As mentioned in our earlier newsletter, there has been no legislation specifically concerning the taxation of incomes derived from from cryptocurrencies in Hungary. However, the increasing volume of cryptocurrency trading requires that income from this type of transactions, as a new form of capital income, be integrated into the personal income tax (PIT) system.
Bill on the new handling and taxation of cryptocurrency incomes
If passed into law, bill no. T/16208, submitted on 11 May 2021, would take significant steps towards “whitening” incomes from cryptocurrencies. Under the current rules, unless otherwise provided by law, incomes derived from cryptocurrency transfers are taxed in the category of “other income”, which means that, in addition to a 15% personal income tax (SZJA), they are also subject to a 15.5% social contribution tax (SZOCHO). If the income is received by a private individual from a company that is not resident in Hungary (which is quite common in the case of cryptocurrency trading), the social contribution tax must be paid by the individual, which means that the tax base of the SZJA and the SZOCHO are 87% of the otherwise established amount of income.
By contrast, under the proposed new rules, income from the sale of crypto-assets would no longer constitute part of the aggregated tax base, but would be regarded as a “separately taxed income”, which entails no social contribution tax to be paid. Thus, under the rules of the bill, the tax burdens on cryptocurrencies would be reduced from 30.5% to 15%.
Definition of crypto-assets and transactions
Under the new rules of the Personal Income Tax Act, ‘crypto-asset’ means a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.
A transaction with a crypto-asset would be one whereby a private individual derives income in the form of a non-crypto asset through the transfer or assignment of a crypto-asset, by way of a transaction that is open and available to anyone (a non-private transaction). In other words, the transaction is only taxable if the crypto-asset is converted into a non-crypto asset; otherwise, the transaction is tax-free.
The method of determining and declaring the income
The method of determining the income from transactions with crypto-assets will follow a logic similar to the determination of income from controlled capital market transactions. Income is considered to have been derived if, in the given tax year, the combined amount of transaction gains in the given tax year exceeds the combined amount of transaction losses plus the fees and commissions paid in connection with the transaction. The latter also includes documented expenses not linked to the specific transaction, but related to the holding of the crypto-assets. A transactional profit is achieved if the income derived exceeds the documented expenses incurred in connection with the acquisition of the crypto-assets, from fees and commissions and related to the transaction. However, it is not necessary (not possible) to determine a transactional income if its amount is less than 10 percent of the prevailing minimum wage. This latter provision is applicable if the individual does not receive income from other transactions of the same subject matter on the date of the income, and the combined amount of such incomes is less than the minimum wage.
In determining the transactional profit, the arm’s length (market) value of the crypto-asset determined for the date of the transfer or assignment of the crypto-asset (the date when the associated rights are first exercised) must be used as income. On the other hand, as expenses, such costs may be taken into consideration that were incurred in the given year under legal titles specifically mentioned in the law (e.g. the expenses incurred in connection with the purchasing of the crypto-asset or in the course of crypto mining activity).
If the combined amount of all transaction losses in the tax year exceeds the combined amount of all transactional gains, the individual who has suffered the loss may use tax equalisation. In the course of tax equalisation, individuals may offset the “tax content” of their losses arising from transactions carried out with crypto-assets during the given and the preceding two tax years against the taxes to be paid on their current annual tax return.
Private individuals must determine the income derived from transactions with crypto assets annually, for each tax year, which may be done either by supplementing the draft tax returns prepared by the tax authority or by filing their own tax returns.
Transitional provision – deferrable PIT payment obligation
A transitional rule related to the PIT payable on income from a crypto assets provides that, if the private individual has not declared income from the transfer or assignment of crypt assets before 2022, they may elect to apply the new rules on all transactions involving crypto assets, provided that the profit from the abovementioned transactions must be taken into consideration as transactional profit for 2022.
Therefore, on the basis of this transitional provision, individuals satisfying the above conditions may defer their obligation to pay the personal income tax on cryptocurrency incomes until the deadline for submitting the tax return for 2022, i.e. until 22 May 2023.
