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Cryptocurrency and Digital Assets Tax in Serbia

28/12/2022

About Digital Assets and Their Regulatory Framework

In recent years, we have witnessed significant innovations and an upward trend of investments in various forms of digital assets, which consist of the creation of new forms, as well as various acquisitions, dispositions, and further development of digital assets. Nowadays, many legal systems widely recognize this trend and strive to direct the crypto wave of change into existing or newly developed legal frameworks. The question that is of most interest to everyone involved in crypto and blockchain is how the state treats digital assets from a taxing perspective. That’s why we aim to cover questions such as: are cryptocurrencies taxed or is there any tax on Bitcoin or NFTs? In this text, we will therefore cover exactly which taxes related to digital property must be paid and how are digital assets regulated in Serbia.

Is There a Legal Framework for Digital Assets in Serbia?

Yes, Serbia is one of the countries that have regulated virtual currencies and digital tokens. Namely, the newly adopted Law on Digital Assets is one of the first and most important steps that Serbia has taken to include digital property in its legislative framework, which became applicable starting on 29 June 2021. This date also marks the moment from which new regulations on the taxation of digital assets began to apply. This is why all interested parties must familiarize themselves with how digital assets, which among others include Bitcoin, Ethereum, NFTs, and many other forms of digital assets, are taxed.

What is also of great importance is the fact that the Law on Digital Assets is based on the technological neutrality principle, which means that, although it is essentially focused on blockchain technology, it will apply to other similar technologies that could be developed in the future. This shows the legislator’s intention that the Law on Digital Assets becomes the long-term regulatory framework pillar for all modern technologies that are based on blockchain, as well as other similar technological achievements. In other words, crypto regulation has arrived in Serbia and plans to stay and evolve together with the technology.

What Are Digital Assets?

A digital asset, as a collective term, refers to any digital record of value that can be digitally bought, sold, exchanged, or transferred and that can be used as a medium of exchange or for investment purposes. What exactly does this mean? This means that there are two types of digital property recognized by Serbian Law. Namely, the law classifies digital assets into two categories – virtual currencies and digital tokens.

Virtual currency represents a type of digital property that has not been issued and whose value is not guaranteed by any public authority, which is not tied to a legal tender and does not have the legal status of money or currency but is accepted by natural or legal persons as a means of exchange. It can also be bought, sold, exchanged, transferred, and stored. Digital currencies are most easily described as digital valuables, like gold or diamonds in the real world. Namely, they have a certain value, and they can be a means of exchange, but at the same time, they do not represent a currency.

A digital token, as a type of digital asset, is a digital record that contains one or more property rights. The rights contained in a digital token can be diverse – from claiming a certain amount of money, all the way to management rights and participation in profits, as well as the right to access certain goods or services. Therefore, digital tokens are the type of digital property that guarantees its owner a certain right or service due to the mere fact that it owns it, while the issuer of a token can, at his discretion, incorporate certain rights or services into the token.

One of the important consequences of the distinction between these two types of digital assets lies in the fact that the legislator based the jurisdiction of two regulatory institutions on this classification. Also, this difference is significant for some tax aspects of virtual currencies and digital token transactions. Thus, the National Bank of Serbia will be competent for matters related to virtual currencies, while the Securities Commission will be competent regarding digital tokens.

How Should I Determine Which Type of Digital Property I Possess or Which I Want to Acquire or Invest In?

There is no exact single answer to this question, but it is necessary to assess in each case to which type of digital assets one belongs. However, the big difference between the two consists of the following. In case there are certain rights guaranteed within the digital asset that is reserved for the owner of the digital asset, as might be the case with NFTs, that is probably going to be a digital token. On the other side, if the digital asset has such characteristics that it does not grant specific rights to its owner, then it will most probably be a virtual currency, like Bitcoin[1].

