Taxation and Tax Administration of Transactions with Crypto Assets in the Positions of the Fiscal Authorities of Russia

Valova Anna Aleksandrovna ORCID: 0000-0003-2296-8824 Postgraduate student, Financial University 125057, Russia, Moscow, Leningradskii Prospekt, 49/2 valovs@yandex.ru Other publications by this author

       IntroductionThe development of digital technologies has led to the emergence of a special category of digital assets, the creation of which is based on the technology of a distributed registry using cryptographic methods – crypto assets.

  The realities of the current time, including sanctions restrictions on the use of traditional financial instruments for Russian individuals and institutions, are fueling interest in crypto assets from the point of view of investing, saving capital, making international settlements. The speed of the appearance of various types of crypto assets on the international market, the possibility of their cross-border use with a high degree of anonymity by subjects from jurisdictions in which the relevant legal regulation of transactions with crypto assets lags behind the practical use of these assets, raises many questions for both participants of the crypto market and regulatory authorities. In addition to questions about the legal nature of these assets and the limits of legal transactions with them, the extraction of income from transactions with crypto assets raises questions about the tax consequences of transactions with such assets.Approaches to tax regulation of transactions with crypto assets are not the same in different countries.

In some countries, for example, in Singapore ^[1], the UK ^[2], specialized tax guides have already been issued on taxation and tax administration of transactions with various types of crypto assets. In other countries, for example, in Australia ^[3], the situation with taxation of crypto assets has been partially settled, the rules for taxation of transactions with cryptocurrencies have been adopted, as the most common type of crypto assets. The most common case of tax regulation is the situation when there is no separate tax legislation regarding transactions with crypto assets, it is at the stage of development and implementation, or regulation takes place on the basis of already existing tax legislation.

The last of the above-described regulatory options can be attributed to Russia, where at the moment, within the framework of the national project for regulating the digital environment, there is a consistent adoption of regulatory legal acts related to crypto assets.

Figure 1. Adoption of regulatory legal acts in Russia regarding crypto assets

In addition to the already adopted regulatory legal acts in the field of crypto assets, there are also separate bills regarding the regulation of mining ^[4] and the turnover of digital currencies ^[5].

As can be seen from Figure 1, changes in the taxation of transactions with certain types of crypto assets (the term "digital financial assets" is more commonly used in Russia) have already been introduced into the Tax Code of the Russian Federation in 2022 and have entered into force. With regard to transactions with the most common type of crypto assets in practice – cryptocurrencies, special changes have not yet been made to the Tax Code of the Russian Federation, which raises many questions for taxpayers, which they relay to the fiscal authorities of the country.

The purpose of the research in the article is to update at the moment the approaches of the fiscal authorities of Russia to the procedure of taxation and administration in Russia of transactions with crypto assets, in particular, with cryptocurrencies, committed by individuals and legal entities, in relation to the relevant types of taxes. 

Approaches to taxation of transactions with crypto assets in Russia were previously studied in the works of such authors as Kucherov I.I., Khavanova I.A. ^[6], Tokarev S.I. ^[7], Samolysov P.V. ^[8], Prokaev M.V. ^[9], Zhuravlev A., Brisov Yu., Yankovsky R., Levashenko A. ^[10].  However, a comprehensive study of the positions of the fiscal authorities of Russia, comparative analysis and statistical data on this issue has not been carried out before.

 To achieve the purpose of the study, the author of the article set the following tasks: to identify a unified position of the fiscal authorities of Russia regarding the need to tax personal income tax on income received by individuals when performing transactions with crypto assets, including the possibility of exemption from taxation of income received from the sale of crypto assets when the latter are owned for more than three years; updating positions regarding the need to tax on profit of organizations of profit received as a result of transactions with crypto assets, and determination of the moment of receipt of the corresponding income; the procedure for taxation of income of taxpayers applying special tax regimes, including the simplified taxation system, the tax on professional income; issues of VAT on the sale of crypto assets and the occurrence of property tax on the possession of crypto assets; the need for specialized reporting to the tax authorities in relation to transactions or ownership of crypto assets.

Material and methods The study used the provisions of the current legislation of the Russian Federation and foreign countries, data on existing legislative initiatives in the field under consideration, explanations of the Ministry of Finance of the Russian Federation and the Federal Tax Service, presented in the legal reference system "ConsultantPlus", the work of scientists and specialists on relevant topics.

The processing of the obtained data was carried out using universal (analysis, generalization) and special-legal (comparative-legal, historical-legal) methods of cognition.

