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The Financial Administration is taking cryptocurrencies under the magnifying glass

18. 5. 2023Ludmila Benešová

The Financial Administration is aware that the taxation of cryptocurrencies is not clearly regulated in the law. It is also aware of the fact that there are many active cryptocurrency enthusiasts in the Czech Republic who sometimes fail to declare the income from their “crypto-investment” in their tax returns.

The fact that the Financial Administration has started to address this area is evidenced by recent rulings of the Regional Court, in which the court expressed its opinion in line with the CNB’s position that virtual currencies such as bitcoin do not constitute ordinary money. In the rulings in question, the individuals did not include the income from trading in cryptocurrencies in their tax return because they mistakenly believed that they could claim an exemption for the exchange rate gain on the exchange of money from an account held in a foreign currency.

This is not an isolated activity on the part of the Financial Administration in the cryptocurrency area. Another Regional Court dealt with a situation involving the supply of computing power from the Czech Republic to the US, which was then used to mine cryptocurrencies. In this ruling, the Financial Administration went to considerable lengths to gather evidence and prove that cryptocurrency mining was in fact taking place.

The Financial Administration also issued Information on the tax assessment of cryptocurrency transactions (e.g., bitcoin) last March, which also shows that it has started to scrutinize this area more intensively. The Financial Administration has also carried out a number of tax audits in the past year in which significant undeclared income from cryptocurrencies has been identified.

Do you still say that the risk of the Financial Administration will begin to question you personally is not high? You may be wondering how the Financial Administration could know that you own and trade cryptocurrencies? Quite simply – from available public registers, such as the Land Registry, and incidentally from cryptocurrency platforms that the Financial Administration can also access. So, if you have bought a property or a luxury car with the profits you have earned from trading in cryptocurrencies, for example, and the income you have reported on your tax return does not correspond to the income you could have earned from your job or business, you could very easily find yourself in the crosshairs of the Financial Administration. Banks are another source of information for the Financial Administration. Specifically, this refers to situations where you have transferred funds from a crypto bank to your current bank account. This is because banks are obliged to identify transactions and deals with higher amounts. If they fail to identify the transaction, they pass this information to the Financial Analysis Authority to investigate whether a tax evasion crime has been committed.

If the lines above have prompted you to address your situation, you are on the right track. Even the Financial Administration prefers a procedure that puts the least burden on the taxpayer. For example, an additional tax return can be filed and the income can be declared and tax paid additionally. And maybe the tax will not be so high if you use the appropriate method for allocating expenses. And what if you actually end up with a loss – do you also have to report that on your tax return? More in our next article…

Have you decided you would rather proactively resolve and rectify your tax liability yourself, but do not know how? Our specialists in the Personal Income Tax team will be pleased to discuss your situation and related tax obligations with you.

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