Published
09/12/2024, 08:35Kyrgyzstan, known for its reforms in the field of digital assets, faces a serious challenge - how to regulate the rapidly growing cryptocurrency sector without nipping it in the bud. On the horizon is an increase in the tax rate for virtual asset service providers (VASPs), which is already causing heated discussions among experts and market participants.
It has become known that the country is discussing amendments to the Tax Code, according to which the sales tax rate on transactions with virtual assets may be raised from 3% to 5%. But how justified is such a step? The Kyrgyz Association of Blockchain Initiatives (KABI) considers it unreasonable and openly opposes it, citing strong arguments in favor of maintaining the previous conditions.
In January 2022, Kyrgyzstan adopted the Law on Virtual Assets, legalizing cryptocurrency transactions and launching a new round of the digital economy. At the time, the move seemed bold and progressive: the republic sought to create an attractive environment for investors and technology companies.
And it has yielded results. If for the whole year 2022 the turnover of legal crypto exchanges amounted to only 5.2 billion soms, then in 2023 it grew to 95.8 billion soms, and for the first six months of 2024 - to 346.7 billion soms, and the turnover of crypto exchanges - to 8.2 billion soms.
They have already paid 74.2 million soms in taxes in six months, compared to 73.1 million soms for the whole of 2023.
However, the proposed tax increase risks reversing these results.
“With a high number of unlicensed market players operating at minimal costs, increasing the tax burden on legal companies could be disastrous for them. Legal PUVAs, while complying with the rules and passing licensing, today operate with minimal margins. For them, an increase in taxes means only one thing - a forced increase in prices, which will reduce their competitiveness against shadow players,” CABI argues.
The cryptocurrency market is extremely volatile by nature. Prices of digital assets fluctuate depending on global factors such as demand on international exchanges, difficulty in obtaining liquidity and general sentiment in the crypto community. That said, most PUVAs in Kyrgyzstan are already operating on the brink of break-even, with margins as low as 0.1%-0.15%.
Add to that high transaction costs, bank fees and security costs, and the picture becomes even bleaker. Raising taxes in this environment looks like a blow to an already fragile business.
“It will force companies to raise prices for their services, which may lead to an exodus of customers to illegal operators who, due to the lack of tax costs, investments in cryptocurrency infrastructure offer more favorable conditions,” the association states.
Big players of the cryptocurrency market in Kyrgyzstan, such as the largest PUVAs, continue to invest in the development of local infrastructure. The creation of mobile applications, asset exchange platforms and verification systems all require significant financial investments. But without a stable tax environment, these investments may not be justified.
Higher taxes will also discourage international investors, for whom competitiveness and predictability of the tax system play a key role. With the global market for blockchain initiatives growing rapidly, Kyrgyzstan risks missing its chance to become a regional center of innovation.
Cryptocurrencies are not just a buzzword. They represent a new economic model that can create thousands of jobs, increase investment inflows and promote the country's technological development. But this growth is only possible with a balanced approach to regulation.
The Association of Blockchain Initiatives offers an alternative solution: keep the tax rate at 3% and continue to consult with market participants. This will avoid investor outflow and preserve the competitiveness of legal companies at a time when the global cryptocurrency industry is experiencing rapid growth.
The issue of taxation of virtual assets is one of the key issues for the republic. On the one hand, taxes serve as a tool to replenish the budget, on the other hand, the cryptocurrency sector has just begun to develop in our country. We saw the first significant tax deductions and turnover in the market of virtual assets only in the first half of this year, and it is extremely important now not to harm the development of the new industry by changing the working conditions too quickly and not to scare away international players.
