Draft Law No. 9083 has been submitted to Parliament. How would you assess the proposed initiative?

Draft Law No. 9083 On Changes to the Tax Code of Ukraine in Relation to Taxation of Transactions with Virtual Assets in Ukraine is undoubtedly a positive move by the state towards the transparency of transactions with cryptocurrencies and tokens and encouraging taxpayers to report the relevant transactions in their tax returns. In the absence of specific regulations and laws in respect of virtual assets, their circulation and transactions involving such assets, the Draft envisages at least a certain Ukrainian legislative framework in these areas.

Although taxpayers and the tax authorities are likely to differently interpret definitions of virtual assets, cryptocurrencies, tokens and mining suggested by the Draft, the document resolves certain tax concerns actively discussed in the crypto-community. Specifically, the Draft clearly provides for the rules for VAT treatment of transactions with cryptocurrencies and tokens, envisaging that only transactions with token assets certifying the title to VAT-able goods are subject to VAT. Furthermore, the Draft envisages that crypto-assets exchange transactions are not subject to taxation.

The Draft Law provides for a corporate income tax reduced 5% (until 31 December 2024) and 5% personal income tax rates applicable to profits generated from transactions with virtual assets (i.e. cryptocurrencies and tokens). Taxpayers will account their transactions with virtual assets separately from other transactions. Losses from such transactions will not reduce the tax base of the relevant taxes.

Despite the positive impact that the Draft may have on regulation of transactions with virtual assets, it also involves certain threats to the financial system of Ukraine, state and municipal budgets and taxpayers. These threats include the likelihood of certain businesses switching to crypto-business instead of operating in the real sector of economy, volatility of cryptocurrencies rates, potential fraud, cyber-crimes, bankruptcies, increased risks for money-laundering and potential shortage of income part of the budgets due to the reduced tax rates applicable to transactions involving virtual assets. The absence of a clear regulatory framework with respect of transactions with crypto-assets and rules/procedures for tax audits of transactions with these assets are also likely to give rise to tax disputes because of differing interpretation of such transactions by  taxpayers and tax authorities.  It would, therefore, be in the best interests of both the state and taxpayers if the Draft comes into effect alongside the legislative framework addressing the above-mentioned threats. Nevertheless, the Draft is a good starting point for regulation of crypto-assets related transactions and, if it becomes law, it will likely speed up the process of adoption of the relevant Ukrainian regulatory framework in relation to this technically-advanced, unstable, but fast-growing market involving billions of dollars daily.

Andriy Reun, partner, head of tax, exclusively for The Ukrainian Journal of Business Law.