Due to the increasing presence of various forms of digital assets, governments are forced to pay special attention to the regulation of this issue. Our legal system is one of the few jurisdictions that comprehensively regulates digital assets. In June 2021, the new Law on Digital Assets was enacted in the Republic of Serbia, and the main issues related to the application of the new law will be discussed later in this text.
What are digital assets?
Digital assets, or virtual assets, are digital representations of value that can be bought, sold, exchanged, or transferred digitally and used as a medium of exchange or for investment purposes.
It is important to note that digital assets do not include digital records of currencies that are legal tender or other financial assets that are regulated by other laws.
Types of digital assets
If we consider the legal definition of digital assets, we could talk about two types of digital or virtual assets:
- VIRTUAL CURRENCY
The virtual currency is a type of digital asset that is neither issued by a central bank nor guaranteed by any other public authority, that is not necessarily linked to legal tender, and that does not have the legal status of money or currency.
- DIGITAL TOKEN
A digital token is a type of digital asset and refers to any intangible good that represents in digital form one or more property rights, which may include the right of the user of a digital token to receive certain services. The Law on Digital Assets does not distinguish between different types of digital tokens recognized in the modern market but encompasses investment, user, and hybrid tokens under one definition.
The distinction between these two types of digital assets is important in terms of the jurisdiction of state authorities. Specifically, the National Bank of Serbia is responsible for implementing the Law on Digital Assets with respect to virtual currencies, while the Securities Commission is responsible for digital tokens. Both regulatory authorities have jurisdiction in the case of hybrid digital assets.
Taxation of digital assets for individuals
The implementation of the Law on Digital Assets is accompanied by the application of new tax rules that regulate the taxation of digital assets of individuals in a more favorable manner. Until the adoption of the Law on Digital Assets, the tax treatment was very unfavorable, as the tax regulations did not explicitly recognize digital assets, and they were taxed with the tax on other income under the Law on Personal Income Tax. With the comprehensive legal regulation of digital assets and the change in tax regulations, a new phase of taxation of digital assets begins, and the Law on Personal Income Tax specifies that digital assets will be taxed with capital gains tax.
This would mean that any individual who earns income from the sale or transfer of digital assets in exchange for other types of assets will be required to file a tax return and pay capital gains tax at the rate of 15 %. An individual who earns income from the sale or transfer of digital assets is required to file a tax return no later than 120 days after the end of the quarter in which the income was earned. The same obligation applies to individuals who have suffered a capital loss.
A person shall be deemed to have made a profit on the sale of digital assets if there is a positive difference between the purchase price and the price at which the digital asset was sold. The purchase price is the price that the person can prove to have actually paid, while the sale price is the price obtained from the sale, or the market price if the tax authority considers that the market price is higher than the price obtained from the sale of the digital asset.
We will use an example to explain how this works in practice. So, if you bought a cryptocurrency for 150 euros and sold it for 200 euros, you would make a profit of 50 euros. The stated amount of 50 euros would represent the tax base on which you would have to pay capital gains tax at the rate of 15 %, which in this case would mean that you would have to pay a tax amount of 7.5 euros.
If a person does not make a profit from the sale of digital assets, there is no obligation to pay taxes. It is also important to note that the Law on Personal Income Tax does not distinguish between different types of digital assets; whether it is bitcoin or NFTs, taxation is done in the same way.
After explaining in which cases a person is obliged to pay capital gains tax on the sale of digital assets, it is necessary to clarify how to determine whether a person has made a profit from the sale.
The person who sells digital assets is required to document the purchase and sale price of such assets, and a confirmation from an exchange or a specific platform may serve as proof of the purchase price. But what if the seller cannot provide the tax authorities with proof of the purchase price? The tax administration has not taken a specific position on this issue or provided any concrete guidance, so it can be expected that if the taxpayer cannot provide proof of the purchase price for digital assets, it will be considered to be 0, which case the tax base would be the entire income generated by the sale of digital assets. In the example above, this would mean that taxes would be calculated on the basis of a tax base of 200 euros.
Tax benefits for individuals
In order to encourage taxpayers to file tax returns and pay taxes in the case of transactions with digital assets, the legislator has provided certain tax benefits in addition to new tax solutions.
If a taxpayer invests the funds obtained from the sale of digital assets into the share capital of a company or into the capital of an investment fund in the Republic of Serbia within 90 days from the date of sale, he would be exempt from 50% of the capital gains tax.
If the taxpayer makes the aforementioned investment after the expiration of 90 days but no later than within 12 months from the date of sale of the digital assets, he is entitled to a refund of 50 % of the capital gain tax paid.
It should be noted that the taxpayer is entitled to the mentioned tax exemption only if the company in which he made the investment does not reduce its share capital within two calendar years from the year in which the investment was registered.
Is property tax also payable on digital assets?
Since digital assets represent a type of property, there is an obligation to pay property tax if they are acquired as a gift or inheritance. The Law on Property Taxes prescribes that first-degree heirs or gift recipients are exempt from paying taxes. Second-degree heirs or gift recipients pay inheritance or gift tax at the rate of 1.5 %, while all others pay tax at the rate of 2.5 %.
In case the heir or gift recipient acquires digital assets in the amount of up to 100,000 dinars from the same person in one calendar year, they are not subject to taxation, i.e., they are exempt from tax.
Conclusion
With the adoption of the Law on Digital Assets and the new tax regulations, Serbia has taken an important step towards ensuring legal certainty in relation to the disposal and trading of digital assets, which is a good basis for further regulation given the rapid development of the digital market, both globally and domestically.
However, despite the establishment of a good starting point, there are still numerous uncertainties that are expected to be regulated in the coming period through the adoption of a series of sub-legal acts by supervisory authorities determined by law, namely the National Bank of Serbia and the Securities Commission.
It is particularly important to emphasize that the tax administration must take a stand and provide guidelines for the implementation of tax laws since there are numerous other open issues in addition to those already mentioned.