Those who have delved deeper into the world of digital assets will probably wonder what digital assets have mixed characteristics, and how we differentiate between these two types of digital assets in such borderline cases. Our law also recognizes this phenomenon. If a digital asset gives some other rights besides being used for exchange, then it is (almost) certainly a hybrid digital asset, which has the characteristics of virtual currencies and digital tokens at the same time. In this case, both regulatory authorities, the Securities Commission, and the National Bank of Serbia will be competent in all matters related to such hybrid digital assets.

What Else Remains (Un)Regulated?

The Law on Digital Assets does not deny or limit anybody the right to acquire digital property. Thus, natural and legal persons can own digital assets and can trade them, both within Serbia but also abroad. When trading, natural and legal persons may or may not use the services of digital assets service providers that have obtained permission for conducting such activities following the Law on Digital Assets. So, in principle, there are no obstacles to using foreign trading platforms.

Also, mining is recognized as allowed, but it is left unregulated, which means that individuals and legal entities can do it freely. However, it is important to keep in mind that tax regulations recognize mining as a way of acquiring digital assets. We will discuss this topic in more detail below.

Additionally, one of the goals of issuing digital assets could be the financing of projects and business ventures. Therefore, anyone who wishes to issue digital tokens and advertise the initial coin offering (ICO) to the public must publish the so-called white paper. A white paper is a document that contains information about the issuer, the digital asset itself, risks associated with the digital asset, etc. This paper should enable investors to make an informed investment decision. A white paper is issued and published in a much simpler procedure than a prospectus when issuing financial instruments, but the logic behind its issuance is almost identical. This type of financing can therefore be appropriate for small and medium-sized legal entities, as well as for startups that seek financing but are not ready to issue securities or operate in the form of a joint stock company.

Following we will analyze topics such as – how to pay tax on cryptocurrencies, i.e. if there is an obligation to pay tax on bitcoin or tax on NFT, but also when should the tax be paid. In the rest of this text, we will present all the important topics and aspects of the crypto tax.

TAX TREATMENT OF DIGITAL ASSETS

Taxation of Natural Persons’ Income Realized Through Buying and Selling Cryptocurrencies

What is a decisive fact that determines the obligation to pay tax on cryptocurrencies and digital tokens? The Law on personal income tax stipulates that all income coming from the sale of digital assets is considered a capital gain and is being taxed at a tax rate of 15%. Therefore, the decisive fact that represents the basis for taxation (taxable event) is the trading of cryptocurrencies and digital tokens itself. This means that the obligation to pay capital gains tax may arise in case of realizing a certain profit from the sale of digital assets. What exactly is that certain profit, i.e. does the sale of digital assets always involve paying taxes?

Profit implies the existence of a positive difference between the two prices – one price at which the digital asset was originally bought by the seller (“Purchase price”), and the current price at which the digital asset is sold to the buyer (“Selling price”). For example, if you sell a certain coin for EUR 50, and you acquired it at a purchase price of EUR 20, the obligation to pay capital gains tax is related to the difference between these two prices, that is, to the profit of EUR 30. That being the case, this tax on digital assets is determined by the amount of profit obtained (tax base), at a rate of 15%.

On the other hand, if the sale of the digital asset did not generate a profit, that is, if it was sold at the original purchase price or even at a lower price, there is no capital gain (i.e. profit), and there is no obligation to pay taxes. For example, if the virtual currency was bought at EUR 20 and later sold at EUR 10, no profit was made, meaning that a capital loss occurred. The “good news” is that there is a possibility to offset this kind of capital loss with other capital gains.

Also, to determine whether a profit was made by the sale of digital assets or not, it is necessary to document the purchase price, that is, the price at which the seller (taxpayer) purchased the exact digital asset. The confirmation of a certain platform or exchange can serve as proof of the paid purchase price.

It is important to note here that since the law prescribes the obligation to document the purchase price, the question arises as to what is to be taken as the purchase price if there is not a single document based on which the taxpayer can prove at what price he bought the digital asset. The Tax Authority has not issued more detailed views and guidelines regarding the relevant evidence that a natural person can provide to the tax authorities, considering that the seller may have no evidence of the purchase price. In this case, it can be expected that the Tax Authority would consider that the selling price amounts to RSD 0,00. Therefore, if the seller cannot document the price at which it originally acquired the digital asset, the whole amount of the selling price would be considered profit and would be taken as a tax base for determining the personal income tax.

