Legal entity's operations with cryptoassets

Crypto assets have become an important financial instrument for both individuals and companies in recent years. More and more legal entities are purchasing, selling or using crypto assets in their business activities. However, with opportunities come responsibilities – especially in the field of accounting and tax accounting. In this article, we will look at the main issues on how companies in Latvia can correctly account for transactions with crypto assets.

Should transactions with crypto assets be reported in a company's accounting?

Yes. All transactions with crypto assets must be reflected in the company's accounting. According to Article 6, Part 3 of the Accounting Law, all business transactions of the company, as well as any fact or event that affects the company's assets, must be reflected in the accounting.

When a company purchases crypto assets, it acquires an asset with a certain value. This asset can be sold later, resulting in both profits and losses. Therefore, every transaction with crypto assets must be recorded in the company's accounting.

What are cryptoassets in economic terms?

By their economic nature, crypto-assets are considered a commodity or product that can be used as a medium of exchange if the parties to the transaction agree to do so. In accounting, crypto-assets are usually classified as current assets. According to the Annual Accounts and Consolidated Annual Accounts Law, they are presented as follows:

• E-money tokens (cryptoassets with a stable value tied to the official currency) are presented in the balance sheet item “Cash”, creating a sub-item “Electronic money”.

• Other crypto-assets are presented under the item “Inventories”, creating a separate sub-item “Crypto-assets”.

This allows for clear and transparent accounting in the company's financial statements.

At what value should crypto assets be listed?

In Latvia, the measure of value in accounting is the euro, therefore crypto assets must also be valued in euros in accounting. The value of crypto assets is determined by:

• at purchase cost, or

• at the cost of production (if crypto assets are obtained, for example, through the "mining" process).

This requirement is established by Section 7, Part One of the Accounting Law, and Section 14, Part One, Clause 10 of the Annual Reports and Consolidated Annual Reports Law.

What documents are required to substantiate a crypto asset purchase transaction?

If crypto assets are purchased online with a bank card or money transfer, the transaction can be substantiated in accounting with a credit institution account statement, which does not necessarily have to be certified by the bank, but must be approved by the person responsible for the business transaction in accordance with the procedure established by the company manager. Such a document is considered an external supporting document in accordance with Article 11, Part Eight, Clause 4 of the Accounting Law.

Does a company have to register in the VAT register?

Cryptocurrency purchase and sale transactions are not subject to VAT. Therefore, a company is not required to register in the VAT register just because it conducts cryptocurrency transactions. However, registration will be required if the company meets other criteria set out in Article 55 of the Value Added Tax Law.

Are cryptocurrency transactions subject to VAT?

Although Latvian legislation does not explicitly provide for VAT exemption for cryptocurrency transactions, the case law of the Court of Justice of the European Union is of significant importance. According to the CJEU, in its judgment of 22 October 2015 in case C-264/14 (Skatteverket v. David Hedqvist), it was determined that cryptocurrency purchase and sale transactions are exempt from VAT.

Is VAT applied to the commission fee for cryptocurrency exchange services?

If a company provides cryptocurrency exchange services for a fee, then VAT is applicable to the commission fee. In this case, the standard VAT rate of 21% is applied to the value of the service, if the service provider is a registered VAT payer.

Can cryptocurrency transactions be made in cash?

The regulations do not require cryptocurrency transactions to be non-cash. Therefore, companies may also make payments in cash using a cash register, subject to the restrictions on cash transactions set in Latvia.

What reference should be indicated on the tax invoice?

When issuing a tax invoice for the sale of cryptocurrency, it must include a reference to the regulatory act that provides for VAT exemption, for example:

• Article 52, paragraph one, subparagraph “d” of paragraph 21 of the Value Added Tax Law, or

• Article 135(1)(e) of Council Directive 2006/112/EC.

In this case, VAT is not indicated on the invoice.

How should cryptocurrency transactions be reported on the VAT return?

Cryptocurrency purchase and sale transactions are treated as transactions with means of payment for VAT purposes.

In the VAT return, the transaction value is reported on line 49, the value of the service is calculated as the difference between the purchase and sale price of the cryptocurrency.

In conclusion

Cryptoassets are becoming increasingly common in business operations, but their use requires careful accounting and compliance with regulatory enactments.

It is important for companies to correctly classify crypto assets on the balance sheet, document each transaction, correctly apply VAT regulations, and ensure transparent financial accounting. A proper approach to accounting helps avoid tax risks and ensures the reliability of a company's financial statements.