Russia’s bill on the taxation of transactions with digital assets contains provisions on VAT, personal income tax and corporate income tax.
Special for ForkLog, Sergey Leoshko, CEO of «Юнф Сопровождение», and Maria Agranovskaya, managing partner of the law firm «Град», analysed the requirements imposed by the authorities on digital asset holders.
VAT
The services of entities that will issue, control, and account for DFA transactions are exempt from VAT, by analogy with securities.
However, the sale of digital assets themselves remains subject to VAT. A similar principle applied to the sale of precious metals by banks to individuals until March 9, 2022.
“These provisions significantly reduce the investment attractiveness of precious metals in the eyes of investors. Apparently the bill’s authors consider the digital asset market so attractive that even 20% VAT won’t dampen this interest,” says Sergey Leoshko.
All VAT treatment rules are preserved in cases involving the use of digital assets in foreign trade transactions, with participation of agents and other special cases for this tax.
VAT payers will be all legal entities engaging in primary issue or secondary transactions with digital assets.
Corporate income tax
Income from the sale or holding of digital assets must be included in the corporate income tax base.
Expenses related to servicing, paying income to the holder, or redeeming the asset may be deducted for corporate income tax purposes.
Rules for recognizing expenses for corporate income tax purposes are established either as a one-off or evenly over the life of different digital assets. There is a provision for accounting for VAT paid at acquisition as an expense if the organization is the ultimate holder of such asset.
“The bill provides for the features of issuing and circulating digital assets in line with the issuance and circulation of securities, including similar restrictions. For example, revenues from the issuance of digital assets, for which the redemption term is not defined or is more than ten years, are recognised on the date of expiry of the ten-year period from the date of issue,” explains Maria Agranovskaya.
Profits or losses from DFA transactions can be determined together with operations with non-listed securities and non-listed financial derivatives, separately from the overall tax base.
There is also a possibility to hedge using DFA and other special cases of applying such assets.
Personal income tax
Income from DFA transactions should be determined net of expenses for acquiring and executing the deal. However, the bill also requires documentary evidence of such expenses.
“Which documents can prove the expenses for purchasing digital assets is not detailed in the amendments. The right to deduction in the absence of supporting documents (deemed expense at 20% of the income) is explicitly prohibited by the bill. We still hope for official clarifications on how to document expenses for DFAs acquired in 2021 and earlier,” notes Sergey Leoshko.
Expenses may include fees of exchanges, operators, registrar services, banks and other future participants in the official turnover of DFAs in Russia.
Moreover, according to the bill, losses from digital deals can be offset only against income from other similar deals — it will not be possible to offset against other taxable personal income. It is also necessary to separately account for income connected with holding assets, such as coupon or interest income, dividend payments to holders, and others.
Overall, the introduced regime is similar to the personal income tax rules for income from trading and owning securities. Expenses for DFAs, for which securities will be obtained upon redemption, can be deducted from the income from such securities; however, these and other special cases should be analysed in advance.
Income and expenses for deals denominated in foreign currencies must be converted into rubles at the official Central Bank rate as of the date of actual income receipt or expense incurred.
All individuals who are tax residents of Russia must declare and pay personal income tax on DFA income, as implied by current Tax Code rules. The bill will bind legal entities to be tax agents in relation to DFA income paid to individuals.
“Undoubtedly, this will simplify life for individuals, as all features of tax calculations, as well as the remittance of personal income tax, will be borne by organisations officially dealing with digital assets. The key is that such organisations appear,” the lawyers conclude.
Conclusion
The introduced amendments aim to provide clear rules for taxing income from deals or holdings of digital assets. Although the bill comes into force one month after publication, it provides for applying the new tax provisions to relationships arising from January 1, 2022 — i.e. retroactively.
At the same time, experts advise examining the impact on each individual deal separately.
Previously, ForkLog reported that the tax bill on digital assets does not affect the cryptocurrency market in Russia.
Taxation of cryptocurrency operations will be described separately and may be adopted in parallel with the bill “On Digital Currency”.
Follow ForkLog’s bitcoin news in our Telegram — cryptocurrency news, prices and analysis.