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How to declare tax on crypto-assets in your Hungarian 2022 income tax return?

How to declare tax on crypto-assets in your Hungarian 2022 income tax return?

How to declare tax on crypto-assets in your Hungarian 2022 income tax return?

Income generated from crypto asset transactions in 2022 must be declared in the personal income tax return by May 23, 2023. This year, private individuals must pay taxes according to the new regulations. What exactly is it about?

 

  • What is a crypto-asset?

By crypto-assets, the Personal Income Tax Act (hereinafter: PIT Act) means a digital currency of value or rights, capable of being transferred and stored electronically with the application of distributed ledger or similar technology.

Therefore, it does not belong to the scope of crypto-assets, so it is not taxed according to the rules applicable to crypto-assets, e.g., investing in derivative instruments (CFDs) in which the investor does not acquire ownership of the crypto-asset will only be entitled to a specific contract position. Indirect investments when the investor invests in an investment fund (ETF) that (also) manages crypto-assets are also not taxed according to the rules for crypto-assets.

It is therefore not such an easy task to clarify exactly which asset and under which legal title the tax payment obligation arises.

  • Tax liability until 2022

Previously, the income from crypto-asset mining was taxed as self-employment income, and the profit from the sale and purchase of crypto-assets was taxed according to the rules of other income (and various discounts could also be used for this income - e.g.: family, personal).

  • Tax liability from 2022

From 1 January 2022, as a result of the amendment of the Hungarian PIT Act, the income from a crypto-asset is no longer part of the consolidated tax base, but is considered to be separately taxable income. A 15% personal income tax obligation arises on this type of income, but no social contribution tax should be payable, with no tax benefits available. Provided that certain conditions are met, transaction income that does not exceed annually the minimum wage should be tax exempt.

An executed transaction should be taxable only if the crypto-asset is “retrieved from the crypto-world”, that is, the conversion of a crypto-asset into another crypto-asset should be non-taxable, conversion into a fiat currency (i.e., any legal tender) should be liable to tax, whereas if an individual pays, without conversion, by a crypto-asset for a real estate or any other asset (e.g.: car, computer, etc.) or contributes it into a company’s share capital, it should also be taxable. In this case, the market value of the crypto-asset should be considered as the basis for tax calculation. The latter rule, by the way, applies to all sales: revenue must always be calculated at fair market value.

It is important that only the current year's expenses related to the acquisition of crypto-assets can be accounted for (the market value at the time of acquisition, as well as the related bank and transaction costs), i.e., if the acquisition took place before the year in which the income was earned, the entire income forms the tax base. It allows for further tax planning that the loss can be deferred for two years: if there is a loss in one year, it is also worth declaring, because in the next two years this loss can be used against the realised revenue, and if a profitable year is followed by a loss-making year, the tax payable in the subsequent (profitable) year can be reduced by the tax calculated on the amount of the previous year’s loss. It is important that a loss occurs only if the crypto-asset is sold with a negative balance in the year of purchase. Since the loss can no longer be used in the long term, it is worth thinking about using the loss after two unprofitable years.

  • „Tax amnesty”

A tax amnesty for 5 years was also announced as a motivation to tax crypto-assets: those who have not paid tax on their crypto-income until now will receive a tax amnesty for 5 years, which can be enforced in this year's 2022 tax return. This is possible if the individual did not declare income from crypto-assets before 2021 and chooses the taxation method introduced in 2022 for all previous transactions of this type. Previous income must be taken into account as 2022 income and included in the tax return.

  • Income from foreign sources

Most of the crypto-asset transactions are carried out on foreign trading platforms, therefore, individuals earn income from foreign sources. In this case, the provisions of the relevant double taxation treaty should also be taken into account (in the absence of an agreement, the Hungarian rules shall apply). Under some of the treaties, the source country may also have the right to tax. It is definitely worth seeking professional help in order to determine the tax liability correctly.

  • Tax planning options

Additional tax questions may arise if an order is settled in cryptocurrency or if employees receive crypto-assets as part of an employee loyalty program, whether the favorable tax rules applicable to long-term investment accounts (so-called permanent investment accounts) can be applied to cryptocurrencies, ETFs, etc. The question also arises as to what tax advantage can be achieved if cryptocurrency is assigned to trust asset management.

Important information for the future is that, based on the DAC 8 directive, it is expected that from 2026, both EU and third-country service providers providing services to EU customers will be obliged to provide data to the tax authorities, so that these incomes will also become transparent.

 

Since clarifying the tax planning options that arise in connection with crypto-assets, determining the withholding tax, and filling out the tax return correctly are complicated processes, we definitely recommend that you consult with a tax advisor before preparing the return.

 

April 18, 2023

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Should you have any questions regarding this newsletter, the tax experts of VGD Hungary will be pleased to assist you.

This newsletter provides general information and does not constitute tax advice.

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