Intangible Property
Global Solutions

with Tatiana Zarubina

Taxation of Cryprocurrencies

There is no unified approach to bitcoins and other cryptocurrencies, and their legality will depend on your country of residence. However, the authorities gradually get more and more experience and knowledge about bitcoins and the industry of cryptocurrencies on the whole, that is why, most likely, in the nearest time we will see the minimal legislative norms in most countries. To be more specific, the big profits generated by cryptocurrencies in 2017, have already pushed the regulatory bodies of over 30 countries into issuing legislative acts on this topic within the oncoming months.

Dr Tatiana ZARUBINA, PhD, one of the founders of the IP Global Solutions Company, an expert in intangible assets, answers the questions of Liana GRIBANOVA.


Today I suggest discussing the topic which causes quite a stir – the cryptocurrencies. 2017 went on under the sign of common interest for such assets – not only on behalf of investors and individual users, but also regulators and tax authorities the world over.


Indeed, everyone has heard about cryptocurrencies. Some are convinced that it is a bubble, others believe in the big future awaiting this type of assets. However, if we ignore this judgemental component for a moment, we will face specific questions today:
- are any transactions with cryptocurrencies legal?
- do we have to pay taxes from our activities?
- into which income category do our profits and losses fall…
and many other.


Today we see that there is no unified approach to bitcoins and other cryptocurrencies, and their legality depends on the country of your residence. How well do the governments of various countries understand the importance of questions related to the legislative regulation on these assets?


In recent months practically all countries have spoken on this issue. The EU has taken up a more open position towards cryptocurrencies than the US. European Central Bank has classified bitcoins as a “free decentralized virtual currency”. The European Bank regulator has advised European banks not to trade cryptocurrencies before a clear regulatory regime is adopted. Regulating transactions with cryptocurrencies is also necessary to prevent tax evasion. And this issue is of greatest concern for all governments. The position of the Russian Ministry of Finance is a shining example (See the Letter of the Russian Ministry of Finance of 13 October 2017: “On income tax of physical persons when making transactions between physical persons on the purchase and sale of bitcoins” and instruction of Vladimir PUTIN to the Russian Central Bank and the Government to ensure control over the issue and circulation of cryptocurrencies in Russia).


But, as far as I understand, before imposing taxes on transactions with cryptocurrencies, the authorities have to decide what they understand under the cryptocurrency for the purposes of taxation, don’t they?


They fall under the definition of the only possible type of asset: intangible assets. Many experts are inclined to think that cryptocurrencies are a specific class of intangible assets purchased for investment purposes and having an active market. To this class also belong some types of licenses, domain names etc.

Indeed, cryptocurrencies meet the criteria for intangible assets:
- They can be individually identified and sold;
- They are a non-monetary asset;
- They have no physical form;
- They are likely to bring future economic benefits.

Taking into account the price volatility of cryptocurrencies and the fact that they are valuable only as a means of exchange, then the only logical method of their accounting after recognition is accounting their revalued price. However, para 85 of IAS 38 “Intangible assets” forbids to recognize revaluation towards an increase as part of profits or loss, requiring businesses to declare such an increase as part of other aggregate income.

This approach to evaluation is stipulated by the fact that intangible assets historically are viewed as long-term investment aimed to facilitate the economic activities of businesses. Such interpretation of intangible assets, by all means, runs counter to the essence of cryptocurrencies as highly liquid assets used for trading or investment purposes.

Another and no less important way of accounting cryptocurrencies is declaring them as inventory. IAS 2 defines inventory as assets:
- held for sale in the ordinary course of business;
- in the process of production for such sale.

This conclusion is substantiated by IAS 38 “Intangible Assets”, where there is a reservation: “If another Standard prescribes the accounting for a specific type of intangible asset, an entity applies that Standard instead of this Standard. For example, this Standard does not apply to: intangible assets held by an entity for sale in the ordinary course of business” (IAS 38 “Intangible Assets”, para 3а.)

The accounting of inventory for the trader in cryptocurrencies and for the “mining” company will be different. A company mining for cryptocurrencies will be accounting for them according to the least of two values: at cost or at net selling price. If a company is a trader, then the changes in the fair price are declared in the profit-and-loss report.

In the current version of IAS cryptocurrencies do not meet the criteria of other types of assets but the two above-mentioned. These are non-monetary funds since they are not guaranteed by any government and have high volatility. They have not been so far a widely recognized means of exchange. Besides, if you view cryptocurrencies as monetary funds, they have a huge deflation potential, if you take into account that the number of bitcoins, a major cryptocurrency in the world, is limited to 21 million units. And they are not money equivalent since their future cost is not known in advance.

As we have said already, cryptocurrencies cannot be classified as financial instruments since they do not grant the holder a legal right to receive monetary funds or financial assets in the future.

However, for purposes of taxation, a number of countries have already fixed the definition of cryptocurrencies in their legislation. Thus, the US regards them as a property, Switzerland – as a currency, Japan and Canada – as goods, the UK – as assets, and Brazil – as financial assets, whereas the Netherlands suggested defining them as “products of barter”. The taxation in these countries will proceed according to these definitions. In many jurisdictions, VAT for transaction with cryptocurrencies is not applied.


I have a purely practical question in this connection. Let’s assume that I had 1,000 bitcoins in my electronic wallet at the end of 2017. And I will declare only 100 bitcoins in my tax return. Knowing, that apart from me, nobody can physically get access to my wallet, how will tax authorities control the validity of data submitted?


Indeed, the real problem with taxation of cryptocurrencies is that even if you wish to pay taxes on the earned money, it is not easy to do so. The easiest way is to convert your earned cryptocurrencies into dollars or your native currency. Here we immediately get capital gain tax or similar taxes depending on the chosen class.

However, what to do in your example? First, tax authorities have practically no tools to check the validity of the information. Second, you can try and prove your claims with your statement of account, but to be able to provide it, you would have to grant the tax authorities with a personal access to your wallet, but this is the disclosure of personal data which is unacceptable. Third, what exchange rate to use for your bitcoins?

At the basis of this approach there is a special formula, which presupposes that costs, directly aimed at the creation of an intangible asset still in use, would include costs that will be qualified as expenditure on R&D. All other costs (for example, interest rate, construction costs and costs of purchasing rights for intangible assets from third parties as well as costs directly not related to a certain Intellectual Property, should not be included in the qualified costs, and in that part the income, obtained from the use or selling this intangible asset, will not be considered preferential.The classical option, which is used when evaluating assets in currencies, is to calculate the average price for the year. A very good idea but the problem is that there is both currency fluctuation and differing price at different stock exchanges! And such stock exchanges are not just one or two: you won’t be able to collect unified statistics.


Ok, there is very little clarity. But perhaps there is a solution to this complicated question here in Switzerland? What’s the state of affairs in terms of taxation of this type of assets?


In Switzerland the holders of cryptocurrencies get a property tax at the rate determined by tax authorities for 31 December. The holder of cryptocurrencies will have to declare his or her annual income from transactions with cryptocurrencies together with other types of income. Capital gains income from private movable assets is not taxable. But losses from transaction with cryptocurrencies cannot be deducted.

However, if you are a professional trader, then the income from cryptocurrencies is a constituent part of your income and has to be declared as income from sole proprietorship. The losses are then deductible.