In addition, the fact that certain individuals acquired their digital assets years ago and that all transactions were made through certain digital/mobile platforms and applications for trading digital assets where there is often no trace of the purchase and sale should be considered. In Croatia, this problem is explicitly solved simply – if the cryptocurrency was acquired more than 2 years ago, no capital gains tax is paid when exchanging it for money. However, our legislator was not initially guided by this example.

On the other hand, Serbian Law on Personal Income Tax, among other things, recognizes a general exemption from the obligation to pay capital gains tax in the case when the profit was realized by transferring rights, shares, or securities that were owned by the transferor for at least 10 years continuously. Although the competent authorities have not issued an official opinion on this matter, it can be expected that this exception applies to digital assets as well. For example, if you bought bitcoin 11 years ago and now decide to sell it, you may be exempt from capital gains tax on this basis.

However, in the world of digital assets, a period of 10 years can be very long, and the Croatian legislator’s solution seems to be a more effective way to overcome the practical problems that taxpayers may face.

Taxation of Personal Income Obtained Through Digital Assets Mining

The Law on Personal Income Tax recognizes mining as one of how digital assets that can be acquired. In this case, the question arises whether natural persons must pay taxes for mining.

In the case of acquisitions of crypto assets through mining, the purchase price of digital property is most often considered to be equal to the expenses incurred by the miner in connection with the mining which can be documented. Therefore, the tax is paid at the rate of 15% on the profit, meaning the difference between the selling and purchase price.

For example, a documented cost related to mining could be the bill for used electricity, which is being consumed to a much greater extent during the mining process. In that case, the taxpayer could claim that the purchase price of the digital asset is exactly the amount of paid electricity that was used for mining purposes. Thus, in the case of the sale of the digital asset, the owner of the digital asset could effectively reduce the tax base by stating that the purchase price of the digital asset amounts to the paid electricity expenses.

Therefore, to prove the purchase price, it is important to keep all invoices, receipts, bills, and other documentation that could prove these purchase costs. What remains to be resolved in the practice is how it will be determined what part of the electricity bill should be recognized as an expense related to the acquisition of cryptocurrencies through mining. It could be the part of expenses in the bills that would show the increase in electricity consumption compared to the average consumption in previous months. Also, it could be argued that the purchase of mining equipment itself also represents the acquisition (purchase) cost incurred by the miner. The answers to these practical questions are not yet known, so it is up to the Tax Authority to issue more detailed guidelines and opinions regarding these questions.

The Law also prescribes an exception to the above rule when the taxpayer has already paid tax on the so-called other income for the acquired digital property, in which case the purchase price to determine capital gain is the tax base on which the tax on other income was paid. What does this mean practically? Namely, given that miners generally receive a reward for their work in the form of a certain percentage of digital assets, such a relationship is usually considered an informal contract between the miner and the initiator of the transaction, by which the miner will provide a transaction confirmation service, for which it will receive a predefined compensation in digital assets from the initiator of the transaction. This exception can be useful for those holders of digital assets who have already paid taxes this way before. This type of taxation used to be the way digital assets acquired through mining were taxed before the tax laws amendments. Specifically, such transactions were classified as other incomes and were taxed at a rate of 20% plus the corresponding contributions, which increases the effective tax burden. What remains an open question is whether digital assets acquired through mining are still, even after the amendments of the law, taxed as other income. In other words, it is unclear whether the first taxable event is the moment of acquiring the digital asset through mining (other income) or it is the moment of disposing of the digital asset (capital gains). However, the Tax Authority has not yet issued a single official opinion regarding this issue, so it remains yet to be seen how this issue will be resolved.

