What is crypto-currency?
The answer to this question is largely unclear at this moment, but still attempts have been made to define what exactly this new type of payment instrument is. One of the first attempts to define the concept dates back to 2015, when in one of its decisions (on case C ‑ 264/14 CJEU) the Court of Justice of the European Union accepted that “bitcoin” is neither a security nor a deposit, account or transfer; according to the court, crypto-currency is rather a “contractual means of payment”, which cannot be qualified as a tangible asset, but serves to “the operators who accept it”.
Later on the case law changed and crypto-currencies began to be considered as financial instruments or at least as having a similar nature and that as such they should be included in the regulatory framework of financial instruments.
At national level there is also an attempt to define crypto-currencies, namely in §1, item 24 of the Additional Provisions of the Measures Against Money Laundering Act: “Virtual currencies” are digital representations of a value which is not issued or guaranteed by a central bank or public body, is not necessarily linked to a legally established currency and does not have the legal status of currency or money, but is accepted by individuals or legal entities as a medium of exchange and can be transferred, stored and traded electronically”. It becomes evident from this definition that “virtual currencies” are not money within the meaning of art. 25, par. 2 of the Bulgarian National Bank Act and do not constitute legal means of payment.
What transactions can be carried out with crypto-currencies?
As crypto-currencies are not legal means of payment, we cannot put our counterparty under the obligation to accept a crypto-currency payment. On the other hand, we can also refuse to accept payment in “virtual money”.
From the opinions of the CJEU and our courts that crypto-currency is, after all, a medium of exchange, we can conclude that at the moment no contract of sale can be concluded, when one party pays with crypto-currencies – this will always be a contract of exchange and the provisions governing this type of transaction will apply accordingly.
The question of the value of crypto-currencies is also interesting. Their monetary value changes every minute and sometimes in a very short time their price rises or falls dramatically. Therefore, when a contract is concluded, the amount of crypto-currency to be paid is agreed, and not a specific value in money.
It is also possible to provide crypto-currencies as collateral for an obligation and this is done by a pledge agreement. It is assumed that the pledge is a rather informal, yet a real pledge of an item and for the conclusion of the pledge contract it will be necessary to transfer the crypto-currency to the crypto portfolio of the pledgee.
The National Revenue Agency assumes that the income from transactions with crypto-currencies should be treated as income from transactions with financial assets; hence the rules of Section 5 of the Personal Income Tax Act shall apply. That is, tax will be due if any profit is realized from a crypto-currency transaction. The tax will be 10% of the amount of the profit itself, and here comes the question of how it will be declared and calculated. The calculation must take into account the respective monetary value of the currency at the time of its acquisition and, respectively, the value at the time of its transfer. Thus, depending on whether the price has increased or decreased over the respective period, an assessment is made whether a profit has been realized from the respective transaction or not. The profit is declared by the annual tax return and according to the National Revenue Agency when filing the return individuals are not required to provide documents proving circumstances, but in the event of a future inspection such documents may be required.
Another major question is whether a person owes tax if it mines crypto-currencies with the appropriate machines. According to the National Revenue Agency, such individuals will be treated as sole proprietors, the provisions of the Corporate Income Tax Act will apply and the respective sole proprietor will owe a higher tax, namely 15% of the realized profit.
“The future of finance is digital”
Thus begins the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on a digital finance strategy for the EU, COM (2020) 591 of 24.09.2020. This act can be considered the first major step towards the regulation of crypto-currencies at supranational level. The Communication holds the view that the advancement of digital technologies and digital services intensifies the need for clear legislation to guarantee both the interest of consumers and that of service providers.
The Communication sets out four clear priorities for promoting the deployment of digital technologies by 2024. The first priority is “to tackle fragmentation in the Digital Single Market for financial services, thereby enabling European consumers to access cross-border services and help European financial firms’ scale up their digital operations”. According to this priority, by 2024 the EU should introduce a comprehensive framework allowing the introduction of the distributed ledger technology (DLT) and crypto-currencies in the financial services sector, as well as to implement “a sound legal framework enabling the use of interoperable digital identity solutions which will enable new customers to access financial services quickly and easily (“on boarding”).
The second priority is to ensure that the EU regulatory framework facilitates digital innovation in the interest of consumers and market efficiency. Under this priority, the Commission undertakes to regularly review legislative and interpretative proposals, aiming to ensure diversity and right to choose regarding the use of certain technologies to which consumers have access.
The third priority is “to create a European financial data space to promote data-driven innovation, building on the European data strategy, including enhanced access to data and data sharing within the financial sector”. Under this priority the EU faces the task of building a data system that will be accessible to a wide range of individuals and institutions, for the purpose of facilitating the exchange of information and ensuring the financial security of all participants in trade. The fourth priority is “to address new challenges and risks associated with the digital transformation”. It also discusses the potential risks of these new technologies, and to this end the Commission has expressed its desire to revise the existing regulatory framework on consumer protection and the public interest.
The fourth priority is “to address new challenges and risks associated with the digital transformation”. It also discusses the potential risks of these new technologies, and to this end the Commission has expressed its desire to revise the existing regulatory framework on consumer protection and the public interest.