Sale and exchange of crypto-assets: proposed exemption from personal income tax

The proposed exemption would apply to the transfer of crypto-assets that are currently liable to personal income tax as part of other income but not to crypto-assets that are part of the taxpayer's business assets. The exemption should follow similar principles as the exemption of income from the transfer of securities for consideration. The first principle is the income threshold test:  to claim the exemption of income from the transfer of crypto-assets (other than electronic cash tokens) for consideration, the total gross income from such sales for the taxable period cannot exceed CZK 100 thousand. The second principle is the time test: income from the transfer of crypto-assets for consideration would be exempt from personal income tax if the crypto-assets had been held by the taxpayer for more than three years immediately before they were transferred for consideration, with the exemption limit of CZK 40 million of gross income for the taxable period (including also income from the transfer of securities and shares in corporations for consideration).

The proposed regulation brings several technical and interpretative ambiguities. The amending proposal does not provide any explanation on this exemption, giving no clues to clarify the legislator's intent and provide at least some indication as to why the exemption was granted and how to interpret the disputable parts of the draft amendment.

Definition of crypto-assets for the Income Tax Act purposes

The current wording of the Income Tax Act does not provide a definition of crypto-assets or electronic cash tokens; both are considered intangible movable assets. The bill on the digitisation of the financial market (Print 692) implements the EU Regulation on Markets in Crypto-Assets (MiCA Regulation), which defines the crypto-asset more narrowly than can be generally understood.'

The proposed amendment to the Income Tax Act neither introduces its own definition of crypto-assets or electronic cash tokens nor refers to any other law or source of EU law, such as the MiCA regulation. The interpretation of the term could thus be very broad.

No interruption of the time test for exemption in the event of a crypto-asset exchange by the issuer

The proposed provisions on this exemption largely adopt the wording used in the Income Tax Act for the exemption of income from the transfer of securities for consideration. In the case of securities, the law provides, among other things, that in an exchange of a security by the issuer for another security of the same aggregate nominal value, the period of holding the security is not interrupted for the purposes of the time test for exemption. The key fact is that the nominal values of the exchanged securities do not change, as the Supreme Administrative Court has ruled in several of its judgments.

According to the proposed wording of the exemption of income from the transfer of crypto-assets for consideration, the time test for exemption would not be interrupted when an issuer exchanges a crypto-asset for another crypto-asset, without any further limitation. Thus, unlike the limitation on the exchange of securities, in the case of crypto-assets, there could be (without interruption of the time test) an unlimited exchange of crypto-assets by the issuer regardless of the type or value of the exchanged crypto-asset.

Non-existent transitional provisions

Transitional provisions are generally intended to increase legal certainty and ensure the predictability, continuity, and stability of the legal environment. However, transitional provisions that would provide, e.g., that the new legislation would apply only to crypto-assets acquired by the taxpayer after the amendment takes effect (i.e., from 1 January 2025) are missing. And since there are no such transitional provisions, the new wording of the act should also apply to crypto-assets acquired before the effective date of the amendment.