The Czech Republic and Cryptocurrency

Czech Republic Cryptocurrency Laws
Regulation of Digital Currencies: Cryptocurrency, Bitcoins, Blockchain Technology

In the Czech Republic, cryptocurrencies are largely unregulated. First, they are not regulated as a currency. Rather, cryptocurrencies are classified as commodities. Consequently, cryptocurrencies are not interpreted as a monetary unit by the Czech government. As a result, cryptocurrencies are not an official means of payment and are not subject to the law on payment systems. Although they are not an official means of payment, cryptocurrencies may nevertheless be used in transactions. Second, ICOs are unregulated by the Czech government. Instead, ICOs are subject to EU legislation, particularly AML regulations. Despite being largely unregulated, the CNB permits Czech banks to offer cryptocurrency-related services as long as AML/KYC regulations are satisfied.

On February 27, 2018, the Vice-Governor of the Czech National Bank (CNB) stated cryptocurrency’s classification as a commodity highlights the CNB’s “light-touch, liberal approach” in cryptocurrency regulation. While the Czech Republic refuses to promote or protect cryptocurrencies, they will not ban or hinder their development. To highlight the risk, the CNB analogized cryptocurrencies to casinos. Like gamblers, all cryptocurrency investors must accept the risk that they may lose all of their money. Consequently, cryptocurrency investors in the Czech Republic assume the risk of losing their investments.

As a member of the EU, the Czech Republic is subject to the EU’s AML regulations. In July 2018, the EU enacted AMLD5 and requested that EU countries regulate cryptocurrency exchanges and wallets operating within Europe. The Czech Republic has implemented a stricter legal model than AMLD5 by requiring that every cryptocurrency-related firm be regulated by the Czech government. So, Czech’s AML regulations apply to anyone that provides cryptocurrency services, including “those who buy, sell, store, manage, or mediate the purchase or sale of cryptocurrencies or provide other services related to such currencies as a business.” Accordingly, the Czech Republic regulates more cryptocurrency-related businesses than the EU, which only regulates cryptocurrency exchanges and wallets. Any firm that fails to register their operations with the Czech government will be fined up to half a million koruna, or approximately $20,000. As a result, the AML regulations in the Czech Republic are more strict than what AMLD5 requires.

Registration of Cryptocurrency Exchanges. 

In the Czech Republic, the types of licenses that an enterprise can be awarded are divided into one of four categories depending on the cryptocurrency’s use: classic, fiat, traditional, or specialized. Classic licenses allow companies to exchange cryptocurrencies with other cryptocurrencies. To illustrate, a classic license permits a company to trade Bitcoin for an Ethereum token. In contrast, fiat licenses authorize entities to exchange “real money” for cryptocurrency. Accordingly, fiat licenses permit companies to sell bitcoins in exchange for euros. The third category, traditional licenses, give entities “control over the procedure for manipulating currency of all types.” In contrast, specialized licenses provide fewer influential powers by only extending the control to cryptocurrency businesses’ work.

There are several steps that an enterprise must meet to register as a cryptocurrency exchange in the Czech Republic. The first requirement is that the Czech officials must be notified of the cryptocurrency enterprise’s name, and that name must be verified. Second, a document identifying the business’s future owner must be provided along with a certificate of a clean criminal record. Presumably, people with criminal records will not be granted a license. Third, the residency requirement must be satisfied by having a legal address in the Czech Republic for at least one year. For the fourth requirement, the future owner must account for business, recruit employees, and buy the necessary software and equipment for their business operations. In the final stages of registration, the owner must do three actions to register a cryptocurrency exchange in the Czech Republic. These actions include:

  1. Provide an entire package of all the relevant documents relating to the company.
  2. Pay state fees.
  3. Submit all collected papers to the appropriate legal entities within the Czech Republic.

In conclusion, a cryptocurrency exchanged may be authorized to operate in the Czech Republic if they satisfy the requirements mentioned above.

Taxation. 

The Czech Republic taxes cryptocurrencies differently depending on their use. Overall, individuals that trade cryptocurrencies are taxed at a rate of 15%, while businesses are taxed at a rate of 19%. Typically, sellers of goods and services that receive payments in cryptocurrencies are taxed in the same manner that their competitors are taxed, even if their competitors receive payments in conventional currency, such as Euros. While there may be difficulties in taxing cryptocurrency in the same manner as conventional currencies, the Czech government stated that taxpayers must do their best to navigate the legal framework’s unclear framework to avoid tax evasion charges.

Czech citizens who use cryptocurrencies to sell goods and services must pay income taxes on those transactions. In this context, cryptocurrencies are taxed in the same manner as citizens who use “conventional money.” Individuals who profit in cryptocurrency transactions pay a tax rate of 15% on their profits. This tax rate is similar to the taxes on trades that use foreign currencies. Accordingly, cryptocurrency transactions and foreign currency transactions are taxed on a similar basis. Individuals who receive payments in cryptocurrencies are taxed similarly. Their tax base is the income from selling cryptocurrencies plus the value of cryptocurrencies minus the expenses.

