Bulgaria’s National Revenue Agency (NRA), the government organisation in charge of administering state taxes and social security contributions in the eastern European nation, has issued new taxation guidelines for digital currency.
In a post on 2nd April, the NRA indicated that income from the sale of digital currencies such as bitcoin will be treated as income from the sale of financial assets and taxed at a rate of 10%.
Effectively, earnings from bitcoin trades will be taxed on the same level as ordinary income and corporate income in Bulgaria.
Explained the NRA:
“Taxable income … is the sum of the gains realized during the year specified for each transaction, reduced by the amount of losses realized during the year designated for each specific transaction.”
This differs from guidance from the US Internal Revenue Service, which called for digital currency to be taxed as property, thereby allowing capital gains taxes to be imposed on each trade.
One source in Bulgaria suggested that the guidelines merely prevent its citizens from declaring bitcoin as non-taxable income, and that gains realized on purchases are not subject to taxation.
Timing and impact
The release comes in advance of the NRA’s 30th April 2013 tax deadline, and includes guidance on where bitcoin gains should be reported on tax forms.
Perhaps most notably, however, the announcement does not seem to have big-picture implications for how digital currencies will be classified or regulated. The NRA’s announcement compares bitcoin as a financial instrument, not a currency.
Further, Stamen Gorchev, founder of Bulgaria-based bitcoin informational website Hash.bg and member of the newly launched Bulgarian Bitcoin Association, stressed that the guidance amounted more to an ad-hoc announcement, and that the NRA has no legal authority to determine the status of bitcoin.
Bulgaria’s Financial Supervision Commission has reviewed the matter, but does not have the authority to determine the legal status of a currency in the country, according to Gorchev.
He indicated that the FSC sent a letter to the National Bank asking for regulation on the matter in August, 2013.
Money-laundering risk?
Gorchev indicated that the move was perhaps motivated by a desire on the part of the NRA to reduce the risk that citizens would use bitcoin to avoid tax payments, however, he suggests this intent may backfire.
He notes the NRA does not require taxpayers to submit documentation that proves income from bitcoin trading, and that this comment has been raised on social media outlets by the local community.
As a result, Gorchev explained, this could cause problems for the local government:
“It’s a very easy way for someone in Bulgaria who gets some dirty money just to sell some bitcoins, pay the back tax for it, and this way, it’s very easy to launder money.”
Income targeted
Gorchev indicated Bulgaria’s guidance differs from the recent IRS guidance in that it mostly covers those who earn income from trading digital currencies.
Explained Gorchev:
“If a miner sells bitcoins, he must pay tax on the sale price and he cannot subtract the cost of producing the bitcoins.”
Furthermore, Gorchev indicated that gains realized on bitcoin purchases aren’t taxable:
“If you buy one bitcoin at $500 and then later purchase goods for $600 with this bitcoin, you are not liable to pay taxes on the realized gain of $100.”
Regulation to follow?
A member of the European Union since 2007, the announcement is notable as it illustrates how different states are approaching taxation and regulation in lieu of formal guidelines from higher authorities.
For example, on 25th March, Denmark declared that it would not tax gains and losses from casual bitcoin trading, a different approach than that announced by Bulgaria yesterday.
The news notably follows calls from member state financial officials for the EU to take action on regulating bitcoin, and as more European countries – such as Greece and Lithuania – indicate that they are looking for the EU to take a leading position on the matter.
Still, Gorchev indicates that Bulgaria is likely to wait for such guidance from the EU as opposed to issuing its own regulation.
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