TAXATION OF CRYPTOCURRENCY TRANSACTIONS FOR INDIVIDUALS

CLARIFICATION No. 94-00-144 from 16.10.2017 regarding the taxation of income from the sale of bitcoins by an individual NATIONAL REVENUE AGENCY DIRECTORATE "APPEALS AND TAX-INSURANCE PRACTICE" - PLOVDIV Art. 4 SSC,Art. 6 SSC,Art. 10 SSC,Art. 127 SSC,Art. 157 SSC,Art. 1 CA,Art. 40 HiA,Art. 16 PITLL,Art. 26 PITLL,Art. 33 PITLL,Art. 3 VATA,Art. 12 VATA,Art. 40 VATA,Art. 96 VATA In response to your inquiry submitted to the "Appeals and Tax-Insurance Practice" Directorate in P…… with ref. No. …… from 25.09.2017, I inform you of the following: As outlined in the inquiry, you are an individual for tax purposes and do not have a company. In May 2017, approximately 10,000 BGN was deposited into your personal bank account by the Bulgarian company "E J K" EOOD, realized through the sale of cryptocurrency - Bitcoin. You acquired these Bitcoins over several years through trading on cryptocurrency exchanges. You are now selling them for real money (BGN), which has been deposited into your personal bank account. In the last 12 months before the current one, you have no other income from the sale of cryptocurrencies. By the beginning of September 2017, approximately 20,000 BGN had also been deposited into your bank account, acquired from transactions under Contracts for Difference (CFD) of financial instruments on the financial exchange Plus500CY Ltd, registered in Cyprus. In September 2017, the overall receipts in your bank account, realized as per the above items 1.1 and 1.2, exceeded a turnover of 50,000 BGN (mainly income from contracts for difference of financial instruments) over the last 12 consecutive months before the current month. In light of the outlined facts, you pose the following questions:

• What are the aforementioned incomes according to Bulgarian legislation /PITLLand VATA/?

• How is the taxable amount of these incomes determined and calculated and under which law?

• If in the future you acquire digital currencies through "mining", how will the acquisition price be formed, given that you will incur expenses for computer equipment depreciation and embedded software, electricity costs, and others?

• Is the regulatory recognition of expenses for the activity applicable?

• Are the incomes from these financial activities exempt from VAT and on what basis, according to which article of the VATA?

• Do you need to register for VAT concerning item 1.3 given that you have no income from other economic activity and the turnover from these financial deals exceeds 50,000 BGN?

• Could the aforementioned incomes have an incidental character, i.e., you might not have such incomes in the future. Does this change the taxation method according to VATA?

• A small part of the digital currency, subject to sales, was acquired through "mining" conducted in our country. If a direct link between the mining services provided and the received payment cannot be established and proven between you and the recipient, are the activities involved in acquiring digital currency treated as a taxable supply according to VATA?

• If you conduct future sales should you issue any documents?

• Should any contributions (for pension, illness, or health) be paid on these incomes, considering that you work on a 4-hour employment contract in a Bulgarian private firm where you are insured for all cases?

