Tax treatment of cryptocurrencies
Taxes on income
As part of the Environmentally Responsible Tax Reform (Ökosoziale Steuerreform) specific regulations on the taxation of cryptocurrencies will come into force on 1 March 2022. Under the new system, cryptocurrency holdings will be counted as income from capital assets, and will be taxed at the special rate of 27.5%.
Which cryptocurrencies are covered?
Pursuant to Section 27b, para. 4 of the Austrian Income Tax Act (Einkommensteuergesetz - EStG) a cryptocurrency is defined as "a digital representation of a value that has not been determined or guaranteed by a central bank or other state body, is not necessarily tied to a statutory currency, and that does not hold the legal status of a currency or of money, but that is accepted by natural persons or legal entities as a means of exchange and can be transferred, stored or traded by electronic means."
This definition encompasses publicly offered cryptocurrencies that are accepted as a means of exchange. It also applies to "stablecoins" - cryptocurrencies whose value is supposed to be tied to that of an underlying legally recognised currency or of other assets using a set mechanism.
The definition does not cover "non-fungible tokens" (NFT) and "asset tokens" underpinned by real assets, such as securities or property. These products are taxed according to general tax regulations, depending on nature of the tokens concerned.
Income affected and calculation methods
The definition of income from cryptocurrency holdings includes current income from cryptocurrency holdings ("fruits") and income as a result of realised increases in the value of cryptocurrency holdings ("realised gains"), irrespective of whether any minimum holding period has been observed.
Pursuant to Section 27b para. 2 EStG, the definition of current income from cryptocurrency holdings includes remuneration paid for transferring cryptocurrencies (see sub-para. 1). Such remuneration is deemed to have been paid whenever cryptocurrencies are transferred to other market participants in return for a fee. The definition of these fees for tax purposes specifically includes interest earned on loans of cryptocurrency (i.e., "Lending") and taxable considerations in return for the provision of cryptocurrencies for liquidity and/or credit pools as part of a "Decentralised Finance process" (or DeFi) (also referred to as "liquidity mining").
Cryptocurrency holdings acquired by means of a technical process in which transaction processing services are provided (sub-paragraph 2) also fall under the definition of current income. This provision is designed, in particular, to cover the acquisition of cryptocurrency holdings in the course of "mining" activities, regardless of whether the process results in the creation of new cryptocurrency or whether the income is provided by other members of a network in the form of a transaction fee. Operating a master node can also generate current income for tax purposes.
Income from capital assets is only deemed to have been generated if the nature and scope of the activity does not extend beyond simple asset management work. If the activity extends beyond such asset management, any resulting income is classified as income from commercial activity.
All current income is subject to taxation at the point of inflow. Such income is assessed for tax purposes at the time of the inflow on the basis of the value of the acquired cryptocurrency holdings and/or any other remuneration received at that time. This value will also be used in the future to represent the cost of the acquired cryptocurrency holdings for tax purposes.
By contrast, current income is not deemed to have been generated if:
- the service associated with processing the transaction consists primarily of investing (staking) existing cryptocurrency;
- cryptocurrency is transferred free of charge ("airdrop") or solely for other, insignificant benefits ("bounties");
- cryptocurrencies are accrued as a result of an alteration from the original blockchain ("hardfork").
In these cases, income from cryptocurrency holdings is not taxed at the time of inflow. However, the cryptocurrency holdings concerned are deemed to have been acquired at zero cost. This means that if they are disposed of at a later date, the full value of the cryptocurrency holdings will be taxed.
The exception for cryptocurrency holdings acquired as part of a traditional staking procedure only applies to services provided in connection with transaction processing (i.e, creating and/or validating blocks). Where processes that actually amount to the provision of a consideration in return for the transfer of cryptocurrency holdings are described as "staking," such processes are not covered by the exemption, meaning any proceeds arising from them are taxed at the time of inflow.
The definition of "income from realised increases in the value of cryptocurrency holdings" pursuant to Section 27b para. 3 EStG specifically includes:
- Income resulting from the conversion of cryptocurrency holdings into euros
- Income from converting cryptocurrency holdings into legally recognised foreign currency (for example, the US dollar)
- Income from trading cryptocurrency holdings against other economic goods and services (for example, buying an economic good and paying for it in cryptocurrency).
Trading one cryptocurrency for another cryptocurrency does not constitute a disposal, and such trades are not taxed. In addition, any expenses associated with such trades (such as transaction costs) are not deemed significant for tax purposes, and are therefore not taxed at the time of the trade. In this situation, the acquisition costs of the transferred cryptocurrencies are carried over to the cryptocurrency acquired in the trade.
Any behaviour that leads to the loss of the Austrian government's right to tax any profits resulting from disposal is also treated as a disposal (for more details, see here - in German only).
