You’ve probably had the opportunity to hear a lot of information about cryptocurrencies so far - which ones are most in demand, what the price is, what blockchain technology they’re based on, and how much blockchain can increase the security and speed of modern transactions.

The media constantly wrote about the large oscillations of cryptocurrency prices on the world market. One Bitcoin was worth $ 19,498.63 on December 18, 2017. It is a currency of unstable value and in order to do business safely, you need to be well acquainted with all its aspects.

If you are thinking of investing in cryptocurrencies from Serbia, this text will provide you with information on how they are viewed by our legislation, how they are treated in accounting and help you make further decisions.

How is the legal aspect of cryptocurrency ownership defined in the world

Cryptocurrencies are certainly among the biggest technological innovations. The blockchain mechanism behind them is really noteworthy and creates many opportunities for use in a large number of industries. As is the case with most innovations, it takes time to set the legal framework.

There is currently a tendency to set one universal legal framework. Until that is realized, some countries have already set their legal frameworks by which they have temporarily resolved the status of cryptocurrencies.

Japan has given bitcoin the status of a means of payment and an official currency. China has allowed bitcoin trading, but only to individuals. Israel treats bitcoin as a commodity, not as a currency. The EU has not yet regulated bitcoin as a currency, but it has not banned it either.

How is the legal aspect of cryptocurrency ownership defined in Serbia

On the territory of the Republic of Serbia, there is still no legal regulation in this area. Bitcoin (or other cryptocurrencies) cannot have the status of money, considering that the official currency in the Republic of Serbia is the dinar and, as a rule, all transactions (except legal exceptions for payments in foreign currency) are performed in dinars.

In the absence of legal regulations and in accordance with what we stated earlier in the text, cryptocurrencies can only be treated as intangible assets. Trade in cryptocurrencies is not under the supervision of the National Bank of Serbia, which has distanced itself from any liability related to trade in cryptocurrencies through several notifications.

The laws of the Republic of Serbia do not represent obstacles to the inheritance of cryptocurrencies, ie to be part of the testator's property. However, the very nature of cryptocurrencies can be a problem of transferring ownership from the testator to the heir.

Namely, one of the main features of cryptocurrencies is the anonymity of the owner. Accordingly, if the testator-holder of the cryptocurrency does not leave the necessary data (e.g. "key" number) to access the "wallet", the heirs can never access the "wallet" and use (sell) cryptocurrencies.

Accounting treatment of cryptocurrencies - are cryptocurrencies cash?

In accordance with IAS 7 - Statement of Cash Flows, cash includes cash and demand deposits. Cash (according to IAS 7) are short-term, highly liquid investments that can be quickly converted into cash and that are not affected by a significant risk of changes in value.

The value of cryptocurrencies in the previous period fluctuated significantly (in some periods it grew up to 1000 times). Given this definition, cryptocurrencies cannot be captured and valued as cash or demand deposits.

Are cryptocurrencies a financial instrument?

Under IAS 32, a financial instrument is any contract that gives rise to a financial asset, a financial liability or an equity instrument of another entity. From the point of view of accounting regulations, cryptocurrencies cannot be classified as financial instruments because they do not meet the definition prescribed in IAS 32.

Are they cryptocurrencies real estate, plant or equipment?

The definition of property, plant and equipment is given in IAS 16 where it is stated that property, plant and equipment are tangible items. On the other hand, cryptocurrencies do not have a physical form, that is, they are not materialized. Thus, cryptocurrencies do not even meet the definition for recognition as property, plant and equipment.

Are cryptocurrencies stocks?

Inventories are, according to IAS 2, assets held for resale in the ordinary course of business, in the production process they are sold either in the form of basic and auxiliary materials consumed in the production process or in the provision of services. Due to the definitions prescribed in this standard, cryptocurrencies cannot be classified as inventories.

Are cryptocurrencies intangible assets?

IAS 38 defines intangible assets as non-monetary assets without identifiable physical substance. Monetary funds are money and funds that should be obtained in fixed or determinable monetary amounts. Therefore, cryptocurrencies can be recognized as intangible assets.

Therefore, in terms of accounting, cryptocurrencies are not currencies, but intangible assets with an indefinite useful life and thus are not subject to amortization.

