The taxation of cryptocurrency transactions is a hot topic. The Austrian Ministry of Finance recently issued an interesting ruling outlining when mining for cryptocurrencies in Austria by a non-resident taxpayer may trigger a permanent establishment.
Income tax treatment of cryptocurrencies
In general, capital gains from the sale of cryptocurrency units held as business assets and income from commercial activities related to cryptocurrencies (e.g. mining, brokerage) are subject to progressive income tax rates of up to 55 % for individuals and 25 % for corporations.
Special rules apply to cryptocurrency units treated as investment assets and other (non-business) assets:
- Units are treated as investment assets in case the taxpayer uses them to generate income in the form of interest. In this case, capital gains from a subsequent sale are taxed at 27.5 % for individuals (taxation at lower progressive income tax rates optional) or at 25 % for corporations.
- In case the units are not used to generate income from interest, only acquired and sold occasionally (private sales) and not part of a business (non-business assets), capital gains are only subject to taxation of up to 55 % for individuals if the units are acquired and sold within 12 months. A tax exemption applies if the capital gains do not exceed EUR 440 per calendar year. In case the units are held longer than 12 months, capital gains are not taxable.
VAT treatment of cryptocurrencies
The exchange of cryptocurrency units (e.g. Bitcoin) into traditional currencies (e.g. euros) and vice versa is VAT-exempt (CJEU 22 October 2015, C-264/14, Hedquvist; VAT guidelines para. 759).
Bitcoin mining as such is not subject to VAT (CJEU 22 October 2015, C-264/14, Hedquvist).
Supplies of goods or services that are subject to VAT and paid for with cryptocurrencies are treated no differently from payments with traditional currencies. The assessment basis for transactions subject to VAT is the fair market value of the units.
Does mining result in a permanent establishment?
The Austrian Ministry of Finance recently issued a ruling (EAS 3401, 30 April 2018) in regard to the income tax treatment of (cloud) mining in Austria carried out by a Swiss corporation (AG). The ruling comes to the conclusion that a permanent establishment only exists if the non-resident taxpayer itself has a physical presence in Austria.
The ruling states that currently no guidance exists in regard to (cloud) mining projects at the OECD level. However, it answers the question by referring to the long-standing opinion that a server located in Austria may suffice to trigger a permanent establishment. Apart from the server through which the taxpayer's commercial activity is carried out, there is no need for personnel to be physically present in Austria. The taxpayer must, however, dispose of the server as the owner or lessee in order to be treated as having a permanent establishment.
If the taxpayer only uses processing power from a third-party provider (cloud mining), rather than owning or leasing the server in Austria, such an arrangement does not result in a permanent establishment for the taxpayer due to the lack of a physical presence in Austria.
Booming cryptocurrencies open new opportunities – but also trigger tax risks
Although tax authorities are publishing more and more guidelines on how to tax cryptocurrency transactions, in most cases the tax courts have yet to confirm these interpretations.
Cross-border transactions and activities bear an increased risk of double taxation due to the lack of guidance by the OECD, which may result in a different tax treatment in the countries involved. In case the country of residence denies the existence of a permanent establishment in the source country and, as a consequence, the taxing right of the source country, double taxation related to the activity may not be avoided by a double tax treaty.
Taxpayers should seek tax advice prior to venturing into the new business of cryptocurrencies – especially in cross-border situations.