“Tax Control of Cryptocurrency Transactions in Ukraine”

“Tax control of cryptocurrency transactions in Ukraine”

Svitlana Volosovych https://orcid.org/0000-0003-3143-7582 https://publons.com/researcher/2218914/svetlana-volosovich/ AUTHORS Yurii Baraniuk https://orcid.org/0000-0003-1289-2248 http://www.researcherid.com/rid/J-5726-2018

Svitlana Volosovych and Yurii Baraniuk (2018). Tax control of cryptocurrency ARTICLE INFO transactions in Ukraine. Banks and Bank Systems, 13(2), 89-106. doi:10.21511/bbs.13(2).2018.08

DOI http://dx.doi.org/10.21511/bbs.13(2).2018.08

RELEASED ON Saturday, 23 June 2018

RECEIVED ON Thursday, 17 May 2018

ACCEPTED ON Wednesday, 13 June 2018

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JOURNAL "Banks and Bank Systems"

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businessperspectives.org Banks and Bank Systems, Volume 13, Issue 2, 2018

Svitlana Volosovych (Ukraine), Yurii Baraniuk (Ukraine) Tax control of cryptocurrency BUSINESS PERSPECTIVES transactions in Ukraine

Abstract The current global financial market is witnessing the activation of cryptocurrency as a payment instrument and a means of accumulation. However, the risks of money LLC “СPС “Business Perspectives” laundering, terrorism financing and tax evasion that cryptocurrency transactions im- Hryhorii Skovoroda lane, 10, Sumy, ply lead to the need to implement their state regulation, an important component of 40022, Ukraine which is tax control. www.businessperspectives.org Therefore, the purpose of the article is to substantiate the value orientations when forming the system of cryptocurrency transactions tax control in Ukraine taking the positive experience of developed countries into account. The scientific results of the study consist in the emphasizing structural, functional, systemic and institutional approaches to understanding tax control, which became the basis for identifying the features of cryptocurrency transactions as a tax control object. It was revealed that the lack of personalization of the agreement parties, the relatively high level of information security, free international turnover and a decentralized payment system are the factors of the cryptocurrency market further development. On Received on: 17th of May, 2018 the other hand, this leads to the loss of tax revenues for Ukrainian budgetary system, Accepted on: 13th of June, 2018 taking into account the forecasted trends in the development of the cryptocurrency market by 2022 through methods of sums, least squares and expert estimates. Given the institutional approach to the understanding of tax control, an institutional structure of the cryptocurrency transactions tax control in Ukraine is proposed. It is established that domestic state institutions are able to carry out tax control over these transactions. It is also determined that introducing fiscal control will resultin the receipt of additional revenues by budgets, reduction of shadow economy, counterac- © Svitlana Volosovych, tion to cybercrime and terrorism financing. Yurii Baraniuk, 2018 The practical importance of the results is in the need to form an effective system of Svitlana Volosovych, Doctor of cryptocurrency transactions tax control as a function of public administration. Economics, Professor, Department of Finance, Kyiv National University It has been determined that transactions on cryptocurrency supply, on the determin- of Trade and Economics, Ukraine. ing exchange rates and transactions on cryptocurrency disposal should be an object of Yurii Baraniuk, Doctoral Student, tax control in Ukraine. Mining transactions, receipt of income (profits) in the cryp- Department of Finance, Kyiv tocurrency are subject to general taxes, depending on the taxpayer’s legal status, in National University of Trade and particular, personal income tax, corporate income tax and a unified social tax (UST). Economics, Ukraine. Taking into account the EU recommendations on the non-application of value added tax in the cryptocurrency transactions taxation, it is not appropriate to implement it in this area. Establishing tax control over cryptocurrency transactions will expand the powers of state authorities that are empowered to control observing financial discipline by economic agents in Ukraine and the financial capabilities of state and local budgets.

Keywords tax control, cryptocurrency, tax control object, tax control subject, cryptocurrency transactions, mining JEL Classification E44, E62, G18 INTRODUCTION

Under the international trade intensification, cross-border capital movements and the information technology development, a gradual This is an Open Access article, distributed under the terms of the transformation of financial systems towards the use of electronic money Creative Commons Attribution 4.0 is taking place. Currently, the world financial market is witnessing the International license, which permits unrestricted re-use, distribution, circulation of cryptocurrency as a payment instrument and accumula- and reproduction in any medium, tion means, which is due to the benefits for financial services consumers provided the original work is properly cited. and a decrease in confidence to state institutions and, in particular, to

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traditional financial intermediaries. The cryptocurrency development makes an innovative foundation for the transforming financial services market, creating new pportunitieso for investment, lending, insurance, payments and money transfer. At the same time, the mechanism for the cryptocurrency transactions includes the risks of money laundering, terrorist financing and tax evasion. This necessitates their state regulation, an important component of which is tax control, which has recently been intensified in developed countries. Shaping the system of cryptocurrency transactions tax control and defining its objects and subjects will provide institutional modernization of the domestic tax system, increase the possibilities of the state and local self-government bodies to finance social and economic programs through additional tax revenues and working against negative phenomena such as shadow economy and cybercrime.