Considering the outlined factual situation and relevant regulatory framework, I express the following opinion: ON THE APPLICATION OF PITLL: Pursuant to Art. 16, para. 1 of PITLL, taxable income and taxable base are determined for each source of income separately under the provisions of this law. Therefore, determining the nature of the income for tax purposes is crucially important. Income from the activity of creating (mining) and trading as "bitcoins" is not separated as a distinct type of income, i.e., taxation must comply with the general rules and principles of the tax law. In general terms, the virtual currency "bitcoin" in its characteristics and purpose can be identified as a financial asset. According to Art. 33, para. 3 of PITLL, taxable income from sales or exchanges of shares, compensatory instruments, investment bonds, and other financial assets, as well as from trading in foreign currencies, is the sum of the realized profits during the year, determined for each specific transaction, reduced by the amount of realized losses during the year, determined for each specific transaction. The realized profit/loss for each transaction is determined by reducing the sale price with the acquisition price of the financial asset (Art. 33, para. 4 of PITLL). In forming the tax base for this type of income no regulatory recognized costs are provided. However, bear in mind that the cited provisions do not apply to income from business activities of an individual who is a trader under the Commercial Law (CA), even if not registered as a sole trader. Defining an individual as a trader is not tied solely to the presence or absence of registration under the CA. When an individual engages in commercial transactions, it doesn't matter whether they manifest their participation as a sole trader. The transactions define them as such, not the other way around. The objective criterion here is the executed actions, not who and in what quality performs them. The purchase of specialized computer systems for creating (mining) bitcoins with the intention of profiting from their sale on relevant exchanges is an argument that the activity will be conducted professionally, i.e., you intend it to become a permanent income source. According to Art. 1, para. 3 of CA, a trader is considered any person who has formed a company, which by its subject and volume requires its affairs to be conducted in a commercial manner even if the activity is not listed in para. 1. In these cases, by virtue of Art. 26, para. 7 of PITLL, taxable income is determined under paras. 1-6, i.e., by the rules set out in the tax law for income from commercial activities as a sole trader. Taxable income from business activities as a sole trader is the tax profit formed under the Corporate Income Tax Law (Art. 26, para. 1 of PITLL). We present a general standpoint since the National Revenue Agency cannot commit to an opinion regarding "possible activities" that might be performed by you. ON THE APPLICATION OF VATA: In the VATA there is no legislative regulation of so-called virtual currency, such as bitcoin or similar. Regarding the status of so-called virtual currencies, their acquisition and exchange have not established specific rules, and in discussing the posed questions, it should be based on the general rules of the law and the practice of the European Court of Justice. The creation of bitcoin is carried out through specialized computer systems by calculating specific algorithms. Given unclear factual information, the opinion below concerning VAT treatment of the process of bitcoin mining is general. The process of acquiring bitcoins through computational work is called "mining." As far as "mining" activities of bitcoin can be determined as activities related to data processing or providing information, it should be assessed whether there is the provision of service in terms of the VATA. According to the interpretation of the European Court, formulated in Decision of the CJEU for Case C-16/93 Tolsma, the concept of a service provided for consideration, in terms of Art. 2, § 1 of the Sixth Directive supposes the existence of a direct connection between the provided services and received payment. According to the court, a service is for consideration only if there is a legal relationship between the provider and recipient, within which reciprocal performance is exchanged, and the received remuneration from the provider represents effective consideration for the provided service to the recipient. Provided there exists a direct connection between the supplied service – performed computation work – and received reciprocal consideration in the form of payment units of bitcoin within a legal relationship between provider and recipient, "mining" activities of bitcoin could be defined as the provision of a service. Provided that the supply of this service is not covered by Chapter 4 "Exempt Supplies and Acquisitions" from the VATA, there would be a taxable supply under the provision of Art. 