• Tax Treatment of Crypto Currency in Croatia

    By Ksenija Cipek


    Authors: Ksenija Cipek and Iva Uljanić Škreblin - Ministry of Finance, Tax Administration

    1. What is BITCOIN, i.e. what is a crypto currency?

    We can find a lot of definition of bitcoin and crypto (or virtual) currency in general on the Internet, but from a legal point of view when we are talking about taxation, in Croatia crypto currency are not regulated nor prescribed by any law. In that case, Croatian Tax Administration has issued few opinions about tax treatment of crypto currency with reference to the judgment of ECJ (C-264/14, on 22 October 2015). Namely, bitcoin was the subject of a dispute between Skatteverket (Swedish tax authority) and Mr. D. Hedqvist in 2015 and the Supreme Administrative Court of Sweden sent a request for a preliminary ruling to the ECJ on whether transactions to exchange a traditional currency for the bitcoin virtual currency or vice versa, which Mr Hedqvist wished to perform through a company, were subject to value added tax (VAT). In the judgment it states that, referring to a 2012 report by the European Central Bank on virtual currencies, the requesting court states that the virtual currency can be defined as a type of unregulated digital money issued and verified by its developers, and which is accepted among members of the specific virtual community. The virtual currency, Bitcoin, belongs to the so-called "virtual currency" with a bidirectional flow, which users can purchase and sell on the basis of an exchange rate. When it comes to their use in the real world, such virtual currency is similar to other convertible currencies. They allow both real and virtual goods and services to be purchased.

    Virtual currencies differ from electronic money, as defined in Directive 2009/110/EC of the European Parliament and the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC (OJ 2009 L 267, p. 7), in so far as, unlike that money, for virtual currencies the funds are not expressed in traditional accounting units, such as in euro, but in virtual accounting units, such as the bitcoin.

    Furthermore, in the judgment it is stated that, since the virtual currency bitcoin is a contractual means of payment, on the one hand it cannot be regarded as a current account or a deposit account, a payment or a transfer. On the other hand, unlike a debt, cheques and other negotiable instruments referred to in Article 135(1)(d) of the VAT Directive, the bitcoin virtual currency is a direct means of payment between the operators that accept it. The Court therefore concludes that transactions involving non-traditional currencies, that is to say, currencies other than those that are legal tender in one or more countries, in so far as those currencies have been accepted by the parties to a transaction as an alternative to legal tender and have no purpose other than to be a means of payment, are financial transactions.

    It is also concluded that it is indisputable that the virtual currency bitcoin is neither a security conferring a property right nor a security of a comparable nature.

    On those grounds, the Court has ruled that Article 2(1)(c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that transactions such as those at issue in the main proceedings, which consist of the exchange of traditional currency for units of the bitcoin virtual currency and vice versa, in return for payment of a sum equal to the difference between, on the one hand, the price paid by the operator to purchase the currency and, on the other hand, the price at which he sells that currency to his clients, constitute the supply of services for consideration within the meaning of that article, and that Article 135(1)(e) of Directive 2006/112 must be interpreted as meaning that the supply of services such as those at issue in the main proceedings, which consist of the exchange of traditional currencies for units of the bitcoin virtual currency and vice versa, performed in return for payment of a sum equal to the difference between, on the one hand, the price paid by the operator to purchase the currency and, on the other hand, the price at which he sells that currency to his clients, are transactions exempt from VAT, within the meaning of that provision.

    The judgment is in reality about transactions performed by an exchange office. Namely, this is one way by which a natural or legal person can become the owner of a crypto currency (by exchanging some of the so-called fiat currencies for bitcoins or other crypto currencies on various web portals offering such a service). In addition, crypto or virtual currency can be purchased or exchanged for one of the fiat currencies on specialized ATMs. Several bitcoin ATMs exist today in Croatia and there is also some domestic entrepreneurs who accept bitcoins as a means of payments for tourist accommodation or other services (hairdressing services, etc.).

    In addition to crypto currencies serving as internet payments, they are traded like any other currency and (as well as any currency or commodity on the market) - their value can change significantly. For example, at the beginning of 2015, 1 bitcoin could be purchased for $ 217, and at the beginning of March 2017 for $ 1,286. Since the trading of crypto currencies is not monitored nor regulated by any institution, there is a high volatility in price and this provides the opportunity for a large profit, but also for losses for those without experience. Therefore, many experts, banks, governments and other regulators are more and more concern about the high risk of investments in such currencies, i.e. trading those currencies.