1. THEORETICAL BASIS and Troshchak (2014) support the institutional approach. According to this approach, tax control The analysis of Ukrainian scientific literature indi- is the activity of the tax service officials to oversee cates the lack of attention to cryptocurrency trans- the compliance of accounting of taxation objects, actions as a tax control object. At the same time, it methods of calculating and paying taxes and tax allows for the emphasizing structural, functional, payments with the current normative and legal systemic and institutional approaches to the gen- documents, detecting tax offenses and defining eral idea of tax control. Within the first approach their impact on tax liabilities. Given that, tax con- (structural), tax control is considered as a kind of trol includes organizational, methodological, an- state financial control aimed at ensuring compli- alytical and effective measures for the controlling ance with tax and other legislation by taxpayers, bodies (Ihnatyshyn & Troshchak, 2014, p. 161). On identifying, eliminating and preventing tax of- the one hand, this is the basis for meeting fiscal fenses (Melnyk & Leshchukh, 2015, p. 21) at the obligations to the budgets of all levels. On the oth- controlled object (Lopatovskyi & Demchuk, 2016, er hand, the institutional approach to understand- p. 115). As a result, the country’s economic securi- ing tax control ensures: ty is maintained (Baranovskyi, 2017). • harmonization of interests of tax relation Vasiuk (2015), Maryniv (2016) and Proskura subjects; (2014) are the functional approach representatives. With that, attention is drawn to the fact that fill- • minimization of tax risks for all national ing the budget through full and timely payment economy subjects; and of taxes and fees (Vasiuk, 2015, p. 89), as well as observance of the legislation on cash flow regula- • raising the tax culture of society. tion, settlement and cash operations, patenting, li- censing and other legislation, the control of which Achieving these goals results in the modernization is entrusted to supervisory authorities (Proskura, of both the activities of the State Fiscal Service of 2014, p. 265) are the main objectives of tax control. Ukraine and the actualization of taxation objects in accordance with changes caused by the finan- Tax control within the system approach is under- cial technology development and the intensifica- stood as the multidimensional inter-sectoral sys- tion of globalization processes triggering the cryp- tem of supervision of state controlling bodies on tocurrency market development. The inclusion of the financial and economic activity of taxpayers cryptocurrency transactions in the tax control ob- to provide the specified level of budget and set it jects depends on domestic approaches to state reg- in accordance with the current legislation require- ulation of the cryptographic market. Lansky (2018, ments (Koretskyi, 2010). As an element of the tax p. 22) outlines six approaches to the regulation of administration system, tax control contributes to cryptocurrency markets in individual countries: the development of measures to counteract tax evasion, the system of fines for violating tax laws • level 0 – ignoring; (Shuba & Khymych, 2016, p. 137). Shevchuk (2012), Nasypaiko and Samsonova (2012), Ihnatyshyn • level 1 – monitoring;

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• level 2 – recommendation; this approach was changed when the National Bank of Ukraine has expressed interest in new • level 3 – management; cryptocurrency payment services, which have prospects of entering the domestic market subject • level4 – regulation; to their safety. In October 2017, the Verkhovna Rada of Ukraine considered the bills “On the • level 5 – interdiction or integration. Cryptocurrency Turnover in Ukraine” (2017) and “On Stimulating the Market of Cryptocurrency and However, there is an opinion on the existence of a Their Derivatives in Ukraine” (2017). According liberal, conservative, and repressive models of reg- to Article 1 of the draft Law (On Stimulating the ulating virtual currency schemes and an expecta- Market of Cryptocurrency and Their Derivatives tion model (Volosovych, 2016, pp. 72-73). Within in Ukraine, 2017), cryptocurrency should be con- the liberal and conservative regulatory models, sidered a financial asset for the purposes of legal the law provides for the presence of taxation ob- regulation. Proposals come to imposing a tax on jects, which stipulates: buy and sell transactions in the amount of 2% to the Pension Fund. At the same time, cryptocur- • increase in state budget income; and rency mining transactions will also be subject to taxation, the size of which will depend on the en- • avoiding financial flows in the cybercrime tity’s organizational form, which can be both indi- world that promote money laundering from vidual entrepreneur and legal entity. cybercrime. The authors of the bills (On the cryptocurrency The preliminary determination of the cryptocur- turnover in Ukraine, 2017; On stimulation of the rency legal status, which belongs to virtual curren- market for cryptocurrency and their derivatives cies is the basis for the taxation of cryptocurren- in Ukraine, 2017) propose to implement tax con- cy transactions. In February 2015, the European trol of cryptocurrency transactions at the level of Central Bank proposed to consider the cryptocur- financial institutions that provide services on the rency as a digital representation of a value not is- cryptocurrency market. It is proposed to oblige sued by a central bank, a lending institution or an such institutions to simultaneously execute the e-money institution, which in some cases could be client’s request for the purchase/sale (exchange) used as an alternative to money (European Central of cryptocurrency, to charge and retain the fee for Bank, 2015). It has following features: fictitious compulsory state pension insurance against the currency without the official offer status; lack of transaction amount, to keep a tax record of such proper regulation; issued by non-financial private transactions and to report to the Pension Fund companies; recognition, as a rule, only by specific bodies. However, most likely, this will lead to vir- virtual companies; lack of fixed offer and guaran- tual money market participants looking for other tee of money return; insufficient control of oper- ways to convert the hryvnia into a cryptocurrency, ations (European Central Bank, 2012). Financial or vice versa, possibly through European finan- Action Task Force (FATF) has a similar approach cial markets, where such transaction fees are not to understanding the cryptocurrency. Features collected. of the virtual currency as a means of turnover were emphasized: means of payment; means of For example, in the United Kingdom, since 2014, accumulation, though without the legal payment cryptocurrency is recognized as a means of pay- means status (FATF Report, 2014). ment, and special tax regulations are not appli- cable to transactions with their use. In 2013, The The first attempts to determine the legal status of Danish Financial Supervision Authority stat- cryptography in Ukraine were made in November ed that cryptocurrencies are not recognized as a 2014 by the National Bank of Ukraine, which de- means of payment, so there is no need to regu- termined the cryptocurrency as a money surro- late them at all. In France, the taxation of cryp- gate without the possibility to use it as a payment tocurrency transactions begins with a margin means on the territory of Ukraine. In October 2015, of 5,000 euros, which is justified by the need to

