The Polish Ministry of Finance has come up with draft amendments to the Act on Personal Income Tax and Corporate Income Tax that pertain to taxation of profits from cryptocurrency transactions. We have referred recently to the proposed law in that area announced still during the term of the now former Deputy Minister of Finance – Paweł Gruda, whereunder digital assets were to be regarded as transferrable economic property.
Far from ideal, yet jolly good
The proposed changes are far from ideal and surely representatives of the Polish crypto sphere will have plenty of suggestions to submit. The general concept for digital assets adopted in the draft law refers to the definition of a virtual currency as set out in the Act of 1 March 2018 on the Combating of Money Laundering and the Financing of Terrorism. The gist of the government’s amendments could be summarised as follows: any income earned from cryptocurrency transactions constitute a separate source of revenues and will be subject to a 19-percent tax rate (a modified version of capital gains tax, in Poland commonly referred to as Belka’s tax – from the surname of a former Minister of Finance Marek Belka – in office 2001-2002, whose administration introduced tax on capital gains).
What “fiskus” requires of Polish taxpayers
Taxpayers will be obliged to declare any expenses made on the purchase of cryptos to the Polish taxman (commonly known as “fiskus” in Poland) – and this applies even to situations when digital assets are still stored unspent. Relevant settlements should be made after cryptocurrencies have been sold. The Polish lawmakers have also admitted that it is impossible for individuals to pinpoint losses on crypto-related transactions and that crypto-to-crypto is neutral from the income-tax perspective (i.e. both personal income tax, commonly known as PIT and capital income tax – commonly known as CIT in the country by the Vistula River). Also, only costs directly associated with the purchasing of cryptos may be settled in that way.
As has been pointed out by Marcelina Szwed Ziemichód (a Polish tax advisor and a qualified lawyer, member of the working community ‘Blockchain/DLT and cryptocurrencies’ supporting the Polish Ministry of Digital Affairs, currently, also involved in the Blockchain working group supporting Polish financial watchdog – KNF), even though the amendments refer to the definition mentioned above, no exceptions are made, and such exceptions are badly needed. According to her, this is due to the fact that there is a number of hybrid “virtual currencies” that, in fact, have nothing to do with the world of cryptos and she has hinted at the possibility that this step by the Polish government might have been intentional.
A voice of reason echoes in the new amendments
This more pragmatic approach is reflected in the reasoning for the proposed amendments:
“The definition that has been applied, is a word-for-word translation of the term “virtual currencies” as used by FATF (Financial Action Task Force) for the specification of cryptocurrencies that fall outside the category of legal tender and encapsulate both cryptocurrencies (such as e.g. Bitcoin, Monero, Litecoin, etc.) and to include centralised virtual currencies (such as WebMoney or PerfectMoney).”
The neutral treatment of crypto-to-crypto transactions (tax neutrality means that the amount of the tax paid will not constitute the final cost that they bear) is a step in the right direction, also proving that pragmatism prevails in the Ministry of Finance after the departure of Paweł Gruza prevails.
Some background to put things into perspective
As a result of the protests organised by crypto traders and enthusiasts and representatives of the crypto sphere in Poland, back in April 2018, on 18 May the Ministry of Finance published an announcement in which it decided to temporarily refrain from collecting PCC (from Polish Podatek od Czynności Cywilno Prawnych – tax on cywil law transactions) on the sale of cryptos, originally imposed as a result of a tax interpretation issued at the beginning of April, which sparked outrage in the Polish crypto sphere, at a very unfortunate moment in time when most traders had already filed their tax returns. The announcement went that “as a result of the temporary refraining from collecting tax, there will be extra time for making a more insightful analysis and preparing more systemic solutions aimed at normalising this area of the economy – including in the context of taxes”.
If the Polish taxman had followed up on the interpretation mentioned above, Polish crypto investors – and even hodlers, would have ended up submitting perhaps not tonnes, but kilos, of PCC-related declarations and paying taxes that would significantly exceed the invested capital – in extreme cases even 5 to 10 times the original outlay (though there is no official cap to the PCC in Poland).
The draft regulation (rozporządzenie in Polish) on refraining from the collection of PCC, mentioned above, is set to apply to transactions made between 13 July 2018 and 30 June 2019. A statement that followed was a voice of reason:
“Considering the specificity of transactions involving virtual currencies, which boils down to the trade in those property rights through the purchase, sale and the exchange thereof – i.e. acts of multiple entry into sale and exchange agreements, the party engaged in trading a virtual currency may contract an obligation to pay tax that may oftentimes exceed several times the invested funds.[…] As a result, if provisions of the law on PCC are applied in a strict manner, taxpayers may be burdened with obligations that are impossible to be fulfilled, leading, in many cases, to property confiscations and, thus, infringement of the principle of [personal] property protection enshrined in the Constitution .”
The fact that Constitution is mentioned may be crucial in the context of the Polish government’s moves related to the Ministry of Justice’s interference with the Constitutional Court’s line-up and the infringement procedure launched by the European Commission to defend judicial independence in Poland – widely commented by international media.