I have an account in a crypto exchange, with a payment card connected to the account. Virtual-currency purchases are the base for cashback rewards. Are these rewards subject to income tax the same way as bonus from other customer-loyalty programs?
When you buy something with a payment card that enables you to pay for goods and services using the virtual currency in your account, your account gets a credit entry known as “cashback”, consisting of virtual currency. The credit transaction is subject to tax, and it is classified as an item of capital income that you have received. You are now seen as having received an amount equalling the virtual currency’s quoted value on the day when you receive it.
The income in the form of cashback is taxed in a different way from how other loyalty cards, points, and bonuses are taxed. Typically, grocery stores and banks roll out loyalty cards and provide bonuses. There are several reasons for this difference:
- The size of the credit transaction with cashback is a percentage based on how much virtual currency you have in your account in the virtual-currency exchange. But the size of your bonuses from the grocery store is based on your household’s volume of purchases.
- After you receive the cashback, it is not spent on (a bank’s) service fees or on other similar purposes. Instead, you receive more units of virtual currency, which means that you now own a higher total balance. You can spend the added units any way you like, which is different (compared to bank-card bonus programs, where you cannot receive cash in any form, but you can receive lower service-charge rates or lower insurance premiums – which are items that only the bank or insurance company can determine and decide upon).
However, there is one exception to the standard tax assessment of cashback-income. The credit transactions are exempt from tax if you, the customer, do not need to have a positive balance of virtual currency in your account in order to receive the cashback. For example, some virtual currency exchanges have a policy of giving out minimum credits to everyone who opens an account. If this is offered (for example, as 1% of the value of all purchases), the cashback you receive is treated as tax-free income for you.
Submitting the tax return and reporting the cashbacks subject to tax
If your cashback card lets you receive credit, and this is treated as being taxable income, you are required to report it on your pre-completed tax return under Other capital income.
If you sell or otherwise use your position in virtual currency later and make a profit, you can declare the capital-gains taxes entering the position’s “acquisition price” as equal to the value of the cashback that you had reported to the tax authority as the current value on the date of receipt.
Example: Matt has 100 units of the “A” virtual currency in his cryptocurrency exchange account. Matt’s account balance entitles him to a 5% reward, as cashback, for payments made with the payment card when shopping.
Matt buys consumer goods for €5,000 and his card account is credited with 5 units of “A”. The current quoted value of the 5 units is €250. As a result of this cashback reward, Matt has €250 of income. He must report this income, classified as “other capital income”, to the tax authority. Later, if Matt sells, or otherwise uses, 5 units of his “A” virtual currency, he can indicate that the acquisition of the 5 units had cost him €250. This serves as the “acquisition cost” on his tax return for capital gains.
When cashback credits are tax-exempt income, it is not necessary for you to declare them on the pre-completed tax return.
If you sell or otherwise use your position in virtual currency later and make a profit, you have to indicate “0 euro” as the position’s “acquisition price” on your tax return for capital gains. However, natural persons or estates of deceased persons can declare their capital gains based on a “deemed” acquisition cost. This is more beneficial, because the deemed cost is either 20% or 40% of the selling price. The percentages depend on how long you had owned the virtual currency before you sold it.