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allow citizens first to try to invest and develop the capitalization of the most common cryptocur- a business with this type of assets before taxing rencies; and methods of comparison and general- (Kuznetsov &Yakubov, 2016). However, in some ization were used. Also, forecasting methods were countries, the taxation of cryptocurrency opera- used to substantiate the expediency of tax control tions is being introduced, and mechanisms for tax on the cryptocurrency market. Forecasts of the control of the above-mentioned objects are being cryptocurrency market development are based developed. These countries include Sweden, the on the methods of sums, least squares and expert USA, Australia, Hong Kong, Singapore, Norway, estimates. Canada and others (Volosovych, 2016, p. 72). The forecast by the sum method was calculated ac- Developing a tax control mechanism for crypto- cording to the algorithm below: currency transactions will facilitate the identifica- kk tion of entities, objects and a subject of transaction   a⋅∑∑ xii +⋅= kb y in a digital currency. As a result, this will allow  ii=11 = , (1.1) determining what tax rate to apply to a particular  nn cryptocurrency transaction and establishing com- a⋅ x + nkb − ⋅= y  ∑∑ii() pliance or violation of the law on the cryptocur-  ik=+=11 ik+ rency market by economic actors. Linear forecast model parameters were deter- An analysis of the foreign experience of using mined as follows: tax audit tools shows that in France, tax control n nn is carried out as tax declarations and documen- n⋅ xy⋅ −⋅( x )( y ) ∑i=1ii ∑∑ ii = 11 i = i tary checks. While in the United Kingdom, the a = , (1.2) nn2 USA, Japan, Canada, and Germany, tax assess- nx⋅−2 x ∑∑ii=11ii() = ments are differentiated to check tax returns, audit, and tax/criminal investigations (Shevchuk, 11nn 2013). In Ukraine, tax control is carried out in (1.3) b= ⋅∑∑ yaii −⋅⋅ x. terms of checks, revisions, investigations, super- nnii=11 = vision and inspections (Law of Ukraine “On the Basic Principles of State Supervision (Control) in To calculate the forecast values, information for the Sphere of Economic Activity”, 2007), but still the 2012–2017 period was used, where y is the the list of tax control objects remains unclear to a volume of the cryptocurrency market capitaliza- full degree, which becomes the reason for nondis- tion, and x is the period (in particular, the year closure of some uncontrolled cash flows associated 2012 corresponds to the value of “1”, 2013 – “2”, ... with public administration (Bardash & Baraniuk, 2022 – “11”). Therefore, a and b are the predictive 2016). This necessitates the harmonization of the function variables; n and k are the corresponding interests and objectives of tax control participants. number of periods. The equalities obtained by the methods of sums and the least squares allowed to Therefore, the purpose of the article is to substan- determine the value of the forecasted market cap- tiate the value orientations when forming the sys- italization for the years 2018–2022 and their share tem of cryptocurrency transactions tax control in in the GDP. Ukraine taking the positive experience of developed countries into account. Forecast of the cryptocurrency market through the expert estimation method is based on the To achieve this goal, the methodical techniques of Michael Novogratz’s (ForkLog, 2017) statement quantitative and qualitative system analysis of the that the cryptocurrency market will reach USD 5 financial and economic development of the cryp- trillion by the year 2022. Accordingly, the differ- tocurrency market, which consist in the study of ence between forecasted capitalization and the sit- state tax control in this market in the system of re- uation on the market at the end of 2017 is divided lations arising between state and private economic into five equal parts, which are added annually to entities; retrospective and comparative analysis of the aggregate sum.

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2. RESULTS For financial institutions, blockchain technology is the most secure way to store information about anonymity and confidentiality-based transactions. 2.1. The development At the same time, its ongoing modernization takes of cryptocurrency transactions as place. Thus, the Blockchain 1.0 technology, which was incorporated in Bitcoin, was upgraded to 2.0 a prerequisite for their taxation version, resulting in the emergence of a new digi- system tal currency, Ethereum, whose principle of operation lies in the functioning of “smart contracts”, The formation of the cryptocurrency market took excluding the impact of the human factor on the place in 2008. This was caused by the 2008–2009 transaction and the information preservation. global financial crisis, one of the factors of which Such contracts are concluded between two partic- was the crisis of centralization (Dyba et al., 2014, p. ipants (signatories), and a numeric key serves as 316). Nakamoto (2008) is the founder of the crypto- a signature. At the same time, blockchain is the currency. He considered Bitcoin as a decentralized guarantor of the agreement implementation, that digital currency payment system, consisting of the is, if the terms of the contract are observed, both blockchain, open to general use account ledger. It re- parties receive the proper benefits (Ethereum mains the most widespread cryptocurrency, and its Foundation, 2018). blockchain technology has begun to be used in many industries (Yli-Huumo et al., 2016), in public admin- In 2014, the Blockchain 3.0 was announced, which istration, in the financial market services, in trade, became the basis for cryptocurrencies such as EOS, which is influenced by its technological structure. Dfinity, Cosmos, Dashta, etc. The advantage, for Since the Bitcoin appearance, the number of types of example, of Dash currency compared to Bitcoin, cryptocurrency has increased and reached approxi- is that it has lower energy costs during the mining, mately 1.2 thousand types (RBC-UKRAINE, 2018). and absolute anonymity. If bitcoin transactions As of January 30, 2018, the market capitalization are identified when the wallet owner is detected, it of cryptocurrency in the world amounted to USD is not possible to monitor transactions in the Dash 538.4 billion, with 80% of this amount accounted for system, since their data is not published in blocks. the top 10 leaders in the rating of digital currencies (RBC-UKRAINE, 2018) (Table 1). Most modern types of cryptocurrencies are derived from Bitcoin by modifying its code. However, As Table 1 demonstrates, four out of top 10 cryp- there are cryptocurrencies, for example, Ripple, tocurrencies in the world by the size of capitaliza- which principles are different from Bitcoin. The tion appeared in 2017, which confirms the strong purpose of this cryptocurrency is to carry out safe development of the cryptocurrency market. and fast global financial transactions of any size

Table 1. Top 10 cryptocurrencies in the world by size of capitalization as of January 30, 2018 Source: Compiled based on RBC-UKRAINE data (2018). Name Year of creation Founder Capitalization, USD bln Bitcoin 2009 Satoshi Nakamoto 137. 5 Ethereum 2015 Vitaliy Buterin 81.9 Arthur Britto, David Schwartz, Ripple 2012 Ryan Fugger 31.6 BitcoinCash 2017 Amaury Sechet 18.9 EOS 2017 Daniel Larimer 9.0 Litecoin 2011 Charlie Lee 8.2 Jed McCaleb, Stellar 2014 Joyce Kim 7.2 Neo 2017 Da Hong Fei 6.8 Dash (previously known as DarkCoin, iXCoin) 2014 Evan Duffield 4.3 TRON 2017 Justin Soon 3.8 Total –– 309.5

