19 Jul 2021

Digital Property and Tax: Tomorrow is Now?

In the past few years, virtual currencies have become very attractive to investors across the globe.  Their importance for world capital and money flows is constantly growing, which resulted in the need for them to be regulated.  That was the precise reason for the Republic of Serbia to adopt the Digital Property Act at the end of last year.  Its significance is recognized in defining digital assets for the very first time, thus introducing them into regulated economic flows.

However, this Act alone could not resolve all issues and questions related to digital property.  For example, the Digital Property Act does not regulate the taxation of such property.  As we can probably agree, this is an important issue for those who use it to conduct business, but also for the state where the business will take place.  In order to continue to keep up with the latest trends, Serbia is changing a whole set of tax acts.

Please note that the Digital Property Act divides digital assets into virtual currencies and digital tokens.  This division is not relevant in the context of digital property taxation with exemption when paying Value Added Tax (“VAT”), which will be emphasized and clarified below.

Personal Income Tax Act

Anyone who transfers digital assets is obliged to pay personal income tax.

In particular, income from the transfer of digital assets is taxed with capital gains tax.  Capital gains, or losses, is the difference between the selling price and the purchase price, achieved through the transfer of digital assets.  The capital gains tax rate is 15%.

For example, a taxpayer bought coin X for 200 euros and sold it for 250 euros.  The difference between the sale and purchase price is 50 euros so the basis for calculating the capital gains tax is 50 euros.

In the case of a transfer of digital assets acquired by the taxpayer through participating in the mining of digital assets, the purchase price is equal to the total costs incurred by the taxpayer in connection with the acquisition of the digital assets in question, but only if they can be documented.

Clearly, a number of questions arise here.  So far, the Tax Administration and the Ministry of Finance have not issued instructions or guidelines on how to prove prices, which may present potential difficulties.  Also, the Tax Administration requires that all documentation is in the Serbian language, but stock exchanges and platforms for trading digital property are mostly abroad, so they send reports in English which can be an additional problem or at least a cost.  There are difficult questions when it comes to mining as well.  Namely, the purchase price should include the costs of purchasing computer equipment, electricity, etc.  But, for example, how can one separate the electricity used for mining from that used for household needs?

If not adequately addressed, all issues mentioned can lead to significant costs for taxpayers.  Namely, if the purchase price cannot be documented, the tax base could be the entire income that the taxpayer realizes from the sale.

For example, a taxpayer bought coin X for 200 euros and sold it for 250 euros.  If the taxpayer does not document the purchase price of 200 euros and in the manner required by the Tax Administration, the basis for calculating the capital gains tax will be 250 euros, instead of 50 euros.

Obviously, in this case, tax is much higher than in the previous one.  Of course, it remains to be seen how the competent institutions will solve the above-mentioned issues.  The only thing that can be said for now is that this job will not be easy.

On the other hand, it should be noted that the legislator was not strict when it comes to writing the texts of amendments to this Act.  In particular, the profit that a natural person makes by selling or transferring digital property will not enter the basis for determining the annual personal income tax.  Furthermore, some tax reliefs are prescribed as well.  Namely, if a natural person invests the funds generated from the sale of digital assets in the share capital of a company or investment fund whose center of business or investment activities is in Serbia, he/she acquires the right to a 50% reduction in capital gains tax.  The procedure and manner of achieving this tax exemption are still to be regulated, but it is obvious that legislator intents to increase investments and accelerate the recovery and development of the economy in Serbia.

Corporate Income Tax Act

A legal entity that achieves capital gains by selling digital assets will include those capital gains in the corporate income tax base.  That will not be the case if legal entities obtain a license for providing services related to digital assets.

When it comes to the regulation of personal income tax, a legal entity acquires the right to tax relief by not including capital gains achieved by selling of digital assets in income tax base if it invests funds from the sale of digital assets in the equity capital of a company or investment fund whose business center or investment activities are in Serbia.  The condition that must be met is that the investment was made in the same tax period when the legal entity sold the digital property.

Property Tax Act

Transfer of digital property by inheritance or a gift is also taxed.  Same as before, tax rates, in this case, depend on the relationship between the testator, or the donor and the successor i.e the recipient of the gift. What does this mean?  Taxpayers who are closely related to the testator i.e donors will pay inheritance and gift tax at the rate of 1.5%.  In other cases, inheritance or gift tax will be paid at the rate of 2.5%.  In some cases, the tax will not be paid at all (successor of the first heredity order, spouse and parent of the testator, i.e. gift recipient of the first heredity order and spouse of the donor, etc.).

Value-added Tax Act

The transfer and sale of virtual currencies are exempt from paying VAT, without the right on deduction of the previous tax.  As we emphasized at the beginning of this article, the Digital Property Act distinguishes between virtual currencies and digital tokens, so it is important to note here that the exemption applies only to virtual currencies, not to digital tokens.

It is noticeable that legislators tried to be comprehensive but also fair, without the desire to impose large levies on taxpayers.  On the other hand, there is a clear tendency to use the expansion of cryptocurrency businesses to rebuild and develop the economy, which is of great importance, especially given that Serbia is slowly recovering from the COVID-19 pandemic.  However, it should be borne in mind that this is a new and very complex matter and that we have a long way to go before the complete regulation of digital assets.