One of the biggest novelties of the tax changes adopted and announced last year is that in 2022, for the first time, private individuals’ income from so-called crypto-assets can be declared. In this post, we analyse this topic.

Last year’s amendment to the Hungarian Act CXVII of 1995 on Personal Income Tax (hereinafter referred to as the “PIT Act”) remedied a shortfall of about a decade: Hungarian private individuals have been realizing income in their various transactions with crypto-assets for about that time, and have been fulfilling or failing to submit a personal income tax return, according to their own interpretation in most cases.

It says a lot, that until last year there was not even a legal definition of crypto-assets in the Hungarian law, so according to some interpretations they could (should) be treated as receivables, while according to others as virtual means of payment. This anomaly was resolved last year by the adoption of Section 67/C of the PIT Act.

Without going into the – mainly IT related – details, it is definitely worth mentioning that the revenue related to crypto-assets is mainly stem from mining (the user’s computer checks and validates the transactions waiting to be confirmed by stringing them to the block-chain, in return for which the users receive a crypto-asset from the system at certain intervals) and from trading. Perhaps the best known (but by far not the only) form of crypto-asset is Bitcoin (₿).

Based on the above-mentioned section of the PIT Act, the profit achieved on the basis of a transaction executed with a crypto-asset concluded by a private individual for the given tax year shall be treated as an income from a crypto-asset transaction (the significance of the word profit will be discussed in more detail later in this post).

Thus, on the one hand, the regulation applies only to private individuals, in the case of legal entities these rules cannot be applied, on the other hand, the tax year (which is almost always the same as the calendar year) plays an important role as a time interval.

Also the PIT Act defines the crypto-asset itself, according to which it is a digital display of value or rights that can be electronically transferred and stored using shared general ledger technology or similar technology.

Unlike before, under the new regulations, the method of acquiring a crypto-asset is completely irrelevant: the tax consequences of mining, trading, betting, investing, and acquiring as consideration are the same. However, it is extremely important that a taxable transaction only occurs when the crypto-asset left the virtual space, i.e. it is exchanged for cash or other goods. If someone buys Ethereum (Ξ) in exchange for Bitcoin for instance, he / she does not have to pay personal income tax only because of this particular acquisition of crypto-asset.

In the personal income tax return to be completed by 20 May 2022, it is possible to declare the income earned from crypto-asset related transaction(s) during the tax year 2021 – based on the given private individual’s decision – as a separate taxable income.

This decision is strongly recommended, as for 2021 such income will otherwise be included in other income (trading), or income from independent activity (mining), but in these cases a significantly higher tax burden would be expected (in addition to the personal income tax, the private individual concerned shall also pay social contribution tax).

From 2022, crypto-asset related incomes will have to be declared as separate taxable income, which will be subject only to the 15% personal income tax.

We would like to emphasize, that it is also possible to determine the previously unreported (and from a tax perspective not yet expired) crypto-asset incomes, so it is worth considering on the taxation of such incomes to those, who dealt with crypto-assets at the second half of the 2010s without paying any tax, in 2021, however, no income from any crypto-asset has occurred.

As mentioned, according to the PIT Act, the profit made in a tax year is considered to be the income from a crypto-asset transaction. Similar to the method used for income from a controlled capital market transaction, the institution of tax equalization can be used here as well.

This means that the (crypto-asset related) losses of previous years can be used for two tax years, i.e. they can reduce the (crypto-asset related) income of the given year, which will ultimately determine the (crypto-asset related) tax base. However, this is subject to the condition that the personal income tax return for the previous tax year includes the loss resulting from the crypto-asset transactions in that tax year.

Thus, it is definitely worth paying more attention to the personal income tax return of those who, in the year 2021, also dealt with crypto-assets, but only had expenses (costs).

If these private individuals include these (crypto-asset related) costs in their personal income tax return, they can reduce their tax base and thus also the payable tax in the tax year in which they (finally) generate (crypto-asset related) income. However, this is only possible within two tax years and this is a bit unrealistic in the case of crypto-assets: their retention period is usually significantly longer.

However, a precondition for indicating expenses (costs) in the personal income tax return is, of course, to keep detailed records of both the purchase of the crypto-assets and mining.

In this connection, it is worth bearing in mind that in the case of a tax audit, it should be clear and unambiguous to the tax inspector how was the value declared by the private individual under review in his / her personal income tax return for the relevant tax year determined: the more detailed the record, the lower the potential tax risk.

It should be noted here that the values included in the Hungarian personal income tax return must always be stated in HUF, so the payable tax must also be determined in HUF. In the record containing the expenses (costs), therefore, the private individual should also pay special attention to the exchange rate at which he / she converted the values determined in other currencies (e.g. EUR or USD) to HUF.

As income from crypto-assets is considered to be separate taxable income, the personal income tax base of such income cannot be reduced by any other benefits available (e.g. family allowance or allowance for young people under the age of 25).

As can be seen, the imminent personal income tax return affects both those who have only dealt in the past and those who are still dealing with crypto-assets. Should you have any questions regarding to this type of income, Grant Thornton’s tax experts will gladly assist you.

This newsletter is written on the basis of the information available on the day of its publication and is for general information purposes only, so it does not in any way constitute or replace personal tax advice.