We have been reading about cryptocurrency price surges, mostly about the bitcoin’s, for the last few months. Cryptocurrency price volatility provided both natural and legal entities in this region with the opportunity to invest and make easy money. At the same time, cryptocurrency investment raised a number of questions.
Cryptocurrencies (Bitcoin above all, but others as well) were originally designed as a medium of exchange to be used for real-time direct payments of goods and services with minimum costs, whose purpose was to avoid the limitations imposed by commercial banks and states. Although Bitcoin was developed in 2009, it is still far from having fulfilled the intended purpose since the transactions are performed with a considerable delay (that can even last for a few hours), whereas the transfer costs are still high. In the meantime, cryptocurrencies have found other purpose – to be used for trading (e.g. shares), which has attracted a large number of investors. For the purposes of illustration, the total capitalization of the cryptocurrency market at the beginning of 2017 was approximately USD 20 billion, while one year later it exceeded vertiginous USD 820 billion! At the time of writing this article (end of January 2018), the value is USD 550 billion.
The first economic issue that pops up is the definition of cryptocurrencies in the light of the existing financial regulations in the Republic of Serbia. If we regard Bitcoin as a synonym for any cryptocurrency, it is a decentralized digital currency not regulated by any country. However, it is possible to use it for payments of goods and services and exchange it for conventional currencies. Bitcoin has not been officially recognized as a payment method in Serbia, thus it cannot be regarded as money in a real sense. Hence, if it is not money, the economic logic dictates that it should be some kind of an asset. It is the lack of definition and inability to fit the Bitcoin characteristics into the existing regulations that gives a headache to accountants and tax consultants worldwide.
Lately, we have been exchanging plenty of information with our colleagues from the BDO global network about accounting and tax treatment of cryptocurrency transactions, with a special emphasis on how to make an invoice in cryptocurrencies, how to account for these transactions and what the tax implications would be.
The International Financial Reporting Standards (IFRS), which are also used as accounting standards in Serbia, do not provide accurate guidelines on how to account for Bitcoins if, for instance, a company buys them. There are various approaches to how it should be treated: some think as cash, while others think as either a financial instrument, inventory or an intangible asset. Each approach has its benefits and drawbacks, both in terms of meeting the criteria for initial recognition and subsequent accounting for. In any case, none of the solutions is ideal and each of them has different tax implications. A particularly sensitive issue for accountants is cryptocurrency valuation taking into consideration high price surges. One day you make profit, while the other you make a loss due to a sudden decrease in the value, which affects business performance.
On the other hand, individuals buying cryptocurrencies do not have to take care of how to record them since they do not keep books of account, but they should pay attention to potential tax implications of such investments. The Personal Income Tax Law does not recognize income from investment and cryptocurrencies which would be a tax base. However, the Law leaves open the possibility for the income generated from the difference between the Bitcoin purchase and selling prices to be taxed through sundry income. There are other questions, such as whether bitcoin transactions are taxable in terms of VAT or if Bitcoin mining can be regarded as an economic activity.
Cryptocurrencies also constitute a problem in applying other regulations, such as those on foreign exchange operations. Taking into account that residents cannot have bank accounts abroad (except in special occasions), the question is whether owning Bitcoin or other cryptocurrency constitutes a breach of the National Bank of Serbia regulations (which again depends on what is Bitcoin – money or something else)? Moreover, anti-money laundering requires that all cash transactions over 15.000 EUR should be reported – does a payment of a service or an item of goods made with a cryptocurrency exceeding this amount requires that the taxpayer undertake actions and measures of being acquainted with and monitoring the party when it is known that the owner of the address where the bitcoins are located cannot be practically traced?
It is certain that, if cryptocurrencies keep on generating global interest, both global and local regulations will have to be amended in order for the new digital currency to be legally regulated.
Partner, BDO Serbia
CEO, BDO Podgorica
Published in BIZ Life magazin, februar 2018