Crypto in Georgia | Legal and Tax Framework

Legal Status and Taxation of Crypto-Assets / Cryptocurrencies in Georgia

This is a three part article on the legal and tax framework of crypto in Georgia. The first part serves as an icebreaker and short introduction of the main legal documents regulating the crypto; in the second piece we will delve deeper into the legal status and taxation of extraction (mining) of cryptocurrencies, and finally, the third and the final piece will detail on the legal and tax implications on receipt, storage, supply and exchange of crypto-assets. 

DISCLAIMER: This is not legal, tax or investment advice. Our opinion is not binding for any court or tax authorities. Any kind of investment bears risks.

Ice-Breaker

Cryptocurrencies (crypto-assets) have emerged as a result of internet development, technological innovations, and the need for secure, fast, and cheap transfer, storage, and accounting of information. At the same time, crypto has provided a platform for new ways of speculations, financial crimes, and the possibility to receive illicit income securely. All of this has triggered the need to develop a modern legal and tax framework, which will keep up with the technology, the opportunities it offers as well as the threats that it may pose.

Georgian regulators were silent on the topic of crypto-assets until 20 December 2017 (which was a period of another enormous bullish market of crypto). On that day, the National Bank of Georgia (NBG) published a warning, which inter alia stated the following:

“...Digital currency is not a legal tender in Georgia. Activities related to digital currency are not regulated by the legislation of Georgia and, therefore, digital currency is not regulated by the National Bank of Georgia…”

The statement also warned the users of digital currency to understand the potential legal and financial risks related to their fluctuations, decentralized way of functioning, unregulated exchange platforms, and anonymity.

Based on the above warning, NBG showed its following position:

• 1. Activities related to cryptocurrency are not regulated by the Georgian legislation;
• 2. NBG does not regulate digital currency in Georgia;
• 3. Crypto is not a legal tender in Georgia;
• 4. Crypto bears legal and financial risks for the users.

Definition of Crypto-Assets

It is noteworthy that Georgia still does not have a separate law on cryptocurrencies. At the same time, the Minister of Finance of Georgia has issued a public ruling N201 (Ruling N201) of 28 June 2019, which is the sole normative act (bylaw) of Georgia determining in detail what the crypto-assets are and interpretation of tax implications related to them.

Note: Public ruling is an instrument determined by the Tax Code of Georgia that clarifies the application of certain provisions of the tax legislation. If a person acts in accordance with a public ruling, a monitoring / law-enforcement authorities may not adopt a decision contradicting the ruling and may not impose additional taxes/sanctions.

Georgian law does not provide a legal definition of cryptocurrency or virtual currency. The Ministry of Finance of Georgia shares the definition of virtual currency established by the European Central Bank, which includes crypto assets: “...virtual currency / cryptocurrency is a digital expression of a value not issued by a central bank, credit or electronic money issuer, which in some cases can be used as an alternative to money…”

According to the Ruling N201: “...Crypto-asset is a digital asset, whose storage and exchange is done electronically, within a decentralized, peer-to-peer network, it does not require a trustworthy middleman and functions on the basis of distributed ledger technology software working in a network of computers, which uses cryptographic methods. Crypto-asset digitally reflects value, its issuance and exchange are conducted by decentralized consensus mechanism, without central trustworthy issuer and supervisor / controlling body, ownership on crypto-asset is confirmed using cryptographic methods…” and “...A crypto-asset has no physical form, is not located in a specific location, is not deposited in any account with a financial institution, and it is usually impossible to identify its issuer…”

At the same time, the Tax Code of Georgia (TCG, 22/07/2021 amendments) mentions and partly regulates crypto-assets as well, without going into detail about their definition. Therefore, we assume that the definition of Ruling N201 is the only definition that we might use for the determination of crypto-assets under Georgian laws including when interpreting the TCG.

The TCG on its end defines cryptocurrency as the same as / one of the versions of crypto-asset: “...cryptographic currency (crypto-asset)...” which means it at least includes cryptographic currency (cryptocurrency) within the scope of crypto-assets.