12, para. 1 of VATA, when performed by a taxable person under this law and is with execution place in the territory of the country. If there is no direct link between the provided services and received payment, and between the provider and recipient, there is no relationship in which reciprocal consideration is exchanged, "mining" activities of bitcoin would be outside the scope of VAT. In terms of VAT treatment of the sale of bitcoin, the legal and economic characteristics of this virtual currency should be considered (see in this regard Commission/Germany, C-427/98, EU:C:2002:581, point 57, and cited case law). The virtual currency bitcoin does not exist in another, except in digital form and is sold on private exchanges, with the seller having no information about the end buyer. According to Art. 8 of VATA, service in terms of the law is everything with value other than goods, money in circulation and foreign currency used as a payment instrument. In this context, transactions with virtual currency bitcoin should be considered as the provision of service for VAT taxation purposes, and should be assessed whether there is an exempt supply. According to the practice of the Court, the concepts used in indicating cases of exemption under Art. 13 of the Sixth Directive, represent autonomous concepts of Union law, aimed at avoiding differences in applying the VAT regime in different Member States (decision Nordea Pankki Suomi, C-350/10, EU:C:2011:532, point 22 and cited case law), and are subject to strict interpretation since the exemptions are exceptions from the general principle, according to which every service supply made for consideration by a taxable person is subject to VAT (decisions Stichting Uitvoering Financiele Acties, 348/87, EU:C:1989:246, point 13 and Skandinaviska Enskilda Banken, C-540/09, EU:C:2011:137, point 20). In this context, these activities should be assessed whether they fall within the scope of the concepts "other negotiable instruments," respectively used in Art. 13, B, letter (c) points 5 and 3 of the Sixth Directive. According to Art. 13, B, letter (c), point 3 of the Sixth Directive, Member States exempt from VAT transactions, particularly those affecting "deposits and current accounts, payments, transfers, debts, checks, and other negotiable instruments." The norm of Art. 46, para 1, point 3 of VATA corresponds with that of Art. 13, B, letter (c), point 3 of the Sixth Directive, accordingly with Art. 135, § 1, letter "c" of Directive 2006/112/ЕC. According to the cited provision, Member States exempt transactions, including negotiation, affecting deposit and current accounts, payments, transfers, debts, checks, and other negotiable instruments, except debt collection. To determine whether the virtual currency bitcoin falls within the scope of the concept "other negotiable instruments," used in Art. 13, B, letter (c) of the Sixth Directive, the text of the cited provision, the context within which this concept fits, and the purpose of the exemptions provided in the provision should be analyzed (see in particular in this regard decisions Merck, 292/82, EU:C:1983:335, point 12, ebookers.com Deutschland, C-112/11, EU:C:2012:487, point 12 and RVS Levensverzekeringen, C-243/11, EU:C:2013:85, point 23). Regarding the context of this provision, it should be recalled that according to the Court's practice, the supplies exempt from VAT under Art. 13, B, letter (c) of the Sixth Directive, by their nature, are supplies of financial services. Regardless of the fact that it is not obligatory, these determined supplies based on the nature of the provided service can be performed by banks or financial institutions; all belong to the area of financial service supplies (see in this regard decision Velvet & Steel Immobilien, C-455/05, EU:C:2007:232, points 21 and 22 and cited case law). In Decision in case C-461/12, the CJEU specifies that "Art. 13, B, letter (c), point 3 of the Sixth Directive refers primarily to payment instruments such as checks." Regarding whether, in this specific case, it should be assumed that virtual currency bitcoins are "other negotiable instruments" in the sense of Art. 13, B, letter (c), point 5 of the Sixth Directive, it should be noted that this would be the case if it could be defined as a payment instrument and its mode of operation includes the transfer of monetary sums, similar to payments, transfers, and checks. Although so-called virtual currency has no nominal value, it can be exchanged for money or goods. Under these circumstances, the sale of such virtual currency in its nature is a supply of financial services in the sense of the Court's practice under Art. 13, B, letter(c) of the Sixth Directive (see in this context decisions Velvet & Steel Immobilien, EU:C:2007:232, points 22 and 23, and Nordea Pankki Suomi, EU:C:2011:532, points 24—27). If the virtual currency can be resold at a specified price, its mode of operation includes the transfer of monetary sums, similar to payments, transfers, and