The Financial Administration of the Republic of Slovenia (Tax Authority) had already issued its first extensive guidelines regarding cryptocurrency taxation in 2017. According to the guidelines, capital gains generated from trading in virtual currencies by a natural person outside the scope of performing a business activity are not subject to personal income tax (PIT). Nevertheless, any income generated by a natural person as part of a business or entrepreneurial activity associated with cryptocurrencies is taxable.
The guidelines also cover income due to the acquisition of crypto-assets, which is usually important in initial coin offerings or new token launches. Accordingly, taxable income due to a free-of-charge or for a value lower than market value acquisition of crypto-assets is considered realized when the individual actually receives the crypto-assets, even when there may be restrictions on the disposal (e.g., lock-up period). Fundamentally, there are five categories of income that the tax authority considered in the acquisition of tokens, where facts and circumstances of each case should be examined, as presented below.
The first category is income from an employment relationship. For example, the tax authority can treat the received tokens as salary if it establishes the existence of employment relationship elements defined under Article 4 of the Slovenian Employment Relationship Act. These elements are voluntary inclusion into an organized work process of the employer, the performance of work for payment, personally and uninterruptedly, according to the employer’s instructions and supervision. Therefore, if the tax authority concludes that these elements exist, the allocated tokens are subject to compulsory social security contributions and progressive taxation.
Secondly, tokens can be treated as income from an employment relationship based on other contractual relationships when tokens are given to individuals not employed by the company or given as a reward or payment for services in connection with project development. Accordingly, such a reward is included in the individual’s taxable income after deduction of compulsory social security contributions and flat-rate expenses (10%). In such case, the PIT is prepaid at a 25% rate, and the income is included in the annual personal income tax return, subject to progressive taxation when the recipient is a tax resident of Slovenia.
Thirdly, if the natural person has less than a 25% holding in the company associated with allocated tokens, it is taxed as other income. Consequently, other income is taxed at a 25% rate, is included in the annual PIT return, and is subject to progressive taxation when the recipient is a tax resident of Slovenia.
The fourth possibility is the treatment of tokens as a hidden dividend distribution. Suppose the recipient acquires tokens below market value based on their participation of at least 25% in the equity of a company. Such a benefit is considered hidden profit distribution and is taxed as dividend income under the PIT Act. Tax is levied at the final 27,5% rate when the income is received/paid to the natural person or otherwise made available, i.e., when it is transferred to the individual’s digital wallet. Correspondingly, this possibility seems to be the most favorable one from the taxpayer’s point of view.
Lastly, tokens can be treated as income generated by a natural person from an individuals’ business activity. Income from the business activity is considered income from independently performing an activity, regardless of the purpose or result of performing the activity, as per Article 46 of the PIT Act. The key qualifying factor of entrepreneurial activity is that it is performed regularly rather than occasionally, performed in the market or for the market, and the individual operates as an entrepreneur. Consequently, a natural person performing such activity is obliged to pay PIT on business activity income and calculate and pay social security contributions.
All things considered, the obvious choice for individuals involved in crypto-asset transactions is to work with tax advisors to determine taxation in advance to mitigate potential future tax risks. However, even if the tax perspective of their crypto transactions is not covered before the token’s launch, it may still be worthwhile to consult with tax advisors regarding appropriate tax reporting.
By Janja Ovsenik, Partner, and Lucijan Klemencic, Tax Director, Senica & Partners
This article was written before the advent of the war in Ukraine and was originally published in Issue 9.2 of the CEE Legal Matters Magazine on March 1, 2022. More current articles on developments in Ukraine can be found in our #StandWithUkraine section. If you would like to receive a hard copy of the magazine, you can subscribe here.