TAXATION OF INCOME RECEIVED FROM A VIRTUAL CURRENCY

DEFINITION OF ‘A VIRTUAL CURRENCY’

Usually, when it comes to ‘a virtual currency’, this relates mainly to such measures as Bitcoin, Ethereum, Ripple, Litecoin, etc. For tax purposes, any instrument which by its characteristics is analogical to specified measures (i. e. Bitcoin, Ethereum, Ripple, Litecoin) will always be considered as ‘a virtual currency’. However, for tax purposes other types of crypto instruments may be recognized as ‘a virtual currency’ as well, e. g. certain types of tokens.

The concept ‘a token’ as well as the concept ‘a virtual currency’ do not have a uniform definition, however, usually, when it comes to a token, this relates to an instrument issued through an initial coin offering (ICO) using the distributed ledger technology, blockchain.

In practice, the taxable income from the sale of a “token” is generally calculated in the same way as income from the sale of a virtual currency (cryptocurrency), so the following provisions on the taxation of “virtual currencies” are also relevant for “tokens”.

VIRTUAL CURRENCY (CRYPTOCURRENCY) TRANSACTIONS AND RECOGNITION OF TAXABLE INCOME

For the purposes of the Law of the Republic of Lithuania on Personal Income Tax (hereinafter referred to as “the Law on PIT”), cryptocurrency is recognized as current assets which may be used as payment means for goods and services or stored for sale. When a taxpayer sells a cryptocurrency, he/she is deemed to have earned taxable income.

Exchange to official currency

When a cryptocurrency is exchanged into an official currency (e. g. EUR, USD), the total amount of cash received in euros for the sale of the cryptocurrency is considered to be personal income. For example, if a person bought a certain amount of cryptocurrency and converted it into EUR 10,000, the person would be deemed to have received EUR 10,000 as personal income from the sale of the cryptocurrency (from which the acquisition cost of the cryptocurrency can be deducted, please see more details below).

It should be noted that the moment of receipt of the funds from the exchange is considered to be the moment when a person earned personal income. Therefore, from a tax point of view, it is irrelevant what further intentions the person has: the person transfers the funds to the bank, reinvest it or simply keep it in the wallet.

Transactions where one cryptocurrency is exchanged for another (swapping)

Cryptocurrency swaps involve the exchange of one cryptocurrency for another. In these transactions, one cryptocurrency is considered to be sold, and the other is considered to be bought. Therefore, personal income in these transactions is measured by the market price of the assets (cryptocurrency) acquired, taking the day when an exchange took place.

Example. Person bought cryptocurrency A on the platform for euros and later exchanged it for cryptocurrency B. From the perspective of the Law on PIT, the following assessment would be made: Person  concluded the sale of cryptocurrency A, consequently, personal income should be equal to the market price of cryptocurrency B at the time of the exchange and the purchase price (costs of the acquisition) of cryptocurrency A is the amount paid in euros for the cryptocurrency A.

If the person subsequently decides to exchange cryptocurrency B for cryptocurrency C, same principles would apply: the personal income from the sale of cryptocurrency B would be the market value of cryptocurrency C at the time of the exchange, and the purchase price of cryptocurrency B would be the market value of cryptocurrency B at the time of its initial acquisition (the cryptocurrency B has been acquired by way of an exchange, therefore, the purchase price has been calculated on the basis of market value).

Using cryptocurrency to pay for goods and services

In transactions where cryptocurrency is used to pay for goods and/or services, the amount of personal income is calculated by determining the market value of the goods/services received.

Example. Person bought goods using cryptocurrency. The market value of the goods at the time of acquisition – is EUR 18 thousand. From the perspective of the Law on PIT, the personal income is equal to EUR 18 thousand.

Staking crypto far a reward – interest

The transfer and holding of a cryptocurrency on a platform or exchange (staking) for the purpose of receiving remuneration in the form of interest would result in tax consequences in the extent of interest received, i.e. the interest would be recognized as personal income.

RECOGNITION OF PERSONAL INCOME AND COSTS OF ACQUISITION

Both personal income and costs of acquisition should be calculated in euros.

The exchange rate of a virtual currency (or tokens) against the euro is not regulated by legislation, therefore, in setting the exchange rate of a virtual currency (or tokens) against the euro, all available information and comparable data on the market may be used:

• The amount of income in euros can be calculated, for example, by applying the exchange rate of the crypto exchanges at the actual time (day) of receipt.
• In a free-form document (certificate, accounting note, etc.), the person should describe/record (e. g., by making screenshots of the data on a computer) not only the source (the exchange rate used to calculate the income in euros), but also the date on which the exchange rate used was recorded.

In the case of one-off transactions, the person should make calculations, considering the date of each transaction.

In the case of recurring transactions (where there are a large number of transactions), it is also possible to convert the annual trades into euro (each cryptocurrency should be considered separately) by using one exchange rate of the last day of that year, i.e. 31th of December.

INCOME FROM INDIVIDUAL ACTIVITY VS. OTHER TAXABLE INCOME

Income from virtual currency transactions is subject to personal income tax and should be declared as:

• Income from an individual activity – if all the criteria for an individual activity are met OR
• Other taxable income (i.e.. other income from sales of assets or other transfer of ownership) –if the proceeds from the sale of the cryptocurrency are derived from an occasional/one-off nature transactions (interest from holding on a platform or exchange – as “other taxable interest”).

Income from cryptocurrency transactions must be taxed as income from an individual activity if the transactions meet all the characteristics associated with an individual activity:

• Operational autonomy,
• Continuity, and
• Purpose– the desire to earn income or achieve other economic gain. 

The above criteria shall be assessed together over the entire period of activities (transactions executed). If at least one of the criterion is missing, the activity does not qualify as an individual activity. In this case, the personal income from the sale of the cryptocurrency is taxed and declared in accordance with the provisions of other taxable income (in the case of interest income from crypto staking –   as “other taxable interest”).

It is also important to assess under what type of activity it falls based on the Law on PIT. According to the opinion of the Bank of Lithuania, cryptocurrency-related derivative transactions (e.g., financial arrangements linked to fluctuations in the values of virtual currencies) and tokens that have the characteristics of securities are considered financial instruments which are not listed as activities that could be recornized as individual activities.

 If an income falls under the category “other taxable income “, the difference between sales income (accumulative amount of all “other taxable income “, e.g. income from the sale of crypto, sale of personal items, etc.) and costs of acquisition of such assets, excluding non-taxable amount equal to EUR 2,500. Any amount exceeding  EUR 2,500 per year is taxed at the progressive rates of 15% and 20%.