuations (including earnings from currencies’ rights or derivatives) are tax exempt with the limitation to earnings accumulated from trading currencies which is taxable. As we have seen in a previous article the 5th AML directive has been consolidated with Cyprus Legislation, Law of 2007 (188(I)/2007) as amended, for the prevention of money laundering or terrorist financing to inter alia categorize crypto assets as a virtual representation of value not regulated nor guaranteed from a Central Bank or Public Authority and it is not to be considered a fiat currency, e-money or a financial instrument.
On a final note it is worth mentioning that NFTs may fall under the same tax regime as crypto coins because they are effectively utility tokens tradeable on various NFT marketplaces (currently tradeable mainly on the Ethereum blockchain). NFTs can be considered as a medium of stored value for digital intellectual property with their price depending on their key characteristics, features and popularity. We do not have yet a clear view regarding NFTs and how they are treated for taxation purposes and the present proposal is merely an extraction based on the underlying taxation principles applicable on cryptos and tokens. This is also essential for service providers looking into acquiring a CASP license in Cyprus to act as a crypto exchange brokerage.
In conclusion we would like to highlight that in case of ambiguity regarding the tax treatment for case specifics and prior to any type of engagement, one is strongly recommended to seek professional advice and depending on the key characteristics of his investment or business activity, apply for a tax ruling to the Income Tax Authorities which will be binding and applicable for the given case study presented to the authorities.
This article is for informative purpose only and it is not to be taken as a legal or tax advice. For more info, please contact its author, Mr. Paris Hadjipanayis.