Taxation of crypto-investors in Russia

. In this article, we explain when it is necessary to declare income from cryptocurrency transactions and what the responsibility is in case of tax evasion.

What can be considered cryptocurrency from a legal point of view

In Russia, the crypto market is regulated by the law “On Digital Financial Assets, Digital Currency and Amendments into Certain Statutes of the Russian Federation” (“On digital financial assets”). The draft law existed for about two years but came into force on January 1, 2021.

On December 1, 2020, the Russian government submitted to the State Duma a bill “On Amendments to Parts One and Two of the Russian Tax Code,” which regulates the declaration of transactions with crypto assets. On February 17, 2021, the State Duma passed the bill in the first reading. According to Pavel Krasheninnikov, the Chairman of the Committee on State Building and Legislation, the bill may be considered in the autumn session.

According to Russian legislation, cryptocurrency is property. Transactions with the asset are allowed, but paying for goods and services with cryptocurrency is not.

This definition of cryptocurrency is stated in Article 2 of the law “On Digital Financial Assets.”

“A digital financial asset is a property in electronic form created using cryptographic means. The ownership of this property is certified by making digital records in the register of digital transactions. Digital financial assets include cryptocurrency and tokens. Digital financial assets are not a legal means of payment on the territory of the Russian Federation.”

In June this year, Rosfinmonitoring ordered the creation of a module to track cryptocurrency transactions, and in July selected a contractor to perform this task. The development will be taken over by a structure controlled by Sberbank. This is confirmed by data from the government procurement website:

All these signs indicate that cryptocurrency will be taxed in Russia. This is why it is so important to understand how to use crypto assets without violating the law.

The amount of tax on cryptocurrency in other countries:

• In the U.S., the tax rate on cryptocurrency is the same as the capital gains tax rate. It ranges from 10 to 37% for short-term capital gains (up to 365 days) and from 0 to 20% for long-term capital gains (more than 365 days).
• In accordance with Decree No. 8 “On the development of the digital economy,” citizens of Belarus do not have to pay tax on transactions with crypto-assets until January 1, 2023.

What tax applies to transactions with cryptocurrency

Cryptocurrency is considered property, so income from transactions is subject to personal income tax. For amounts from 600 thousand to 5 million rubles, a tax rate of 13% applies. On January 1, 2021 changes to chapter 23 of the Tax Code came into force: income, which exceeds 5 million rubles, shall be taxed with personal income tax at the rate of 15%.

One should consider that 5 million rubles is a cumulative amount. That is, throughout the year, the amount of income received from crypto investments is accumulated, and as soon as the profit exceeds 5 million rubles, further tax is calculated at the rate of 15%.

The introduction of a tax on cryptocurrency does not mean the prohibition of crypto-assets in Russia.

According to regulators, digital coins are often used for tax evasion, so control over transactions is planned to strengthen.

How to calculate the tax base

The tax base for operations with cryptocurrency is defined as the difference between income from sale and expenses for acquisition, in rubles at the exchange rate of the Central Bank on the date of sale.

For profits up to 5 million rubles, the rate is 13%.

For example, an investor bought one bitcoin on June 18 at the rate of $32 000 and sold it on August 28 at the rate of $49 000. The profit was $17 000. This sum is to be multiplied by the rate of 13%. Calculations result in $2210, or 161 846 rubles at the CB exchange rate as of August 28.

For an aggregate profit of over 5 million rubles, the rate is 15% on the excess amount.

Let's assume an investor bought 5 bitcoins at an average price of $32 000 and sold assets at $49 000. The profit was $85 000, which exceeds the 5 million ruble threshold. Therefore, we multiply the amount of income up to the limit of 13%, and the tax on the rest of the income over 5 million at a rate of 15%: we get $ 12 750 or 931 522 rubles at the rate of the Central Bank on the date of the transaction.

The tax is charged only after the sale of the cryptocurrency. If an investor does not record a profit and keeps crypto assets in their wallet, no tax is due.

When and how to file a return

April 30 is the date to file a return of income from crypto assets to the tax office at the place of registration. You can apply in person or use the Personal account of the taxpayer on the website of the Federal Tax Service. The tax must be paid by July 15. In order to report to the tax authority for income from cryptocurrency, it is necessary to fill out a 3-NDFL declaration (personal income tax return). Such a return is filed on income on which the tax was not paid by the tax agent, for example, employer or company customer. The document must be enclosed with a report on the balances on the wallets, a report on the transactions carried out and information about the exchange rates on the date of exchange of cryptocurrency to the Russian ruble.

You can download the 3-NDFL form on the website of the Federal Tax Service. The form must be printed out, filled in by hand, and submitted to the tax office at the place of registration. You can fill in the declaration in the Personal account of the taxpayer in electronic form and sign it with an e-signature. In this case, you do not need to visit the tax inspectorate; it is enough to monitor the status of the receipt and cameral check of the return in the Personal account.

Penalties for non-payment of tax

All penalties stipulated by the Tax Code for non-payment of taxes also apply to crypto-investors. Failure to pay or incomplete payment of the tax is subject to liability under Article 122 of the Tax Code: a fine of 20% of the unpaid amount of tax is imposed on the defaulter.