    Anonymity is a benefit of crypto currencies that is often mentioned as an advantage. However, trading, including purchasing of crypto currencies is not entirely anonymous. Namely, buying crypto currencies on some of the on-line platforms, such as Coinbase, Litebit, or Cex, where this process is the most simple, requires login identification due to KYC and AML laws (know-your-customer and anti - money laundering). Identification usually consists of sending pictures or copies of personal documents such as passports or ID cards, and photos of the user with it. Some platforms also require a user to be photographed with his/her bank card he plans to use for payments. At the moment of sending this data to a selected platform, bitcoin for these users becomes equally anonymous as a bank account. The same can be compared with shares or other securities trading platforms, which also require a similar way of identification. Furthermore, since the entire bitcoin blockchain is public, it is sufficient for the user of an address to make a mistake just once and publicly announce that the same belongs to him/her (for example if he purchases goods with bitcoins on a website that requires a user account, or if he views the balance of his address on a public computer).

    Once a person's identity is associated with an address, the movement of his crypto currencies is easy to follow. Furthermore, crypto currencies transactions can also be monitored via the IP address of the computer from which these transactions are performed and through the so-called transaction graph and other methods. Finally, and since in Croatia there is still not so much place or entrepreneurs who accept crypto currencies as a means of payment, by exchanging the crypto currencies for “kuna” (Croatian currency) and putting the money on the bank account or purchasing of goods of higher value (cars, real estate etc.) this information can be used by the Tax Administration to investigate the source of funds for which that asset has been acquired or that was putted on the bank account.

    2. What is a capital gain?

    Capital gains are gains generated as a result of the sale or exchange of financial assets, and essentially represent the difference between the higher, sales value of the asset sold and the lower value at which that asset was acquired by the same person. On the other hand, if the sales value is less than the purchase value, a capital loss is generated.

    In the literature, capital gain is broadly defined as an increase in the value of assets (rights, property, movables and financial assets) that is calculated as the difference between the selling price and the price at which the asset was purchased.

    3. Determining income from capital gains in Croatia

    According to the ECJ judgment mentioned in the first section, crypto currencies trading in Croatia is considered a financial transaction, and the income generated by the sale of crypto currencies is subject to personal income tax on the basis of capital gains, since it is the gain on the basis of the sale of that currency, which is an equivalent to money market instruments. Income is determined as the difference between the purchasing price (i.e. the value at which the crypto currency was purchased by the tax payer, measuring in one of the fiat currency, ex. in USD, euro or kuna) and the selling price (i.e. the value at which the crypto currency was sold by the same tax payer, measuring in the same fiat currency), less any potential trading costs (ex. entry and exit fees paid to the online trading platform). This actually means that the purchase or acquisition of a crypto currency itself (or its holding in an e-wallet) does not entail any tax liability, but the tax liability arises only after that crypto currency is sold.

    As prescribed in the Croatian Personal Income Tax Act, income realized on this basis is considered as a final income, i.e. the tax paid on capital gains is deemed final. Final Income is considered to be each individual amount of income from property and property rights, capital and insurance and other income deemed final. For final incomes realized in the tax period, taxpayers can not submit an annual tax return nor use personal allowances.

    However, a taxpayer who wishes to make use of a personal allowance on the basis of capital gains has the possibility to determine, on his/her own demand, such income in the manner prescribed for self-employment. Furthermore, in that case, the taxpayer may also pay profit tax instead of personal income tax.

    However there are also some exceptions, so, among other things, the following is not taxable:

    • replacement of securities with equivalent papers of the same issuer whereby the relations among the members and the capital of the issuer do not change, as well as replacement of securities or shares in the capital of companies, i.e. financial instruments with another or other securities, i.e. with financial instruments, and acquisition of securities, i.e. financial instruments in case of status changes whereby in all cases there is no cash flow and under the conditions that the order of the acquisition of financial assets has been ensured.

    In these cases, therefore, no taxable income is determined and the potential capital gains that the holder of the financial asset can realize in that transfer will not be taxed. However, if, after a replacement that was exempted from taxation the holder of that financial asset sells these securities or shares, the capital gains realized in that transaction is taxable and the value determined on the day of the first acquisition of the financial assets shall be taken as the purchase price.

    In the case of crypto currencies, it is possible to replace one crypto currency for another (for ex. bitcoin is replaced for ethereum), but according to the previously cited exception, in this case no taxable income is determined, i.e. it is not considered as taxable alienation. Namely, since there is no cash flow in this case, i.e. there has not been a replacement or exchange of a crypto currency for one of the fiat currencies recognized as a legal instrument of payment, no capital gain is determined on that basis. Taxable capital gain is determined only after the exchange of the crypto currency for one of the fiat currencies, as the difference between the sales price (value) at the moment of exchange of the crypto currency for one of the fiat currencies and the purchase price (value) at the moment of exchange of one of the fiat currencies for the crypto currency. For example, a taxpayer buys 10 bitcoins at a cost of $ 600.00 per unit (meaning he has invested a total of $ 6,000.00). After a while, he replaces those 10 units of bitcoin for 118 units of ethereum. After few months he sells all 118 units of ethereum for $ 300.00 per unit and earns $ 35,400.00. This means he has achieved capital gains from the trading of crypto currencies in the amount of $ 29,400.00. In case the taxpayer sells only part of the ethereum (for ex. 50 units), then he has to calculate the purchase price as the proportion of bitcoin value by which he has replaced the crypto currencies (in this case that would be the value for the 4 bitcoins).

