"Disclaimer: While every effort has been made to ensure the accuracy and completeness of the information provided in this article, it is for general informational purposes only and should not be considered professional advice. Everyone's situation can differ. The author and publisher of this article disclaim any liability for reliance on the information herein.
With the recent bullish market, Bitcoin halving, and the surge in popularity of cryptocurrencies (kryptoměny), many freelancers are turning to digital assets as part of their payment methods.
However, the taxation of cryptocurrencies is usually complex, especially for expats in the Czech Republic. Each country has its own rules regarding cryptocurrency taxation, making it essential to understand the regulations in Czechia.
How is Tax on Crypto Calculated in Czechia?
Taxation of cryptocurrencies is not straightforward, even for seasoned tax specialists. There are numerous myths and uncertainties surrounding cryptocurrency taxation, prompting the financial authorities to conduct inspection actions focused on this area.
What Needs to be Taxed?
To clarify, let's summarize which transactions are subject to taxation and which are not.
- Income from the sale or use of cryptocurrency (exchange, purchase of goods or services with crypto).
Examples include selling cryptocurrency and transferring the proceeds to your bank account or retaining the proceeds from the sale in an application or online wallet. Additionally, exchanging one cryptocurrency for another or using cryptocurrency to make a purchase all require taxation.
- Cryptocurrency mining (těžba kryptoměn) or the use of mined cryptocurrency.
You must have a trader's license for this activity, specifically a freelance trade No. 81; providing services related to virtual assets. This article does not delve into income tax on cryptocurrency mining.
When Can You Avoid Taxation?
Not everything crypto-related, however, is taxable.
- Holding cryptocurrency (držba kryptoměny) and fluctuations in its value are not subject to tax.
Therefore, if you're wondering how to avoid paying taxes on cryptocurrencies, the solution is simple – buy and hold without selling or exchanging. For example, if you've purchased Bitcoin and its value fluctuates over time but you don't exchange it for another cryptocurrency or fiat currency, no taxable transaction occurs.
Where to Include Crypto in Your Tax Declaration?
Including income from cryptocurrencies in your tax declaration (daňové přiznání) falls under other income from remunerated transfers according to § 10 (1) (b) of Act No. 586/1992 Coll., on Income Taxes.
From the perspective of state authorities, cryptocurrencies are considered intangible movable property, thus they are not recognized as monetary assets, and their purchase and sale are not considered payment services. Trading with cryptocurrencies constitutes continuous activity – management of one's own assets, therefore it does not fall under occasional income up to 30,000 CZK.
Cryptocurrencies cannot be considered as capital gains either, and it is not possible to apply temporal or value exemptions to them as in the case of transactions with securities.
How do Czech Freelancers Tax Cryptocurrencies?
If trading with cryptocurrencies isn't your primary business activity, you'll include these transactions in your tax declaration as other income according to § 10 (1) (b), and you'll apply related expenses (purchase price, fees, etc.).
Are you utilizing any of the flat rate tax allowances (paušální daň)? Here's how you proceed:
Taxation of Cryptocurrencies and Flat Rate Tax
If you're applying expenses as a percentage of your income (typically 60 or 80%), it's crucial to note that they only apply to business income, not other income – including income from cryptocurrencies. In your tax declaration under § 10 of the Income Tax Act, you'll report the actual expenses related to cryptocurrencies. No exception or exemption applies here; income from the sale or other use of cryptocurrencies must always be taxed, regardless of the amount.
As previously mentioned, the flat rate tax regime applies exclusively to business income under § 7. If you find yourself registered for flat rate tax, but within the same year you have additional income under § 8, 9, or 10 (such as from cryptocurrency trading, rental income, or capital assets) exceeding 50,000 CZK, you must file a regular tax return and summaries for the social security and health insurance authorities for that year. Monthly flat rate tax payments will then be considered as an advance payment.
If you stay within the limit, no tax return is required.
Currency Conversion and Tax on Cryptocurrency Profits
When trading cryptocurrencies during the tax period, the positive difference between income and expenses is always subject to tax under § 10 (4) of the Income Tax Act. Expenses include the purchase price of the cryptocurrency and related costs such as exchange fees.
For currency conversion not listed on the exchange rate sheet, you'll use a conversion through a third currency. For tax returns, you can use, for example, the exchange rate for 1 bitcoin (BTC) expressed in the currency of a specific exchange, such as US dollars (USD).
The purchase price can be determined in several ways:
- Weighted average of cryptocurrency purchase prices.
- FIFO, or first in, first out method, where you first sell the cryptocurrencies you bought first.
Losses can be offset against the same type of income, meaning a loss from one bitcoin transaction can be offset against a profit from another. The minimum taxable base is 0 Kč.
And what about the tax rate?
In addition to the 15% income tax, a higher rate of 23% has been introduced since 2022. It applies to individuals whose annual incomes exceed 48 times the average wage. For 2023, the threshold was 1,935,552 Kč (or 161,296 Kč for gross monthly wage). The higher rate is applied only to the amount exceeding this limit.
However, from 2024, the threshold for progressive tax decreases to 36 times the average wage, i.e., 1,582,812 Kč annually (131,901 Kč monthly). This change applies to incomes earned in 2024 and beyond.
Filing Taxes in Czechia as an Expat Freelancer Isn't Easy
For expat freelancers in Czechia, managing tax obligations in Czech can be daunting, especially when it comes to handling cryptocurrency transactions. In addition to the complexities of crypto taxes, expats often grapple with the challenges of invoicing and financial record-keeping.
Fortunately, živno, a platform tailored for expats in the Czech Republic, offers an English-friendly interface designed to streamline the invoicing process. This specialized tool aims to save expats time and effort by simplifying invoicing tasks, eliminating the need to manually calculate exchange rates, and ensuring that all necessary information is accurately included on invoices.
