On 17 February 2021, the State Duma of the Russian Federation, in the first reading, approved the government bill on taxation of cryptocurrency transactions.
DeFi lawyer Mikhail Uspensky explained to ForkLog which provisions the bill introduces and who is likely to benefit from its passage.
According to him, authorities decided to approach cryptocurrencies by the principle ‘an old horse won’t spoil the plough'”
“In other words, use methods that have been tested on more familiar foreign assets — offshore bank accounts and controlled foreign corporations,” says Uspensky.
Cryptocurrency holders will be required to submit:
- Notice of obtaining the right to dispose of digital currency, including through third parties. If not notified — a fine of 50,000 rubles.
- A report on transactions and holdings of digital currency. Failure to notify or submitting a report with false information will incur a fine of 10% of the amount of inflows/outflows.
Reports must be filed by 30 April of the calendar year following the year of transactions if the amount of inflows/outflows of digital currency exceeds 600000 rubles.
“Given the market’s extreme volatility, this fate will befall a sizeable number of Russians,” said Uspensky.
He also stressed that authorities used their usual regulatory tactic essentially retroactively:
“The first reporting period will be the current year 2021. One can hope that the bill will repeat the fate of its elder brother — the ‘On CFA’ law — and spend several plenary sessions languishing in the first reading.”
The lawyer also noted that if such deals yielded a profit, you must file a 3-NDFL tax return and then pay the tax to the budget by July 15.
“To stimulate the market, the fines are set at a maximum of 40% from the start, which may seem overly harsh and even somewhat inconsistent,” he noted.
Under Russian law, Uspensky said, if the unpaid personal income tax (NDFL) for three financial years exceeds 2.7 million rubles, an individual may face criminal liability for up to one year. If it exceeds 13 million rubles — up to three years.
“It is encouraging that criminal liability for the mere fact of not notifying the tax authorities about possession of cryptocurrency was not introduced this time; however this ‘shortcoming’ will likely be corrected by subsequent laws,” the expert noted.
Earlier, the Ministry of Finance proposed to introduce criminal liability for undeclared cryptocurrencies.
Russian citizens will be able to avoid paying tax on tokens if they held them for more than three consecutive years, said Uspensky.
“However, only truly patient hodlers with nerves of steel will be able to take advantage of this,” the lawyer says.
The method for determining the market price of cryptocurrencies should be set by the Federal Tax Service. Earlier, experts proposed to deprive the Federal Tax Service of this right.
“In any case, citizens will not be able to carry forward losses from past years on their coins, because there is a direct prohibition in paragraph 2 of article 227 of the Tax Code. This is done for the benefit of citizens: to stimulate them to pay taxes more actively,” the lawyer quips.
Earlier this year, the Constitutional Court of the Russian Federation confirmed the fairness of this approach in the ruling of January 28, 2021, said Uspensky.
The expert believes big business stands to gain the most from the reforms:
“Firstly, cryptocurrency transactions will be exempt from VAT. Secondly, it will be recognised as non-amortizable property, allowing tax on the profit from the difference between purchase and sale price, and carrying forward losses from price declines into the future.”
The new rules will apply only to a limited type of crypto assets, said Uspensky:
“Many stablecoins will be outside forthcoming regulation. In declaring and paying taxes on these coins, the state will have to rely on the integrity of citizens and businesses, because given the high degree of confidentiality, it is unlikely that Russian tax authorities will be able to effectively identify violators at this stage.”
Earlier, the Presidential Council for codification and improvement of civil legislation criticised the bill for terminology issues.
Head of the State Duma Committee on Legislation, Pavel Krasheninnikov, noted that for introducing cryptocurrency taxation it is necessary to legalize transactions with them.
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