Approaches to Taxation of Crypto Assets in Russia in Explanations of Fiscal Authorities The absence of specific norms in the tax legislation of the Russian Federation in relation to the procedure for taxation of transactions with crypto assets and, in particular, with cryptocurrencies, raises many questions for various categories of taxpayers, ranging from the need to declare transactions with such assets and reports to the tax authorities about the ownership of this category of assets, and ending with questions regarding the taxation of certain types of taxes for individuals, creating crypto assets, owning them and performing operations with them.

Over the past five years, since 2017, more than 30 clarifications have been issued by the Ministry of Finance of the Russian Federation and the Federal Tax Service on a variety of topics related to taxation and tax control of transactions with crypto assets.

Figure 2. Explanations of fiscal authorities regarding transactions with crypto assets for the period 2017-2022.

From the data shown in Figure 2, it can be seen that the prevailing number of responses were submitted to the requests of taxpayers-individuals interested in the procedure for calculating personal income tax. General conclusions that can be drawn based on the analysis of regulatory authorities' explanations regarding personal income tax:

- income from transactions with crypto assets must be declared by taxpayers independently when submitting a 3-personal income tax declaration based on the results of the tax period in which the corresponding income was received (Letter of the Ministry of Finance of the Russian Federation dated 02.09.2022 No. 03-04-05/85586);

- The Tax Code of the Russian Federation does not establish a special procedure for taxation of income of individuals when they perform transactions with cryptocurrencies. Income is an economic benefit if it can be assessed (Letters of the Ministry of Finance of the Russian Federation dated 08.11.2019 No. 03-04-05/86163, dated 24.08.2018 No. 03-04-05/60392);

- the tax base from transactions with cryptocurrencies should be defined as income reduced by the amount of the corresponding expenses (Letters of the Ministry of Finance of the Russian Federation dated 26.09.2019 No. 03-04-05/74126, dated 20.08.2019 No. 03-04-05/63704);

- the exemption from taxation of income from the sale of property owned by a taxpayer for more than three years does not apply, since the legislation does not establish the status of cryptocurrency as a special type of property for tax purposes (Letter of the Ministry of Finance of the Russian Federation dated 04.09.2018 No. 03-04-05/63144);

- in case of receiving income (expenses) when selling (acquiring) cryptocurrencies in foreign currency, such income (expenses) must be converted into rubles at the official exchange rate of the Central Bank effective on the date of receipt of income (actual expenses) (Letter of the Ministry of Finance of the Russian Federation dated 02.09.2022 No. 03-04-05/85586). 

In terms of explanations regarding the taxation of corporate profits, you can specify the following:

- there are no exceptions to the profit received from transactions with cryptocurrencies in Chapter 25 "Corporate Income Tax" of the Tax Code of the Russian Federation. Since the provisions of this chapter imply taxation of all income received by the taxpayer (with the exception of those specified in Article 251 of the Tax Code of the Russian Federation), all income is accounted for in a general manner (Letter of the Ministry of Finance of the Russian Federation dated 12/28/2021 No. 03-04-05/107093);  

- when receiving tokens as a result of an initial coin offering (ICO) conducted by a foreign person, income must be determined taking into account the provisions of Article 41 of the Tax Code of the Russian Federation on the receipt of economic benefits by the taxpayer, if it can be assessed in accordance with the norms of Chapter 25 of the Tax Code of the Russian Federation. Any income received by an organization within the framework of commercial activities is subject to taxation (Letter of the Ministry of Finance of the Russian Federation dated 14.06.2018 No. 03-03-06/1/40729 );  

 - when performing transactions with crypto assets, it is necessary to recognize income in the reporting (tax) period in which they occurred, regardless of the actual receipt of funds or other property in accordance with the accrual method (Letter of the Ministry of Finance of the Russian Federation dated 08/24/2020 No. 03-03-06/1/73953 );  

- when receiving cryptocurrencies as a result of exchange, income is recognized upon sale, regardless of the receipt of funds (assets) for goods, works and services sold (Letter of the Ministry of Finance of the Russian Federation dated 09.02.2018 No. 03-03-06/1/8061 );

- when carrying out cryptocurrency mining activities, it is necessary to be guided by the general norms of Chapter 25 of the Tax Code of the Russian Federation on the tax base when income exceeds expenses (Letter of the Ministry of Finance of the Russian Federation dated 28.08.2018 N 03-03-06/1/61152 ).  

With regard to the taxation of crypto assets with property taxes, the tax authorities explain that when owning crypto assets, the tax on the property of organizations and the tax on the property of individuals do not arise, since the digital currency is not immovable property (Letter of the Ministry of Finance dated 06.05.2021 No. 03-04-05/34900).