In addition, the non-payer may be held criminally liable under Part 1 Article 198 of the Criminal Code, if the amount of unpaid taxes exceeds 2,7 million rubles for three fiscal years.

How should a crypto investor report to the tax office for income from crypto assets?

1. Calculate the income from cryptocurrency, which is received for the current fiscal year.
2. Fill out a 3-NDFL tax return.
3. Submit the declaration to the tax office until April 30 in person at the place of registration or on the website of the Federal Tax Service, in the Personal account of the taxpayer.
4. Pay the accrued tax by July 15.

Supplement of 30.09.2021:

Andrey Tugarin, CEO of GMT Legal, comments on the article.

I: How do you assess the consequences of the cryptocurrency tax?

A: In order to assess the consequences of a cryptocurrency tax, you need to analyze the background. Why would the government want to tax cryptocurrency transactions?

Cryptocurrency is initially a very undervalued asset, which by its nature does not need any government involvement. Of course, the technical ability to make transactions anonymously has tremendously increased the demand for cryptocurrency. For any state, uncontrolled and impersonal transactions in the financial sector are a time bomb and, as a result, undermine the national financial system.

These reasons forced regulators in almost all countries around the world to pay attention to cryptocurrency. They began to develop methods to control transactions with this asset. Based on world practice, the priority is to define cryptocurrency at the legislative level and to regulate transactions with the asset: exchange, storage, purchase, and sale. As a consequence of such regulation, there is a burden of tax, in case operations brought income.

Therefore, the introduction of a tax on cryptocurrency means giving it a legal status on the territory of the state. No one collects taxes from illegal assets. This is a positive thing for cryptocurrency holders.

However, there is another side of the coin. In Russia, the circulation of cryptocurrency is very limited: you cannot buy/sell anything, and you cannot advertise such opportunities. Cryptocurrency can be owned, created, and used as an investment asset.

Also, the consequences of the introduction of taxes are manifested in the establishment of penalties for non-payment, penalties for late filing of tax returns, and fines for inaccurate information in the tax return.

I: What is the tax base for cryptocurrency transactions?

A: The tax base is the profit that a person received after making transactions with cryptocurrency. Profit is calculated by deducting expenses from the income received. Let's discuss the actual proof of expenses for the Federal Tax Service (FTS) separately. As of today, the amendments to the Tax Code of the Russian Federation have not yet taken effect. It is difficult for the FTS to understand and accept documentation confirming expenses received, for example, from a cryptocurrency exchange.

Hopefully, the amendments to the Tax Code will form the right approach for the FTS to account for the expense, create all the necessary forms to account for the expense part, and include it in the tax return. Our task is to keep a close eye on changes in the law and offer cryptocurrency holders to legalize the asset itself and profit from transactions in time.

I: Do you have to pay taxes if there is a loss?

A: No, there is no such requirement in the current legislation or in the amendments to the Tax Code.

I: How can you document transactions with cryptocurrencies in order to report to the tax office?

A: Despite the fact that in the Russian Federation the first and so far the only law regulating DFA and DC came into force only this year, a small judicial practice has already formed.

The first and most important thing when solving the problem of documentary evidence is a verified account. Anonymity (as a recent advantage of cryptocurrency) will not allow to submission of any documents to the FTS. Documents should clearly confirm the correspondence of incoming and outgoing transactions, especially when transferring from fiat and back. Otherwise, the Federal Tax Service may question the reliability of the data and an attempt to declare something “extra” or belonging to someone else.

The amendments to the Tax Code contain information on the documents which must be submitted to the Federal Tax Service for reporting, but so far there is no indication of the format of these documents.

Thus, according to the amendments, taxpayers have the right to submit to the Federal Tax Service:

• a report on obtaining the right to dispose of digital currency including through third parties;
• a report on transactions (civil law transactions) with digital currency and digital currency balances.

If the amount of a person's digital currency receipts for a calendar year exceeds the amount equivalent in monetary terms to 600 thousand rubles, this right is converted to an obligation to provide the above documents to the Federal Tax Service.

I: What difficulties may arise when filing a return and paying tax on cryptocurrency?

A: If we are guided by the amendments to the Tax Code, which are predicted to come into force this fall, the difficulty is primarily manifested in the lack of established forms of reporting documents.

Currently, the taxpayer may file only a 3-NDFL form, but it does not contain indications of transactions with digital currency in either the income or expenditure lines. Therefore, taxpayers use wording by analogy, for example, indicating digital currency as "other property."

I: What are the liabilities if you do not file a tax return and do not pay the tax?

A: The most obvious liability is fines.

Also, according to the amendments:

• for missing the deadline for submitting a report on obtaining the right to dispose of digital currency is charged 50,000 rubles;
• for the inaccuracy of the data presented in the report on transactions 10% of the largest amount of either income or debit is charged;
• for non-payment of profit tax from transactions settled using digital currency 40% of the unpaid tax will be charged.

A rule of law is also already in effect, namely the Federal DFA Act, according to which:

claims related to the possession of digital currency are subject to judicial protection only if they are informed of the facts of the possession of digital currency and civil transactions and (or) transactions with digital currency in the manner prescribed by the legislation of the Russian Federation on taxes and fees.

Andrey Tugarin, CEO of GMT Legal