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300.00 183,13 220,90 82,20 61,79 42,93 92,83 Cryptocurrency 69,77

30.00 45,36

26,97 name 30,22 15,70 14,12 10,30 7,05 9,58 Bitcoin 41,53 26,35 7,78 6,25 6,43 5,31 6,05 11,78 4,60 4,31 12,39 3,58 6,76

3,43 Ethereum 3.00 3,47 12,00 2,32 USD blnUSD 2,56 Ripple 1,15 1,09 0,86 0,64 0,74 Bitcoin Cash 0,35 0,36 0,36 0,28 0,18 0,28 0,27 0,26 0.30 0,23 0,21 0,23 0,14 Litecoin 0,20 0,15 0,19 0,21 0,10 0,12 0,18 0,15 0,12 0,06 0,14 0,08 0,07 0,06 0.03 0,03 І ІІ ІІІ ІV І ІІ ІІІ ІV І ІІ ІІІ ІV І ІІ ІІІ ІV І Quarter 2014 2015 2016 2017 2018 Year

Note: Compiled using CoinMarketCap data (2018). Figure 1. Top-5 cryptocurrencies capitalization for 2014–2018 without refunds. The main function of Ripple is to The change in the level of cryptocurrency capital- increase the speed of transactions between bank- ization is an expression of public confidence in this ing operations. Ripple technology is already be- financial instrument. According to Citigate Dewe ing used by large banks such as Bank of America, Rogerson (The Paypers, One“ in five British temptn- Hongkong & Shanghai Banking Corporation, and ed to invest in cryptocurrencies, study reveals”, Western Union. The latter is testing the Ripple 2018), every fifth adult resident in the UK who nev- protocols (ESPRESO.TV, 2017). er owned a cryptocurrency would like to buy it by 2021. It should be noted that the intensive develop- Currently, Bitcoin, Ethereum, Ripple, BitcoinSash, ment of the cryptocurrency market is more likely to Litecoin are the most common cryptocurren- occur in developing countries where there is a low cies. As of March 2018, the capitalization of each level of trust in financial institutions and the state aforementioned cryptocurrency, according to (The Paypers, “Barclays: crypto, blockchain need to CoinMarketCap, exceeds USD 10 billion (Figure 1). be trusted to become truly mainstream”, 2018).

Figure 1 shows that the capitalization of Now the share of cryptocurrency market capital- Ethereum and Ripple grows faster than that ization reaches 0.7% of the world’s GDP and in- of Bitcoin. In particular, in the first quarter of creases annually (Figure 2). 2016, the capitalization of Ethereum grew more than 12 times, in the first and second quarters Currently, a number of factors contribute to the of 2017 it increased by more than 47 times. At cryptocurrency market development, including the same time, in the third and fourth quarters the lack of personalization of the parties to the of 2014, the capitalization of Ripple increased agreement, information security, free internation- more than 24 times, and in the second quarter al circulation and a decentralized payment system. of 2017 – by 33 times. Litecoin demonstrated According to Merkle Tree Limited (2018), more the rapid growth in the second quarter of 2017. than 60 countries now intend to completely legal- Taking this into account, it can be assumed ize the cryptocurrency turnover. that in the future, cryptocurrencies such as Ethereum, Ripple and Litecoin will have a larger Geopolitics, that is, the lack of a formal statement market share than Bitcoin. on the prohibition of using such assets is the cat-

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100.00 103 Cryptocurrency market 93 98 100 capitalization, left side scale 89 84 The forecast of cryptocurrency 10.00 79 79 4,845 market capitalization by the sum 74 77 74 75 3,454 4,187 80 2,638 method, left side scale GDP 1,728 1.00 The forecast of cryptocurrency 0,723 60 market capitalization by least squares method, left side scale USD trlnUSD the global 0.10 The forecast of cryptocurrency of 40 market capitalization by expert % 0,021 0,013 estimate method, left side scale 0,009 0.01 20 World GDP, right side scale 0,008

0.001 0,001 0 Forecast 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Note: The statement by Michael Novogratz (ForkLog, 2017) regarding the forecasted volume of cryptocurrency market capitalization by 2022, CoinMarketCap (2018) data and Statista (2018) data made the basis for the graph. Figure 2. Dynamics and forecast of the global GDP and the proportion of cryptocurrency in the global GDP, 2012–2022 alyst for the cryptocurrency popularity growth. producers of goods and service providers had no When assessing the real effects of the growing other way but to sell products for unsecured US popularity of cryptocurrency, one can state about dollars and subsequently buy unsecured bonds its dollar-replacing role in the global financial sys- from the Federal Reserve System. They did not tem. The economy dollarization embracing the have an alternative mechanism and a real fi- modern world is a consequence of the dominant nancial instrument that would be a world-class role of financiers of one country over others, while standard of value. Cryptocurrency provides cryptocurrency is an alternative asset that can these opportunities. freely serve the economic actors: producers, trad- ers and consumers. Currently, cryptocurrencies have integrated in- to the world economy and their popularity is In the last century, the US Congress set a course only increasing. The calculations using Bitcoin for transferring its role of the world manufactur- only daily for 2017 range at 1-5 million units, er of goods to China, while for itself, confirmed which at the rate of May 1, 2018, ranges from the role of a financial regulator. However, the 8.97 to USD 44.85 bln per day (Trade Block, debt of the Federal Reserve System of the USA 2018), which already allows for a hypothesis permanently grows. Since 2003, it has exceeded about the possibility of serving at least 11.4% of 60% of the GDP, and 100% as from 2012 (Trading the global GDP. Economics, 2018). This debt refers only to debt securities of the US Federal Reserve System and Under these circumstances, the domestic finan- does not include foreign currency liabilities. It cial system requires institutional transforma- should be noted that over the time elapsed since tion, in particular, it concerns the expansion of the Jamaican Currency Conference, the US dol- the objects and powers of tax control entities. lar devalued for more than 37 times in relation to The need for tax control on the cryptocurren- gold, the prime cause of this is its uncontrolled cy market is that the economy cryptocurrency emission. This allows the US government to pur- predominance can occur in an environment sue a speculative policy, buying up products and free from regulation, resulting in the national raw materials, and pay such purchases through currency depreciation and the financial system almost unsecured money. On the other hand, becoming uncontrolled.