According to the TCG - cryptographic currency (crypto-asset) shall not be regarded as goods (just as the TCG treats cash), nor shall the transfer of ownership over them be regarded as service (again, just like the TCG treats cash). This approach towards cryptocurrencies is provided in the VAT part of the TCG.

There are more than 8,000 types of cryptocurrencies (such as Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), Tether (USDT), Solana (SOL), Cardano (ADA), etc) today and they would all fall under the definition provided by the TCG.

A bit more than the status quo

Before moving on to the next topics, we would like to note that as of writing this article, Georgian legislators have not regulated and the Revenue Service of Georgia has not yet issued any guidance on the taxation of the majority of crypto-currency related operations. The sole guidance which exists at our disposal is the above-mentioned Ruling N201. Based on that Ruling, the position of the Ministry of Finance can be summed up as follows:

1. An individual is exempt from personal income tax on income received from the supply of crypto-assets;
2. Exchange of cryptocurrency to national or foreign fiat currencies is exempt from VAT;
3. Supply of computational speed (power) for crypto mining is (i) not VAT taxable when the recipient is registered outside of Georgia, and it does not have a managing place or permanent establishment in Georgia to which receipt of service is related; (ii) VAT taxable, when the recipient is registered in Georgia, or it has a managing place or permanent establishment in Georgia to which receipt of service is related.

Other important cryptocurrency-related issues such as crypto mining; receipt, storage, supply, and exchange of crypto-assets); ICO; NFTs; Metaverse; staking; DeFi remain disregarded and unregulated (or, at the very best, not precisely or sufficiently regulated).

The lack of regulation is not very surprising as most other countries (including EU member states) also have not regulated most of the abovementioned topics yet. Due to Georgia’s approximation process of its legislation with EU legislation, we assume that going forward, Georgian tax authorities will share and consider an important judgment of the Court of Justice of the European Union (ECJ), Skatteverket v David Hedqvist C-264/14 (22 October 2015). The judgment is important in that it concludes, and of the majority of ministries of finance of EU member states agree, that (i) the purchase, alienation, and exchange of cryptocurrency is VAT-exempt; and (ii) mining is not subject to VAT (as service recipients are unidentifiable).

In addition, two crucial proposals are awaiting the committee decision for a regulation of the European Parliament and the Council - On Markets in Crypto-assets, and amending Directive (EU) 2019/1937 (2020/0265(COD)), and On Information accompanying transfers of funds and certain crypto-assets (COM/2021/422). At their inception stage, it is still too early to predict what the final product will look like, however, it is for sure that in the case and whenever these proposals are approved, it has the potential to change the whole crypto legal and tax landscape in the EU, and eventually in Georgia.

Therefore, the second and third pieces of the series will rely on the analysis and evaluation of the Ruling N201, TCG’s VAT approach toward crypto-assets, and the assumption as well as the expectation that the position of Georgian authorities will be in line with that of the EU colleagues.  

Extraction of Crypto-Assets (Mining)

The mining of cryptocurrency in Georgia is as popular as it is in the rest of the world. What makes it even more attractive is its affordable electricity tariffs: around GEL0.34 kWh ≈ EUR0.097 (incl. VAT, commercial usage tariff).

However, it is noteworthy that the Georgian electricity system is barely able to cover its own needs. To fully cover the electricity demand, Georgia purchases electricity from its neighboring countries for the most part of the year. Simultaneously, shortages of electricity supply are frequent and occur even in the capital city of the country. All of the above shows how fragile the Georgian electricity market is.

Nevertheless, mining in Georgia is conducted by many individuals at their own premises (thus they mostly use personal (non-commercial) tariffs or even subsidized tariffs if living in the mountainous region) and by small / medium / big mining farms.

