How to legally trade cryptocurrency and pay taxes in the Russian Federation: 5 steps to organizing a legal trade

How to legally trade cryptocurrency and pay taxes in the Russian Federation: 5 steps to organizing a legal trade

On January 1, 2021, the law "On digital financial assets" came into force , regulating the field of cryptocurrencies, according to which they were recognized as property. This means that Russian residents are required to pay taxes when making transactions with cryptoassets. General provisions established by the new legislation:

• Cryptocurrencies are prohibited from being used as a means of payment. You cannot buy and sell goods or services with digital assets.
• The legislation of the Russian Federation does not limit the activities of traders: on exchanges, you can freely exchange cryptocurrency for other assets.

Russia followed the example of China, which imposed a total ban on the use of cryptocurrencies , and the Central Bank plans to block transactions of unqualified investors associated with crypto-exchanges and exchangers in order to protect citizens from "emotional" purchases. This article is about how retail investors can trade with digital assets without getting blocked.

After reading the article, you will find out:

• How to withdraw funds from a crypto-exchange to a bank account and not get blocked.
• How to pay tax on cryptocurrency in Russia.
• How to legally use funds and correctly declare income.
• What is the responsibility if you do not pay taxes when working with cryptocurrencies.

How to Organize a Legitimate Trade: 5 Steps to Doing Business

There are two types of cryptocurrency related activities:

• Cryptocurrency trading, which implies making a profit from the exchange of digital currencies. In this case, it does not matter where the trader is located and with what platforms the trader works.
• Entrepreneurial activity, meaning that the resident receives income from the provision of services in cryptoassets. Entrepreneurs need to choose a suitable place and legal field for work in order to organize legal activities.

Step 1: Decide on the place of business

For entrepreneurs, the jurisdiction of Hong Kong and Singapore is suitable for two reasons:

• These regions are loyal to the field of cryptocurrencies and regulate activities related to it.
• The accounts of a crypto exchange registered in Hong Kong or Singapore are legally equated to a bank account. This means that an entrepreneur can receive an account statement and use it to prepare financial statements.

Hong Kong is a separate jurisdiction that is not subject to the prohibitions of Chinese regulators. Mining, cryptocurrency trading and business activities in Hong Kong are permitted by law.

The only drawback of working with the Hong Kong jurisdiction is the mandatory annual audit. An entrepreneur needs to involve an audit company, which entails additional costs and difficulties in conducting business.

Step 2: Prepare documents

Before opening an exchange account, it is necessary to collect and prepare a set of documents for Due Diligence. This is necessary so that no legal problems arise when opening an account.

What documents a trader needs to prepare to open an account on a crypto exchange:

• Primary documents for the purchase of cryptocurrency.
• Documents confirming the origin of funds for the purchase of digital assets: income from work, sale of property, etc.
• Statement on crypto wallets the resident works with.
• Generated reporting sheet with a list of transactions confirming the formation of profit. This is necessary in order to provide the bank with information on how the trader managed to increase capital and what actions he performed for this.

Entrepreneurs (for example, software developers) will need contracts with contractors and acts of work performed, reflecting the list of services provided, work performed.

Advice: if you are a developer, create a business card site which will indicate a list of services to clients. This will make it easier for the bank to understand what your company is doing, and it will simplify the process of opening an account and making transfers. 

Step 3: Register

After you have previously prepared the necessary documents for the bank, you can start registering a company. The minimum package of documents for registering a company is a passport, CV and a document confirming the address of residence.

Different jurisdictions may impose additional conditions and requirements for registration, which may differ depending on the rules of local legislation. 

Step 4: Opening an account

This is one of the most important stages of organizing a crypto business. It is important to understand that not in all countries that regulate cryptocurrency activities, banks provide services to cryptocurrency companies and private traders. For example, in Estonia, crypto business is allowed, but it will not work to open an account for working with cryptocurrency.

Step 5: Opening a corporate account on the crypto exchange

It is preferable to choose cryptocurrency exchanges that support the withdrawal of fiat funds in order to easily and quickly convert digital assets into currency and withdraw them to the company's current account. Licensed exchanges provide for the KYC procedure and require identity verification.

How and when you should pay taxes on crypto trading

Officially, the tax status of cryptocurrencies has not been determined, so the sphere of digital assets falls under general taxation rules: traders who are individuals must pay personal income tax in the amount of 13% (15% on income over 5 million rubles) from income received from transactions with cryptocurrency.  

If trading is conducted from a foreign legal entity, then you need to notify the tax authorities about participation in this foreign organization, annually report on the profit of this company not only at the place of registration of the company, but also to the tax authority at your place of residence.

When your funds are in the account of a foreign company and they need to be withdrawn to your personal account with a Russian bank. This can be done in two ways: paying dividends and receiving salaries.  

Accrual of dividends

In general, dividends can only be paid at the end of the financial year. This means that you can withdraw money no more than once a year. This approach is inconvenient and does not allow free disposal of assets. It is possible to pay interim dividends, but this will create additional difficulties in financial accounting.

Payment of wages 

This is a more optimal solution, since the funds can be freely used. The founder of a company can become a director and conclude an employment contract with the company, setting the amount of remuneration (director's fee) as a percentage of the Company's income. It is legal.

At the end of the financial year, the entrepreneur pays 13% or 15% of the tax and uses the earned funds at his own discretion, providing the bank with a clean history of the salary of the director of a foreign company.

The tax authorities of Hong Kong and Singapore do not withhold any additional contributions and taxes both when paying dividends and when paying salaries to the director, provided that the money is not withdrawn to an account opened in banks of these jurisdictions and the generated income is not associated with counterparties from these countries.

What if you don't pay taxes on cryptocurrencies in 2021

Since activities with cryptocurrencies fall under the general rules of the tax regime, liability is provided for non-payment of taxes on profits in accordance with the Tax and Criminal Code of the Russian Federation. Here are the consequences if you avoid paying taxes on cryptocurrency:

1. Account blocking risks . According to Law 115-FZ "On Counteracting Legalization (Laundering) of Criminally Obtained Incomes and Financing of Terrorism" , banks have the right to require documents confirming the origin of funds and to block customer accounts in the event of suspicious transactions.
2. Accrual of interest and fines. If the FTS reveals illegal income, it will oblige to pay taxes, and also charge penalties and fines for late filing of the declaration under Art. 75 and Art. 122 of the Tax Code of the Russian Federation.
3. Criminal liability. Provided for illegal entrepreneurial activity when the amount of income reaches 2.5 million rubles in accordance with Art. 171 of the Criminal Code of the Russian Federation and tax evasion of an individual under Art. 198 of the Criminal Code .

Summary

It is possible to organize legal activities, but you need to choose the right jurisdiction and open an account in order to avoid additional difficulties in doing business. In the article, we answered the questions: how to get paid for services in cryptocurrency without breaking the law, what stages of organizing legal trade you need to go through and how to withdraw the earned money and pay taxes.