From legalization to taxation. Impact of MiCA on cryptocurrency legislation of Ukraine

In the previous article, we reviewed what changes await the cryptocurrency legislation of the European Union in connection with the adoption of the markets in the Crypto Assets Act (MICA).

In this publication, we will focus on the analysis of Ukrainian legislation on cryptocurrencies and consider how the implementation of the MICA rules will affect the regulation of this sector.

The law “on virtual assets” (hereinafter – the Law) was adopted in February 2022.  However, the final and transitional provisions of the Law link its entry into force with the adoption of amendments to the Tax Code.

Unfortunately, today legislators have not dared to develop and adopt appropriate changes.

Granting Ukraine the status of a candidate for EU membership and related requirements for adapting local legislation to the EU legislation significantly revived the efforts of lawmakers.  And as a result of this important incentive in November 2023, the Verkhovna Rada of Ukraine submitted as many as two draft laws that amend the Law and other normative acts on the settlement of virtual assets (draft laws  10225 d07.   11.2023and 10225-1d17.11.2023 ).

So, gentlemen of the jury, the ice has moved!

It should be noted that these bills not only adapt local legislation to EU standards but also expand it in a certain way and even take into account the wishes of local market participants regarding tax rates, regulation of non-interchangeable tokens (NFT), mining activities, creating an innovation zone, etc.

The draft laws contain legal definitions necessary for understanding the scope and single application by all participants of the process, offer a classification of virtual assets (VA) synchronized with the provisions of the MICA, activities, and requirements for authorization and implementation of activities by service providers and token issuers.

The draft laws also define:  

• Regulators of the market of VA (in one embodiment, these are: the Ministry of Figures and the National Bank in another: NSSMC and the National Bank);
• The procedure for advertising VA;
• liability in the form of financial sanctions against violators;

An innovative zone is introduced - an environment for testing innovative products.

So let's look at some important, in our opinion, provisions of these bills.

Deadlines are necessary for understanding

Authorization is a procedure for granting the regulator the right to carry out activities related to the VA.

A virtual asset is a digital thing that can be transferred and stored electronically using distributed ledger technology or other similar technology.  A virtual asset, depending on the terms of the issue, may certify property rights, in particular, the right to claim other objects of civil rights, and or the issuer's liability.

Mining is the process of checking and confirming transactions with the VA by a consensus mechanism, the result of which is the recording of transactions of the VA to the distributed registry and the creation of a new VA.

Legal entities and individuals, both residents of Ukraine and non-residents, who have a registered permanent establishment and operate in Ukraine, are entitled to carry out mining activities that do not require authorization.

Look at the tokens

Virtual assets are divided into tokens of electronic money, tokens tied to assets, tokens that are defined by individual characteristics virtual assets that are not tokens tied to assets, and tokens of electronic money (in particular, service tokens).

Separately, non-interchangeable VA (NFT) are virtual assets that are determined by individual characteristics.  NFT may contain a link to a digital representation of things and/or an obligation to transfer rights to an intellectual property or thing.

Service providers and activities

Providers of services related to the turnover of virtual assets can be registered in Ukrainian local companies and branches of foreign companies, authorized by the regulator.

Service providers must comply with the requirements established by the Law and state regulators, pass authorization, act as tax agents, are required to record all transactions with VA, keep information on income and expenses for such transactions, and identify their customers.

Service providers may conduct one or more of the activities specified in the Law.

Which activities are related to the organization of trading platforms, storage, administration, exchange, placement, providing services for transfer, receiving and transferring orders, providing advice, and portfolio management regarding virtual assets.

By the way, the bills increase the list of activities specified in the MICA.

Taxation

Investment income from operations with VA - 18 %.

One of the bills provides for a preferential tax period for individuals for 8 years.  The first 3 years of the tax rate is – 5%, and the next 5 years are – 9% (provided that the investment profit during the year is not more than 7 million UAH).

You cannot be a single taxpayer of 1-3 groups:       

• Supplier of services related to the turnover of VA, in addition to consulting on VA;
• Entities engaged in the alienation of VA, in addition to the alienation of official tokens issued by such taxpayers.

It is not the subject of VAT taxation of transactions with VA.

Virtual assets received by inheritance or gift are subject to taxation.

So, what consensus will the deputies come to, and what will be the final version of the law "On virtual assets", known only as artificial intelligence)?  After the adoption of the relevant law by the Verkhovna Rada of Ukraine, we will prepare a more detailed analysis.

And while our professional team of fintech lawyers 24/7 keeps abreast of legislative innovations in the field of cryptocurrency and despite the uncertainty, is already ready to offer non-standard solutions to your ambitious and extravagant business ideas.

Contact us – we have something to offer you!  Together we will find a way out of any situation!