In the ever-changing financial world, cryptocurrencies have become a significant topic of discussion. This article aims to shed light on the current state and potential future of cryptocurrency regulation in Armenia, focusing on recent developments that may impact businesses and investors in this field.
- How does Armenian law address cryptocurrencies?
Currently, the legislation of Armenia does not provide a clear definition or regulation for cryptocurrencies. This leads to a situation where certain types of cryptocurrencies could be considered as securities, while others might function as a medium of exchange, similar to currency, or be classified as assets. While cryptocurrencies may be subject to various interpretations, at this juncture, our preference is to address their classification as securities, as this constitutes a pivotal and developing area within the framework of legal analysis.
Article 3 of Armenia’s “Law on Securities Market” provides a broad definition of securities that could encompass certain types of cryptocurrencies. Article 3 states that securities include “any other investment agreement used for capital (fund) raising that includes the characteristics of the aforementioned securities fully or partially”. This broad definition potentially encompasses various forms of virtual assets.
While cryptocurrencies are not definitively classified as securities in Armenia, the current legal framework leaves room for such interpretation. The lack of specific regulation, combined with the broad definition of securities in existing law and the CBA’s guidance on applying the Howey Test, suggests that some cryptocurrencies could potentially be treated as securities under certain circumstances.
The Central Bank of Armenia (CBA) has issued an Official Clarification (N 3) stating that the Howey Test should be applied to determine whether a virtual asset qualifies as a security. This test considers four main factors:
- Investment of funds: Money is put into the asset.
- In a common enterprise: The investment is part of a larger project or company.
- Expectation of profits: Investors expect to make money.
- Efforts of others: The profits come from the efforts of people other than the investor.
If a crypto-asset meets these criteria, it could potentially be classified as a security under Armenian law. However, it’s important to note that many cryptocurrencies and tokens are primarily designed as means of exchange or utility tokens, rather than investment instruments, and thus may not fit this classification.
However, it’s crucial to understand that not all crypto-assets would necessarily fall under this definition. Many cryptocurrencies and tokens are designed primarily as mediums of exchange or utility tokens, rather than as investment instruments.
- Is Armenia planning to regulate cryptocurrencies?
In 2024, Armenia has introduced a draft law “On Crypto-Assets” which contains several key provisions:
- The draft law defines crypto-assets as property based on cryptography that has value or certifies a right, and can be transferred and stored exclusively electronically using Distributed Ledger Technology (DLT).
- The law does not apply to securities, investment fund units, bank deposits, or insurance contracts that fall under the definition of crypto-assets, which are regulated by other specific laws.
- A licensing regime for crypto-asset service providers is introduced. Licenses are mandatory for services such as operating a crypto-asset trading platform, custody of crypto-assets, and facilitating crypto-asset transfers. The Central Bank of Armenia will serve as the licensing authority.
- Types of crypto-related activities requiring a license under the proposed law.
The draft law identifies several activities that will require licensing, including:
- Operating a trading platform for crypto-assets
- Custody and management of crypto-assets
- Executing transactions on behalf of clients
- Receiving and transmitting orders for crypto-assets
- Issuing asset-referenced tokens
Crypto-asset service providers must be registered legal entities in Armenia. They need to meet capital requirements set by the Central Bank and establish appropriate risk management and internal control systems.
What Are the Potential Tax Considerations for Cryptocurrency Operations in Armenia?
The taxation of crypto-assets in Armenia remains a complex issue due to the lack of specific regulations. If this law comes into effect as currently drafted, it could have significant implications for crypto-asset taxation.
Under the existing tax framework, the treatment of crypto-assets for various taxes, including VAT, income tax, and corporate income tax, is not clearly defined. This ambiguity creates challenges for businesses and individuals dealing with cryptocurrencies.
VAT
The Value Added Tax (VAT) implications for crypto-assets arise from the Tax Code’s definition of taxable transactions. According to Article 60, VAT applies to the supply of goods and services, which includes the transfer or use of intangible assets. If crypto-assets are considered intangible assets, their transfer could be subject to VAT, which contradicts their primary role as a unit of value or currency.
Income Tax
Current regulations, particularly Article 150.9 of the Tax Code, state that when a company pays someone in fiat currency for crypto-assets, it must withhold a 10% income tax as a tax agent. However, this approach may not accurately reflect the reality of crypto-asset transactions. A more effective strategy might allow individuals to deduct expenses related to these transactions and focus on the net gain or loss, similar to how traditional investments are taxed.
Corporate Income Tax
When it comes to corporate income tax, existing regulations in some cases could apply to profits from crypto-asset transactions for businesses. However, in such cases, determining the value of crypto-assets for tax purposes can be tricky. The high volatility of these assets and the absence of standardized accounting practices create uncertainties regarding their valuation.
Retrieve Legal and Tax provides expert advice on crypto-asset taxation. Our specialists analyze existing tax rules and apply them to crypto-assets. We offer solutions that comply with legal requirements while aiming to optimize your business’s financial performance. With our assistance, you can manage your crypto-asset transactions effectively, balancing regulatory compliance and profit maximization.