Note: Personal (non-commercial) usage is heavily subsidized by the government in mountainous regions. Subsidies for personal usage may cover from 50% up to 100% of the electricity cost (with or without special limits), depending on the region.

Legal status of Crypto Mining

Mining of crypto is legal in Georgia.

Ruling N201 determines mining of crypto as activity of the creation of new structures (blocks) to ensure the functioning of the cryptocurrency platform, as a result of which the person carrying out this activity (miner) is rewarded with crypto-assets. Also, it states that mining activities require specific equipment and/or software, as well as internet access. The fast and efficient implementation of this activity, among other factors, depends on the appropriate computational speed (power).

There is no restriction on mining cryptocurrency in Georgia. However, in order to conduct this activity within the legal framework and stay on the safe side miners are advised to consider the following.

Rule N1: any person intending to conduct mining of cryptocurrency in Georgia should be registered as an individual entrepreneur or shall establish an enterprise.

Georgian Law on Entrepreneurs determines business activity as legitimate, repeated, independent and organised activity carried out for the purpose of earning profit. Characteristics of mining activity does most likely satisfy the mentioned test. At the same time it does not fall under any activity which shall not be considered as business activity. Thus, mining of crypto shall most likely be considered as business activity.

Business activity, according to the law, shall be conducted by either an individual entrepreneur or by an enterprise. Registration of the entrepreneur (individual entrepreneur / enterprise) is mandatory in accordance with the Law on Entrepreneurs.

Rule N2: household consumers shall not use their regular electricity tariff for conducting business, which in this case is crypto mining, instead, s/he shall use the commercial usage tariff.

As electricity is the biggest expense of mining - it is important to have a legal tariff for its usage. In accordance with the law of Georgia on Energy and Water Supply, there are two types of electricity end-users:

1. household user - end-user, buying electricity for domestic usage, which does not include commercial or professional activity;
2. non-household user - user, purchasing electricity for non-household consumption.

As there is no precise percentage determined as “household usage” of electricity that might be used for commercial purposes (e.g. 10% / 20% / 30% of the household usage) it most likely means that all commercial usage of electricity requires registration as a non-household user. In order to conduct this activity in accordance with the laws, miners shall register themselves for mining purposes as commercial users and shall not use regular personal tariff for conducting mining business.

The last, but not least important rule: pay taxes (when applicable).

We discuss the tax part below.

Tax implications on Mining

Personal income tax

Although the Ruling N201 describes in detail what is mining of cryptocurrency (to determine importance of computational speed (power), which might be supplied for locals and or foreigners), it does not try to interpret rules of taxation of mining itself (when a person mines for herself). 

For personal income tax (PIT) purposes Georgian resident physical persons’ income consists of both Georgian-based and foreign incomes according to the TCG. However, the TCG provides full tax exemption on the foreign sourced income. At the same time TCG itself determines what is and what is not Georgian-sourced income.

Therefore, in order to understand whether crypto mining is a taxable activity for physical persons in Georgia or not - we shall determine whether such income shall be deemed as received from Georgian source or not.

Arguments supporting PIT taxation

In case of mining (as determined by the Ruling N201) the activity represents creation of new structures (blocks) for functioning of the crypto assets’ system, as the result of which the miner is rewarded with a crypto-asset.

As we can ascertain from the definition - this activity might be regarded as production / mining (similar to mining natural resources) or provision of service for functioning of the crypto platform, whose beneficiaries are the users of this platform, as miners serve as the basis for its proper functioning. At the same time for provision of service Georgian resident miner (provision of service by Georgian tax resident internationally without usage of permanent establishment elsewhere itself already represents Georgian-sourced income, article 104.1.c.g):

1. uses a mining hardware (movable object) which is located in Georgia (regarded as Georgian source income in accordance with article 104.1.c.c of Tax Code of Georgia);
2. Has expense (electricity usage) in Georgia related to provision of this service (which is the basis of Georgian sourced income when service is provided internationally 104.1.c.h).

