How to declare tax on cryptoassets in your Hungarian 2021 income tax return

The Hungarian resident individuals’ income derived from crypto transactions in 2021 must be declared in their personal income tax returns which are due on 20 May 2022. This year, individuals will have the opportunity to decide whether to pay the tax as per the general rule or to apply the new regulations. What exactly is it about?

• What is a cryptoasset?

By cryptoassets, 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.

• Tax liability until 2022

Previously (and as a general rule, in 2021, too), revenues from cryptocurrency mining were taxed as income from self-employment, whereas gains from the sale of cryptoassets were taxed according to the rules of other income (therefore, various tax benefits could be used on this income, e.g. family or personal disability tax benefit). Other income is liable to 15% personal income tax and 15.5% social contribution tax (in 2021, 87% of the assessed income should be taken into account as tax base in this case).

• Tax liability from 2022

From 1 January 2022, as a result of the amendment of the Hungarian PIT Act, the income from a cryptoasset 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 cryptoasset is “retrieved from the cryptoworld”, that is, the conversion of a cryptoasset into another cryptoasset 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 cryptoasset 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 cryptoasset 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.

Expenses related to the acquisition of cryptoassets for the current year are eligible (i.e. the market value at the time of acquisition, the related banking and transaction costs, etc.). 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 the loss cannot be carried forward for longer than two years, therefore, after two loss-making years, it is worth considering how the loss carry-forward may be utilised.

• Options available in 2021 PIT return

In this year's personal income tax return, individuals can choose whether to apply the general, or the new rules for taxation of gains / losses derived from cryptoassets. If they opt for taxation under the new rules, then they can also provide for losses in the 2021 return. If a cryptoasset was purchased in the 2021 tax year, but was not sold until after 2021, it may be worthwhile to declare its cost as a transaction loss in the 2021 PIT return, otherwise it will not be recognised later against the transaction income. It should not be allowed to amend the 2021 PIT return later by way of filing a corrective tax return in this particular case.

• „Tax amnesty”

As an incentive for individuals to declare their income earned on cryptoassets, a 5-year tax amnesty has also been announced: those, who have not declared any income on cryptoassets so far, should be eligible for a tax amnesty for a period of 5 years, which should be included in the 2022 return. The eligibility criteria are as follows: the individual has not declared any cryptoasset income prior to 2021 and has chosen the tax rules introduced in 2022 for all previous transactions of this type.

• Income from foreign sources

Most of the cryptoasset 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. 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.

Further taxation issues should arise, if a service is paid in cryptocurrency, or if employees receive cryptoassets as part of an employee loyalty program.

19 May, 2022

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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.