Staking, mining, NFTs (non-fungible tokens), and airdrops are four areas that are already firmly established in the world of cryptoassets, and in some cases, are even an essential part of how they work. However, from the point of view of taxes and practice, they represent a rather complex issue, for which there is currently no completely uniform approach and legal framework. So how to deal with these topics, especially as an individual person, we have summarized for you in the article.
In the last article on crypto-assets, we focused mainly on their definition, the method of taxation from the perspective of individual persons and the exemption tests. At the same time, we have opened several complex topics that are unclear from a tax and legal point of view, or at least problematic. Let’s take a closer look at them now.
The first topic is staking. Basically, it is a mechanism where the holder “locks” his crypto-assets and they are then used to create a so-called mining node. The latter then acts as a “validator”, whose job is to close blocks within a distributed ledger (the most common type is a blockchain) and earn a reward in the form of newly created tokens.
However, staking can take two forms – “solo (native)” and “delegated (pooled)”.
The result is similar in both cases – the participant receives an economic reward. From a tax point of view, however, we assess these two cases differently.
Delegated staking should be treated as passive income from the provision of tokens, which can be classified under Section 8 of the ITA as income from capital assets, provided that it is not an asset classified as a business asset. By nature, it is essentially a loan provided to a given pool, from which interest income, i.e. income from capital assets, is derived.
Solo (native) staking, i.e. when the taxpayer operates their own validation node and deposits their tokens into it, is no longer just a passive involvement in the staking pool, but an activity that requires a certain degree of self-organization, technical setup and management, as well as a larger amount of funds. In practice, the question often arises whether it is still a matter of disposing of one’s own property or whether it is already an activity that fulfils the characteristics of a business.
Of course, it depends on the extent to which staking is operated. The line that divides income taxation under Section 7 or Section 10 is very thin and represents legal uncertainty in general. It is crucial to distinguish whether it is a continuous activity carried out for the purpose of making a profit or explicitly an irregular activity of a smaller scale.
However, if staking is assessed as a continuous gainful activity, which also meets the conditions of being carried out in a „business-like“ manner, it is also necessary to remember about the related obligations, such as keeping tax records or possible payment of social security and health insurance contributions.
It is also important to note that unlike delegated staking, where the nature of income is a return on capital assets, native staking, which effectively represents mining in a proof of stake system, will be assessed similarly to mining in a proof of work system. In both cases, it should be an increase in the state of one’s own assets – as in the case of own production. When cryptocurrency is obtained through mining, taxable income is not generated. This should only occur when the cryptocurrency is sold for fiat currency or the cryptocurrency is exchanged for a good/service, or for another cryptocurrency. All according to the GFD (General Financial Directorate) methodology – Information on the tax assessment of cryptocurrency transactions.
Another open question is whether delegated staking interrupts the holding period required for the exemption of income from the sale of crypto-assets. The Income Tax Act stipulates that income from the sale of a crypto-asset is exempt if the period between its acquisition and transfer for consideration exceeds three years and provided that the crypto-asset is not held as part of business asset and the other conditions laid down in Section 4(1)(zk) of the Income Tax Act are met. However, there is no transfer for consideration in staking, and the holder does not realize any income from the sale. The question therefore remains whether the insertion of tokens into a staking pool can be considered as such a disposal of assets that interrupts the running of the time test.
The Financial Administration has not yet taken a position on this issue. Theoretically, it could be argued that at the moment of providing tokens to the pool, the holder temporarily relinquishes the full right of disposal to the crypto-asset, which could lead to the conclusion that this is a break in the time test. On the other hand, it can be argued that the de facto ownership of the tokens remains and no transfer for consideration within the meaning of the law occurs. It will probably be necessary to assess this situation for each individual project within which the staking is operated separately. And this depends on how my assets are handled according to the conditions of the pool.
Closely related to staking is cryptocurrency mining in distributed ledgers based on the principle of proof of work. With this model, it does not matter the amount of tokens held, but the computing power, or the amount of energy consumed. In practice, it is a solution to complex computational tasks in which the miner, or rather his computing equipment, repeatedly tests different values of the so-called nonce – a random numerical parameter that affects the resulting hash of the block. The goal is to find such a value that the hash corresponds to the required, predetermined difficulty. For a successfully closed block, the miner will then receive a reward in the form of newly mined tokens.
The operation of cryptocurrency mining is usually associated with considerable costs – especially for the acquisition of computing equipment (e.g. graphics cards or specialized devices designed for mining, the so-called miners), electricity consumption and ensuring the operation and setting up of the mining process itself.