Therefore, based on the above arguments income received from mining shall likely be regarded as Georgian-sourced income and shall be taxed accordingly. Standard personal income tax rate in Georgia is 20%. However, there are multiple ways of tax structuring of this activity, which can be implemented with the help of our law firm in Tbilisi.

Personal Income Tax Exemption arguments

On the other hand, there is a possibility to interpret the activity of mining as income received from non-Georgian source (if activity of mining is regarded as provision of service), just as the Ruling N201 interprets activity of supply and exchange of cryptocurrency for fiat currencies (discussed below).

As mentioned above the EU Ministries of Finance (e.g. of Austria, Germany) has a position that the VAT on this activity shall not apply as the service recipient in case of mining is not identifiable, however it does not automatically mean that this is not subject to income tax.

As for the article 16 of the TCG, it determines provision of service in the following manner:

“...The provision of a service is considered to be the performance of an action by a person to another person of her own will, in exchange for compensation or free-of-charge, which is not the delivery of goods…”

So the main arguments would be:

1. that the action is not provided to identifiable another person;
2. the compensation does not directly come from the person to whom the ‘service’ is provided;
3. The Ruling N201 itself determines crypto-assets as something virtual (place that is not located in Georgia) and receipt of income related to provision of services within this space might be regarded as income from foriegn source (thus exempt from PIT).

To sum up, taxation of income received from mining is uncertain in Georgia, with stronger arguments on the side of its taxation at 20% rate for physical persons (electricity and other related expenses might be respectively deducted from a taxable base though).

In addition, below we will understand that the tax authorities are more likely to look at mining as the creation of a product, and not a service (in relation to companies registered in free industrial zones). At the same time, this product is created in the territory where the miner itself is located. Therefore, if we consider that they should also look at the activities of physical persons the same way (the difference is only in scale), then we can say that the tax authority will consider mining conducted by physical persons as taxable activity, since, based on their approach, it is carried out in Georgia.

Corporate income tax and dividend tax

Corporate income tax and dividend taxes are both taxes, paid by the enterprises. Corporate tax rate is 15%, dividend tax rate is 5%. Enterprises are subject to both taxes, when distributing profits from their worldwide income. So, Georgian corporate miners (enterprises) are subject to tax on their worldwide profit distributed to the shareholders. Thus mining activity for the legal entities is definitely taxable at 15% corporate tax rate and 5% dividend tax. 

However, just like in the case of mining conducted by physical persons, corporates might also have ways of optimizing their tax rate.

VAT

For the VAT purposes the Tax Code of Georgia treats crypto-assets similar as it treats money. Just like money, crypto-assets are defined as something that is not goods and their transfer is defined as something that is not a service.

Also, considering the ECJ’s above decision (Skatteverket v David Hedqvist C-264/14 (22 October 2015)) which exempts crypto mining from VAT we assume that Georgia will take the same approach and deem crypto activity as non-VAT taxable activity.

Free Industrial Zone and Mining in Georgia

According to the tax code of Georgia - companies conducting permitted activity in the free industrial zone are exempt from VAT, corporate and dividend taxes. 

There are numerous companies registered in free industrial zones (FIZ) of Georgia conducting their crypto mining activity from there.

Thus, these FIZ companies (most, if not all) are:

• not paying corporate tax;
• not paying dividend tax;
• and most importantly they do not pay 18% VAT for the electricity supplied by the electricity companies to the FIZ territory for production of goods - which they would be paying for the electricity, if they were not registered within the FIZ. This electricity’s 18% VAT is crucial, because consumption of electricity by big farms consists of usage of hundreds of millions of kWhs per annum. 

At the same time the tax regime applicable to them might be questionable. In 2020-2021 Georgian Revenue Service started active audits and checks of the companies registered in the Free Industrial Zones. During their audits they clearly showed their position to the taxpayers that the activities that do not fall within “permitted” activities of the FIZ shall be taxed at regular 15% corporate tax rate and 5% dividend tax.