Profit from a disposal is calculated by subtracting the acquisition costs from the revenue generated as a result of the disposal concerned. Such profit is taxable. For trades, the disposal price for the relevant cryptocurrency holdings is assumed to be the fair market value of the cryptocurrency holdings concerned at the time of the trade (Section 6 para. 14 EStG). Note that any ancillary costs associated with the acquisition of the cryptocurrency holdings (for example, advice or transaction fees) can be offset against tax, reducing the profit for tax purposes. However, expenses associated with financial assets (such as electricity costs or the cost of acquiring hardware) are not tax-deductible unless the taxpayer chooses to make use of the standard taxation option (Regelbesteuerungsoption). For further details, see here - in German only.
Pursuant to Section 27a para. 1 EStG, income from cryptocurrency holdings (including both current income and profit from disposals) is subject to a special tax rate of 27.5%, and does not count towards the progressive thresholds for the taxation of other income. This provision applies irrespective of whether the amount of tax due is withheld at source (i.e., as capital gains tax), or determined on the basis of the tax return and/or assessment procedure.
However, an exemption does apply to income from private loans made in cryptocurrency, provided that the transfer contracts underpinning the loan are available to the general public. Income from such private loans is counted towards the progressive income tax thresholds.
Compensation of losses
According to Austria's general tax regulations, profits and losses associated with income from cryptocurrencies can be calculated for tax purposes together with the profits and losses associated with other capital income, such as dividends or proceeds from disposing of shares. For further details, see here - in German only.
In principle, the special tax rate for cryptocurrencies applies to commercial assets as well as to traditional capital assets. However, the special rate does not apply if generating income from cryptocurrencies is part of the core activity of the business concerned. In particular, this means it does not apply to businesses trading commercially in cryptocurrencies, or to businesses mining currency on a commercial basis. Revenues from such activities are taxed according to the progressive income tax thresholds.
Loss overhangs arising from cryptocurrency holdings that constitute part of a business's assets are treated in the same way as loss overhangs arising from commercially held capital assets.
Capital gains tax
Domestic (Austrian) debtors and service providers will be required to deduct Austrian capital gains tax (KESt) from capital yields accrued after 31 December 2023. This deduction can be made voluntarily from yields accrued before this date, in which case the capital gains tax is withheld and transferred directly to the tax office. Investors do not need to declare capital yields on which tax has been voluntarily deducted as part of their tax returns, because the applicable income tax is deemed to have been collected when the capital gains tax is withheld (this principal is referred to as "final taxation").
Where income is gained from cryptocurrencies before the duty to deduct capital gains tax comes into force, and if the tax is not deducted voluntarily, the income must be declared in the income tax return and taxed accordingly.
Limited tax liability
Current income from cryptocurrencies pursuant to Section 27b para. 2 EStG and capital gains from cryptocurrencies pursuant to Section 27b para. 3 EStG are not subject to limited tax liability. If the party obliged to withhold capital gains tax is aware that it is not an investor with unlimited tax liability, the withholding of capital gains tax may be omitted in these cases. If capital gains tax is nevertheless withheld by the withholding agent, it can be refunded pursuant to Section 240 para. 3 FFC (Federal Fiscal Code, BAO). For the classification of income from cryptocurrencies according to international tax law, see below.
Entry into force
The requirement to pay tax on income from cryptocurrency holdings enters into force on 1 March 2022, and will apply to cryptocurrency holdings acquired after 28 February 2021 (termed "new assets").
As a rule, cryptocurrency holdings acquired before this date will be treated as pre-existing holdings, and therefore will not be covered by the new tax arrangements. They will continued to be treated as economic goods and taxed as they were prior to the Environmentally Responsible Tax Reform.
However, where cryptocurrency holdings acquired prior to 1 March 2021 ("old assets") are used with a view to obtaining current income from cryptocurrency holdings pursuant to Section 27b, para. 2 EStG, or to acquire cryptocurrency as part of staking, airdrop, bounty or hardfork arrangements (Section 27, para. 2 (2) EStG), the new tax regulations will apply in respect of such acquisitions. Any cryptocurrency acquired in the course of such activity will be deemed to be a new asset.
Where cryptocurrency holdings are liquidated such that they are subject to tax after 31 December 2021 but prior to 1 March 2022 (and in particular as a result of disposal or trade), the positive or negative income from such liquidation can be taxed voluntarily in accordance with the new system. In this situation, the special tax rate for cryptocurrencies will be applied and the income can be combined with other income generated from capital assets in 2022 for the purposes of compensation of losses.
Value Added Tax (VAT)
Based on the case law of the Court of Justice of the European Union (CJEU) on bitcoin crypto assets, the following value added tax treatment applies to bitcoins:
Exchange from legal tender to bitcoins and vice versa
The exchange of legal tender (e.g. Euros) for bitcoins or vice versa, is exempted from VAT according to the case law of the CJEU (see CJEU 22/10/2015, Case C-264/14, Hedqvist; UStR 2000 m.no. 759).
