Tax is paid on profits made from exchanging cryptocurrencies for ‘traditional money’ within two years

The obligation to pay income tax based on profits made from the sale of bitcoins, ethers, tethers, or other cryptocurrencies is due once a year, by the end of February for profits made in the previous calendar year. The tax base is the total annual profit determined as the difference between the price at which the cryptocurrency was purchased and the value for which it was exchanged for a monetary amount of any currency recognized as legal tender (kuna, euro, dollar, etc.), but only if the cryptocurrency was exchanged for 'traditional money' within two years from the date of acquisition.

If the exchange for legal tender occurs after two years from the date of acquisition, the profit is not subject to taxation regardless of the economic benefit realized.

Obligation to keep records

For this purpose, an individual is required to keep records of the acquisition and alienation of each type of cryptocurrency they trade, according to the date of the transaction. The records must contain data on the type of financial instrument, purchase date, quantity and number, acquisition price per unit of each type of digital currency, and total price for each transaction, date of alienation, and profit or loss realized based on the sale or other form of alienation. The records are kept using the 'first in – first out' method, which means that for identical financial assets, the one that was acquired first is considered alienated.

If the taxpayer incurred any costs related to the financial transaction, those costs are recognized as expenses and reduce the realized income.

What is taxed

Profit is not taxed on each individual transaction, but rather the total profit realized on an annual basis, such that the income from capital gains is reduced by losses incurred from capital transactions in the same tax year. If the taxpayer realizes a profit from trading certain securities or financial instruments in the tax year, and records a loss on others, the income from capital gains is determined at the annual level, as the difference between total profits and losses incurred in that tax year.

Based on the data from the records, the taxpayer is required to submit the JOPPD form to the Tax Administration by the end of February with data on income from capital gains and pay income tax at a rate of 10 percent, increased by local surtax.

By the end of February, the JOPPD form for income from capital gains realized abroad must also be submitted, with the stipulation that in the case of foreign income, the taxpayer must also register in the taxpayer registry. If the tax obligation based on income from capital gains amounts to up to 15 kuna (income of 150 kuna), that amount is not considered taxable income due to the rationality of tax costs, and the JOPPD form is not submitted. The form is also not submitted if a total loss was incurred from trading all securities and financial instruments that the taxpayer traded during the tax year.

Losses incurred in one tax year cannot be carried forward and cannot be used to reduce income from capital gains in the following tax year. Losses from trading securities and financial instruments incurred abroad can only be used to reduce taxable income based on capital gains realized in the same country in the same tax year.

Exchange of cryptocurrencies

If one cryptocurrency is exchanged for another, that transaction is not taxed. A tax-relevant event occurs only when the cryptocurrency is exchanged for an official means of payment. In the case of exchanging one cryptocurrency for another and alienating that second currency, the two-year period relevant for taxing profits is calculated from the date of acquisition of the first cryptocurrency, and the realized profit is calculated in relation to the acquisition cost of that cryptocurrency.

For example, if the taxpayer purchased bitcoins in 2020, exchanged them for ethers in 2021, and sells them in 2023, the profit is not taxed because the two-year period is calculated from the date of acquisition of the bitcoins. However, if the ethers are sold in 2022, before the two years have elapsed, the realized profit is calculated as the difference between the acquisition cost of the bitcoins and the selling price of the ethers, as the difference between the invested amount and the return on investment.

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