Cyprus: taxation of income from cryptocurrency

Earlier, we have already talked about the regulation of activities related to cryptocurrencies in Cyprus (see the article), as well as the specifics of accounting for cryptocurrencies (see the article). It is time to talk about the taxation of transactions related to cryptocurrencies.

Income from trading of cryptocurrencies, as well as income from trading stocks, bonds and other securities, is generally active income, and therefore is subject to taxation under the Income Tax Law of 2002. You can also read more about the taxation of income from securities trading in our previous article. In accordance with Article 5 of the Income Tax Act, tax residents of Cyprus (both companies and individuals) pay tax on any income they receive anywhere in the world during the relevant tax period. At the same time, Article 8 of this Law establishes many exemptions and benefits, as a result of which most of the income of individuals and legal entities in Cyprus is not subject to taxation. Among other things, it is very popular believe among the clients that the income from cryptocurrency trading can be exempted from taxation in Cyprus based on the exemption provided for income from securities trading.

To understand whether the taxpayer can use this exemption or not, it is necessary to firstly understand what is a security for the purposes of the Cyprus tax legislation. Here we will quote the article from the Law on the taxation of securities: “In accordance with Article 2 of the Law on Income Tax, a security is shares, bonds, futures and other securities of companies registered in Cyprus and abroad.»

There are also two Circulars from the Cyprus Tax authority explaining the concept of a security. Circular 2008/13 of 17.12.2008 and Circular 2009/6 of 29.05.2009, in which the tax authority further clarifies that in addition to the various types of shares and bonds themselves, securities also include derivatives on these securities. At the same time, the tax service separately explains that, for example, a promissory note issued by a company is not a security for the purposes of the Cyprus tax legislation, which means that the income from its sale is subject to taxation in Cyprus. Despite the fact that in the Circulars issued in 2008 and 2009 the tax authority does not speak separately about cryptocurrencies, we understand that cryptocurrencies, being a means of payment, do not contain a title, and therefore cannot be considered as securities.

In this regard, income from trading of cryptocurrencies is subject to taxation in Cyprus under the income tax and is subject to taxation for companies at the rate of 12.5%, and for individuals in accordance with the progressive rate (for more information on the taxation of personal income in Cyprus, see the article). At the same time, it should be noted separately that the amount of income received from trading of cryptocurrencies for tax purposes can be reduced by the amount of expenses incurred, for example, for the purchase or mining of cryptocurrencies. In this regard, it is necessary to take a responsible approach for collecting documents confirming the costs of purchasing of cryptocurrency.