Cryptocurrency Regulation in the Czech Republic Prior to 2023

Regulatory Overview

In the Czech Republic, prior to 2023, cryptocurrencies were largely unregulated and classified as commodities rather than as currencies. This classification meant that cryptocurrencies were not recognized as a monetary unit, thus not an official means of payment under the Czech law. However, cryptocurrencies could still be used in transactions. Initial Coin Offerings (ICOs) were also unregulated by the Czech government but were subject to European Union (EU) legislation, particularly Anti-Money Laundering (AML) regulations​​.

Approach of the Czech National Bank

The Czech National Bank (CNB) adopted a “light-touch, liberal approach” to cryptocurrency regulation, refusing to either promote or protect cryptocurrencies but not hindering their development. The CNB did not classify cryptocurrencies as a currency but allowed Czech banks to offer cryptocurrency-related services as long as they adhered to AML/Know Your Customer (KYC) regulations. The CNB’s stance likened investing in cryptocurrencies to gambling, emphasizing the risk that investors could lose their money​​.

Implementation of EU AML Regulations

As a member of the EU, the Czech Republic was subject to EU’s AML regulations. In response to the EU’s Fifth Anti-Money Laundering Directive (AMLD5) enacted in July 2018, the Czech Republic implemented a stricter legal model than AMLD5. This model required every cryptocurrency-related firm in the Czech Republic to be regulated by the Czech government, covering a broader range of cryptocurrency-related activities than the EU, which only regulated cryptocurrency exchanges and wallets. Failure to register operations with the Czech government could result in substantial fines​​.

Licensing and Taxation

The Czech Republic established a licensing system for cryptocurrency enterprises, with different types of licenses depending on the cryptocurrency’s use, including classic, fiat, traditional, or specialized licenses. Regarding taxation, individuals trading cryptocurrencies were taxed at a rate of 15%, while businesses were taxed at a rate of 19%. Sellers of goods and services receiving payments in cryptocurrencies were taxed similarly to their counterparts receiving payments in conventional currencies. Cryptocurrency companies were required to pay taxes to the Social fund and the Health Fund, emphasizing the government’s approach to integrate cryptocurrency operations within the existing tax framework​​.

Efforts to Curb Tax Evasion

The Czech government undertook serious measures to prevent tax evasion involving cryptocurrencies. In 2017, obligations were placed on banks, cryptocurrency exchanges, and other financial service providers to identify their customers. This move aimed to increase transparency in cryptocurrency transactions and reduce the potential for using the anonymity of cryptocurrencies for tax evasion​​.

VAT on Cryptocurrency Transactions

Generally, cryptocurrency transactions in the Czech Republic were not subject to Value Added Tax (VAT). However, in specific cases, such as when suppliers failed to pay VATs, the tax burden could be shifted to buyers of cryptocurrencies. This exception was part of the broader tax strategy to ensure compliance and fairness in the taxation of cryptocurrency transactions​​.

In conclusion, prior to 2023, the Czech Republic’s approach to cryptocurrency regulation was characterized by a liberal but cautious stance, emphasizing risk awareness for investors, implementing stringent AML regulations, and integrating cryptocurrency transactions within the existing tax framework. This approach reflected a balance between fostering the growth of the cryptocurrency market and ensuring regulatory compliance and financial stability.