Legalization of Cryptocurrency: Changes in Tax Rules for Investors

Ukraine is among the top 5 countries in terms of cryptocurrency popularity. At the same time, we still do not have clear rules for the taxation of crypto assets. Still, the Parliament is ready to adopt the relevant bill by the summer. Partners of the K.A.C. Group Law Firm Volodymyr Sytnik and Iryna Matsapura explain how tax rules for investors will change in the event of the legalization of cryptocurrencies in Ukraine in 2025.

Ukraine is among the top 5 countries in terms of cryptocurrency popularity.

On February 17, 2022, a week before the full-scale invasion, the Verkhovna Rada of Ukraine adopted the Law of Ukraine No. 2074-IX “On Virtual Assets”, which was supposed to legalize and launch the virtual asset market in Ukraine. It was expected to come into force after the end of hostilities.

The remaining draft laws and resolutions on this issue were never considered. The Ministry of Finance expressed its comments on the proposed changes, noting that preferential taxation would lead to potential losses in budget revenues of all levels.

How Is Cryptocurrency Currently Taxed in Ukraine?

The Tax Code does not contain a separate procedure for taxation of transactions with virtual assets. Thus, the general rules of the Code are applicable.

Taxpayers have repeatedly drawn attention in individual tax consultations that the tax base is income from the sale or other alienation of cryptocurrency, i.e., the entire amount of funds received by the taxpayer from transactions with cryptocurrency, regardless of the costs of the previous purchase of cryptocurrency.

Depending on the source of payment, such income is taxed as “foreign income” (if the source of payment is foreign) or “other income” (if the payment is made by a resident of Ukraine).

Taxes must be paid at the basic rate of 18% personal income tax, together with the military duty, the rate of which from January 1, 2025 is 5%.

Thus, if you sold one bitcoin on February 26, 2025, the tax on this sale will be UAH 650,069, and the military levy will be UAH 180,574, regardless of whether you received it in 2009 for five dollars, or purchased it three months ago and are selling it now at a discount.

Income from cryptocurrency transactions must be included in the tax declaration on property and income, which must be submitted by May 1 of the year following the reporting year, and taxes must be paid to the budget by August 1 of the year following the reporting year.

Note that only income from cryptocurrency transactions is subject to declaration.

The very fact of owning cryptocurrency, if no transactions with it took place during the reporting year, is not reflected in the tax declaration.

Purchase and storing cryptocurrency are not taxable transactions.

Thus, the current procedure for taxation of transactions with virtual assets does not correspond to world practice, and the rather large crypto and digital asset market in Ukraine is still in the shadows.

Cryptocurrency Declaration by Officials

It is interesting that the lack of a regulatory framework for the functioning of the virtual asset market did not prevent the introduction of mandatory cryptocurrency declaration for persons authorized to perform state or local government functions, which is an important part of the process of preventing corruption.

For instance, Law No. 140-IX includes cryptocurrency in the definition of intangible assets, information about which is indicated in the declaration of civil servants. The corresponding changes were introduced on January 1, 2020.

According to the calculations of Incrypted, based on the results of a 2023 declaration campaign, cryptocurrency was reflected in 1,834 declarations of Ukrainian civil servants. This became the third most popular option for asset declaration, after “debt repayment” and “inheritance from close relatives”, which made it difficult to confirm the sources of origin.

At the same time, no income from transactions with virtual assets was found in any of the declarations. This may indicate that officials declare only the fact of acquiring cryptocurrency as an asset (including cryptocurrency received before being appointed to the relevant positions), but do not cover income from their sale. However, given the classification of cryptocurrency income as “foreign income” or “other income”, it is possible that cases of declaration could still have taken place without appropriate detail.

The declaration campaign for 2024 will last until April 1, 2025, so we expect its completion in order to obtain new statistical data.

Providing knowingly false information in the declaration may result in disciplinary, administrative (if the amount of false information exceeds UAH 302,800) or criminal liability (for an amount exceeding UAH 1,514,000).

To illustrate, in January 2024, The National Anti-Corruption Bureau of Ukraine and the Specialized Anti-Corruption Prosecutor’s Office reported suspicion of entering false information into the e-declaration for 2020 to the People’s Deputy Oleksandr Marikovskyi.

According to the investigation, he declared cryptocurrency with an estimated value of UAH 24.6 million (32 bitcoins), but the cryptocurrency wallet never belonged to him, and transactions to purchase cryptocurrency were carried out by citizens of another state.

An illustrative case of bringing declarants to administrative responsibility is a fine of UAH 17 thousand applied to the former Deputy Minister of Infrastructure Oleh Yushchenko, who did not indicate the identifier of the cryptocurrency wallet in the declaration. The official explained that the documents for the purchase of bitcoin in the amount of UAH 600 thousand were missing, and the storage device for accessing the cryptocurrency could not be found at that moment.