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2.2. Types of cryptocurrency ment for kidnapping, cyberattacks, acquisition of transactions for tax control in illicit tools and services, money laundering of cy- Ukraine bercrime, etc. (HM Treasury, 2017). Blokchain, which is the basis of the majority of On the other hand, the introduction of cryptocur- cryptocurrencies functioning, complicates the rency transactions taxation may complicate the le- market participant identification, which helps gitimizing cryptocurrency operations in the econ- to avoid taxation by business entities and indi- omy. However, the liberal model of cryptocurrency viduals. At the same time, Qatar University and market regulation, as well as the repressive mod- Hamad Bin Khalifa University researchers de- el, are found not so often in the world. The Isle of nied the statement of low retroactive operation- Man, the Island of Jersey, Belarus, and Denmark al security for cryptocurrency. They were able are examples of the liberal model, while Algeria, to link 100 bitcoin transactions with buyer pub- Bangladesh, Bolivia, Vietnam, Ecuador, Indonesia, lic accounts, while in 20 cases, their real names Kyrgyzstan, Morocco, and Nepal are the repres- and location were found. At the same time, based sive model representatives. At the same time, some on the social networks analysis, the researchers countries abolished the cryptocurrencies interdic- found that 46 transactions were WikiLeaks dona- tion and began developing legislation on their reg- tions and 22– Silk Road payments for drug supply ulation. This applies to countries such as Malaysia, (ANO “Innopolis Media”, 2018). On the one hand, Nigeria and Thailand. Other countries use either a this can be interpreted as non-compliance with wide range of administrative and financial meth- the cryptocurrency transactions anonymity, and ods, or use only certain regulatory elements. At the on the other hand, it indicates the possibility of same time, a number of developed countries use or controlling cryptocurrency transactions. In 2015, develop the cryptocurrency transactions taxation, British researchers found that the risk of money in particular, Australia, Brazil, the United Kingdom, laundering and terrorist financing associated with Israel, Canada, the Netherlands, Germany, Norway, digital currencies is low, although it may grow in Singapore, the USA, Finland, and Japan. the future (HMTreasury, 2015). However, already in 2017, they emphasized that cybercurrencies are From the standpoint of accounting and control, closely linked to cybercrime in obtaining a pay- cryptocurrency transactions can be divided into

GROUPS OF CRYPTOCURRENCY TRANSACTIONS

Cryptocurrency receipt Cryptocurrency revaluation Cryptocurrency use transactions transactions transactions

Revaluation of available Purchase funds for cryptocurrency Sale wallet Receipt for goods, Closing (reopening) the Payment for goods, works, services cryptocurrency account works, services Cryptocurrency rate change Mining Commissions at the payment date and at the date of product Employer payment for labor recovery Payments to employees

Receiving a gift, etc. Tax control Gifts, etc. object

Figure 3. Cryptocurrency transactions as a tax control object

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transactions related to the cryptocurrency receipt, case, it is necessary to distinguish between oper- revaluation and use (Figure 3). This distribution ations on the receipt or disposal of cryptocurren- is important for crisis management and risk man- cies in a content that will affect the taxation terms. agement in the cryptocurrency portfolio of the entity’s balance sheet (Mazaraki & Kasianova, 2015). Transactions on the cryptocurrency receipt Accordingly, tax control should be specific to each through creating an additional unit of its physi- of these groups of transactions. cal volume, that is, operations such as mining or service, could be an object of the value added tax. It should be noted that the greatest attention in the This is due to the fact that the economic content is implementation of tax control should be given to creating an added value. However, this value-add- the cryptocurrency receipt operations. Since, once ed tax should be recognized as a liability and pay- they are fixed, it is possible to further track the able simultaneously with the creation of a cryp- movement of cryptocurrency assets in the econ- tocurrency unit, without obtaining a tax credit. omy. This can be done on the basis of creating a However, taking into account the European in- database of electronic wallets’ numbers of crypto- tegration vector of Ukraine, it is worthwhile to currency owners. As a result, this will give the pos- abide by the EU tax regulations, where in 2015, sibility for tax authorities to monitor further trans- according to the European Court decision, cryp- actions using such assets. However, there is a risk tocurrency transactions were exempted from that an entrepreneur may register yet another wal- paying value added tax, which had an impact on let. Therefore, states should be interested in creating the formation of national legislation in this area. additional favorable conditions for the digital assets However, the legal uncertainty about the need for circulation, but with increasing control activities. cryptocurrency transactions taxation in Ukraine creates barriers to legalizing incomes thus ob- From the list of cryptocurrency transactions that tained by a country’s population that is an active may be tax control objects, it is clear that the tax participant in the cryptocurrency mining and control subject is not the only body, but acts as their servicing transactions related to its use. Therefore, system. At the same time, depending on the specific nowadays there is a need for organizational and cryptocurrency transaction, the system of tax con- legal and methodological principles for the imple- trol bodies may change, the competence of which mentation of tax control over the cryptocurrency will include the need for appropriate control meas- production. ures. It should be noted that the control measures will also be different, their composition and content The methodology of hypotheses and violations at will be determined by a specific transaction using the organizational-preparatory and technological cryptocurrency. Therefore, in order to determine the stages of tax audit will ensure compliance with the possibilities of cryptocurrency transactions tax con- entrepreneurs’ obligation to pay taxes on crypto- trol, it is necessary to disclose their institutional and currency extracted. The basis of this should be the methodological features in terms of revenues, reval- formation of an integrated system of financial and uations, and the disposal of cryptocurrency assets. legal norms, which will, on the one hand, facilitate the opportunities for deviations from them and types of deviations, and, on the other hand, will 2.3. Determining the possibilities allow the development of mechanisms for their for the state tax control prevention. It optimizes the implementation of the preventive function of tax control and will en- over transactions with the sure the recovery of unpaid taxes to the state and cryptocurrencies receipt and prevent tax offenses in the future. disposal A different approach to the cryptocurrency taxa- Cryptocurrency transactions on the receipt and tion should be applied to transactions on its pur- disposal are characterized by their economic na- chase and receipt as payments for goods, works, ture similarity. That is, such transactions cause and services. The main interest of the tax control a certain movement of cryptocurrencies. In this subjects for these operations should be the possi-

