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Opinion piece by Raluca Bontaş, Partner, and Catalin Barbu, SeniorConsultant, Global Employer Services, Deloitte Romania
Interest in virtual currencies has grown in scale in recent years. According to recent estimates by a trading platform, the number of cryptocurrency users increased by more than 10 million globally between December 2020 and January 2021. In Romania, the community of cryptocurrency users is booming too, so questions arise more and more often about the obligations to declare and tax the income obtained from transactions with virtual currencies. Among the most common questions are those related to how income is declared and taxed, the amount subject to taxation, and the time when the income becomes taxable.
In Romania, transactions with virtual currencies were first regulated in 2019, through Law 30/2019, which introduced provisions in the Tax Code on taxation of income generated from such transactions. According to these regulations, the proceeds from the transfer of virtual currency fall under the category of income from other sources and are subject to a specific tax regime for this category, with certain peculiarities. One of the peculiarities is that the determination of the applicable income tax and social contributions is the responsibility of those who generate the income, and not the responsibility of those paying out the income (as is the case for other income in the same category). Even for trades made through the trading platforms, the reporting obligation remains the responsibility of users of the platform.
How is income declared?
Thus, individuals deriving income from these types of transactions have the obligation to declare the income by filing the “Declaratie unica” tax form and pay the income taxes due. This year, the declaration must be filed by May 25 for revenues from cryptocurrency transactions made in 2020 and for those expected to be made in 2021. For taxpayers with tax residence in Romania, the obligation to declare the income from cryptocurrencies through the single declaration exists regardless of whether the income is generated from Romania sources or from foreign sources.
As income from cryptocurrency trade is considered income from other sources, the gains from cryptocurrency trades are subject to income tax and the health insurance contribution (CASS), but not to the social security contribution (CAS).
With respect to income tax, a 10% flat rate applies to the gains from virtual currency transactions, and not to the gross income. Therefore, the purchasing costs of the cryptocurrency are subtracted from the selling price to determine the gains that are subject to tax. In addition, direct transaction costs may also be deducted (in this context, fees for various trading platforms or network transaction validation fees for direct transactions between users – the so-called “gas fees “) may also be deducted.
The current tax form declaration stipulates that for this income type generated in Romania, only the realized gain (the net gain) is entered (with all allowable deductions being made before data is entered in the declaration). On the other hand, for income obtained from a foreign source, deductions must be reflected in the declaration (by introducing gross income and deductible expenses/amounts).
Earnings of less than 200 lei/transaction are tax-exempt, i.e. there is no obligation to declare the income, but only if the total earnings in a fiscal year do not exceed the level of 600 lei.
With regard to CASS contributions, for 2020 the contribution is due only if the total income achieved (either only from transactions with virtual currencies or cumulatively with sources of income other than salaries and wages) is equal to or greater than 12 times the gross national minimum wages (for 2020, the ceiling is 26,760 lei). The 10% CASS rate applies to this ceiling, so this year the amount due to the health contribution account is 2,676 lei, regardless of the level of earnings (once they exceed the above-mentioned threshold).
Issues requiring further clarification
In relation to the above mentioned particularities, a relevant aspect, which still raises difficulties of interpretation, is that of the time at which the recipient of the income must determine the gain to be declared. In principle, the time should coincide with the time when the conversion from cryptocurrency units to units of a conventional currency or FIAT (lei, euro, dollars, etc.) takes place. However, this is hampered by the complexity of trading platforms that make available to users both electronic wallets, in which they can store cryptocurrency units, as well electronic wallets for FIAT storage. Thus, transactions involving the conversion of virtual currency into conventional currencies are, as a rule, initially reflected in the platform, the FIAT funds can then be withdrawn into personal bank accounts.
In principle, the operation of conversion from crypto to FIAT without transferring the currency from the platform to a bank account does not provide a real, tangible benefit to the beneficiary (as a rule, the funds can only be used for the purpose of purchasing cryptocurrency units as long as they are in the management within the platform). Consequently, the mere conversion operated within the platform should not trigger income taxation. This occurs only when the funds are transferred from the platform back to a person’s bank account.
The particularities of each trading platform must also be considered. Mechanisms behind a simple conversion from cryptocurrency to conventional currency can be complex and are not always visible to users to be able to determine with certainty the moment when the benefit transfers from the virtual realm into the tangible, regulated environment. For example, transactions with cryptocurrencies are reflected directly within the bank account that is linked to the e-wallet in which the FIAT is stored in the trading platform or application (as opposed to transactions that take place solely inside the platform, without reflecting transactions in the bank account) then each transaction is reflected in this bank account which operates in the regulated environment, triggering taxation by bringing the funds into the regulated and visible sphere for the tax authorities. Therefore, the authorities may consider that in this case, even the mere conversion and displaying of these funds as FIAT within the trading platform constitutes a time when income becomes taxable.
A potential counterargument for this approach is that such an account is not entirely under the control of the beneficiary (but of the platform), including limits on the amounts expressed in conventional currencies that can be withdrawn. But even such a counter-argument raises other questions, which, in the absence of specific provisions of the tax law, further complicate the determination of the time of taxation. In addition, we must also consider the continuous evolution of the developments within these platforms, given that some of them allow the purchase of goods and services directly from the platform or through the issuance of cards by these entities. In such situations, we can no longer talk about a lack of tangible benefits.
Therefore, considering the frequent changes in this field, the current fiscal framework for cryptocurrency operations requires a continuous reinterpretation to be adapted to market developments. Since the tax burden relating to income from cryptocurrencies is placed on the beneficiaries, they are required to ensure that they make a correct determination on the abovementioned aspects.
The declaration of income from any source and the payment of taxes is an obligation under the current legislation for any taxpayer, except for the categories expressly provided for in the Tax Code, otherwise competent authorities will impose penalties and late interest as established by law. Authorities have already conducted controls and tax audits regarding cryptocurrency transactions, some of the cases ending up in court. Given the expansion of this financial area, it is expected that such tax controls will only intensify in scope and frequency in the upcoming period.
Translated from Romanian by Service for Life S.R.L.