checks. Considering the fact that the virtual currency bitcoin embodies a right to a specific monetary sum, it should be assumed to fall under the concept of "other negotiable instruments." The tax base of a transaction with virtual currency, as a type of transaction constituting the supply of "other negotiable instruments," is the price paid by the users when acquiring virtual currency bitcoin. Dealings from financial instrument contracts for differences: According to the definition given in § 1, point 33 from the Additional Provisions of the Financial Instruments Markets Act (FIMA) "contracts for differences" are derivative financial instruments, expressing the right to receive, respectively the obligation to pay, the difference between the market value of a certain number of securities or other financial instruments and their pre-agreed price in the contract. Given that in transactions related to trading in contracts for differences there is a right to receive, respectively an obligation to pay, the difference between the market value of a certain number of financial instruments and their pre-agreed price in the contract, and these do not lead to the actual delivery of the financial instruments, I consider there is the provision of services related to trading in contracts for differences on financial instruments. On the basis of Art. 46, para 1, point 3, point 5 and point 7 of VATA exempt supply is: -the transaction, including negotiation, related to payment accounts, payment services, electronic money, payments, debts, claims, checks, and other similar contractual instruments, excluding the transaction of debt collection, factoring and renting of safes; -the transaction, including negotiation, related to shares or other securities and their derivatives, with the exception of management and responsible custody, this does not apply to securities establishing rights over goods or services other than those indicated in this article; - the transaction, including negotiation, related to financial futures and options. According to the above, if the services provided by you related to trading in contracts for differences on financial instruments can be determined as falling within the scope of Art. 46 of VATA. they will have the nature of exempt supplies. Tax status of an individual executing deals: A taxable person, in the sense of Art. 3, para 1 of VATA is every person carrying out independent economic activity, regardless of its purposes and results. According to para. 2 of the cited provision, independent economic activity is the activity of producers, traders, and service providers, including in the field of mining and agriculture, as well as any activity performed regularly or professionally for remuneration, including the exploitation of material and non-material property with a view to obtaining a regular income from it. In this sense, sentence two of Art. 3, para 2 of VATA expands the scope of independent economic activity, stating that such activity "is also any activity carried out regularly or professionally for remuneration." In VATA there is a lack of legal definition of the concept "activity carried out regularly or professionally." "Regularly or professionally" suggests that the person intends to turn this activity into a source of constant income. This intention becomes apparent if the person systematically, with the aim of acquiring income, performs certain activities in their private interest. The systematic nature can manifest itself through both systematic (regular) receipt of income and duration and/or repetition of actions/activities, in which case whether such income is actually realized by the person from the point of law VATA is legally irrelevant. From the cited legislative text, it is clear that within the scope of taxable persons under VATA are included individuals, when their activity meets the criteria of independent economic activity under para 2 of Art. 3 of VATA and is not within the exceptions of para 3 of the same provision. Given the above, if an individual systematically and with the aim of acquiring income carries out, transactions related to trading in contracts for differences and sales of cryptocurrency, not just limiting themselves to ordinary management of their assets, but engaging in active actions in the market (in a commercial manner), their activity, for the purposes of VATA has the characteristics of "independent economic activity," and the person is taxable in the sense of Art. 3 of VATA. Regarding VAT registration: According to Art. 96, para 1 of VATA every taxable person with a taxable turnover of 50,000 BGN or more for a period not longer than the last 12 consecutive months before the current month is obliged in a 14-day term from the end of the tax period during which it has reached this turnover to submit an application for registration under the same law. According to para 2 of Art. 96 of VATA taxable turnover is the sum of the taxable bases of the supplies made by the person:

