Cryptocurrency as a taxable item for individuals in Latvia
Latvian tax legislation neither defines cryptocurrency nor explains the tax treatment of income from cryptocurrency, and so taxpayers can raise many questions when it comes to reporting their income and paying taxes. In the absence of an explanation for a particular type of income or transaction, the principles of statutory interpretation dictate that we should follow the general rules.
First of all, cryptocurrency might be mistakenly thought of as electronic money because of its name. Unfortunately such a simple approach is contrary to section 2(2.1) of the Payment Services and Electronic Money Act, because electronic money payment services can only be provided by properly authorised institutions (credit institutions, payment institutions etc) but cryptocurrency is not issued by those institutions.
Likewise, cryptocurrencies might prima facie be perceived as financial instruments because income from the purchase of a cryptocurrency unit does not arise until it is sold. However, this perception is out of line with Latvian legislation, under which cryptocurrency is neither legal tender nor economically linked to any national currency. Thus, cryptocurrency transactions are currently not governed by the Financial Instruments Market Act either.
According to the State Revenue Service, income from cryptocurrency is considered an individual’s other income under section 8(3)(21) of the Personal Income Tax (PIT) Act, attracting the standard rate of PIT – currently the progressive rate. Without a uniform position adopted by the tax authorities, income from cryptocurrency could be treated under the general rules as various types of other income depending on the purpose of a particular Bitcoin deal. This is especially important since Bitcoin and other cryptocurrencies are mainly used for investment purposes, as payment for goods and services, or as remuneration taxable according to rules specified by the PIT Act.
Experience in neighbouring countries
According to a survey conducted by PwC’s global network, most of the foreign tax authorities have yet to adopt rules for cryptocurrency transactions. As part of the study we asked our colleagues to state what kind of income individuals would earn from an increase in cryptocurrency value according to their applicable general tax rules. As a result of the survey, the majority believed that cryptocurrency is a capital asset that creates a capital gain at the time of sale.
We also believe that for tax purposes, cryptocurrency is more consistent with a capital asset that creates a capital gain at the time of sale. Accordingly, the capital gain should be measured by comparing the acquisition cost with the selling price. Since cryptocurrency transactions are cashless, their acquisition cost and selling price can be established according to their market price at the time of each transaction. The rate of tax on capital gains was 15% in 2017 and is 20% from 1 January 2018.
At the same time, cryptocurrency is increasingly used in paying for goods and services (i.e. this is the supplier’s employment or business income). So this income needs to be assessed on its merits and taxed according to the type of income. For example, when cryptocurrency is received in payment for services, this income should attract the relevant tax rate as business income.
A practical suggestion
The simplest transaction we can do with a cryptocurrency is to buy or sell it in exchange for a regular currency (EUR, USD etc) because the exchange rates for internationally recognised currencies are regulated in a centralised manner and the value of a capital asset can be accurately measured at the time of its purchase and sale. Since it is quite common in foreign countries, especially the US, to use cryptocurrency in paying for various goods and services, a number of tools and mobile apps have been developed for conducting and recording transactions, which allow the value of cryptocurrency to be measured at the time of the transaction, giving sufficient information for the proper application of taxes.
Publicly available sources of information recommend that taxpayers monitor their cryptocurrency dealings and record the time of each transaction and the resulting income. This information will be useful at the time of reporting the transaction, when the taxpayer will have to determine the time of sale of the capital asset and its value for tax purposes. These apps enable fast domestic and international payments, as well as storing information about the amount and time of transactions.