Regarding VAT taxation, there is an ambiguous situation in the explanations of the fiscal authorities. On the one hand, the Federal Tax Service and the Ministry of Finance of Russia explained in a joint letter that a draft law on amendments to the Tax Code of the Russian Federation regarding the taxation of digital currency has been adopted in the first reading, and in accordance with this draft law, transactions with digital currency are not subject to VAT (Letter of the Federal Tax Service of Russia dated 03/16/2021 N SD-4-3/3427@).  On the other hand, the bill has not yet been adopted and recent clarifications by the Ministry of Finance indicate that since transactions with digital currency are not named in the list of transactions exempt from VAT, cryptocurrency transactions need to be subject to VAT in a general manner (Letter of the Ministry of Finance of Russia dated 02.09.2022 N 03-04-05/85586). We believe that in this case, the tax authorities will be guided by the more recent explanations of the Ministry of Finance, taking into account that, indeed, cryptocurrency transactions are not named in the list of exceptions exempt from VAT.

Among other requests from taxpayers, there are requests for the possibility of applying special tax regimes, including a simplified taxation system, a tax on professional income. To the requests of individual entrepreneurs applying the simplified taxation system about the possibility of its application for income received from transactions with cryptocurrencies, the tax authorities respond that the taxation procedure for such entrepreneurs can be considered only after the adoption of laws defining the concept of cryptocurrency (Letter of the Ministry of Finance of the Russian Federation dated 14.11.2018 No. 03-11-11/81983). At the same time, regarding the use of the USN in accounting for digital financial assets (legislation in the Russian Federation separates digital currency and digital financial assets) The Ministry of Finance of the Russian Federation explained that accounting is carried out on the basis of the general procedure provided by the Tax Code of the Russian Federation for accounting for income under the USN (Letter of the Ministry of Finance of the Russian Federation dated 17.11.2020 No. 03-11-11/99914). 

With regard to the tax on professional income, the fiscal authorities respond more specifically, indicating that the tax regime in the form of a tax on professional income does not apply to digital currency exchange activities (Letter of the Ministry of Finance of the Russian Federation dated 06.05.2021 N 03-04-05/34900).

It should be noted that a number of responses from the Ministry of Finance of the Russian Federation to specific requests from taxpayers indicate that a change in the legal regulation of the crypto market is necessary to issue appropriate clarifications. The most common answers about the need to wait for amendments to the legislation are provided on requests regarding the taxation of mining, turnover and organization of the issuance of digital currencies (Letter of the Ministry of Finance of the Russian Federation dated 23.04.2018 No. 03-01-11/27036, Letter of the Ministry of Finance of the Russian Federation dated 02.12.2020 No. 05-06-11/105854).  

In addition to the taxation procedure for certain types of taxes, an important issue of concern to taxpayers is the issue of submitting appropriate reports informing the tax authorities about the possession and execution of transactions with crypto assets, including information about the opening of accounts on crypto exchanges, the acquisition of cryptocurrencies to digital wallets and the movement of funds on such accounts. Since currently no special regulation has been introduced in this part, the Ministry of Finance of the Russian Federation clarifies that taxpayers do not need to notify the tax authorities about this on an initiative basis (Letter of the Ministry of Finance of the Russian Federation No. 03-04-05/107460 dated 12/29/2021).

ConclusionThe study of analytical literature, explanations of the fiscal authorities of Russia over the past five years has made it possible to update the position of the state in terms of taxation and tax administration of transactions with crypto assets at the present time in the absence of appropriate changes to the regulatory legislation.

In general, the Ministry of Finance of Russia and the Federal Tax Service consistently consider, according to various taxes, that the general rules established by the tax legislation of the Russian Federation apply to the taxation of transactions with crypto assets, and in particular cryptocurrencies.

The absence of special taxation rules does not mean that there is no need to declare and impose appropriate taxes on income received as a result of transactions with cryptocurrencies. At the same time, according to the author, the adoption of relevant regulations regarding the mining of digital currencies, the determination of their legal status for tax purposes would make it possible to remove issues that have not been finally resolved to date regarding the taxation of the issue (creation) of digital currencies and their sale, including the possibility of applying personal income tax benefits for the period of ownership more than three years, the possibility of applying special tax regimes in activities related to the turnover of digital currencies, the absence of the need to impose VAT on the relevant transactions, which would generally correspond to the international experience of taxation of transactions with this category of assets. 

The theoretical and practical significance of the article lies in the formation of an integrated approach to understanding the taxation of transactions with crypto assets in Russia and the possibility of using the conclusions and materials in further research on issues related to certain topics within the digitalization of the economy, as well as for educational purposes in the preparation of students of economic specialties. The results of the work can be useful for improving the regulatory framework concerning the regulation of tax relations, as well as for a wide range of persons involved in transactions with this type of assets, for making managerial decisions.