Cryptocurrencies purchased on the virtual market are initially valued as intangible assets. However, if the cryptocurrency is acquired through "mining", recognition guidelines need to be considered.

If the carrying amount of an intangible asset increases (or decreases) as a result of a revaluation, that increase (decrease) is recognized in other comprehensive income, within the revaluation reserve. This applies to those entities that apply International Financial Reporting Standards (IFRS).

Measurement effects for entities applying IFRS for SMEs (International Financial Reporting Standards for Small and Medium-sized Enterprises) are presented in the income statement and through the amount of depreciation.

In accordance with IAS 38, intangible assets with finite useful lives are amortized, while intangible assets with indefinite useful lives are not amortized, but tested for impairment.

In accordance with IAS 38, intangible assets are considered to have an indefinite useful life if, based on an analysis of all relevant factors, it is not possible to predict the end of the period in which intangible assets are expected to generate net cash flows to the company.

However, IFRS for SMEs and the Ordinance on Micro and Other Legal Entities do not provide for the possibility that intangible assets have an indefinite useful life, but it is assumed that all intangible assets have a limited useful life. Paragraph 18.20 of the IFRS for SMEs stipulates that if an entity is unable to make a reliable estimate of the useful life of an intangible asset, it should be assumed that the useful life is 10 years.

Tax treatment of cryptocurrencies - from the aspect of profit tax

If we look at cryptocurrencies as intangible assets, we can say that their disposal or putting them out of use, ie the difference between the book value at the time of derecognition from the balance sheet and the net inflow obtained by its disposal, is determined as profit or loss.

Posting is done by approving the appropriate account on which intangible assets are kept (with possible debiting of the appropriate value adjustment account) and the corresponding receivable on the basis of alienation (eg buyers in the country, etc.), and the difference in favor or at the expense of other income group accounts, or other expenses. The Company, in accordance with IAS 38, should assess whether the useful life of an intangible asset is limited or unlimited.

Tax treatment of cryptocurrencies from the aspect of value added tax

The provisions of Article 3 of the Law on Value Added Tax stipulate that the subject of VAT is the supply of goods and provision of services (hereinafter: turnover of goods and services) performed by the taxpayer in RS for a fee, as part of performing activities, as well as import of goods in RS.

According to the provision of Article 4, paragraph 1 of the same Law, the trade of goods, in the sense of the Law, is the transfer of the right to dispose of goods to a person who can dispose of those goods as the owner.

The provision of Article 5, paragraph 1 prescribes that the supply of services, in terms of the Law, are all jobs and actions within the performance of activities that are not the supply of goods referred to in Article 4 of this Law.

Cryptocurrencies are, in essence, virtual money that is not approved by the competent state authorities, and does not represent a legal tender. The sale of virtual currency is not subject to taxation, since the fee earned on that basis does not constitute a fee for the taxable supply of goods or services.

The sale of cryptocurrencies has the same character as the sale of value vouchers, on the basis of which voucher holders can buy goods or receive services.

Also, the purchase of cryptocurrencies does not represent an advance payment, since the purchase of cryptocurrencies does not represent a fee for certain future turnover of goods and services (when selling cryptocurrency it is not known which goods or services will be delivered, at what tax rate, etc.) .

VAT treatment is not affected by whether the cryptocurrency is sold in the Republic of Serbia or abroad.

Tax treatment of cryptocurrencies from the aspect of income tax

As already mentioned, the area of cryptocurrencies in the Republic of Serbia is still not covered by legislation, so that until the official positions of the competent state authorities regarding this type of revenue are taken, only speculations about possible legal and tax treatments and revenue frameworks from cryptocurrency sales and with aspects of the Law on Personal Income Tax.

Accordingly, the possibility of classifying this type of income as income that would be "at first glance" the closest to the law should be considered.

Revenues from the sale of cryptocurrencies, from the aspect of the Law on Personal Income Tax, could most closely be subject to taxation on other revenues at a rate of 20%. This type of income would be included in the sum of income that is subject to taxation by the annual personal income tax.

We can conclude invest in cryptocurrencies is not covered with law protection of Republic Serbia. Decentralized business system of these new financial instrument make it attractive to mine, but risky for trading due to technical weakness and cyber criminal activities.