Updated: Sep 13
In this article, we will discuss the various tax implications of cryptocurrencies in relation to the applicable tax regime in Cyprus, in order to help the general public get a better understanding of their tax exposure when filing annual tax returns, whether on a personal or corporate level.
The problem with cryptos is that there is ambiguity and speculation about whether they are taxed or not, and under what circumstances, due to the lack of dedicated legislation in Cyprus that would address specific issues such as the applicable taxation for various types of crypto-assets.
When it comes to crypto-assets, one must first determine which type of crypto-asset he is interested in for tax purposes. For example, a security token that represents an underlying asset may fall under MiFID II's financial instrument categorization (ANNEX I – section C) and thus be subject to capital gains and income tax. Other types of tokens, such as utility tokens, payment tokens, and non-fungible tokens (NFTs), may be subject to taxation if they can be traded on dedicated blockchains using crypto coins like Bitcoin or Ethereum or used as a substitute for fiat currency. Selling and purchasing goods and services in AIFs using payment tokens or utility tokens, for example, triggers CGT from point of sale A to point of sale B, as well as income tax. As a result, realized token earnings will be subject to taxation in the same way that fiat currency earnings are.
Cryptos are more likely to be considered investments, and if held for a long time, they will generate a profit when sold. That profit would almost certainly be considered a capital gain. In Cyprus, capital gains tax only applies to real estate, so gains on cryptos would be tax-free.
The problem is that, unlike traditional investments, cryptocurrencies are not tied to any particular jurisdiction because they are transacted on the blockchain network. As a result, each country is free to set its own rules when it comes to taxation of its citizens. It is difficult to determine if, when, and what type of taxation is triggered on crypto trading in Cyprus because there is no specific legislation to regulate these matters. Other countries, such as the United Kingdom, Canada, and the United States, have advanced taxation rules that level the playing field. To that end, we anticipate Cyprus adhering to the European legal framework that will be implemented as part of the long-awaited MiCA Regulation.
The following case study example summarizes the above principles: Mr. X holds crypto coins as an institutional investor, but 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 trading); therefore, any gain arising from Mr. X's positions could be considered fully tax exempt when/if he decides to sell them. Mr. Y (Y being a physical person or a legal entity) who engages in regular and/or periodical crypto trading activities could be considered a professional investor in the eyes of the Cyprus Income Tax Authorities and thus 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), in the same way that one is taxed on their worldwide income when selling Mr. Y would be completely exempt from Special Defence Contribution tax ("SDC"), which is payable on dividends for the tax year in question, if he chooses to trade his crypto portfolio through a Cyprus legal entity and becomes a non-domicile Cyprus tax resident (applies to 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 years prior to the tax year in question).
Trading frequency, volume of transactions, type of trading (buying and selling cryptos, converting them, or even staking cryptos to receive high yields in the form of interest or dividends), and overall incoming earnings are all important factors taken into account by the Income Tax Authorities when determining the appropriate taxation. In this case, the best venue (i.e., trading as a corporation or as an individual) will be determined by the expected annual earnings from crypto-trading for tax purposes. We would like to remind the public that Cyprus tax residents who make false declarations on their annual earnings when filing their tax returns face penalties, interest, monetary fines, and even imprisonment if convicted in a criminal court.
The Cyprus Income Tax Authorities' view of cryptos as an alternative form of currency for the purpose of imposing or exempting them from income taxation is of great interest and importance. Any earnings resulting from currency exchange rate fluctuations (including earnings from currencies' rights or derivatives) are tax exempt under Article 8 (24) of the Income Tax Law 2002 (119(I)/2002), with the exception of earnings accumulated from trading currencies, which are taxable. 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 categorize crypto assets as a virtual representation of value not regulated or guaranteed by a Central Bank or Public Authority, and it is not to be considered a fiat currency, e-money, or financial instrument, as we saw in a previous article.
Finally, because NFTs are effectively utility tokens that can be traded on various NFT marketplaces, they may fall under the same tax regime as crypto coins (currently tradeable mainly on the Ethereum blockchain). NFTs can be thought of as a medium for storing value for digital intellectual property, with prices varying according to key characteristics, features, and popularity. We do not yet have a clear picture of NFTs and how they should be taxed, so the current proposal is just an extraction based on the underlying taxation principles that apply to cryptos and tokens. This is also necessary for service providers interested in obtaining a CASP license in Cyprus in order to operate as a crypto exchange brokerage.
In conclusion, we would like to emphasize that in the event of ambiguity regarding the tax treatment for case specifics and prior to any type of engagement, one should seek professional advice and, based on the key characteristics of his investment or business activity, apply to the Income Tax Authorities for a tax ruling that will be binding and applicable for the given case study presented to the authorities.
By fLEXI tEAM