Acquiring Digital Assets From the Employer

What could be of great interest to employers, as well as the employees themselves, is the law introducing the possibility to pay bonuses and other incentives for digital assets. Namely, the law recognizes the possibility of paying parts of employees’ wages in digital assets, which opens countless opportunities for creative employers. By paying the salary in crypto, employers can offer innovative incentives to their employees – from acquiring shares to various forms of bonuses, rewards, or other incentives encompassed in cryptocurrencies and digital tokens.

One similar example is the Agreement that the football superstar Lionel Messi’s concluded during his transfer to the ranks of the Paris Saint Germain soccer club. Namely, Lionel Messi received a certain amount of compensation in the $PSG digital tokens as part of the transfer fee. This digital token, issued by the club itself, contains various rights available to its holders, related to the functioning and decision-making of the club itself. This kind of token is also available for the club’s fans who can purchase it and exercise the rights it embodies. Some of the benefits offered by this digital token are the right to vote on various decisions, addressing the players before certain matches, influencing the look of the jerseys, receiving prizes, as well as other rights and benefits.[2]

Are There Any Crypto Tax Exemptions?

When introducing new tax solutions, legislators usually foresee new tax incentives, to encourage taxpayers to submit adequate tax returns and to reduce the “negative” effect of the law on taxpayers’ incomes.

In the case of crypto too, the legislator has foreseen how taxpayers can avoid paying capital gains tax. Namely, if the taxpayer sells digital assets and then within 90 days invests the received money in the company’s share capital in Serbia, it can be exempted from 50% capital gains tax.

Also, even in the case, the taxpayer makes the described investment within a period longer than 90 days, but no later than 12 months from the date of sale of the digital property, there is relief consisting of the right to refund 50% of the paid tax. This way, it is possible to finance and start a private business, that is, to co-finance an existing company in Serbia, in such a way as to make real savings through tax reduction, under conditions prescribed by law.

If the Digital Assets Are a Type of One’s Property – Is It Subject to Property Tax?

In short, yes, that is in cases of acquisition of digital assets by gift and inheritance. Nonetheless, the Law on Property Taxes prescribes an exemption from this obligation for gift recipients and heirs of the first order of inheritance (e.g. in the case when a parent gives digital property to his child), while heirs and gift recipients of the second order of inheritance pay tax at a lower rate of 1.5% (e.g. if a child gives his parents Ether, or a brother gives Bitcoin to his sister). Other persons who acquire digital assets based on inheritance and gifts pay the tax at the rate of 2.5%.

Also, it should be important to know that digital assets that are acquired by the heir or gift recipient from the same person within one calendar year in the value of up to RSD 100,000.00 are exempt from taxation.

How Is the Tax Paid?

In the case of achieving a capital gain from digital assets, the natural person who realized the capital gain is obliged to submit a tax application no later than 120 days after the end of the quarter in which the income was realized. In other words, if the owner of a cryptocurrency earns income by exchanging cryptocurrency for money or one cryptocurrency for another, the person who thus made a capital gain must file a tax application within 120 days from the end of that quarter.

The tax on capital gains is ultimately determined by the decision of the competent Tax Authority, based on the information contained in the tax application, as well as based on other information available to the Tax Authority. A tax application must be filed both in the case of a realized capital gain and in the case that a capital loss occurred. After submitting the tax application, the Tax Authority issues a decision giving the taxpayer 15 days to pay the tax determined in the decision. If the taxpayer does not submit a tax application, there is a risk that the tax liability will be determined by the Tax Authority based on the data it has at its disposal. This could often lead to the Tax Authority determining the tax at its discretion.

It is expected that the Ministry of Finance will start issuing closer opinions and further instructions related to crypto, as a more dynamic business and overall crypto environment await us in the coming period. However, it can be said that a great deal of work has already been done. Digital property has been a hot topic in Serbia for years, and it might become even more important now that a comprehensive legal framework has been adopted.

[1] Answers to Frequently Asked Questions Regarding the Digital Assets Act, Securities and Exchange Commission, September 2021, available in Serbian at the link shorturl.at/etVZ7
[2] More about PSG tokens on the following link https://en.psg.fr/fans/psg-fan-token

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