Expenses incurred in relation to the so-called virtual currency digging can be recognised as tax-deductible costs – so held Voivodship Administrative Court in Łódź in a judgment of 19 November 2019, case no. I SA/Łd 411/19, hence setting aside a private ruling of Head of the National Revenue Information Service (KIS Head), which was unfavourable to the taxpayer-petitioner.

A motion for a private ruling set out a future event consisting in the taxpayer in question intending to undertake an activity involving the so-called cryptocurrency digging by means of certain electronic equipment (the Proof-of-Work method), which will result in primary acquisition of a virtual currency. In consequence of the cryptocurrency being dug, the taxpayer will sell it by exchanging it for a traditional currency or, alternatively, first exchanging it for another virtual currency and then for a traditional currency, without being a sole trader. The Proof-of-Work method entails certain costs of purchasing specialist equipment for cryptocurrency digging as well as costs of electricity. The taxpayer demonstrated that without incurring such costs one cannot acquire a virtual currency through the Proof-of-Work method and consequently asked the question whether they should be recognised as expenses incurred directly in acquisition of a virtual currency as under the act on personal income tax (PIT Act) tax deductible costs only comprise documented expenses directly incurred in the acquisition of a virtual currency as well as those incurred in selling it, including documented expenses to bureaux de change or currency exchanges.

The KIS Head found that the expenses incurred in purchasing electronic equipment and electricity costs represent indirect costs. Consequently, he found the taxpayer’s position incorrect. At the same time, the authority failed to explain the meaning of the provisions of law relied upon in the context of the future event and to provide the way of reasoning leading to the position of the taxpayer being challenged.

In a ruling, the WSA upheld the position held by the jurisprudence whereby a virtual currency can be primarily acquired as a result of cryptocurrency digging or purchase, e.g. on an exchange. The latter case is an example of secondary acquisition. Merely acquiring a virtual currency does not constitute revenue for the purposes of the PIT Act; it will arise once a virtual currency is exchange for a traditional legal tender, goods, services or property right other than a virtual currency.

Under the PIT Act, a surplus of the total revenues over the costs of their acquisition in a given fiscal year constitutes income from the sale of a virtual currency. Hence, in the transaction in question the importance should be emphasised of correct determination of tax-deductible costs which affect the taxable base of
a transaction.

The WSA agreed with the taxpayer and acknowledged that primary acquisition of a virtual currency entails costs in the form of expenses incurred in purchasing IT equipment as well as electricity costs. In the assessment of the panel of judges at issue, in issuing the private ruling the authority failed to explain why expenses necessary in the process of cryptocurrency digging, whose levels can be correctly documented, could not qualify as direct expenses, i.e. tax-deductible costs. Not being in a position to recognise such expenses as tax-deductible costs in the event of a sale of a cryptocurrency is in violation of the income taxability principle. Moreover, and quite importantly, it is in breach of the constitutional equality principle by treating income from sales of virtual currencies following a primary acquisition of such cryptocurrencies differently to income generated as a result of their secondary acquisition, in case of which direct costs were not questioned.  

Bearing the aforesaid in mind, the Court reversed the private ruling which was unfavourable to the taxpayer.

Magdalena Walczyńska, Tax Consultant, ATA Tax Sp. z o.o.

Interested in the subject?

magdalena.walczynska@atatax.pl