Ukraine presents bill to tax bitcoin operations

НКЦБФР Ukraine presented a draft law regulating the taxation of cryptocurrency operations in the country, and updated text of the Law on Virtual Assets (OVA) with implemented provisions of the European regulation MiCA. The document is available to ForkLog editorial team.

Changes to the Tax Code

Under the proposed amendments, taxpayers determine the overall financial result (profit or loss) from virtual assets (VAs) transactions themselves. This figure is the sum of income received from the sale of virtual assets, reduced by their initial cost.

If, as a result of an exchange, the taxpayer received not only VAs but also cash and/or goods (works, services), the initial cost of the virtual assets is their contractual value at the time of such exchange.

If a taxpayer holds several virtual assets with different initial costs, their sale is carried out in the order in which they were acquired.

A sale of virtual assets is considered as:

• receiving cash for them;
• settling for purchased goods, works, services or exchanging virtual assets for such.

In the latter case, income is considered both as the value of the received VA and the amount of cash received or the value of received goods.

An exchange of one VA for another, as well as other operations in which the taxpayer receives only a VA, are not considered a sale. Likewise: with the initial issuance or redemption of an electronic money token, a token tied to an asset or a service token by their issuers. Further income from such operations is taxed under a single tax similar to the income of individuals from economic activity.

The aggregate monthly (annual) taxable income includes investment profit from VA transactions and does not include the value of VAs received by the taxpayer as a result of their issuance or gratuitous transfer.

Record-keeping for VA transactions is kept separately from other income and expenses and operations with other investment assets.

Investment profit from VA transactions is determined at the moment of their sale.

The reporting period is the calendar year, at the results of which the taxpayer must file a tax return.

A positive value of the overall financial result from investments in assets held by the taxpayer for 365 days or less is included in the taxpayer’s total annual taxable income and taxed at 18%.

If the overall financial result of VA sale is negative, the amount is carried forward to reduce the overall financial result in subsequent years until full offset.

Providers of services related to the turnover of virtual assets must store and provide to the tax authorities information about citizens’ VA transactions, the amount of income and expenses for such operations.

Amendments to the Law on Virtual Assets

The law sets out requirements for offering and market placement:

• Asset-backed tokens — VAs tied to the value of any other object of civil rights or the right to such an object;
• Electronic money tokens — VAs tied to the value of an official currency;
• Other virtual assets — VAs not relating to the above categories (including a service token providing the right to transfer a product or service).

However, it does not apply to VAs defined by individual characteristics and that are non-fungible. The criteria for asset classification are approved by the NSSMC.

Public offering of virtual assets that are not asset-backed tokens or electronic money tokens requires a legal entity to prepare marketing announcements and a detailed white paper outlining, among other things, potential risks.

Exceptions are cases where assets are distributed for free, issued as rewards for mining or staking, concern service tokens for an existing product, or their owner can exchange them for goods in a limited network of points of sale.

Asset-backed tokens may publicly be offered by authorised legal entities and banks. The latter must also prepare the asset’s white paper.

Issuers of such tokens must maintain own funds and reserves in the amount set by the NSSMC to support the asset. They are also required to identify and prevent potential conflicts of interest.

Public offering of electronic money tokens or applying for admission of electronic money tokens to trading can be undertaken only by the issuer of such virtual assets, including banks, e-money institutions or branches of foreign payment institutions that have published a white paper.

All service providers dealing with the turnover of virtual assets must undergo authorisation. They must be located in Ukraine and be formed as a joint-stock company, a limited liability company or a company with additional liability. At least one director must be a resident of the country.

It is also allowed for a legal entity from EU member states or countries that are part of FATF to provide such services, subject to authorisation.

The consideration of an authorisation application will take up to 40 business days from its receipt by the NSSMC. In case of suspension of activity by the issuer or violations by it, the authorisation may be revoked.

Issuers of electronic money tokens are prohibited from paying interest on them. The issuers must keep records of funds received in exchange for tokens. Investment is allowed only in safe assets with low risk. Not less than 30% of funds raised from the issuance of an electronic money token must be kept in a separate bank account. A report on each token must be submitted to the NBU.

Banks may provide all types of services related to the turnover of VA. Investment firms will require a licence for this. An electronic money institution may provide custody, administration and transfer services of VA on behalf of third parties solely in relation to the tokens it issues.

Licensed operators of organised capital markets will have the opportunity to operate as trading venues for VAs. Before trading begins they must ensure the asset’s suitability and screen it for potential connection to illegal or fraudulent activity. Information about all orders created on the platform must be stored for at least five years.

The amendments prohibit trading on insider information and market manipulation.

A service provider dealing with the turnover of VA is responsible for safeguarding client funds, including countering operational risks and detecting abuse. The fact of material damage to the holder of a VA is established by a court.

Regulation of the market, as in the previous edition of the law, remains with:

• NSSMC in the supervision of providers of VA-related services. Its remit covers virtual assets, asset-backed tokens, and the register of their issuers;
• NBU — in the supervision of electronic money tokens, and maintain the register of their issuers.

In case of unlawful actions by legal entities participants in the market, the NSSMC has the right to fine them up to twice the profit derived from the violation. Fines for individuals must not exceed 28 million hryvnias (≈$760,000).

The Commission may also remove any member of the governing body of a VA-related service provider, strip their voting rights on the board, or demand their replacement.

Specific fines are prescribed for insider information disclosure and market manipulation.

To ensure compliance with the law, the NSSMC may carry out planned and unplanned inspections for up to 30 business days (+15 days if warranted), and undertake controlled purchases to obtain evidence in investigations.

Those providers that have obtained authorisation pay annual regulatory contributions. The amount varies by activity — from 25,000 to 80,000 non-taxable minimum incomes of citizens.

In case of non-payment, the service provider must pay a fine of up to 100,000 hryvnias ($2,710).

A separate fee is charged for administrative services; its amount is to be set by the NSSMC.

On 14 June, the regulatory acts will be discussed at the meeting of the Advisory Council on Virtual Asset Regulation, after which they will be amended in light of comments and remarks.

adopted in September 2021 law ‘On Virtual Assets’ will not come into force until amendments to the Ukrainian Tax Code are enacted.

ForkLog previously analyzed the document.

In the future, authorities said they intend to revise the law taking into account new European rules. At the first stage, authorities are considering implementing only the basic provisions of MiCA.