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bility of a tax levy on the result of such transac- Control of the Accounting Chamber and the tions, that is, on the proceeds from the products State Fiscal Service of Ukraine is possible sub- sale. ject to the preliminary and current financial control exercised by the National Bank of Ukraine, It may be affirmed that the state should create con- the National Commission for State Regulation ditions for the formation of a domestic cryptocur- of Financial Services Markets and the National rency market, which would provide a legitimate Securities and Stock Market Commission. This way to carry out cryptocurrency transactions. makes it possible to assert that tax control is This opportunity can be provided by cryptocur- preceded by the introduction of administrative rency brokers, which actually exist in Ukraine, regulatory instruments in the financial control. and commercial banks. At present, it is necessary to expand the list of transactions that may be car- Tax control for cryptocurrency transactions ried out by commercial banks, through the per- should be carried out as with other traditional mission to trade in cryptocurrencies. Bobyl and currencies. However, according to Article 99 of the Dron (2017, p. 87) point up this necessity. In their Constitution of Ukraine (The Law of Ukraine No. opinion, modern banks should use cryptocur- 254k/96-vr, 1996), the domestic currency should rency together with traditional money. Although be the only legal means to conduct transfers and operations using cryptocurrency will be charac- settlements to be accepted by all individuals and terized by a high level of investment risk, the use legal entities without any restrictions on the terri- of traditional money is also a high financial risk tory of Ukraine. (credit, liquidity, and market). The use of cryptocurrency by business entities Tax control of cryptocurrency buying/selling should not be limited, as in the internation- in Ukraine can be institutionally arranged as in al trade, cryptocurrency is increasingly used Figure 4. to make payments. Therefore, cryptocurrency

Economic entity (resident/nonresident)

Receipt of a cryptocurrency Receipt of a cryptocurrency purchase application selling application

Commercial Cryptocurrency bank broker State Regulation ofState Regulation

Preliminary financial for Commission National control (monitoring) Services Markets Financial

Regional cryptocurrency market. National Bank Bank National of Ukraine Interbank currency National cryptocurrency market exchanges Commission and and Stock Market

International cryptocurrency Securities National markets. International cryptocurrency exchanges Current financial control Service Chamber Chamber of Ukraine of Ukraine State Fiscal State Fiscal Accounting Accounting Next financial (tax) control

Figure 4. Institutional model of financial and tax control of cryptocurrency purchase/sale transactions

98 Banks and Bank Systems, Volume 13, Issue 2, 2018 agreements should be signed as those in for- will expand the trading opportunities for business eign currency, that is, with the definition of entities, because they will be able to freely account their monetary equivalent in hryvnia, as Article for cryptocurrency, not hiding separate transac- 533 of the Civil Code of Ukraine (The Law of tions from fiscal authorities. Consequently, it is Ukraine No. 435-XV, 2003) specifies. Then, the not possible to determine the amount of income amount to be paid will be determined at the of- or expenses in cryptocurrency, as the National ficial rate of the corresponding cryptocurrency Bank of Ukraine does not establish a cryptocur- to the hryvnia on the day of payment, unless an- rency rate and their average commercial rate on other procedure for its determination is estab- the Ukrainian market is not set. lished by the agreement. In this case, between economic entities within the economic territo- For tax control of cryptocurrency transactions, it ry of Ukraine, the circulation of foreign mon- is necessary that the National Bank of Ukraine etary units and monetary surrogates is prohib- determine the official rate of cryptocurrency in ited in accordance with the Law of Ukraine on terms of the hryvnia on a daily basis, as well as its the National Bank (1999). The only condition rate on the interbank and inter-exchange crypto- for the possibility of a cryptocurrency turnover, currency markets. This will allow accounting and as well as other currencies, should remain the tax accounting of cryptocurrencies, their revalua- right to use them subject to calculations in UAH tion, reflecting exchange differences, and, respec- equivalent. tively, exercising tax control.

Concerning the purchase/sale of cryptocurrency, these operations must be carried out on an 2.4. Tax control of cryptocurrency organized financial market, through the provi- revaluation transactions sion of banks and cryptocurrency brokers with the right to perform cryptocurrency transac- The lack of cryptocurrency market regulation in tions. This will allow expanding the range of Ukraine does not contribute to the legitimization banking services, will lead to obtaining addi- of cryptocurrency transactions in the business tional revenues from banks, receive addition- environment. Business is ready to use it, manage- al revenues from local and state budgets of ment accounting tools are capable of performing Ukraine, and reduce the level of shadow econo- accounting, analytical and controlling functions my. In particular, Article 6 of the Decree of the for the management of cryptocurrency and liabil- Cabinet of Ministers of Ukraine “On the System ities (Mazaraki & Fomina, 2016, p. 50), but there of Currency Regulation and Currency Control” is no regulatory document that would allow ac- (1993) stipulates that foreign currency trade by counting and tax records. As a result, it is not pos- legal entities on the territory of Ukraine is car- sible to exercise tax control over cryptocurrency ried out through authorized banks exclusively transactions and regulate this market. on the interbank currency market of Ukraine. While individuals have the right to sell/buy for- The introduction of cryptocurrency legal regula- eign currency in banks and other financial insti- tion will necessitate assets revaluation. Such re- tutions or, through their intermediation, to oth- valuation for different dates will result in the ex- er individuals. Accordingly, if cryptocurrency is change differences that, in accordance with the recognized as a foreign currency, its conversion Regulation (standard) of accounting “21” (Decree will be possible in financial institutions, which of the Ministry of Finance of Ukraine No. 193, will increase the demand for such transactions, 2000), will be displayed between dates: based on the trust and security principles. • reflecting the transaction in the accounting To do this, it is necessary to recognize the cryp- (tax) and the actual calculations; tocurrency transactions as being carried out using foreign currency, which will lead to econom- • reflecting the transaction in the accounting ic benefits for both the state and other economic (tax) and doing accounting (tax) reporting for actors in the long run. First of all, such a decision the reporting period;

