Bitcoin (and other cryptocurrency) payments and the potential risks involved

Cryptocurrencies, including Bitcoin, are becoming popular methods of payment around the world, including the Czech Republic. Although some countries already recognise Bitcoin as legal tender, in the Czech Republic cryptocurrencies are considered as digital assets, not currency. Still, more and more businesses such as restaurants, hotels and shops are accepting cryptocurrency payments in response to the growing demand for alternative payment methods. The use of cryptocurrency as a means of payment carries with it certain tax obligations. It is essential that users of these digital assets are aware of these rules and avoid potential complications.

Is cryptoCURRENCY a currency?

Although the term cryptocurrency can be misleading, the Ministry of Finance and later, the central bank of the Czech Republic have determined that cryptocurrencies are digital assets, not currency, and do not constitute non-cash funds or electronic money. Even so, they can be used as a means of payment and merchants and businesses can accept cryptocurrencies as payment for goods and services.

Purchase contract with Bitcoin payment? Not quite!

Although it looks like a normal purchase contract at first glance, payment in Bitcoin for goods or services is not considered a standard commercial transaction in Czech law. In fact, the central bank of the Czech Republic does not recognise cryptocurrencies as legal tender. Payment for goods or service in cryptocurrency is thus understood as an exchange, where the ownership rights to two things are "exchanged", rather than as a purchase.

What are the tax implications of paying with cryptocurrency?

For income tax purposes, the transaction is considered an exchange of non-monetary benefits between two parties - the buyer and the seller. Taxable income is earned by both parties, and on both sides, the income is valued according to the Property Valuation Act. Similarly, income arising from the exchange of a cryptocurrency for another cryptocurrency is taxable.

Cryptocurrency payment and VAT

Where a VAT payer receives payment in cryptocurrency for the supply of goods or services in the domestic market, it determines the taxable amount by reference to the normal price of that supply, excluding VAT. The normal price is the amount that a comparable person at the same level of trade would pay on the open market. If the usual value of the supply cannot be found, the purchase or cost price shall be used for goods and the total cost of the taxable person for services.

In addition, since 1 July 2017, the recipient of a taxable supply (e.g. the buyer) may be held liable for unpaid tax by the supplier (e.g. the seller) if the payment for the supply is provided (even if only partially) by a virtual asset - cryptocurrency. The institute of liability in such transactions was introduced due to the high riskiness of transactions resulting from the anonymity of users.

Conclusion

The adoption of cryptocurrencies by traders and entrepreneurs brings new opportunities, but also specific legal and tax challenges. It is important for users and businesses to be aware of the tax implications and legal aspects of trading cryptocurrencies, especially given that they have not yet been used as standard tender and the potential liability for tax liabilities. Taking the necessary measures will thus allow cryptocurrencies to be used effectively and safely as part of the modern economic environment.

Responsible Attorney: Mgr. Mgr. Lukáš Nálevka, Anna Pokorná contributed to this article.