Cryptocurrencies and income tax in practice
Investing in cryptocurrencies is not only about market volatility and the security of funds, but also about proper tax reporting. In practice, a taxpayer may still be required to recognise taxable income and pay tax even if they have lost access to funds held on a cryptocurrency exchange.
Bitcoin, Ethereum, Cardano and other virtual currencies have become a permanent feature of many investment portfolios. We increasingly encounter them in the tax affairs of our clients — both individuals and businesses. These investments are usually made through various platforms, including foreign exchanges operating under different legal and tax frameworks.
It is important to remember, however, that cryptocurrency investments involve not only price volatility, but also the risk of losing access to funds. Recent market events have shown that problems with withdrawals or even the collapse of an exchange are not merely theoretical scenarios. From a tax perspective, however, such events do not necessarily eliminate the obligation to report and settle tax.
A good example is a situation where an investor first exchanges virtual currency into fiat currency through a crypto exchange and then loses access to the funds held on that exchange, for example due to its insolvency. Under Polish tax rules, this may still trigger an obligation to recognise income and pay income tax, provided that a taxable gain arose on the transaction, even if the investor has no realistic possibility of recovering the funds.
This follows from the specific rules governing the taxation of virtual currencies in Poland. Taxable income arises upon the disposal of virtual currency for consideration, in particular when it is sold for fiat currency or used as payment for goods or services. From the perspective of income tax, what happens to the funds afterwards is, as a rule, irrelevant.
Income from the disposal of virtual currencies is taxed at a 19% rate and reported in the PIT-38 annual tax return. At the same time, Polish tax law provides for specific rules on the recognition of cryptocurrency-related costs. Such costs may only be settled in a limited manner and cannot be offset against income from other sources.
From a practical perspective, this means that investors should regularly review not only their transaction history, but also the way those transactions are documented and reported. This is particularly important given the growing interest of the tax authorities in virtual currency transactions. In addition, the EU DAC8 Directive significantly broadens the scope of information on crypto transactions that may become available to the tax administration.
For taxpayers investing in cryptocurrencies, this means that greater caution and a more structured approach to tax compliance are becoming increasingly important. The fact that funds have been lost does not automatically eliminate the related tax consequences.
If this issue may affect your situation, please feel free to contact us. We would be happy to share our practical perspective and experience from the projects we handle.