The basic and initial stage of the life of the cryptocurrency is its creation, through the mining process (blockchain mining). In the process, cryptocurrency transactions are collected, verified and recorded in international, public records for the purpose of execution and liquidation.
From an accounting and tax point of view, various issues have arisen, which must be resolved in order for the relevant market to function safely and confidently.
A first and foremost question is whether cryptocurrency should be treated as a currency, financial instrument or intangible asset. The International Accounting Standards Board (IFRIC) Interpretations Committee in its June 2019 decision classified a subset of cryptocurrencies (namely, digital cryptocurrencies, which were not issued by an institutionalized entity) as intangible assets. Most developed and developing countries have followed a similar accounting approach.
In the light of the intangible asset, it is very important to choose a reliable valuation method, since cryptocurrencies are traded in non-regulated markets (Crypto exchanges, including various electronic platforms). In the event that cryptocurrencies evolve into institutionalized currencies, which presupposes a specific and commonly accepted valuation model, historicity of use and recognized intrinsic value, a similar accounting approach will be adopted.
There are several concerns at the tax level:
- When performing a transaction in exchange for a cryptocurrency, goodwill / undervaluation arises under the very transfer of the cryptocurrency as a tangible asset?
- Or only from the transaction which is executed in exchange for cryptocurrency?
- How will the relative gain or loss be measured in the absence of a reliable valuation method?
- When will the relevant income be considered to have arisen, upon the transfer of the cryptocurrency or upon the completion of the transaction made in cryptocurrency?
But also from the point of view of indirect taxation, there are issues to be clarified: the transfer of currencies is, per se, a transaction subject to VAT or exempted as falling within the exemption provisions;
The question arises from the nature of the cryptocurrency and in particular from whether the cryptocurrency is a financial security, legal tender or other type of asset.
We note that the European Court of Justice has already ruled in favor of the exemption in cases of cryptocurrency exchange transactions with traditional currencies.
In conclusion, in parallel with the need to form a regulatory framework for the cryptocurrency market, it is necessary to have full coverage of tax issues.