What you should know about Bitcoin regulation

Do you have a Bitcoin wallet?

There are some key things you should know. Although the blockchain technology and the Bitcoin cryptocurrency were created by Satoshi Nakamoto ten years ago and there are now more and more Bitcoin users, the regulation of Bitcoin is still not completely clear and can depend on the country.

However, you should be aware that you might be responsible for paying taxes if you are dealing with Bitcoin or other digital currency.

Our article will discuss the latest changes in its regulation in the EU and more specifically, Bulgaria.

Bitcoin regulation in the EU

Last month, it became clear that the European Union is planning to implement comprehensive cryptocurrency regulation by 2024. The new regulatory framework is expected to enable the uptake of distributed ledger technology (DLT) and crypto-assets in the financial sector.

Currently, cryptocurrencies are legal throughout the EU, but specific regulation and standards vary among countries, similarly to the United States where laws governing the crypto industry vary from state to state, and federal authorities also interpret and regulate them differently.

In matters of taxes, most of the European countries are guided by the decision of the European Court of Justice of 2015, according to which the exchange of cryptocurrencies should be exempted from value-added tax.

Moreover, all European countries have adjusted their regulatory standards to the recommendations issued by the Financial Action Task Force in June 2019. According to the FATC, any crypto site should comply with strict Know Your Customer and Anti-Money Laundering standards, as well as sharing data with the regulator.

In January 2020, the 5th EU Anti-Money Laundering Directive came into effect. It requires the registration of cryptocurrency exchanges with financial regulators and the transfer of client wallet addresses to them. In general, the EU is gradually tightening its regulation of the cryptocurrency market.

Bitcoin regulation in Bulgaria

Cryptocurrencies are not defined as financial instruments or electronic money, so no license is required to do business with them.

In Bulgaria, as in the EU, they are treated in the same way as income from the sale of financial assets - they are taxable.

To determine the taxable income, the sum of the profits realized during the year for each specific transaction is taken and reduced by the sum of the respective losses.

The realized profit or loss is determined by reducing the selling price by the acquisition price of the financial asset. Finally, the income, which has been thus calculated, is declared with the Annual tax return.

Although the virtual currency isn’t an official one, most jurisdictions require you to pay taxes on income, sales, salaries and capital gains on anything of value, including Bitcoins. Everyone has a responsibility to ensure that they comply with tax and other laws or regulations issued by the government and / or local municipalities concerned.

Declaring Bitcoin

Here is what you need to declare:

1. Cryptocurrency transactions

   The income from such transactions is declared in the Annual tax return. Taxable income is present when a profit is realized (meaning that the selling price exceeds that of the acquisition). The obligation to declare is waived if no transactions have been made during the tax year.

2. Transfer (exchange)

   If against one virtual currency is purchased another and income has been realized from this exchange, this income is taxable.

3. Purchases made with cryptocurrency

   If you purchased a virtual currency some time ago, its value (the price of Bitcoins, for example) has increased and then you have purchased an asset directly with it, then the difference between the purchase price and the value of the asset is not taxed or declared. This is considered an increase in the purchasing power of the cryptocurrency, as is the purchase of GBP, for example, which then rise in price. However, this only applies if it happens once and is for personal use.

   Upon inspection by the NRA you must be able to present proper documents for these purchases. If it is established that you are conducting transactions for commercial purposes, the realized profits will be declared and taxed. The same applies if these purchases are made with coins acquired by mining.

4. Payment received in cryptocurrency (for example, for a service or product)

   When the payment of a certain type of income subject to taxation is in cryptocurrency, the taxation is again in accordance with the current tax rules for the respective income.

5. Mining of cryptocurrency

   The NRA accepts that the mining of cryptocurrency is not a separate type of income. The general rules apply to taxation.

   Individuals engaged in the mining of cryptocurrency are treated as traders within the meaning of the Commercial Law. As a sole trader, one is taxed at 15% on profits. For legal entities, the taxable income is formed in accordance with the Corporate Income Tax Act.

Specific aspects

1. If throughout the year you have bought more cryptocurrencies than you have sold, owning the financial assets will have no tax consequences.
2. To determine the tax base in BGN, the reference rate of the respective platform on which the cryptocurrency is traded and the days of the realized transactions or conversion are taken.
3. Cryptocurrency trading is considered as a supply of financial services. When they represent the main activity (together with other revenues from supplies of financial and taxable services or goods), as soon as the tax bases of these supplies of financial services exceed BGN 50 000 for 12 months, you are obliged to register them under the VAT Act. According to the NRA, when the turnover is reached for a period not longer than two consecutive months, including the current one, you are required to submit an application within 7 days from the date on which this turnover was reached.

Recent law changes regarding Bitcoin

On 12.08.2020 a decision was adopted by the Council of Ministers, which reads as follows:

Those providing services for Bitcoin exchange (or of virtual cryptocurrencies), as well as providers of digital wallets, are required to register with the National Revenue Agency, declaring their activities. The registration fee is BGN 50.

The register is created for achieving greater clarity of this specific sector and limiting the possibilities for money laundering and other illegal practices.

Conclusion

Even if you are not using your digital wallet for doing business, you should have a look at the current laws and regulations regarding Bitcoin and Bitcoin transactions so that it’s clear whether you have to pay any taxes or not. This will help you avoid sanctions and problems with the Bulgarian tax administration.

If you need to consult a good lawyer, contact us. We will be happy to assist you on these and all other kinds of legal matters.