• taxable supplies, including those with a zero rate;

• supplies of financial services under Art. 46 of VATA;

• supplies of insurance services under Art. 47 of VATA.

In the sense of Art. 96, para 3 of VATA, the supplies under para 2, points 2 and 3 of the same provision, which are not related to the main activity of the person, supplies of long-term tangible or intangible assets used in the activity of the person, as well as supplies where tax is due by the recipient under Art. 82, paras 2 and 3 should not be included in the taxable turnover. It should be noted that in forming the turnover for mandatory registration, only supplies with a place of execution in the territory of the country are included. In VATA, there is no legal definition of the concept "main activity". In item II of letter ref. No. 91-00-114 of 18.04.2008 from the Ministry of Finance and NRA, regarding the content of the concept "main activity" for the purposes of Art. 96 of VATA, directions are given for determining whether the supplies under Art. 96, para 2, points 2 and 3 of VATA (financial and insurance services) are related to the main activity. It is published on the NRA website - www.nap.bg. In determining "main activity" for the purposes of Art. 96 of VATA include exempt supplies according to the same law that are with a place of execution outside the territory of the country. Given the cited provisions, to assess whether the supplies of services you perform form turnover for registration under VATA the nature of these supplies should be determined, i.e., whether they are taxable based on Art. 12 of VATA and whether they would form a taxable turnover according to VATA or are they exempt supplies, falling under Art. 46 of VATA, which would form a taxable turnover for registration according to VATA provided they are with a place of execution in the territory of the country and are related to your main activity. If the above hypothesis is present, you are obliged to register under Art. 96, para 1 of VATA. In case supplies under Art. 46 of VATA are made following registration under VATA, given these are exempt, there will be no VAT obligation. According to Art. 86, para 3 of VATA, no tax is charged on exempt supplies. An obligation for VAT arises for supplies not covered by Art. 12, para 1 of VATA. Upon cessation of supplies, the person may proceed with VAT deregistration according to Art. 108, para 1, point 1 of the law. Ground for voluntary deregistration arises for a person registered under Art. 96, when the corresponding requirement for mandatory registration is no longer present. Documentation of supplies under VATA: Pursuant to Art. 113, para 1 of VATA, every taxable provider is obliged to issue an invoice for the provided supply of goods or services, or upon receiving advance payment, except in cases where a supply is documented through a protocol under Art. 117. Exceptions to the above rules are provided in Art. 113, para 2, point 2 of VATA, and an invoice may not be issued for supplies of financial services under Art. 46. According to Art. 119, para 1 of VATA, for supplies where issuing an invoice or protocol is not mandatory, the supplier - a registered person under this law, compiles a report for the provided sales, containing summary information for these supplies for the respective tax period. ON THE APPLICATION OF SOCIAL SECURITY LEGISLATION: The exercise of labor activity is the basis for the individuals to be insured for part or all of the risks covered by the state social security system. The binding of insurance with labor is provided for in Art. 10, para 1 of the Social Security Code (SSC), which states that insurance arises from the day individuals begin to exercise labor activities per Art. 4 or Art. 4a, para 1 and for which contributions are paid or due and continues until its termination. The Social Security Code and its subordinate acts lack a legal definition of "labor activity". For insurance purposes, it is sufficient for a person to fall within the circle of compulsorily insured persons under Art. 4 or Art. 4a, para 1 of the code, by performing an activity on any of the specified grounds, to arise an obligation for paying contributions for this. Enumerated in Art. 4 of SSC are self-insured persons under Art. 4, para 3, points 1 - 4 (individuals registered as exercising free professions and/or craft activity, individuals exercising labor activities as sole traders, owners or partners in companies and individuals being members of non-incorporated companies and registered agricultural producers and tobacco producers). The individuals under Art. 4, para 3, points 1, 2, and 4 of SSC are compulsorily insured for disability due to general illness, old age, and death. Optionally, they can insure for general illness and maternity as well (Art. 4, para 4 of SSC). Contribution payments for these individuals are wholly at their own expense and are paid in advance on a monthly insurable income between the minimum and maximum monthly amount of income determined by the State Public Social Security Budget Law (SPSSBL) for the respective year (Art. 6, para 8 of SSC). The final amount of their monthly insurable income is determined according to the rules of Art. 6, para 9 of SSC—for the period over which labor activity was exercised during the previous year based on the data declared in the reference form to the annual tax declaration under the Personal Income Tax Law (PITLL), which cannot be less than the minimum monthly insurable income and more than the maximum monthly insurable income. Individuals, born after 12.31.1959, insuring under the "Pensions" fund of public social security, are also compulsorily insured for an additional pension in a universal pension fund. Contribution payments for additional mandatory pension insurance are made on incomes on which contributions are due for public social insurance (Art. 127, para 1 and Art. 157, para 6 of SSC). Health insurance of individuals under Art. 4, para 3, points 1, 2 and 4 of SSC is conducted under the rules of Art. 40, para 1, point 2 of the Health Insurance Act (HiA). They pay health insurance contributions in advance on a monthly income that cannot be lower than the minimum monthly size of insurable income for self-insured individuals and registered agricultural producers and tobacco producers, set by the State Public Social Security Budget Law, and ultimately on income from activity and income under point 3, during the calendar year, according to the reference form to the tax declaration in the order of Art. 6, para 9 of SSC. When individuals exercise activities on different grounds under Art. 4 of SSC, they are subject to public social insurance for each activity, and contributions are paid on an insurable income in the order determined by Art. 6, para 11 of SSC but not more than the maximum monthly insurable income for the respective year, in the following order:

• income from individual activities according to the sequence indicated in Art. 4, para 1 and 10 (including income from employment relationships);

• income from indemnities paid according to Labor Code or according to special laws, on which contributions are due;

• insurable income as sole traders, owners, or partners in commercial or non-incorporated companies conducting free profession and/or craft activity, registered agricultural producers, and tobacco producers;

• income from work without an employment relationship.

From the cited provisions it follows that an obligation to insure as a self-insured person for you would arise only if you engage in work activity on any of the grounds specified in Art. 4, para 3, point 1, 2 or 4 of SSC (by virtue of Art. 10, para 1 of SSC). From your inquiry, it becomes clear that as an individual, you have acquired income from trading on exchanges with cryptocurrency-bitcoin and that you are not registered as a trader. Therefore, as long as the received income is not a result of performed labor activity as a self-insured person, they are not considered income from labor activity in the sense of Art. 4 or Art. 4a, para 1 of SSC and on them no social and health insurance contributions are due as described above under Art. 4, para 3, point 2 and Art. 127, para 1 of SSC and Art. 40, para 1, point 2 of HiA. Exercising labor activity by individuals in the sense of Art. 4 of SSC is established for all specific cases in the course of administrative proceedings according to Tax and Social Security Procedural Code (TSSPC).