99 Banks and Bank Systems, Volume 13, Issue 2, 2018

• preparation of accounting (tax) reporting for by the same founders of the project and there are the previous reporting period and the actual no decentralized miners. Bitcoin Cash is also calculation; more prone to change rate. That is, among the five most popular cryptocurrencies (Bitcoin, Litecoin, • preparation of accounting (tax) reporting for Ripple, Bitcoin Cash, and Ethereum) there is no the previous reporting period and preparation one that would be able to maintain exchange rate of the accounting (tax) report for the report- stability. ing period. Cryptocurrency exchanges are now functioning A significant cryptocurrency market volatility will in Ukraine, the largest of which are BTC-trade be the cause of the exchange differences. At the (https://btc-trade.com.ua), BTCZoo (https://www. International Economic Forum in Davos, George btczoo.com) and Kuna (https://kuna.io). Moreover, Soros said that cryptocurrency cannot be consid- the Ukrainian Exchange (www.ux.ua) has become ered a means of preserving value. It is impossible, the world’s first venue for tradable cryptocurren- for example, to pay wages to employees if currency cy derivatives (ForkLog, 2016). This creates the fluctuations reach 25% per day (Bloomberg, 2018). basis for the capabilities of the National Bank Therefore, the presence of cryptocurrency on the of Ukraine, the National Commission for State balance sheet of an enterprise will lead to signifi- Regulation of Financial Services Markets and the cant changes in the balance sheet at the reporting National Securities and Stock Market Commission date, at the date of delivery of products or at the to control cryptocurrency transactions. date of settlement. Comparing quarterly changes in the rate of the most capitalized cryptocurren- Consequently, the growth of the cryptocurrency cies (see Figure 1), it should be noted that there is a in Ukraine is facilitated by both the external fac- tendency of a simultaneous growth of all curren- tors of the cryptocurrencies entry and the internal cies rate or, vice versa, decline (Figure 5). structure of the financial market. Tax control of cryptocurrency transactions in the calculation of The analysis results presented in Figure 5 show exchange differences is necessary and is possible that Ripple is the most volatile to time changes. taking into account the number of cryptocurrency This is due to the fact that its emission is controlled exchanges on the Ukrainian market.

Source: Made using the Figure 1 data.

100 2,7 7,5 15,1 20,0 80 17,2 Cryptocurrency 21,1

78,3 name: 20,4

60 65,9 11,0 20,9 7,1 96,8 12,2 86,6 1,4 40 90,0 Litecoin 20,9 47,1 10,7 71,8 20 39,3 Bitcoin Cash 40,3 40,2 38,7 22,7 21,4 23,8 % 1,5 0,8 6,5 0 3,4 Ripple -0,5 -1,0 -20 -4,7 -13,2 -12,0 -24,4 Ethereum -17,6 -17,7 -37,0 -11,0 -30,4 -19,1 10,8 -51,8 -40 Bitcoin -8,7 -34,0 -78,4 -50,9 -40,6 -19,7 -45,7 -12,1

-60 -46,9 -80 -26,7 -27,7 -31,5 -21,9 -10,6 -100 -29,9 І ІІ ІІІ ІV І ІІ ІІІ ІV І ІІ ІІІ ІV І ІІ ІІІ ІV І Quarter 2014 2015 2016 2017 2018 Year

Figure 5. Quarterly analysis of changes in the rates of individual cryptocurrencies in the world, 2014–2017 and Q1 2018

100 Banks and Bank Systems, Volume 13, Issue 2, 2018

2.5. Consequences of cryptocurrency transactions tax control for offer of the cryptocurrency (from A1 to A2 ) within the newly established volume Q1 . This is due Ukraine to the fact that under such conditions, the trans- The introduction of mining taxation, purchase/ fer of part of the cryptocurrency assets value will sale or other cryptocurrency transactions will take place to the state through taxes, the outflow lead to a change in the cryptocurrency rate, since of both miners and consumers will be observed, at the present price of a given unit of digital assets, due to lower demand for this type of assets. As a there is a cost of their creation and maintenance result, there will be a decline in the rate and physi- (investment in computing power, risks associated cal volume of the cryptocurrency market. with wear and tear, costs for electricity) and the desired profit of the computer technology owner. In the third stage, there will be a need for the state At the same time, as a result of taxation, there will to convert the withdrawn part of the cryptocur- be three consecutive stages that will significantly rency through tax, that is, the complete restora- reduce its rate. tion of the physical volume of the cryptocurrency

market (from Q1 to Q0 ) . The new equilibrium In the first stage, which will start from the date point will move along the direct demand from À2 of taxation on the cryptocurrency market, its rate to A3. At this point, it should be noted that its will increase as the tax will be added to the value rate will finally decrease, accordingly, its capital- of the unit, that is, the equilibrium point will shift ization will fall and crises will be expected on this from to , due to the increase of the direct offer up- market. ward in parallel. It means that the physical volume of the cryptocurrency market will not expand, but In order to prevent crisis phenomena on the cryp- only the cost per unit of the digital asset (from to , tocurrency market, countries whose governments where T is a tax) will increase, and, as a result, the decide to introduce cryptocurrency transactions money supply will decrease by the amount of the taxation, should keep the accumulated portion of withdrawn taxes ( to ), which will remain at the taxes from this market in cryptocurrency. state’s disposal (Figure 6). In determining the market equilibrium subject to In the second stage, the weakening of its rate will synergistic effect of tax and administrative control actually take place at the point on the direct initial (in the part of financial control), rapid decrease

Rate

𝑶𝑶𝑶𝑶𝑶𝑶𝑫𝑫𝑶𝑶𝟏𝟏

𝟎𝟎 Tax 𝑶𝑶𝑶𝑶𝑶𝑶𝑫𝑫𝑶𝑶 Consumers’ tax PT0  burden А1

А0 P0

P2 Miners’ tax А2 burden 𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝟎𝟎 Cryptocurrency А3 P3 surplus 𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝟏𝟏

