Cryptocurrency Regulations in Hungary: Key Features

The legal status of cryptocurrencies in Hungary is still a matter of debate. The Civil Code does not recognize them as physical assets due to their lack of tangible form. Nevertheless, in contract law, parties can agree on payments of debts or salaries in digital currencies. 

Cryptocurrencies also don't fit into the category of securities, as per Hungarian regulatory perspectives, because they lack an issuing entity (this does not apply to security tokens). 

NFTs too are in a legal gray area. Oversight of these non-fungible tokens has been assigned to the Office for Property Rights and Copyright Protection, which has yet to provide clear regulatory guidelines.

Despite these legal ambiguities, the National Tax and Customs Administration (NAV) of Hungary and the Hungarian Central Bank (Magyar Nemzeti Bank) have established a set of cryptocurrency taxation laws, which came into effect a year ago.

Under Hungary's recent law, crypto trading and mining are classified as distinct types of personal income, subject to a 15% tax rate. This rule, however, applies only to residents within Hungary's borders. Hungarian nationals earning income outside of Hungary's jurisdiction are required to adhere to the tax laws of the country where the income was generated.

To determine the taxable income from a transaction, the market value of the cryptocurrency at the time it is either received or transferred is considered. Commonly, this market value is determined by the daily exchange rate on a cryptocurrency exchange, or the average daily chart candle value, at which the asset was bought or sold.

Importantly, a transaction is added to the tax base only when it involves fiat currencies. As per the Income Tax Law (SZJA), this is known as the ‘black box’ principle.

What does this imply in practice?

A taxable event is triggered in cases where:

1. The transaction is settled in fiat currency (converting cryptocurrencies to fiat currencies like EUR, USD, and HUF).
2. Payment for goods or services is made with a crypto card in retail or online stores (where the purchase amount becomes taxable).
3. Cryptocurrency is acquired through gifting, inheritance, or donation.
4. Physical items like cars, real estate, or appliances are purchased from an individual using virtual currencies.

In Hungary, converting Bitcoin to stablecoins and income from staking without a fiat equivalent are exempt from taxation. For tax declaration, individuals need to focus only on transactions linked to fiat currency. This approach greatly simplifies the management of cryptocurrencies and reduces the taxable profit from digital dealings.

Additionally, certain expenses can lessen the taxable income from a transaction. 

These include:

1. Costs associated with acquiring a digital asset, if borne by an individual within the same year. For example, in 2023, the sale of ETH purchased in 2022 will be taxed but without the allowance for its purchase price.
2. Purchase of computer hardware for trading or mining, provided these expenses are documented with receipts.
3. Expenses incurred in the current year for repair and maintenance of such equipment and software purchases.
4. Electricity bills for mining activities. 

This aspect of Hungarian cryptocurrency taxation significantly differs from those in countries like Germany, where holders often sell assets a year after purchase to evade taxation.

To incentivize digital market participants to comply with crypto tax obligations, authorities have introduced a tax amnesty. Revenues from cryptocurrency transactions that were not reported in tax declarations from 2017 to 2021 are exempt from accounting. However, this exemption does not extend to transactions in 2022.

Furthermore, the law stipulates that transactions generating income less than 10% of the minimum wage (20,000 HUF or about $55 in 2023), are tax-exempt if limited to one per day. The cumulative annual total for such transactions should not surpass the minimum wage cap, which stands at 232,000 HUF or around $641 in 2023.

This essentially implies that crypto holders are exempt from taxes if their annual income matches the monthly unemployment benefit amount.