How to avoid crypto taxes and why it's a bad idea
Today, Ukraine doesn’t have a clear guidance on how crypto is taxed. Does this mean that you can avoid paying taxes on crypto? Spoiler – alas, no.
Almost a year ago, the President of Ukraine signed the Law "On Virtual Assets." The document aims to create a regulatory framework for the cryptocurrency market. So far, it hasn‘t been implemented yet. The legislators are only developing some amendments to the Tax Code of Ukraine, which will clarify the crypto tax issues.
What taxes must be paid by law-abiding crypto holders?
However, the lack of a working law doesn‘t mean that your income is exempt or tax-free. Indeed, there are no established cryptocurrency taxation regulations which means that crypto taxes must be paid on a general basis.
A natural person must declare income received from the sale of cryptocurrency in the annual declaration, indicating the sale price. The government withholds 18% personal income tax, and 1.5% military tax. “To sell some things, you must first buy them” we know that rule from childhood. Contrary to worldly logic, you can't specify how much you paid to acquire your crypto (and thereby, reduce the tax base).
Things get worse when you buy some property with crypto. Cryptocurrency cannot serve as a payment method. Therefore, the tax authorities will consider (if they want) your purchase as property income received from the sale of cryptocurrency in a non-monetary form. This means that the price you paid must first be multiplied by 1.21951 (yes, the number looks unusual, we were also surprised). And then calculate personal income tax (18%) based on the amount received. Say, you've purchased a car. Do you think it was an expenditure? Think twice. In the existing reality, you made a profit (sad emoji). Share some money with the government by paying taxes. And don't forget about the military tax (1.5%) that can be calculated without the use of the 1.21951 coefficient.
What taxes do legal entities pay on crypto transactions?
Legal entities operating under the general tax system should remember that cryptocurrencies must be accounted for as intangible assets. Hence, all crypto transactions are subject to 18% income tax and VAT (20%).
Single tax payers seem to be in the most advantageous position: pay 5% and live peacefully. However, the devil is in the details. There is such a thing as KVED – a classifier of types of economic activity. A single tax payer is obliged to produce goods and services within the KVED framework. All other types of activities will require the single tax payer to switch to the general tax system.
You have already guessed that in Ukraine, cryptocurrency trading is not listed as a type of economic activity. In 2018, the State Statistics Service proposed to add crypto-related activities to KVED 66.19, "Other services auxiliary to financial services, except insurance and pension funding." But the tax office rejected the proposal. Of course, you can try to minimize taxes and follow the path proposed by the State Statistics Service. But you must understand that the tax service will evaluate such a decision individually.
In other words, any crypto-related operations of a single tax payer can be classified as the implementation of activities outside the KVED. In this case, your status as a single tax payer will be revoked retroactively – from the first day of the month following the quarter in which the violation was committed. That is, if you have declared that you traded in crypto since January 1, 2022, within the framework of KVED 66.19, then your registration of the single tax payer will be considered revoked as early as March 1. And taxes under the general taxation system will be additionally charged for the entire remaining period.
The situation is not normal. Ukrainian crypto holders desperately need a reasonable tax treatment of transactions with virtual assets. Fortunately, Ukrainian legislators and regulators understand this. The draft amendments to the Tax Code of Ukraine are expected to be ready in the coming weeks.
