Bookkeeping for a Cyprus-based company that trades Cryptocurrencies

[baitmine]

I'll be relocating to Cyprus later this year, and in doing so, will be incorporating in Cyprus (I expect to pay 12.5% + GESY in effective tax rate as a non-dom trading cryptocurrencies).

I have a few questions the relate to bookkeeping which I hope someone in here can help shed some light on.

Note that I engage in algorithmic trading and generate upwards to 1 million transactions per annum (a lot of these transactions are partial executions that on the low range can be as small as a few cents apiece).

1. What are the taxable events? While I haven't been able to confirm, but I've been told that any crypto-to-crypto conversion (which currently makes up all of my transactions) are not taxable events in Cyprus (the taxable event only being when any crypto is converted to fiat; which will not happen very often in my case).
   1. Do stablecoins (USDC, USDT, DAI) count as fiat? I would imagine that they do not, seeing how they're not backed by any government. However, if they do, then that would complicate matters (I could most likely eliminate this type of transaction, but, it would reduce my profitability).
   2. Are there any withholding taxes if no crypto-to-fiat conversions take place? I'd imagine that there aren't, but a confirmation would be good.
   3. How do I declare the value of the initial starting capital given that it is spread out over dozens of exchanges and wallets, in the shape of several hundred unique tokens (90% of the value probably consists of only a handful of different tokens)? What is the correct procedure? I assume that this will form the basis of my PNL balance, and as such, the 12.5% + GESY will be applied to any gains above this initial number on an annual basis (assuming any such gains have been converted to fiat).
   4. Can someone please confirm the following example?
      
      Initial capital: 2,000,000
      
      Year 1
      
      Withdrawals to fiat: 500,000
      Deposits to crypto: 0
      Taxes: 12.5% + GESY on 0 = 0.
      
      Year 2.
      
      Withdrawals to fiat: 2,000,000
      Deposit to crypto: 100,000
      Taxes: 12.5% + GESY on 400,000 (2,500,000 - 100,000) = 50,000 (12.5%) + 4,770 (GESY applied to 180,000) = 54,770
      

      ---

2. Do accounts have to be in the company name? Not all exchanges support 'corporate accounts', not to mention that I've already KYC:d most of my accounts, meaning I might not be able to open up new accounts on some exchanges (since even a corporate account still has to be KYC:d by an individual, much like a corporate bank account). Ideally, I'd continue using my current accounts.
3. How do I deduct losses in the event that an exchange gets hacked and my funds are lost? Do I even need to acknowledge this loss (assuming there are no withholding taxes on funds that have not been converted to fiat)?
4. How should I go about maintaining my books? I've spoken to one Cypriotic CPA so far, and the quote I received was not sustainable as I was quoted on a transaction-by-transaction basis. I'm capable of generating automated solutions for maintaining the books (which I assume that the CPA would've done either way to reduce their own workload), but I do not know how these books should be organized so that any CPA who goes about auditing them will have an easy time verifying their accuracy and thus not have to quote me an unreasonable amount for doing so. This is somewhat of a broad question, but, I suppose a lot of this comes down to that. I'd be happy to pay for instructions from a professional, and I still plan on seeking out more quotes from different CPA firms in Cyprus.

Hopefully, I can answer most if not all of these questions, and, with some luck, they can provide guidance to others who are currently wondering the same things.

 

[glengoolie]

just few notes:
- you will have to employ yourself as director and pay income tax, healthcare and social security
- you will have to close all your positions, withdraw money, put the money into the company as initial capital, set up new accounts on the company's name and re-open the positions from these new accounts
- only securities are part of the capital gains tax exemption, crypto is not part of that so you will pay full corporate income tax on that
- for accounting...hire accounting, easy. they can recommend a software or service to use so you can possibly do book keeping yourself and only pay accountant to fill your taxes at the end of the year.
- if you will be living in cyprus, as company director, your company is considered domiciled there and it will pay contribution into the cyprus' defence fund which is 17% on dividends(rates depend on the type of income/capital gain)

 

[baitmine]

- you will have to employ yourself as director and pay income tax, healthcare and social security

I don't think you're required to give yourself a salary, if you are, you'd just pay yourself minimum wage which would be taxed at 0% + 15% social. You'd also write off the salary as cost, ending up paying only marginally more.

- you will have to close all your positions, withdraw money, put the money into the company as initial capital, set up new accounts on the company's name and re-open the positions from these new accounts

This would be a huge problem if true since there's simply no way to find a bank that won't flag a transaction of this size from a cryptocurrency exchange, not to mention the time and cost involved in making this happen. It'd take me close to a week to liquidate all the positions, and I'd lose a notable amount on the transaction fees.

