How to Tax Bitcoin Transactions? A Look at Ukraine’s Ministry of Digital Transformation Bill

The authors alternative Ukrainian tax bill told Incrypted what information users will need to prepare their declaration, under what conditions bitcoin transactions will not be taxed, and whether reporting is required if coins bought long ago are sold.

What has changed in the document and why such rates?

According to the director of the Digital Economy Directorate at the Ministry of Digital Transformation of Ukraine, Yulia Parchomenko, the main proposed changes, besides the tax-rate levels, touched on the classification of virtual assets (VA) and the types of service providers. The Ministry also reaffirmed its authority as market regulator instead of НКЦБФР.

The obligation to pay taxes arises only when converting cryptocurrencies to fiat. The document proposes that personal income tax (PIT) in the first three years after the law comes into force should be 5%, the next five years — 9%, and after eight years — 18%.

«Any rates are a compromise between the state, which wants to collect as much tax as possible, and business, which either does not want to pay taxes at all or wants to pay a smaller percentage. Transitional periods will allow the Ministry of Finance and the tax authority to create an optimal system. The main thing we are sure of is that starting at 18% PIT for the new industry is a dead end», said Parchomenko.

The right to reduced rates for the first eight years will apply to payers whose annual investment income does not exceed 7 million hryvnias. The rule mirrors the limit for taxpayers in the third group of sole proprietors (FOP).

A separate regulation section concerns VA service providers. Their services, other than consulting, are exempt from VAT. After authorization they can also use the preferential regime Diia.City, choosing between an 18% corporate tax or a 9% tax on withdrawn capital.

Other legal entities that are not VA service providers pay the general rate of 18%. These incomes are accounted for separately from other activities as investments.

Additionally, when disposing of a service token — a right to demand another civil-rights asset — value-added tax will also be charged.

Classification of VA by the Ministry of Digital Transformation

The document describes the following types of virtual assets (VA):

• service tokens — tokenisation of rights to assets from the real economy;
• electronic money tokens — e-hryvnia tied to fiat currency, its circulation will be regulated by the НБУ;
• assets-backed tokens — tokenisation of the obligation to pay the current value of the asset;
• uncategorised virtual assets — Bitcoin, USDT and other cryptocurrencies and stablecoins.

Will exchanges be responsible for taxes on users?

In the draft bill by the National Commission on Securities and Stock Market, VA service providers would have been obliged to withhold and remit taxes for individuals. The Ministry of Digital Transformation declined this provision.

Under the new scheme, trading platforms must file reports about their activities with the tax authorities. They can assist users with preparing reports on performed transactions. Based on these, the latter independently form the declaration and pay taxes.

«We understand that every user may use the services of several providers. They collect all the reports and, on that basis, form a consolidated declaration», said Parchomenko.

The Ministry of Digital Transformation hopes that trading platforms will implement such an accompanying service to “make life easier” for users.

According to the chief lawyer of the Virtual Assets Project Office at the Ministry of Digital Transformation, Dmitry Nikolayevsky, with documents from the exchange and the user the tax authorities will be able to compare the information received and request additional information if discrepancies are found.

He acknowledged that there is some difficulty with decentralised exchanges and cold wallets.

«If a person wants to be able to account for expenses incurred, it is preferable to do so where they can be documented. While they may earn on a DEX, sell assets on a Ukrainian exchange, withdraw funds to a card and pay tax on the full amount of income without considering costs», said Nikolayevsky.

At the same time, the lawyer did not rule out that at this stage centralized platforms as primary financial-monitoring entities may request information from the user about the source of funds.

«The main task of a compliance professional is to ensure that the money does not have criminal provenance. This is a question for each case whether the person can prove it. Our law does not create new AML procedures — it gives providers the opportunity to operate with already used control mechanisms», added Nikolayevsky.

In the Ministry of Digital Transformation’s bill, the value of virtual assets is considered the amount of documented expenditures on their acquisition. According to Parchomenko, for the tax authorities these would be such proofs as:

• a bank statement showing a transfer for the purchase of cryptocurrency;
• a statement from the service provider confirming the rate at the time of purchase.

Additional rules, including those relating to P2P, will be developed by the tax authority and the Ministry of Finance of Ukraine.

Nikolayevsky agreed that the proposed mechanism is awkward. Automation of the tax-reporting process by trading platforms would help solve it.

If a person sold long-purchased coins for fiat and cannot prove the costs of their purchase, the Ministry of Digital Transformation advises paying tax on the entire amount. A negative result from cryptocurrency operations can be carried forward, reducing the tax base of future periods.

Registration of VA service providers in Ukraine

Mandatory authorisation applies to activities that involve handling VA belonging to others. The ten-year deferral applies only to providing advisory services. This is due to the absence of high risks.

The Ministry of Digital Transformation’s bill does not prohibit Ukrainian users from using trading platforms registered abroad. However, dealing with VA service providers registered in Ukraine will simplify obtaining reports for tax and other documents, Parchomenko explains.

Moreover, this reduces the risks of fraud, since the regulator will screen each licensed company for involvement in illicit activity. It also gives users the right to go to court if asset loss occurs.

In November, Ukrainian users complained about the blockage of PrivatBank and Monobank cards after buying and selling cryptocurrencies. Some reports linked this to anti-money-laundering requirements or the need for additional checks into the origin of funds.

The Ministry of Digital Transformation believes the main reason is that banks classify cryptocurrency transactions as high-risk.

The situation could change with regulatory adoption: VA service providers will be able to open bank accounts, fiat gateways will operate, and various crypto projects will be able to conduct operations with digital assets legally.

Will there be a third bill or not?

Earlier MP Aleksei Zhmmerenetsky stated that the working group plans to prepare a kind of averaged regulatory option to reach a compromise between the NSMC and the Ministry of Digital Transformation.

However, according to Parchomenko, anything official would only be possible after reviewing conclusions from state authorities regarding these two documents.

«We do not yet know how discussions will proceed: whether one of the laws will be taken as a basis or whether the two ministries’ visions will be merged into a new common document. The Ministry of Digital Transformation is prepared to defend its reasoned position to the end, and then we will observe reactions from other stakeholders», said the official.

With optimistic forecasts in the department, tax collection and mandatory registration of VA service providers are expected to come into effect in early 2025.

As a reminder, the enforcement of the 2021 law “On Virtual Assets” was postponed until taxation of digital-asset operations is enacted. In addition, the text of the act was updated to reflect MiCA. The new version was submitted to the Verkhovna Rada on November 7.

Along with it, the National Securities and Stock Market Commission presented a tax bill proposing a rate of 18%, which drew condemnation from civil society.

Meanwhile, the Ministry of Digital Transformation presented an alternative-law project envisaging a gradual rate increase for individuals and an exemption from VAT for legal entities, except for operations with tokenised assets.