In comparison to individuals, cryptocurrency companies have higher tax burdens than individuals with a rate of 19%. For optimal taxation, enterprises that utilize cryptocurrencies for business purposes must obtain a license for their operations and pay taxes to the Social fund and the Health Fund. Companies that use cryptocurrencies for business purposes include firms whose entire business scheme is focused on cryptocurrency and firms that trade on cryptocurrency exchanges, such as Coinbase. As a result, cryptocurrency mining operations must obtain a license and pay taxes to the Social fund and the Health fund since they use cryptocurrency for business purposes. Specifically, mining operations use cryptocurrency for business purposes because their operation focuses entirely on mining cryptocurrencies for profit. Therefore, mining operations in the Czech Republic are taxed at a rate of 19%.

While the basis for taxing cryptocurrencies is unclear, the Czech government nevertheless stated that the confusing tax laws in the Czech Republic do not excuse the responsibility of taxpayers to obey the law and avoid tax evasion. In fact, Czech officials have displayed a severe initiative to find taxpayers that use Bitcoin for tax evasion. In 2017, the Czech government implemented obligations on banks, cryptocurrency exchanges, and other financial service providers to identify their customers. Accordingly, the Czech legislation aims to make cryptocurrency more transparent and make it harder for taxpayers to use the anonymous nature of cryptocurrency to evade taxes. This initiative illustrates the desire of the Czech government to prosecute tax evaders.

Generally, cryptocurrency transactions are not subject to VATs in the Czech Republic. However, there is one situation in which Czech cryptocurrency organizations may be required to pay VATs. When suppliers fail to pay VATs, the Czech tax authorities are authorized to recover taxes from the company that purchased the goods. For that reason, the burden of paying VATs may be shifted to the buyers of cryptocurrencies if the suppliers fail to pay VATs. For example, suppose the cryptocurrency exchange does not pay VATs. In that case, the cryptocurrency buyer may be required to pay the VATs if the authorities try to recover taxes from the transaction. However, in most situations, buyers in cryptocurrency transactions are exempt from paying VATs for the buyer.

P.S. Insights on Cryptocurrency Legal Issues

Most jurisdictions and authorities have yet to enact laws governing cryptocurrencies, meaning that, for most countries, the legality of crypto mining remains unclear.

Under the Financial Crimes Enforcement Network (FinCEN), crypto miners are considered money transmitters, so they may be subject to the laws that govern that activity. In Israel, for instance, crypto mining is treated as a business and is subject to corporate income tax. In India and elsewhere, regulatory uncertainty persists, although Canada and the United States are relatively friendly to crypto mining.

However, apart from jurisdictions that have specifically banned cryptocurrency-related activities, very few countries prohibit crypto mining.

Our Freeman Law Cryptocurrency Law Resource page provides a summary of the legal status of cryptocurrency for each country across the globe with statutory or regulatory provisions governing cryptocurrency.  The globe below provides links to country-by-country summaries:


Podcast:
The Freeman Law Project – Cryptocurrency Regulation and Taxation: A Brief Primer


Is cryptocurrency legal in the Czech Republic?

Do you have questions about cryptocurrency, digital currencies, or blockchain technology?
Freeman Law can help with digital currencies, tax planning, and tax compliance.  Contact us now to schedule a consultation or call (214) 984-3410 to discuss your cryptocurrency and blockchain technology concerns.


WORKS CITED

REGISTRATION OF A CRYPTO EXCHANGE IN THE CZECH REPUBLIC ‖ Eternity Law International. (2020, November 11). Eternity Law International. https://www.eternitylaw.com/ready-licenses-for-sale/registration-of-a-cryptoexchange-in-the-czech-republic/

WORKS CITED

Aki, J. (2019, August 8). Czech Republic to Broaden Crypto Regulation. Bitcoin Magazine. https://bitcoinmagazine.com/articles/report-czech-republic-wants-to-broaden-crypto-firm-regulation

Regulation of Cryptocurrency Around the World. (2014). Loc.gov. https://www.loc.gov/law/help/cryptocurrency/world-survey.php#:~:text=Cryptocurrencies%20are%20not%20legal%20tender,and%20demand%20of%20their%20market.&text=Fundraising%20using%20digital%20currencies%20is%20prohibited.

Huillet, M. (2019, August 8). Czech Republic to Impose Stricter Crypto Regulations than EU Requires. Cointelegraph; Cointelegraph. https://cointelegraph.com/news/czech-republic-to-impose-stricter-crypto-regulations-than-eu-requires

Czech. (2018, May 23). Legal regulation of cryptocurrency in Czech Republic.

 

Regulation of Cryptocurrency Around the World. (2014). Loc.gov. https://www.loc.gov/law/help/cryptocurrency/world-survey.php#:~:text=Cryptocurrencies%20are%20not%20legal%20tender,and%20demand%20of%20their%20market.&text=Fundraising%20using%20digital%20currencies%20is%20prohibited.

Blockpit.io. (2019, March 18). Taxes on cryptocurrencies like Bitcoin in the Czech Republic? | Medium. Medium; Medium. https://medium.com/@blockpit/how-are-cryptocurrencies-regulated-in-the-czech-republic-6db777409306

Czech. (2018, May 23). Legal regulation of cryptocurrency in Czech Republic. https://sb-sb.cz/en/news/pravovoe-regulirovanie-kriptovalyut-v-chehii

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