- only securities are part of the capital gains tax exemption, crypto is not part of that so you will pay full corporate income tax on that

That's correct, hence, 12.5% (that's the full corporate income tax).

- for accounting...hire accounting, easy. they can recommend a software or service to use so you can possibly do book keeping yourself and only pay accountant to fill your taxes at the end of the year.

That's the plan. I will begin looking for an affordable option in ernest, soon.

- if you will be living in cyprus, as company director, your company is considered domiciled there and it will pay contribution into the cyprus' defence fund which is 17% on dividends(rates depend on the type of income/capital gain)

I am not sure what you're referring to. The company does not receive dividends, it pays out dividends (to moi), which as a non-dom I would be exempt from paying the SDC on, ergo the effective rate would be 12.5 + GESY (2.65).

 

[glengoolie]

someone will correct me if i am wrong but a director must receive a salary because it is an employment type of position. and yes, you should pay yourself the minimum, so you will pay no income tax(i think up to 19 800€ a year or something like that), but you will pay for healthcare insurance and for social security and that will be calculated from the actual salary or from the minimum allowed salary so neither will be 0.

as for transfer of accounts - there is no way around that anywhere in the world. you cannot use your personal accounts to trade for your company. it would make you essentially a broker and you would need a license for that. you can't even transfer securities between different owners. you can open up a new broker account and transfer securities between your own accounts under different brokers but you cannot transfer to another entity/owner. i don't do crypto so my take is from stocks/securities point of view and these are publicly traded securities that abide by specific laws and regulations so maybe crypto could bypass this somehow? i doubt it but i don't know anything about it so ...

as for the contribution into the cyprus defence fund, every cyprian native or domiciled company is subject to it. you as a non-domiciled resident are exempt for 17 years. as i have said, if you, as a director, reside in cyprus, the company is considered as domiciled in cyprus which means it will pay taxes on worldwide income in cyprus but also it means that certain types of income are subject to this defence fund. i am not saying your type of income will be subjected to it, only that it might.

see https://www2.deloitte.com/content/dam/Deloitte/cy/Documents/tax/CY_Tax-Facts-2020EN_Noexp.pdf
Dividend income 17%
Interest income 30%
Interest received by an individual from Government Savings Certificates, Government Bonds and Corporate Bonds 3%
Interest earned by an approved provident fund 3%
Interest earned by the Social Insurance Fund 3%
Rental income less 25% 3%

When you withdraw profits from the company through a dividend, that is indeed tax. I was talking about dividend your company might receive if you would hold stock that pay dividends.

You haven't mentioned where you are from but make sure you are not subject of exit tax because that can screw you up pretty bad.
https://en.wikipedia.org/wiki/Expatriation_tax

 

[khinkali]

Great thread @baitmine, items 2 and 4 are why I'm hesitant about Cyprus.

Could a partnership work? One partner is a natural person using his personal exchange accounts for the partnership. The other partner is a company that does the work, builds the technology and gets most of the profits. The corporate partner pays dividends, which go to its owner who also happens to be the natural person partner. I don't know if that would need some collective investment registration or licensing, given there is only one human UBO.

 

[baitmine]

someone will correct me if i am wrong but a director must receive a salary because it is an employment type of position. and yes, you should pay yourself the minimum, so you will pay no income tax(i think up to 19 800€ a year or something like that), but you will pay for healthcare insurance and for social security and that will be calculated from the actual salary or from the minimum allowed salary so neither will be 0.

Fair enough, I'd prefer it if that was not the case since that would simplify things, but the difference in effective tax rate will be somewhat negligible.

as for transfer of accounts - there is no way around that anywhere in the world. you cannot use your personal accounts to trade for your company. it would make you essentially a broker and you would need a license for that. you can't even transfer securities between different owners. you can open up a new broker account and transfer securities between your own accounts under different brokers but you cannot transfer to another entity/owner. i don't do crypto so my take is from stocks/securities point of view and these are publicly traded securities that abide by specific laws and regulations so maybe crypto could bypass this somehow? i doubt it but i don't know anything about it so ...

This is indeed a problem if it has to be capital held in fiat at a traditional bank as I simply can't think of a bank that would be okay with receiving such a transaction.

as for the contribution into the cyprus defence fund, every cyprian native or domiciled company is subject to it. you as a non-domiciled resident are exempt for 17 years. as i have said, if you, as a director, reside in cyprus, the company is considered as domiciled in cyprus which means it will pay taxes on worldwide income in cyprus but also it means that certain types of income are subject to this defence fund. i am not saying your type of income will be subjected to it, only that it might.

