The tax problems that the crypto community in Serbia is facing or will face in the future have remained in the shadow of the conflict that arose between freelancers and Tax Administration. Namely, in order to regulate the fast-growing cryptocurrency market and ensure that citizens pay tax on a part of the income that they make from trade, at the end of 2020, Serbia passed the Law on Digital Property (LDP) which regulates cryptocurrency and digital token market. Naturally, the legislator had to harmonize tax regulations on income generated through digital property trade (Law on Personal Income Tax ‒ LPIT, Law on Corporate Income Tax, etc.).
Regulating the tax treatment of income from digital property was necessary, both from the perspective of citizens’ legal certainty, and from the economic point of view, because favourable tax treatment should encourage citizens to report their income.
Confusion arose at the beginning of the application of tax regulation (LPIT) and material regulations (LDP). The beginning of the application of LPIT is linked to the date when LDP came into force. As LDP came into force on December 29, 2020, LPIT started being applied from the beginning of 2021.
By the way, in practice, a law’s entry into force and the beginning of its application mostly coincide. Namely, the law comes into force on the eighth day after it has been announced in the Official Gazette of RS. This deadline is usually enough for those to whom a specific law applies to get acquainted with the changes and prepare for their implementation, i.e., to adjust their business with the new rules. However, when the changes in the law are so pervasive or the area that has been completely unregulated so far is regulated for the first time, the deadline of eight days is not sufficient, so the legislator separates the day of entry into force and the beginning of application of the new law. In that case, the law enters into force, but the beginning of its implementation is postponed for an appropriate period for which it is estimated that it is sufficient for state authorities and citizens or companies to prepare for new obligations. This is exactly the case with LDP and LPIT.
The legislator has decided to tax the income from the cryptocurrencies trade with the capital gains tax, i.e., the positive difference between the purchase and sale price, at the rate of 15%. However, the problem that law abiding citizens i.e., taxpayers, have already encountered, makes it impossible to report capital gains. Namely, the form of tax return for capital gains tax has not been changed so as to contain appropriate columns for entering data on a specific transaction with cryptocurrencies. However, this omission can be quickly and easily remedied if the Ministry of Finance updates the tax return form.
Once the problem with the tax return is overcome, there is the problem of processing the submitted tax return and determining the tax. Specifically, the capital gain tax is determined by a resolution of Tax Administration, which means that when a taxpayer submits a tax return and supporting documentation, the tax inspector must process the return, and create and submit a resolution determining the tax that the taxpayer must pay by a certain deadline.
The nature of cryptocurrency trade is such that numerous transactions are performed on a daily basis and price differences are often minimal. Nevertheless, according to the current solution, the obligation to file a tax return exists regardless of whether the amount of capital gain is 1 or 500 euro. This further means that Tax Administration could be overwhelmed by numerous tax returns for capital gains, which are negligible for the public budget because the cost of time and resources of Tax Administration required for processing tax returns by far exceeds the income from collected taxes. The same is true for taxpayers. The solution would be to prescribe a non-taxable amount of transactions or capital gains in order to relieve Tax Administration and focus on more fiscally generous revenues, while taxpayers should not be held liable for not reporting insignificant taxable income.
The described problems can be easily solved by legislative interventions, but even then there will be a problem of documenting transactions. Capital gain, i.e., loss in the sense of LPIT represents the difference between the selling price and the purchase price, realized by transferring cryptocurrency. When transferring cryptocurrencies, the purchase price is considered to be the price that the taxpayer documents as actually paid.
The essence of the current problems is that there is no further consideration of statutory provisions on how to document the purchase price or instructions from Tax Administration and the Ministry of Finance on what is acceptable evidence for that purpose. Additional legal uncertainty for the crypto community stems from the fact that cryptocurrency trade takes place through mobile apps, i.e., foreign cryptocurrency exchanges (e.g., Binance, CEX, Kraken, etc.) which have different reports on completed transactions that are delivered by e-mail or through appropriate apps, which is not the usual piece of evidence in tax proceedings. In addition, all reports of foreign stock exchanges are in a foreign language, most often English, so Tax Administration could request certified translations of those reports, which would make cryptocurrency trade completely meaningless.
Finally, it should be noted that these are only the most obvious problems that the crypto community is currently facing. In addition to those, there are others such as documenting the purchase price of cryptocurrency acquired by miners, lack of benefits for long-term investors (holders), treatment of exchanging one type of cryptocurrency for another, determining the value of digital tokens (eg popular NFTs) and the like.
The application of completely new regulations always causes problems at the beginning, which is understandable. However, it seems that the novelties in the LPIT on cryptocurrency taxation causes many more problems for taxpayers, despite their proclaimed goal to improve legal certainty. Therefore, the crypto community should be ready when Tax Administration decides to control the income from the sale of cryptocurrencies.