Regulation and taxation of crypto assets in Ukraine, impact on GDP and tax revenues, and the shadowing factor as the main driver of efficiency growth in the industry – a key highligts of the independent group of macroeconomic analysis and forecasting Ukraine Economic Outlook and Blockchain Association of Ukraine.
From the point of view of global development of the crypto market, the current stage can be characterized as the beginning of the formation of a regulatory framework in most countries and intense international competition for tax revenues from crypto assets.
Despite the high level of development of the crypto industry in Ukraine in all directions, in recent years the country has been losing its position due to the lack of a legally regulated field.
According to Blockchain Association of Ukraine calculations, in the period from 2016 to 2022, Ukraine lost significant amounts of direct income and tax revenue due to the lack of regulation of this sector: $48.8 bn in GDP and $4 bn in tax revenue, which is equal to $7 bn and $600 mn annually, respectively.
The problem of shadowing the crypto sector
The key problem in the development of the crypto industry in Ukraine is the high level of shadowing, due to the lack of a regulatory framework and a specific tax regime, which does not allow the full use of the tax potential from activities related to crypto assets.
Particular attention should be paid to public investments in crypto-assets, mining and issuance of coins by developers, which currently continue to function, but remain outside the legislative framework.
The lack of a legal framework and the ability to pay taxes at the market rate makes these segments vulnerable, reduces the transparency of their structuring and access to financing.
The Ukrainian government losing millions in tax revenue from crypto
The Ukrainian government said it is losing potentially tens of millions in tax revenue due to the non-regulated status of crypto exchanges operating within the country.
Crypto exchanges have cost the state budget an estimated 3 bn UAH ($81 mn) in uncollected taxes.
An analysis by Ukraine’s Bureau of Economic Security found that trades involving bitcoin (BTC), ether (ETH) and tether (USDT) reached a total volume of over $55 bn from 2013 to 2023 on Ukrainian-based exchanges (see Crypto Criminal Case Involving Attack on a DEX’s Smart Contract).
With trading fees typically ranging between 0.1% and 1.5%, data analytics estimates that these exchanges have amassed roughly $445.5 mn over that same period.
As there are currently no specific regulations in place governing the taxation of these transactions, the exchanges are not obligated to pay taxes on the revenue accrued from digital assets in Ukraine.
In February 2022, Ukraine’s Verkhovna Rada adopted a law governing and clarifying digital assets, but it will only come into effect once amendments have been made to Ukraine’s tax code to include provisions for the taxation of digital asset transactions.
So far, those regulations have not been put in place, leading to a continual loss of potential tax revenue for the state (see New Crypto DeFi Crime Trends).
The operations involving crypto can be used to circumvent sanctions, withdraw funds abroad, conduct illegal gambling businesses and commit criminal offenses, Ukraine’s Bureau of Economic Security says.
Ukraine itself has been the beneficiary of crypto donations from the community seeking to aid its war efforts, following Russia’s War of Ukraine’s territory, which began in February 2022.
Ukraine has received $225 mn worth of crypto donations, with the majority of it now going towards humanitarian aid, Crystal Blockchain recently reported (see FATF Updates Guidance on Virtual Crypto Assets).
On June 27th 2023, the FATF published its report on country compliance with Recommendation 15 – including the Travel Rule – and updates on emerging risks and market developments. Global implementation and compliance remain relatively poor and behind most other financial sectors..
The need for a special crypto tax regime
Tax reform for the crypto sector should be created, including the establishment of correct tax rates, which will create the preconditions for the legalization of cryptocurrencies and increasing tax revenues to the budget.
Tax conditions during the war remain unpredictable, which reduces the investment attractiveness of Ukraine for foreign crypto capital.
But in the current conditions, the lion’s share of domestic crypto assets for all types of activities we analyze is in the shadows.
Thus, the “shadowization” of even 20-40% of the sector will lead to an increase in budget revenues.
The optimal way to bring crypto assets and income from them out of the shadows
The establishment of a competitive and stimulating tax regime and the legalization of the crypto market will lead to GDP growth (both by emerging from the shadows at the first stage and by increasing tax revenues, also attracting foreign investors, for whom current tax rates are secondary).
The proposed tax rates in the first years of legalization of crypto assets are 5% for personal income and 18% for corporate income.
A potential risk is that the special tax treatment for crypto-asset income may be abused by other domestic taxpayers (which poses a risk of base erosion for the Treasury). That is why a mechanism to control the origin of declared income is also necessary.
Implementation of similar cases in Ukraine
Special tax regime for Diya-City in 2022. The high level of shadowing of the IT sector similarly reduces the development potential of the industry (fragmentation, aggressive optimization of income tax/ evasion).
Based on actual tax rates (the effective level taking into account all the costs of optimizing and supporting a more complex legal structure), the Ministry of Digital Transformation proposed a new tax regime for Diya-City.
Despite the potential risks and the introduction of the regime in the first year of the war, residents of Diya-City increased tax payments to the budget compared to 2021.
Results
The analysis confirms the possibility of implementing the proposed tax regime, taking into account the current instability and shadowing of the crypto sector.
Shadowization and the creation of favorable conditions contribute to the protection and structuring of activities related to crypto-assets, and allow the organization of business processes more transparently and sustainably.
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Reviewed by
Oleg Parashchak