    Furthermore, income from capital based on capital gains shall not be taxed in the following cases:

    • if the alienation is executed between spouses or kin of the first degree of kinship and other members of the immediate family, between divorced spouses if the alienation is directly connected with a divorce,
    • if the alienation is directly related to inheritance of financial assets, and
    • in the case that the financial assets are alienated two years from the day of procurement, i.e. acquisition of those assets.

    If the taxpayer on the basis of the alienation of the financial asset realized a loss, that capital loss may only be deducted from income from capital gains realized in the same calendar year. Capital loss shall be stated maximally up to the tax base amount and is recognized only if it is realized on the basis of financial assets acquired on or after 1 January 2016 and if it is realized within 2 years from the date of acquisition of the financial asset that is alienated. Capital gains or capital losses shall also include all the related costs which were collected at the expense of the taxpayer.

    3.1. Determination of the market price of crypto currency at the date of acquisition / sale

    If income from capital based on capital gains has not been determined or reported at market prices, income shall be determined by the Tax Administration according to market prices. Therefore, every purchase and sale of crypto currency must be documented with credible documents (for example certificate or statement of the online platform (decentralized stock exchange, online retailer etc.) or confirmation of the exchange office etc.) and the sells and purchase price is determined according to these documents. In exceptional cases, if the value of a bitcoin or any other crypto currency cannot be determined from a credible document, the market value can be determined by the average value of a particular crypto currency in relation to one of the fiat currency on the day of purchase/sale according to the trading data at some of the largest crypto currency exchanges, such as OKEx, Binance, Gemini, Kraken, GDAX, Coinbase and others.

    In the case of the purchase of crypto currency directly from another natural person, this transaction must also be documented (by contract or other credible document), in which the following data must be highlighted: personal data of the buyer and seller, purchase/sale subject, purchase/sale date, amount and price and number of units that is being purchased/sold and the method of payment. Investors, for example, can use websites such as LocalBitcoins where they can find a buyer close to them and buy bitcoin from him in cash, but in that case, both the buyer and the seller must keep a certificate of the sale.

    3.2. Determining income in special cases of acquisition or use of crypto currency

    We have previously explained the different ways in which a natural (or legal person) can acquire or obtain crypto currencies and we will now clarify how in some cases the income or purchase value is determined from a Croatian Tax Administration point of view:

    • purchase from an online retailer, a local dealer, Bitcoin ATM or a stock exchange can be considered as a typical way to buy bitcoins, or any other crypto currency, and in such cases the usual procedure as previously explained applies,
    • acquisition by donations - if a natural person acquires bitcoin or any other crypto currency by donations (for example, if a natural person manages any free web content such as a blog or simple web application and puts his public key on the page and asks for donations in bitcoins) this is considered as non-taxable income if the conditions of the Personal Income Tax Act have been met. Otherwise, the taxpayers themselves are obliged to calculate and pay the income tax on the basis of other income or income from self-employment if they are self-employed. If the donated crypto currency the beneficiary (i.e. the tax payer) uses further for trading and realizes capital gains, the usual procedure as previously explained applies,
    • acquisition of crypto currency by accepting it as a mean of payment for the delivery of goods or services - in this case, if the tax payer is a craftsman or a physical person who carries out a self-employed activity, then the difference between the sells price in the crypto currency and the exchange price of that crypto currency for “kuna” would be considered as receipt acquired from a self-employment activity, if the capital gain on that basis is realized from the financial transactions that constitute the principal activity of the taxpayer,
    • acquisition of crypto currency by accepting it as a mean of payment for the sells of own property - receipt acquired by a natural person in that case is non-taxable and this transaction can be charged in bitcoins, or any other crypto currency or cash. If these bitcoins are further used for trading and thereby that natural person realized capital gains as the difference between the sell and the purchase price, then the usual procedure as previously explained is applied. The purchase price is the market value of the crypto currency at the time of the sells of the property.

    In the case of “mining”, the miners, who are actually the computer, are rewarded for their work (verifying and recording transactions in the main book) in a certain amount of crypto currency units. Since all the work is actually done by a computer, in this case, we can already talk about a predecessor of “robotax” or taxation of robot`s labor, and there will certainly be more and more talk in the future about it, especially with the increase use of robots in production and services that nowadays people are still in most cases doing. In the case of “mining” we are actually talking about the use of property (own or leased) to create value based on a particular software program. Although in this case income acquired by the computer owner would be deemed as a property income, since this is not provided for in the existing law provisions, income derived by a natural person on that basis in Croatia is considered to be other income and is taxable at a rate of 24%.