In accordance with the respective Georgian Law on Free Industrial Zones - permitted activities are production and processing of any goods, or rendering of any services within a free industrial zone. Also, the TCG states that the FIZ companies are not allowed to provide services to Georgian companies (except FIZ companies) and that the Government of Georgia is entitled to determine the types of services that are permitted to be provided to non-resident persons by FIZ companies (however, Government never issued such a list of activities, which is interpreted by the RS so that there are no services allowed to be provided to non-residents, yet).

Thus, all the other activities are subject to regular taxation. Under this approach many international trading companies and international service providers had to either leave or change their tax approach, as they were told that their activity does not fall under any permitted activity of FIZ.

As for the crypto mining taxation for FIZ companies - the focal point is how crypto mining should be determined: as production, processing, provision of service or something else.

Based on the RS previous approach if the crypto mining is determined as production / processing of goods - such enterprises’ activity should fall under all the tax exemptions. If the crypto mining falls under activity of provision of service, then the electricity supplied to the FIZ company shall be subject to regular 18% VAT, as TCG exempt 18% VAT only in the case of supply of electricity for production purposes. As for corporate and dividend taxes, it will be exempt from CIT and dividend tax only in case the service is deemed to be provided within FIZ.

So Production / Processing / Provision of Service or something else?

Hard to say. 

TCG generally envisages under goods both material and non-material goods (but in the VAT chapter directly says that crypto-assets are not goods (though, does not specifies that this rule applies only for VAT purposes)).

Based on the fact that many companies are conducting their business within the FIZ and do not pay corporate, dividend and VAT taxes (and the treasury has a lot of unearned revenue) - we assume that at this stage RS considers that activity of mining on the territory of FIZ is either production or processing of goods.

Receipt, storage, supply and exchange of crypto-assets

Legal status of receipt, storage, supply and exchange of crypto-assets in Georgia

Receipt, storage, supply and exchange of crypto-assets in Georgia is legal.

There are no laws that would prohibit any of the mentioned activity, however crypto-assets are not a legal tender in Georgia and can not be paid as currency as they are not regarded as currency. Most likely such payment shall be regarded as payment in kind / barter, rather than as cash remuneration.

Tax implications on receipt, storage, supply and exchange of crypto-assets in Georgia

Nor storage, nor supply of crypto by the physical persons should be taxed in Georgia. Though there exists capital gain tax, it should not apply as holding and capital gain on increase of crypto asset is received from foreign sources (virtually).

In accordance with Ruling N201 income received from activity of supply of cryptocurrency (its exchange to fiat currencies) is regarded as received from non-Georgian sources. The reasoning part is that Georgian tax residents are exempt from foreign source income and supply of cryptocurrency is non-Georgian sourced income, because:

1. it is not directly mentioned in a Georgian-sourced incomes list;
2. cryptocurrency has no physical place;
3. it is not placed in any financial institution;
4. It's almost impossible to determine the place of operation of supply of cryptocurrency as supply and exchange of cryptocurrency is conducted virtually.

Regarding receipt of cryptocurrency - it might be subject to personal income tax. Taxation of receipt of cryptocurrency is subject to each specific case, just like receipt of cash, thus each such receipt requires separate analysis.

Staking Activity

As for most other activities TCG does not specify tax rules on staking. Income received from staking is income from ‘lending’ of the crypto-assets back to the network and the owner of the crypto-assets can claim back her crypto-assets together with the added ‘percentage’. 

As previously - there are arguments on taxation and non-taxation of the staking. One receives crypto interest from the network (from the virtual reality) because of its supply of cryptocurrency to the network (to the virtual reality). Based on that, such income might be regarded as foreign-source income, thus exempt from PIT. 

At the same time, if the person uses hardware for staking - it makes chances of considering this income as Georgian-sourced higher.

Crypto Exchange Platform activities and ICO in Georgia

Legal implications on Cryptocurrency Exchanges and ICO in Georgia

Nor cryptocurrency exchanges activities, nor ICOs are regulated in Georgia. 

