“Nothing is certain except death and taxes.”
– Benjamin Franklin
In December 2021, the Tax Administration of Kosovo made headlines in the media by notifying all of its taxpayers that any sale of crypto assets is taxable income under Kosovo’s Tax Code. The headlines made everyone scratch their heads.
Can the Government do this?
The answer to that question is: Well, it depends. Shocking. We know. (Literally every lawyer ever.) But we promise to discuss both of the questions in detail.
So let’s dive right in, shall we?
“Cryptocurrencies are taxed in most jurisdictions around the world, including the US, UK, and Germany. This helps crypto users to be tax compliant as well, that’s why Kosovo’s tax authorities should have clear rules on it.”
– For Legit, Arber Avdullahu, Software engineer at CoinTracker, a crypto tax software company based in California, USA.
Under Kosovo’s Tax code, taxable income is the difference between gross incomes received or accrued during the tax period and the deductions allowable under the present law with respect to such gross income.
Under the Law on Personal Income Tax, Article 7, paragraph 1, subparagraph 1.6, includes capital gains resulting from the sale of a capital asset including movable, immovable property and securities, as gross income, and as such are considered to be taxable income under Kosovo’s Tax code.
The answer to the question of whether sales from crypto assets are taxable income, as we’ve mentioned above, depends on whether the regulators think that cryptocurrencies are capital assets, more specifically intangible assets or securities. Both of these questions have been baffling regulators all around the world.
What exactly are cryptocurrencies, and are they considered to be intangible assets under Kosovo’s Tax Code?
Cryptocurrencies are any form of currency that exists digitally or virtually and uses cryptography to secure transactions. They don’t have a central issuing or regulating authority. Instead, they use a decentralized network to record and issue new units.
They run on a distributed ledger called blockchain, which records all of the transactions of currency holders. It is a computer code; a distributed database backed by cryptography, intended to be used as a medium of exchange. Think of it as a virtual currency. Keywords here are “digitally” and “decentralized”. But are they intangible assets?
Kosovo’s tax code defines Capital Assets as:
“Tangible and intangible property that costs more than one thousand euros with the term of use for more than one (1) year.”
Moreover, the tax code defines the term “Intangible property” as:
“Patents, copyrights, licenses, franchises and other property that consists of rights only, but has no physical form.”
Can cryptocurrencies be intangible assets according to Kosovo’s tax code?
Now, while it is true that cryptocurrencies have no physical form, it’s hard to put crypto assets in the intangible property category. This is because cryptocurrencies do not incorporate royalty rights in their ecosystem. There are, obviously, different implications for royalty rights when talking about blockchain technology or NFTs specifically.
Kosovo’s tax code defines royalty rights as:
“Payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic, or scientific work including cinematography films, and patent, trademark, design or model plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.”
When you’re buying a cryptocurrency, you don’t have to buy any of the rights for the usage of that particular asset from the original owner who owns the copyrights of that asset. Such rights do not exist. Every crypto owner holds the private keys to his/her wallet which establishes ownership over that crypto asset. You’re buying an asset, not the right to use another party’s intellectual property.
Additionally, while it is true that you can very easily lend your crypto to somebody else and earn a reward/interest on it, it’s considered a normal lending practice and it has nothing to do with royalty payments. This is mainly because you’re not paying someone interest who lent you crypto because they own the copyrights of that particular asset, but because of the credit risks associated with the borrower or other economic factors.
Moving on to the second question on whether cryptocurrencies are securities.
Let’s start first by explaining the fundamentals of securities. The most simple definition of a security is that they are fungible and tradable financial instruments used to raise capital in public and private markets.
An even more simple definition is that it is an investment contract. In the United States, when determining if something is a security, regulators usually refer to the Howey Test. The Howey Test refers to SEC V. W.J. Howey Co., which is a Supreme Court case decided in 1964, where it established the criteria to determine whether a financial instrument qualifies as an “investment contract” for the purposes of the Securities Act.
They decided that an investment contract exists when there is:
- An investment of money;
- In a common enterprise;
- With the expectation of profit;
- To be derived from the efforts of others.
On the other hand, under Kosovo’s law, the term “security” is defined as:
“A security is a written document by which the issuer undertakes to perform the obligation recorded thereon to the lawful holder thereof.”
Furthermore, the Law on Obligational Relationships of Kosovo, Article 218, underlines the essential components that every security must have:
- An indication of the type of security;
- The business name and head office address or name and address of residence of the issuer of the security;
- The business name or name of a person to whom it is payable or who orders to whom the security is payable, or an indication that the security is payable to the bearer;
- A precise indication of the issuer’s obligation deriving from the security;
- The place and date the security was issued, and the serial number for those securities issued in a series;
- The signature of the issuer of the security or a facsimile of the signature of the issuer of a security issued in a series.
Moreover, paragraph 3 of the same article states that any document that does not contain all the essential components is not a security.
Up until now we’ve discussed and given a brief overview of Kosovo’s Tax Code and its implications regarding the sale of crypto assets. But what about the tax rates? How would taxing crypto assets actually work in reality? Let’s take a short example:
Pretend that you’ve purchased a crypto asset at a price of one thousand euros (1.000 €), with the term of use longer than a one (1) year, and that the value of that asset has gone up and reached a price of ten thousand euros (10.000 €). As a result of this increase in value, you’ve decided to sell that crypto asset, resulting in a profit of nine thousand euros (9.000 €).
Kosovo Tax Authority considers the profits of this sale as a capital gain, and as such it’s considered taxable income under current legislation. But what’s the tax rate for this specific capital gain? The Law on Personal Income Tax lists the tax rates as below:
|Yearly Income||Tax Rate|
|0 – 960 Euros||Zero percent (0%)|
|960 – 3000 Euros||Four percent (4%)|
|3000 – 5400 Euros||Eight percent (8%)|
|5400 Euros and upwards||Ten percent (10%)|
In our example when we sold our crypto asset it resulted in a gain of nine thousand euros, so a tax rate of ten percent (10%) is applicable.
Disclaimer: these tax rates apply only to natural persons and not to corporations. The tax rate for corporations in Kosovo is ten percent (10%).
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