15% flat tax on cryptocurrency incomes in Hungary

Dear Clients! Dear Readers!

In an international comparison, it will be possible to tax income from cryptographic devices in Hungary from next year on attractive terms, if the Parliament approves the package of laws submitted in recent days.

What can be considered a cryptographic device?

The dreamer of cryptocurrencies is a person or group publishing under the pseudonym Satoshi Nakamoto, who solved the problem of double spending in a publication of just nine pages after the 2008 financial crisis, i.e. that a person can spend money in a given digital form only once, without a central authentication organization. The aim was to show that there is no need for a central intermediary role in the current financial sector for people to be able to pay each other in a credible, secure way. Today, many still have doubts about the rise of cryptocurrencies, but it is clear that the experiment was technically successful.

However, the placement of cryptographic devices in the tax system is still quite cumbersome. This is because tax systems (like spell-checking software) tend to adapt rather slowly to the new phenomena, and there is no uniform global regulation for the assessment of cryptocurrencies that clearly defines the place of cryptocurrencies either in accounting systems or in the tax system.

According to the Hungarian Civil Code, cryptocurrency cannot be considered either a legal tender or a security. In the Hungarian accounting environment - according to professional consensus - we can mostly interpret cryptodevices as receivables. According to the ruling of the European Court of Justice, it can be considered as a "virtual currency" that can be obtained in a number of ways:

• by purchasing using a commercial (cryptocurrency) interface,
• with mining (by joining the blockchain process through a computer resource)
• with betting
• through acquisition for consideration
• or through various investments.

Current tax legislation for individuals

Under current regulations, a distinction must be made according to whether we perform a cryptographic device activity on an ad hoc or business basis. While ad hoc transactions may even remain tax-exempt, business-like activities (if profits are made) are in any case taxable.

The most commonly known source of income is the so-called mining and trading, for which different rules apply.

Cryptocurrency mining

If a person, as a private individual, operates computer equipment and thereby acquires a newly created mining and trading, for which different rules apply.
Cryptocurrency (mining), his activity is considered a separate activity for personal income tax purposes. The cost of obtaining cryptocurrency, typically the cost of electricity, can be deducted from the revenue. In this respect, an itemised cost accounting or the application of the 10% cost ratio is possible. Revenue is considered to be the normal market value at the time when the cryptocurrency is acquired. After the deduction of the 10% cost ratio or the cost of expenditure certified by itemised supporting documents, 15% of the income tax, or 15.5% social contribution tax, shall be paid on the basis of the debt. There is no tax limit on social contribution tax, the total income is taxable.

Cryptocurrency trade

By selling cryptocurrency purchased for investment (exchange rate gain) purposes, we can indeed generate income and profits. However, since such income is not a real security or foreign currency, it should be treated as other income. A tax liability arises when the cryptocurrency is converted into legal tender (so-called fiat money) and the proceeds of the conversion exceed the previous acquisition value, i.e. a profit is made. The tax base is 87% of profits (given that the income is likely to be paid by a non-payer), which is also subject to 15% personal income tax and 15.5% social contribution tax.

In the above two cases, it can be seen that such transactions give rise to income on a consolidated tax base, on which a tax advance must be paid, but in return, tax relief can also be claimed.

Regulations coming into force from 2022

From next year, the category of “income from a cryptographic transaction” will be added to the personal income tax system as a new concept and tax fact. Under the new set of rules, any transaction will be considered as separate taxable income, in which an individual

• in a bargain available to anyone
• through the transfer of a cryptographic device
• acquires property value.

It is important to emphasize, therefore, that the acquisition of any asset value through a cryptographic means generates such separate taxable income.

A cryptographic device is a digital display of value or rights that can be electronically transferred and stored using shared ledger technology or similar technology, so any digital payment device based on blockchain technology commonly used as cryptocurrency in the common language falls into this tax category.

Under the new rules, it is clear that a taxable transaction only arises if the cryptographic device is removed from the virtual space, i.e. the tax liability arises when switching to a legal tender.

Determination of a tax base

Under the new rules, it is necessary to determine the profit (profit or loss) for the current year per cryptocurrency.

In practice, the market value at the time of the conversion of the cryptographic instrument into a “fiat currency”, i.e. legal tender, should be considered as income. In determining the result, only expenses incurred in the current year may be taken into account as expenses:

• expenditure on purchases and acquisitions
• expenditure incurred in operating systems used for cryptographic mining.

Individuals can claim their losses from a transaction executed with a cryptographic instrument in the tax year or in the two years preceding it against the profits of other transactions in the current year by means of tax offsets, similarly to regulated capital market transactions. On this basis, the deduction for the current year's losses could be deducted from the tax payable on the current year's profit In addition, the tax on the loss resulting from a transaction with a cryptographic instrument in previous years will be included in the current year's tax return as tax paid, which will also reduce the tax payable.

The tax rate applicable to the tax base resulting from the aggregation of the results of transactions is 15%, to which no social contribution tax or other contribution is linked.

It is important to emphasize that since the income from the cryptocurrency is now considered a separate taxable income, from 2022  it  it will not be possible to benefit from a tax credit either by a family allowance or the benefit of firstly married spouses and the exemption of mothers with four children, either.

It is a relief for those aiming for additional income that income not exceeding 10% of the current minimum wage does not have to be determined if there is no income from other cryptocurrencies on the day the income is earned or the income from cryptocurrencies for the whole year does not reach the the value of the minimum wage per year.

A clear goal is to whiten incomes

The legislator’s clear intention is to channel revenues from cryptographic assets into the tax system with a lower tax burden. This is also reflected in the fact that the income earned before the law came into force in 2022 but not declared will be able to be declared as current year income in the 2022 return without additional sanctions. The 15% tax rate is low enough for even foreign individuals to think about moving their tax residence to Hungary, as they can make significant savings completely legally compared to international tax rates.

Kind regards,

ABT Treuhand Group