Money supply Q1 Q0 Figure 6. Market equilibrium subject to of cryptocurrency transactions state regulation

101 Banks and Bank Systems, Volume 13, Issue 2, 2018

in its price should be noted. Due to the introduc- tain guarantees to society and business environ- tion of the tax, the cryptocurrency market can be ment as to the safety and legality of such financial maintained if the state does not convert accumu- transactions with their strengths and weaknesses, lated funds from this market to other currencies, threats and capabilities. as this will lead to a significant drop in the cryptocurrency rate. The strong points of the approach proposed are as follows: its compliance with the basic mod- The aforementioned may also cause miners to el of control in management, which will provide change their placement, with their computer systematic scientific knowledge of control; iden- equipment, to other countries where there are tification of new facilities and control measures, no such taxes. However, nowadays in Ukraine which will ensure the coverage of cryptocurrency the most favorable conditions for cryptocurrency transactions; compliance with international re- mining among all European countries are created. quirements for resisting terrorism financing, cy- Ukraine occupies the 4th place in the world at cost bercrime and tax evasion. of creating a unit of digital assets (TV Channel “24”, 2018). Cost of electricity made the basis for The weaknesses of the study include: fragmentary calculating the cryptocurrency profitability. consideration of the research of the tax control object and subject, which may have an impact on its If Ukraine does not regulate the cryptocurren- organization and methodology. cy market now, the current favorable conditions will quickly become transformed into the miners’ Opportunities include the adoption of nor- outflow and transferring their capacities to oth- mative legal acts on the cryptocurrency mar- er countries. This will not only bring the loss of ket regulation in Ukraine (On Cryptocurrency potential tax revenues in the budgets, but also the Turnover in Ukraine, 2017; On Encouraging loss of solvent consumers in the domestic market the Market of Cryptocurrencies and Their of goods and services. And this, in turn, will result Derivatives in Ukraine, 2017), taking into ac- in a surplus of goods in the economy, the econom- count the distinction between cryptocurrency ic downturn and the shadow economy growth. transactions and those that cause their physical volume growth and those aiming at using cryptocurrency; further development of the theory 3. DISCUSSION and practice of tax control over cryptocurrency transactions. The proposed approach to the tax control is based on the fact that cryptocurrency transactions serve The threat is due to underestimation of the impor- as its object. In this case, state tax control of cryp- tance of tax control for the cryptocurrency mar- tocurrency transactions should be considered as a ket development in Ukraine, which will result in a control over its individual object, the widespread shadow economy growth and will not ensure the introduction of which in Ukraine will provide cer- state and local budgets execution by revenues.

CONCLUSION

As a result of the research conducted, it was found necessary and expedient to implement tax control of cryptocurrency transactions on the basis of the preliminary determination of the cryptocurrency legal status, which would help prevent the use of cryptocurrency in terrorist financing, money laundering, tax evasion and ensure the filling of the revenues of the state and local budgets of Ukraine and other countries.

Cryptocurrency transactions, which should be the object of tax control in Ukraine, are determined. Among them: transactions on the cryptocurrency receipt, transactions on determining exchange rate differences, and transactions on the cryptocurrency disposal. As a result, it has been established that:

102 Banks and Bank Systems, Volume 13, Issue 2, 2018

• mining transactions and cryptocurrency income generation should be taxed with general taxes depending on a taxpayer’s legal status. These taxes include personal income tax, corporate income tax and a unified social tax. At the same time, given the EU recommendations on the non-application of value added tax in the cryptocurrency transactions taxation, its implementation is not appropriate in this area;

• all other transactions, which do not result in an increase in the physical volume of cryptocurrency assets, should not be taxed by special fees, they should be subject to the same taxation conditions as for foreign currency.

It is determined that there is an opportunity to carry out tax control of transactions on cryptocurrency receipt and disposal. To do this at the macro level, it is necessary:

• to ensure normative legal documents regulating the cryptocurrency market. These normative documents should determine the cryptocurrency as a foreign currency, supported by the representatives of the Department of Cyberpolice of the National Police of Ukraine;

• to recognize the National Bank of Ukraine the main body of tax control on this market. The National Commission for State Regulation of Financial Services Markets and the National Securities and Stock Market Commission State Commission should provide financial control at the level of cryptocurrency brokers and exchanges. Tax control over cryptocurrency transactions of economic entities must be secured by the State Fiscal Service of Ukraine, and the Accounting Chamber of Ukraine should become the supreme body of tax control;

• to legalize cryptocurrency exchanges in Ukraine, which will allow receiving additional tax revenues in the budgets and contribute to the development of the domestic cryptocurrency market;

• to take into account the volume of cryptocurrency assets when cutting tax rates or subsidies (in order to stimulate business entities to disclose information about cryptocurrency transactions).

At the micro level, it is necessary:

• to provide conditions for identification of electronic wallet owners; and

• through the mass media, to ensure the popularization of the conditions for cryptocurrency transactions taxation.

The introduction of tax control on the cryptocurrency market will lead to the eedn for accounting of cryptocurrency assets by business entities. This in turn will necessitate their revaluation, based on the high volatility on the market under study. As a result, in order to create opportunities for cryptocurrency tax control, the National Bank of Ukraine should determine the official rate of major cryptocurrencies on a daily basis, as well as their exchange rate on the interbank and inter-exchange cryptocurrency markets. These measures will form the basis for tax control of transactions in terms of determining exchange differences.

The consequences of taxation on the cryptocurrency market are established. It is proved that the state needs to keep revenues derived from cryptocurrency transactions in the same cryptocurrency, rather than immediately convert it, which will ensure sustainable development of the cryptocurrency market.

These results create new preconditions for the development fo the state tax control theory, as well as procedures for its conduct, in particular, extend its object to cryptocurrency transactions, as well as supplement the list of functions and responsibilities of the tax control system.

103 Banks and Bank Systems, Volume 13, Issue 2, 2018

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