Crypto investment bears high risks for investors and has many similarities with the securities market which is highly regulated by the National Bank of Georgia. However, National bank of Georgia at this stage declines its competency over crypto-assets, and based on latest news that might change in near future.

Even though the crypto market exchanges are not regulated in Georgia - banks treat such business as high risk activity and they are normally refused to be served by Georgian financial institutions. At the same time several crypto exchanges have been established in Georgia. They successfully carry out their activities, e.g. Emoney.ge, ge.Cryptal.com, Coinmania.ge and MyCoins.ge. Normally they are somehow affiliated or direct subsidiaries of the financial institutions that are able to serve them.

Initial coin offerings are also not regulated (at least as soon as the payments for the ICOs are done also in cryptocurrency). At the same time, as soon as during ICOs companies do not issue physical shares to the investors and just grant them digital currency - it does not directly fall under specific regulations.

Taxation of Cryptocurrency Exchanges in Georgia

Cryptocurrency exchanges are subject to regular taxation: 15% corporate tax and 5% dividend tax upon distribution (or deemed distribution) of profit from the enterprise.

As for initial coin offering - once the company distributes something of value to its shareholders - same taxes should apply: 15% CIT, 5% dividend tax.

Free Industrial Zone and Cryptocurrency Exchanges

Cryptocurrency exchanges definitely provide services. As discussed above, FIZ companies are not allowed to provide services locally, nor internationally, so registration in the FIZ does not grant them tax benefits. Therefore, registration of cryptocurrency exchange in Georgian free industrial zones does not have any benefits.

Non-fungible tokens (NFTs)

NFTs shall also most likely fall under crypto-assets definition. NFTs are initially goods that are virtual (not placed in Georgia). Their supply can be conducted also only electronically. Therefore, the gains that might be created should be deemed as also received not from Georgian source, but virtually. Therefore, we assume that as all the activities related to NFTs are done virtually - there is no stage on which one can claim that the income is received from a Georgian source, even if we know that the buyer is from Georgia, as supply of NFT can not be conducted to Georgian territory. 

At the same time, just like with any other crypto-asset discussed above - it might be subject to tax, if NFT represents a remuneration of a person from activity conducted in Georgia (e.g. employment in Georgia, supply of goods in Georgia, service provided from Georgia, etc.).

As for the legal protection of the issuers / traders of NFTs we would like to note that currently (and possibly in future as well), there is no clear regulatory framework which would define rights and obligations of the NFT-related agreements. At the same time, it is crucial for parties to audit smart-contracts that are implemented in the NFTs traded. So, even if we might have a regular civil contract on sale and purchase of NFT - the main contract that would effectively protect the rights of the parties would be the smart contract that mint an NFT.

Summary

As you can see from our analysis - there are many uncertainties on both legal and tax sides related to cryptocurrency. However, it is not a total ‘blank’ as it was before. 

To sum up, all the activities related to crypto in Georgia seem legal (if the respective conditions are satisfied). Many types (if not, almost all) of operations related to crypto are tax exempt, with a couple of important existing black holes, like mining by physical persons and companies in FIZ, staking.

It is noteworthy that many crypto-investors today are in search of countries of residence, which would benefit them most. Creation of a comfortable place for such investors requires a clear and stable legal and tax framework. Currently there are many investors looking at the development of Georgian crypto rules. We, on our side will make sure to advise them in accordance with the latest updated rules.

The legal and fiscal environment for digital assets in Georgia is an extremely complicated sphere, with a number of open interpretations and uncertainties up to date. While continuing to work its way out towards the development of their regulatory framework, it is so far a country of interest for crypto investors and entrepreneurs looking for lenient conditions for their activities. For detailed assistance and updates regarding crypto regulations in Georgia, reach our law firm in Tbilisi and connect with our gambling lawyers to learn more about licenses and permits in Georgia.

Stay tuned: https://lta.ge