From a tax point of view, it is therefore logical to assess income from the sale or exchange of tokens obtained through mining under Section 7 of the ITA as income from self-employment. In most cases, mining fulfils the characteristics of a business or self-employment: the taxpayer performs it systematically, on his own account and responsibility, with the intention of making a profit, and the nature of it is a service – the fulfilment of the condition “in a business like manner”. In such a case, it is therefore again necessary to comply with other related obligations, in particular social security and health insurance contributions and any other related administrative requirements. As already mentioned above (see the GFD methodology – information on the tax assessment of cryptocurrency transactions), the actual mining of tokens should not constitute the moment when taxable income arises.
Another topic that has not yet been addressed is the so-called NFTs (non-fungible tokens). Their main function, unlike many other cryptoassets, is not an exchange, but primarily to prove ownership of a certain digital or physical product. Naturally, this raises the question of which regulation should be used to assess these tokens (including their purchase, sale or other transactions) legally and tax-wise.
Directly in the MiCA Regulation in Article 2 para. 3. it is provided: This Regulation does not apply to crypto-assets that are unique and not fungible with other crypto-assets. NFTs fall under the definition of crypto-assets, but they are excluded from and regulated by this regulation.
According to the so called Czech AML Act No. 253/2008 Coll. (Section 4 (8)), a virtual asset is a crypto-asset under a directly applicable EU regulation governing markets in crypto-assets, with the exception of:
a) crypto-assets pursuant to Article 2(8) of the Act; 4 of Regulation (EU) 2023/1114 (i.e. financial instruments under MiFID 2);
b) crypto-assets that are unique, non-fungible with other crypto-assets and cannot be used for payment or investment.
Based on this definition, more precisely point b), it could therefore be concluded that NFTs do not fall into the category of virtual assets if they cannot be used for payment or investment. In practice, however, the problem arises when it is necessary to assess whether or not the NFT can be used for investment. The possibility of using NFTs as a means of payment is irrelevant in most cases. It is necessary to be careful that the law directly states if the token “cannot” be used for investment, and does not say whether or not the token is used for investment (so it does not talk about the taxpayer’s intention). Assessing this fact can be problematic and may bring a number of disputes in the future. The topic of NFTs would definitely deserve attention to avoid legal uncertainty.
The last topic is the so-called airdrops. This is a situation where users or community members are given tokens of a certain crypto-asset for free. This is usually a marketing event when a new project is launched (issuance of new tokens). Users receive crypto-assets in this way, for example, for promoting or supporting a project or for holding a certain amount of tokens.
From a tax perspective, the acquisition of new crypto-assets must be properly assessed and it is crucial to determine on what basis the airdrop was accepted. If it was a reward for promotion or sponsorship, i.e. some systematic activity for the purpose of profit (i.e. not a gift that could be exempted up to a certain amount, or an incidental income under Section 10), this income should be assessed as remunerated under Section 7 of the ITA – i.e. as income from self-employment.
It is worth recalling that in accordance with Section 4 para. 1 lit. zj) of the ITA, the so-called value test of CZK 100,000, which represents the limit for the exemption of income from the sale of crypto-assets per calendar year, is generally not applied to crypto-assets included in a business asset.
With airdrops, we can ask at what point to tax it and at what point to determine the acquisition price. In practice, there may be a situation where the tokens are airdropped to the user without his knowledge or consent, and he does not immediately know about their acquisition.
The question remains, if taxation should take place only during the actual sale or exchange of these tokens, whether the valuation should be based on the value of the tokens on the day of their adoption. Related to this is the idea of whether the crediting of tokens itself should not constitute a taxable moment. In this case, unpleasant situations would occur, especially if the user only found out about the crediting of the tokens with a significant time lag – for example, even several years after the airdrop took place. Currently, airdrops are usually negligible amounts, but with the growing importance of this form of token distribution, it can be expected that this issue will need to be addressed in more detail in the future.
It is obvious that the mechanics of airdrops are not clearly defined by legislation and the issue would deserve a more detailed commentary from the legislator or a methodological opinion of the tax administrator. Mainly because of the dispute of opinion about whether it is right to tax income in the form of airdropped tokens immediately or to tax only the income from their sale.
The tax assessment of airdrops by the provider would certainly deserve comment. We will discuss this in the next article. And this is also from the point of view of legal entities.
Assessing mining, staking, NFTs, and airdrops from a tax perspective is not easy. The difficulty lies mainly in the fact that the legislation often does not reflect the very technology on which these crypto-assets are based. If the aim is to create a more regulated environment for the industry, crypto-assets need to be seen not only as simple investment or payment instruments, but above all as a technology with specific functionalities and practical impacts that can vary significantly in different situations.
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