As the court noted, even if a virtual asset is purchased for cash through intermediaries, in any case, a crypto wallet containing the public address of the cryptocurrency is opened in favor of the buyer.

How Cryptocurrency Is Planned to Be Taxed

The agenda of the 13th session of the Verkhovna Rada, which will last from February to August 2025, includes consideration of Draft Laws No. 10225 and No. 10225−1 on amendments to the Tax Code regarding the regulation of the turnover of virtual assets in Ukraine (registered in November 2023).

Draft Law No. 10225 was developed by the National Securities and Stock Market Commission, and an alternative Draft Law No. 10225−1 was developed by the Ministry of Digital Transformation. Accordingly, it is proposed to assign the functions of the regulator of the crypto asset market to the National Commission and the National Bank, or to the Ministry of Digital Affairs and the National Bank.

Both drafts set out the new version of Law No. 2074-IX “On Virtual Assets” and provide for taxation of the positive financial result of cryptocurrency transactions, similar to securities. However, the documents still contain significant differences.

According to Draft Law No. 10225, the financial result from transactions with virtual assets shall be determined at the time of their sale or other disposal. In this case, the exchange of one virtual asset for another is equated with disposal, which significantly complicates the accounting of such transactions by crypto asset owners.

An alternative Draft Law from the Ministry of Digital Economy exempts transactions on the exchange of virtual assets from taxation if the taxpayer receives only virtual assets as a result.

Both documents provide for the application of the basic corporate income tax rate on the results of transactions with virtual assets (18%).

Transactions on the issue, introduction and withdrawal from circulation, exchange, sale and other disposal of virtual assets are not subject to VAT, with certain exceptions. In particular, VAT is subject to the supply of tokens defined by individual characteristics – NFT (Draft Law of the National Commission) or transactions with service tokens (Draft Law of the Ministry of Digital Economy), which are equated to the supply of objects, the ownership of which is confirmed by the corresponding token.

For individuals, a basic personal income tax rate for investment income is set at 18%.

At the same time, Draft Law No. 10225-1 establishes preferential conditions for individuals during the transition period, namely taxation at a rate of 5% during the first 3 years from the date of entry into force of the law, and 9% – during the next 5 reporting years.

Payers whose annual income from transactions with virtual assets does not exceed UAH 7 million will be entitled to benefits.

The alternative Draft Law establishes a wide list of expenses that can be taken into account for the purpose of calculating investment income. For its part, according to Draft Law No. 10225, the list of such expenses will be determined by the National Securities and Markets Commission of Ukraine, which does not provide the necessary level of legal certainty.

Finally, both drafts oblige individuals to declare cryptocurrency transactions, regardless of their location. Payment of the tax must be made independently by individuals (Draft Law No. 10225-1) or by tax agents – providers of services related to the turnover of virtual assets (Draft Law No. 10225).

It is currently unknown which of the Draft Laws will be adopted as the basis. Danylo Hetmantsev, head of the relevant Verkhovna Rada Committee on Finance, Tax and Customs Policy, criticized the alternative Draft Law, noting that “8 years of a grace period for a market that does not create jobs and added value and, to a certain extent, is speculative, is too much.” At the same time, he stated the shortcomings of the main Draft Law, pointing out the unfairness of taxation of the exchange of some cryptocurrencies for others.

Why We Need Clear Taxation Rules as Soon as Possible

In conclusion, we emphasize that the current approach of tax authorities to taxation creates significant financial risks for investors, as they are obliged to pay taxes on all income, regardless of the costs of acquiring assets.

Nevertheless, every investor sooner or later faces the need to confirm the legality of the source of funds and pay taxes on acquired wealth, in particular, when opening accounts in foreign banks, opening accounts for their own business, making significant purchases (such as real estate), or even simply making transactions in traditional financial structures.

The proposed Draft Laws No. 10225 and No. 10225-1 are aimed at creating a more transparent and fair system of taxation of crypto assets. The main idea is to tax the financial result of operations, rather than gross income, which corresponds to the approach to taxation of traditional investment assets. However, the differences between the approaches of the National Commission and the Ministry of Digital Economy require further development and coordination with the business and expert community.

It is worth noting that the need to confirm the legality of the source of funds and payment of taxes is an essential point when converting crypto assets into tangible assets both in Ukraine and in other countries. There are many examples when purchasing an expensive car in Ukraine or real estate in Europe was impossible, as only crypto wallets with the appropriate amount of bitcoins were indicated as the source of funds.

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