    If the mentioned bitcoins (or any other crypto currency) acquired for “mining” are used further by a natural person for speculative trading (on stock exchanges, via online retailers etc.) and on that basis the natural person acquires a capital gain (when exchanges the said crypto currency for one of the official fiat currencies), taxable income from capital is determined as the difference between the purchase price (the average market value of the crypto currency at the date of acquisition according to the stock exchange rate of some of the biggest crypto currency exchanges) and the sells price.

    However, it should be noted that if the natural person on the basis of "mining" generates receipts continuously and with the intention of gaining income over a longer period of time and this becomes his/her "primary occupation", he/she has to register in the tax register for self-employment activity and determine the income from the “mining” as self-employment income (but he/she can do it also voluntarily even if only earns that kind of income occasionally).

    Similar to "mining", if a natural person obtains a certain amount of crypto currency for a certain counteraction, such as for viewing ads, completing a survey, promoting certain products on his/her own website or other advertising activity, then again a taxable other income or income from self-employment shall be determined.

    Regarding the tax treatment of ICO (Initial Coin Offering), it is necessary to look at the determination of income from 2 positions: from the position of the investor and from the position of the recipient. From the position of the investor, since ICO is not specifically regulated in the Republic of Croatia, tax treatment will typically depend on the type of benefits that investors (or buyers of tokens) can obtain. If it is an "Asset/Security" token, and investors obtain a share in profits of the company itself that has launched the ICOs (or the recipient of the stake), those income can be treated (and taxed) as capital income on the basis of dividends and profit share. On the other hand, if investors have certain benefits (for example, more favorable condition for money lending etc.), then on that basis capital income on the basis of withdrawal of assets can be determined. Furthermore, if the tokens themselves do not carry any special benefits for investors, but investors expect a gain on the basis of the increase in the value of the token itself that they will sell further to other natural or legal persons, either on the exchange market or directly, then on that basis capital income on the basis of capital gains is determined (as the difference between the initial value of tokens when buying or investing, and the sales value).

    From the position of the recipient (since even natural persons can announce the sale of tokens for financing some of their projects, or use the ICO as the financing model), the receipts collected in that way (either in one of the fiat currencies or in one of the crypto currencies) shall be usually deemed as self-employed income (since it is usually a project for a longer period of time and has also a feature of self-employment) or exceptionally as other income, if it is a one-off event that is not expected to last for a longer period of time nor to be a continuous self-employed activity.

    In all the cases mentioned above, the transaction must be proved by credible documentation (contract, decision, confirmation, prints of financial transactions on e-wallet or digital wallet through which the sale of the crypto currency was executed, prints of financial transactions made with credit card or debit card etc.).

    4. Calculation and payment of income tax in Croatia

    The taxpayer – holder of financial assets shall calculate, withhold and pay tax on income from capital based on capital gains, until the last day in February of the current year for all capital gains realized in the previous year reduced by realized capital losses, at the rate of 12%. The taxpayer shall keep records of equivalent financial assets according to the method of consecutive prices (FIFO).


    At the global level, there is not only no unified tax treatment of bitcoin or other crypto currency (which is not surprising since each country decides on its tax system depending on many factors), but there is also no single definition of what bitcoin actually is, or any other crypto currency. Somewhere this is deemed as property, like in the USA (more precisely capital goods), somewhere is regarded as a service, as in Singapore, and somewhere as means of exchange, as in Australia. Croatia would, according to those definitions, be the closest to the definition used in the USA.

    When it comes to direct taxes, even there differences exist between the tax systems of different tax jurisdictions. But more and more countries are beginning to use different instruments (existing and new, specific measures) for taxing capital gains generated by the sale of crypto currency.

    The Croatian tax treatment of the income based on capital gains from the trading of crypto currency as well as on the basis of “mining” activity does not differ largely from the tax treatment in the USA, as one of the leading countries for the trade and use of crypto currencies for direct payments.

    In future there will surely be more and more talks on global level about cooperation between countries in the sense of exchange of good practices or exchange of information between tax administrations gathered from online platforms where crypto currency can be traded. Finally, this is also a “product” of the emerging digital economy and it should also be considered in the final solution expected from the OECD and the EU (currently on both levels there is undergoing work in the working parties about possible solution for challenges arising from digital economy).

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  • The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.

Ksenija Cipek

Ksenija Cipek is based in Zagreb, Croatia and she is a lecturer at the local University of Law and a Member of European Law Institute. Ksenija has over 20 years experience working at the Ministry of Finance and the Tax Administration. She is a highly respected and recognised tax expert who has been heavily involved in lawmaking. Ksenija is also an author and books writer.

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