Consideration in bitcoins
Supplies or services for which consideration is made in bitcoins shall be treated in the same way as other supplies or supplies or services for which the consideration consists of legal tender (e.g. Euros). The tax base for such supplies or services shall be determined by the value of the bitcoin.
Bitcoin mining is not subject to VAT due to the lack of an identifiable service recipient and in light of CJEU case law (see CJEU22/10/2015, Case C-264/14, Hedqvist).
International tax law
For reasons of clarity, this legal assessment is based on the OECD Model Tax Convention. In practice, the applicable Double Tax Convention (DTC) must always be consulted.
Whether taxable income accrues, the types of income, the attribution of income to a taxpayer and the time of its accrual are all governed by the principles of the Austrian domestic tax laws. This domestic treatment is subsequently considered for the sake of the qualification at the level of the DTC.
If the income derived from cryptocurrencies is qualified domestically as income from commercial (business) activities, it needs to be classified as business profits in the sense of Article 7 OECD Model Tax Convention at the level of the applicable DTC. In such cases the company's country of residence has the primary right to tax those business profits, unless its activity is carried out through a permanent establishment in the sense of Article 5 OECD Tax Convention situated in the other Contracting State of an applicable DTC. Both mining and staking require specialized, sometimes very expensive equipment that has to be set up and put into operation and is connected to a specific place. Therefore, the requirements to establish a permanent establishment in line with Article 5 OECD Model Tax Convention could in principle be met. The assessment of whether or not this is the case is case-specific and cannot be generalized. If the generated cryptocurrencies or the income derived from cryptocurrencies can be attributed to a permanent establishment, the Contracting State where such a permanent establishment is situated gains the primary taxing right. The residence country of the company would generally exempt such income, but nevertheless apply progression. An exception to this principle can be found in those DTCs that provide for a credit method to relieve double taxation. It should be noted that Article 7 OECD Model Tax Convention only applies on a subsidiary basis, i.e. if no other provision of an applicable DTC is applicable (see below).
In case of income derived from transfer of cryptocurrencies against payment (§ 27 para. 2 Z 1 EStG), such income can be basically qualified as interest in the sense of Article 11 OECD Model Tax Convention, since the income is paid in exchange for making capital available (see the definition of interest in paragraph 3 of Article 11 OECD Model Tax Convention). This means that the income may in principle be taxed in the Contracting State in which the recipient is a resident. In addition, the source country, which is usually the Contracting State in which the payer has his residence in the sense of paragraph 5 of Article 11 OECD Model Tax Convention, has the right to levy a withholding tax of 10% of the gross income. This income is taxed at the time of its inflow (see above). This also applies to the transfers of cryptocurrencies against payment when they are undertaken as a commercial (business) activity, because Article 7 OECD Model Tax Convention is subsidiary to Article 11 OECD Model Tax Convention.
The withholding tax rate of 10% corresponds to the rate indicated in OECD Model Tax Convention and it must always be checked against that in the applicable DTC.
From a domestic point of view, the income from "mining" that is carried out by the taxpayer himself (e.g. "proof of work") is to be qualified as current income (§ 27b para. 2 Z 2 EStG, acquisition of cryptocurrencies through a technical process). Under such circumstances, Article 11 OECD Model Tax Convention is not applicable, because there is no income derived from making capital available. Article 7 OECD Model Tax Convention is also not applicable because there is no commercial enterprise (business activities). Income from mining of cryptocurrencies derived outside a commercial enterprise is therefore in principle classified as "other income" within the meaning of Article 21 OECD Model Tax Convention and the Contracting State in which a taxpayer has his residence generally has the primary taxing right to such income.
A few of the DTC concluded by Austria contain a provision based on paragraph 3 of Article 21 of UN Model Tax Convention and therefore also provide for the source state’s taxing right.
If an enterprise realizes capital gains from cryptocurrencies, including those from the sale of cryptocurrencies obtained via "staking", "airdrops", "bounties" and so-called "hard forks", Article 13 OECD Model Tax Convention is applicable. If the cryptocurrencies are attributable to a permanent establishment located in the other Contracting State, paragraph 2 of Article 13 OECD Model Tax Convention assigns the taxing right to that State. For other realized capital gains of cryptocurrencies (i.e. those held outside of a business), the catch-all provision of paragraph 5 of Article 13 OECD Model Tax Convention is applicable and allocates the exclusive taxing right to the seller's country of residence. This legal assessment is also applicable to circumstances that lead to the loss of Austria's taxing right with regard to capital gains, resulting in domestic exit taxation and for the sale of cryptocurrencies falling into the commercial (business) activities of an enterprise since Article 7 OECD Model Tax Convention is subsidiary to Article 13 OECD Model Tax Convention.
Asset token and NFT are not classified as cryptocurrencies within the meaning of § 27b EStG. The previous explanations therefore do not necessarily apply to income from these types of assets. As a result, other provisions of the DTCs, such as Article 10 or Article 12 OECD Model Tax Convention, may apply.