Hungary announced to cut the tax on cryptocurrency earnings by 50% to encourage investors to declare income from trading digital tokens such as Bitcoin. The Hungarian Parliament accepted the tax package for 2022 on 9 June 2021. The package contains inter alia significant simplification and tax reduction with regards cryptocurrencies.
More than HUF 300 billion of household investment is kept in crypto assets in Hungary, even by conservative estimation. The Hungarian Government now aims to increase the visibility of the country’s cryptocurrency market and minimize tax evasion, and the lower tax rate with transparent rules are expected to generate several billion forints in additional budget income as well.
Cryptocurrencies have been around for more than a decade now and in the last 5 years 1 Bitcoin went from 750$ to 35.000$. The significant earnings on crypto transactions, however, remained mostly under the radar for tax purposes.
Throughout the EU, although there are overall guidelines and regulations regarding cryptocurrencies, regulation and by extension taxation, is still up to individual countries. Back in 2014, the Court of Justice of the European Union decided in its standalone case C-264/14 that – for VAT purposes - crypto assets to be considered as currency. Since then, the EU is prepared a proposal for a regulation on Markets in Crypto-assets and individual member states are also moving forward and adapting their own tax laws to encompass cryptocurrencies.
In Hungary, crypto assets have not been even defined for tax purposes and earnings on such transactions were considered as ‘other income’ by default. As a consequence - summarizes Balint Zsoldos, Head of Tax at KCG Partners Law Firm - tax implications of crypto assets were disadvantageous (compared to other capital gains) with 15% of income tax and 15.5% of social contribution tax (non-capped) applicable.
New definition, new rate, new rules
The new legislation gives a fairly broad definition: crypto asset is a digital display of value or rights that can be electronically transferred and stored using distributed ledger or similar technology. The new rules should apply to crypto trade and mining, accordingly.
Taxation is based on the ‘black box’ concept: tax point is only triggered when the crypto assets are ‘withdrawn’; i.e. transferred to the bank account in ‘normal’ currency. As long as the crypto assets are stored or exchanged in the crypto world, it remains tax free. Furthermore, taxation of crypto assets will be regulated under capital gains. That also implies that - similar to the controlled capital market transactions - the income should be determined after the transaction profit achieved in the tax year, if it exceeds the amount of transaction losses and the amount of other fees and commissions related to the conclusion of transactions. Also, previous crypto losses for the tax year and the two preceding tax years can be taken into consideration and offset against the crypto income in each tax year.
The tax obligation is also decreased: firstly, crypto income will not be subject to social contribution tax, thus, the decrease in half of effective tax rate and income under 10% of the minimum wage (i.e. current threshold would be HUF 16,740) is not taxable, provided that the individual does not earn income from another transaction on the same subject on that day and the amount of such income in the tax year does not exceed the minimum wage.
Crypto earnings should be declared voluntarily to the Hungarian tax authority or the draft income tax return (as prepared by the tax office) amended, accordingly. As a last-minute modification, the legislation contains that the above rules can be opted for the current tax year of 2021 and previous non-reported earnings can be also considered (whitened) retroactively in the income tax return for 2022.
The above rules should provide a favourable environment for taxation of crypto assets and are aimed to whiten the Hungarian digital economy. For now, taxation of crypto incomes is still based on self-declaration, but it might be expected that tax offices will have more and more information on the transaction from financial service providers, reminds Balint Zsoldos.
By Balint Zsoldos, Head of Tax, KCG Partners Law Firm