The world of cryptocurrencies is like the Wild West. Pioneers are exploring new territories and there are few rules to follow. Developers and crypto-economic-legal-philosophical researchers (Finney, Maxwell, Brown, Szabo ...) have been the driving force. From their point of view, the appeal of blockchain technology lies precisely in its unambiguous and extremely transparent rules, where all the rules of operation are known in advance and are non-negotiable for all. Initially, the main attraction of cryptocurrencies for speculators was the lack of tax rules, but this is now changing.

Digital assets called virtual currencies or crypto-assets, usually based on cryptography and distributed ledger technology, include both payment cryptocurrencies, as the most widely used form of virtual currencies (e.g. bitcoin), as well as all other forms of cryptographic tokens (e.g. Virtual currencies) pose a major challenge for various regulators around the world due to their specific technological characteristics compared to other forms of assets.

From the perspective of equal treatment in the taxation of taxable persons' income, it may be problematic to tax the profits of individuals from trading in virtual currencies when the trading reaches the activity threshold, while the profits are not taxed when the trading does not reach the activity threshold. The current Draft Tax Legislation would partially address this.

The taxable amount of a virtual currency transaction is determined by the market value of the virtual currency. Therefore, the fluctuating value of virtual currencies and their lower liquidity compared to traditional currencies are also features of virtual currencies that are important from a tax perspective. Income is usually generated in a virtual currency and the taxpayer has to pay tax in EUR, often at a different moment from when the income is generated. In this case, the value of the virtual currency may change significantly from the moment when the person receives the income (and the tax liability is established) to the moment when the tax is due. Taxpayers therefore bear both the exchange rate risk and the risk of failing to convert the virtual currencies they earn into EUR, or of not finding a buyer when selling virtual currencies, or of obtaining a very low price for large quantities due to the small depth of the market. An additional complication may be the restriction on the disposal of virtual currency income, while for tax purposes the income is deemed to have been received.

In contrast to mining, which serves to verify transactions by solving a large number of mathematical problems, Staking provides a so-called Proof of Stake (PoS)[1] . Although Staking requires less investment in resources than mining, the economic activity of Staking is similar to mining and should therefore be subject to the same tax consequences. With Staking gaining momentum, there is an opportunity for Slovenia to introduce favourable tax legislation for this activity and attract new investors.

Cryptocurrency lending is person-to-person lending that directly links borrowers and lenders. Crypto lending platforms accept different types of cryptocurrencies as collateral and give either cash or cryptocurrency to borrowers in return. The FURS Explanatory Note does not currently include a description of how such remuneration is taxed.

Decentralised Autonomous Organisations (DAOs) are the latest trend in raising money and bringing together ad hoc communities for business or charitable purposes. A DAO is an organisation that is collectively owned by its members and managed and run by smart contracts implemented through blockchain technology. A DAO can have a legal form (usually a foundation, LLC or LLP) or be unincorporated. As explained by the FURS[2] , the key to determining the type of cryptographic token (investment, user or payment or cryptocurrency) is to assess its content. In determining the content, the rights that the token confers on its holder are taken into account. The key question for tax purposes is therefore whether the token is used for anything other than fundraising and speculation.

Certain cryptocurrency exchange platforms or investment platforms only keep data for a short period of time. It may be that the exchange platform no longer exists when an individual wants to prepare his/her tax return. It is therefore important for an individual to keep separate records for each cryptocurrency transaction, including: the type of cryptocurrency, the date of the transaction, whether the cryptocurrency was bought or sold, the number of units, the value in EUR (based on the date of the transaction), the total number of units held, bank statements and the addresses of digital wallets.

The boom in cryptocurrency investments increases the need for tax reporting. The FURS has a duty to educate cryptocurrency investors - including income payers - and to ensure that all parties have the information they need to comply with their tax obligations. We can see that much of the information is already available. Although the tax rules on cryptocurrency reporting are not yet fully clarified and are likely to evolve over time, investors should continue to comply with existing tax rules. In addition, cryptocurrency investment platforms, such as exchange platforms, need to find effective tax reporting solutions that will allow them and their investors to remain compliant ahead of the coming regulatory waves.

[1] Learn more about the differences between PoW and PoS at https://www.bitdegree.org/tutorials/proof-of-work-vs-proof-of-stake/

[2] FURS Explanatory Note of 25.8.2021, Tax treatment of public offer of investment in crypto tokens

Source: Pravna Praksa, nr. 20/2022

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