Andreas NicolaouDue to the lack of crypto specific laws in Cyprus and the EU, there is uncertainty regarding the taxation of cryptocurrency investments and trading in Cyprus, and how such activities are taxed, if at all.
However, based on general principles of taxation in Cyprus as well as communications with Tax Department Officials it is clear that cryptocurrency activities are generally categorised into two types for tax purposes:
If you purchase cryptocurrencies with the intention of holding them as a long term investment (one-off transaction) then you will not be subject to income tax for any gains you make from this investment. However, this is something you should be able to prove and the tax department will assess whether or not your purchase qualifies as a one-off transaction based on several factors.
In case where you are actively trading cryptos then any profits you make will be calculated as part of your income and subject to income tax.
Whether or not the Tax Department considers your activity as trading depends on several
factors such as profit seeking motive, number of transactions, interval between purchase
and sale and others. So to be considered as actively trading cryptos does not necessarily
solely include buying and selling everyday to make a profit off of short-term market
fluctuations (day-trading).
It is enough that you make more than one purchase or exchange one coin for another and generally position yourself so that your portfolio grows over time. Since there are no specific laws or guidelines from the tax department in Cyprus that explicitly exempt cryptocurrency trading from income tax, general principles of taxation appear to be applicable.
If you are trading cryptocurrencies as an individual in Cyprus, any profits you gain will be added to your taxable income. These profits will be taxed based on the personal tax rates applicable in Cyprus.
As such, you must declare your annual crypto profits in your tax returns and pay the applicable tax if you're over the threshold. You can read more on income tax here.
| From | To | Tax Rate |
|---|---|---|
| €19,501 | €28,000 | 20% |
| €28,001 | €36,300 | 25% |
| €36,301 | €60,000 | 30% |
| €60,000 + | 35% |
And since profits resulting from crypto trading are to be calculated as
part of your income, they'll also be subject to Social Insurance and General
Healthcare System (GHS) contributions.
Since trading will be regarded as self-employment income, you will have to pay 16.6% of your income for Social Insurance and 4% for GHS. You can read more on Social Insurance and GHS here.
If you're not trading as an individual and have incorporated a company under which you perform all your cryptocurrency trading activities then the company will be taxed on 12.5% of the profits. You can read more on corporate tax here.
As a shareholder, you can receive company profits through dividends, which are exempt from income tax in Cyprus. However, if you are a Cypriot domiciled individual, these dividends are subject to Special Defence Contribution (SDC) at a rate of 17%. You can read more about it here. If you are a non-domiciled individual, you will not be required to pay any SDC on your dividends. You can read more on non-domiciled status here .
The law is more clear on the taxation of foreign exchange. Any profit resulting from exchange rate differences due to currency fluctuations is tax-neutral in Cyprus. This means that gains or losses from changes in exchange rates are not subject to income tax.
For example:
Let's say you have $1,000 in your bank account and one day the exchange rate changes, making the dollar worth more than when you originally bought it. This means that you can exchange your dollars for more euros than before. Simply put, you won't have to pay income tax on this increase in value whether such gain is realised or not.
This exemption does not apply to profits made from trading currencies. Many people reading information online are confused by this and think that Forex trading is not taxed. This is incorrect.
If you're an active trader and you primarily buy and sell currencies with the aim of making a profit from short-term fluctuations in currency values then your profits will be taxed normally under income tax. The tax rates will be the same as those discussed above, depending on whether you are an individual or a company.
A common misconception is that trading profits are subject to capital gains tax. However, this is not the case.
Capital gains tax is only applicable to profits from the sale of property in Cyprus and the sale of shares of Companies who own property in Cyprus.
So, if you're trading in cryptocurrencies or in foreign exchange, you do not have to worry about capital gains tax. You can read more on capital gains tax here.