That is a fair point, although, I don't think it would apply to this case. There's the matter of receiving airdrops and interest, but, since neither would be in fiat, I don't think it would be applicable in this case (I'd simply pay the 12.5% + GESY on any of the gains at a point where it is converted to fiat).

When you withdraw profits from the company through a dividend, that is indeed tax. I was talking about dividend your company might receive if you would hold stock that pay dividends.

I appreciate this tidbit, I don't think it applies to this case, but, I do also engage in stock trading (that would, however, be under a separate entity).

You haven't mentioned where you are from but make sure you are not subject of exit tax because that can screw you up pretty bad.

I'm currently residing in South East Asia, I do not think an exit tax would apply in my case.

 

[Sols]

1. What are the taxable events? While I haven't been able to confirm, but I've been told that any crypto-to-crypto conversion (which currently makes up all of my transactions) are not taxable events in Cyprus (the taxable event only being when any crypto is converted to fiat; which will not happen very often in my case).
   1. Do stablecoins (USDC, USDT, DAI) count as fiat? I would imagine that they do not, seeing how they're not backed by any government. However, if they do, then that would complicate matters (I could most likely eliminate this type of transaction, but, it would reduce my profitability).
   2. Are there any withholding taxes if no crypto-to-fiat conversions take place? I'd imagine that there aren't, but a confirmation would be good.
   3. How do I declare the value of the initial starting capital given that it is spread out over dozens of exchanges and wallets, in the shape of several hundred unique tokens (90% of the value probably consists of only a handful of different tokens)? What is the correct procedure? I assume that this will form the basis of my PNL balance, and as such, the 12.5% + GESY will be applied to any gains above this initial number on an annual basis (assuming any such gains have been converted to fiat).

I don't think any of this is currently specifically described in Cypriot law. You're entering new territory and will need to work closely with your chosen accountants to agree on a procedure.

Do accounts have to be in the company name? Not all exchanges support 'corporate accounts', not to mention that I've already KYC:d most of my accounts, meaning I might not be able to open up new accounts on some exchanges (since even a corporate account still has to be KYC:d by an individual, much like a corporate bank account). Ideally, I'd continue using my current accounts.

Normally, yes. Mixing personal and corporate funds creates uncertainty about what assets are whose, which can be a nightmare when it's tax time, or if you get sued/default on debts.

How do I deduct losses in the event that an exchange gets hacked and my funds are lost? Do I even need to acknowledge this loss (assuming there are no withholding taxes on funds that have not been converted to fiat)?

No one knows the answer to this. It hasn't happened yet (in Cyprus, at least not to the extent it has become established procedure). No laws have been written and there are AFAIK no court cases to lean on for guidance.

How should I go about maintaining my books? I've spoken to one Cypriotic CPA so far, and the quote I received was not sustainable as I was quoted on a transaction-by-transaction basis. I'm capable of generating automated solutions for maintaining the books (which I assume that the CPA would've done either way to reduce their own workload), but I do not know how these books should be organized so that any CPA who goes about auditing them will have an easy time verifying their accuracy and thus not have to quote me an unreasonable amount for doing so. This is somewhat of a broad question, but, I suppose a lot of this comes down to that. I'd be happy to pay for instructions from a professional, and I still plan on seeking out more quotes from different CPA firms in Cyprus.

These are questions you need to be asking accountants. Crypto is poorly if at all regulated and standardized in terms of accounting. You may need to look specifically for law firms and corporate service providers that cater to virtual currencies or financial service providers.

someone will correct me if i am wrong but a director must receive a salary because it is an employment type of position. and yes, you should pay yourself the minimum, so you will pay no income tax(i think up to 19 800€ a year or something like that), but you will pay for healthcare insurance and for social security and that will be calculated from the actual salary or from the minimum allowed salary so neither will be 0.

It's not that simple. You can be director and shareholder of a Cypriot company and pay yourself exclusively dividends. You can also be a director without being a shareholder and not get paid a cent.

Why don't you have calls with some tax advisers in Cyprus? By the looks of it, you're just running around drawing half-baked conclusion based on summarised, condensed information. The texts published by Deloitte et cetera are excellent sources for cursory research and introductory reading. But that's all they are. You'll get a very distilled, narrow understanding if that's all you go by.

 

[glengoolie]

Why don't you have calls with some tax advisers in Cyprus? By the looks of it, you're just running around drawing half-baked conclusion based on summarised, condensed information.

I think that is the entire point of this forum. You will find out about 90% of information you need to make a decision and filter out what works and what does not work and then you can move on to target specific professionals to give you the 10% so you have the full picture and not waste time on dead ends.