TerraLex Cross-Border Guide to Crypto Assets

A new Bill on Markets in Crypto-Assets (“MCA”) defines a “crypto-asset” by reference to the definition of crypto-asset set out in Article 3, paragraph 1, item 5 of Regulation (EU) 2023/1114 on Markets in Crypto-Assets (“MiCA”). MiCA defines crypto-asset as “a digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology.”

Additionally, the Bulgarian Anti-Money Laundering Law ("AML Law") provides for definitions for both "virtual assets" and "virtual currencies”.

The definition of virtual asset was introduced in 2023 as a result of recommendations from the Financial Action Task Force (“FATF”) and the Committee of Experts on the Evaluation of Anti-Money Laundering Measures (“MONEYVAL”). Virtual asset is defined as “a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes”. This definition aligns with the one adopted by the FATF.

On the other hand, the definition of virtual currencies reflects the definition of cryptocurrencies given by the European Banking Authority and means “a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily pegged to a fiat currency, and does not possess a legal status of currency or money, but is accepted by individuals or legal entities as a means of exchange and which can be transferred, stored and traded electronically”.

When responding to the below questions we assumed that the crypto assets are not structured in a way that would give them characteristics typical to, and ultimately qualify them, as financial instruments under the applicable Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments/MIFID II regulatory framework.

Crypto assets are legal to hold and trade in Bulgaria.

The anticipated adoption of the MCA in 2025 will provide the legal framework necessary for the implementation of the MiCA authorisation requirements in Bulgaria, specifically regarding the issuance of crypto-assets and the authorisation of crypto-asset service providers (“CASPs”).

The MCA Bill when adopted will assign the Bulgarian National Bank (BNB) as the authority responsible for granting authorisations for the issuance of e-money tokens (“EMTs”), while the Financial Supervision Commission (“FSC”) will be tasked to oversee asset-referenced tokens (“ARTs”) and other crypto-assets that fall outside the scope of ARTs or EMTs, including utility tokens. Additionally, the FSC will handle the authorisations of CASPs.

Yes. Pursuant to Bulgarian AML Law the local operators which provide by occupation crypto-to-fiat exchange services, services for the transfer or exchange (crypto-to-crypto) of virtual assets, virtual assets safekeeping and administration services enabling control over virtual assets and virtual assets public offering services, as well as custodian wallet providers and providers of custodian wallet services shall apply for registration with the Bulgarian National Revenues Agency (“NRA”) before they commence the operations/provision of their respective services. Other than that, such entities have been expressly included as obliged persons under the EU AML regime and as such shall observe and apply the general AML measures provided in the Bulgarian legislation – for the performance of client due diligence, the establishment of the source of funds and source of wealth of prospective clients, for the performance of UBO identification, transaction monitoring, preparation and filing of suspicious transaction re- ports with the Bulgarian State Agency for National Security and record keeping.

In Bulgaria, blockchain use in financial services is not fully regulated. However, operators of multilateral trading facilities (“MTFs”) and trading and settlement systems based on distributed ledger technology (“DLT”), which includes blockchain-based systems, shall be legal entities with a head office in Bulgaria that comply with Regulation (EU) 2022/858 on a pilot regime for market infrastructures based on distributed ledger technology (“DLT Regulation”) and the Bulgarian Law on Markets in Financial Instruments (“LMFI”). They are required to obtain special permission from the FSC, which is valid across the EU for up to six years.

As of January 1, 2024, cryptocurrencies are officially recognized as financial assets under the Law on Personal Income Taxation (“LPIT”). This classification means that the tax treatment of cryptocurrencies and transactions with such cryptocurrencies is subject to the same treatment as financial assets and transactions with such assets.

Bulgarian withholding tax

Bulgarian withholding tax is not applied on income realized by Bulgarian tax resident persons. The tax treatment of income realized by Bulgarian tax residents should be considered in the light of Bulgarian personal income tax (for Bulgarian tax resident individuals) and Bulgarian corporate income tax (for Bulgarian tax resident legal entities).

Unless a relevant cryptocurrency is “issued” by a Bulgarian tax resident person, any income realized by a foreign tax resident and arising out of such cryptocurrency would not be considered Bulgaria-sourced and it will not be subject to Bulgarian with- holding tax. In other words, to the extent that a cryptocurrency is not “issued” by a Bulgarian tax resident person, Bulgarian withholding tax will not apply to any income realized by a foreign tax resident as a result of the acquisition, holding, exchange, or sale of cryptocurrencies.

Bulgarian personal income tax

The main legal framework of the taxation of individuals in Bulgaria is provided by the LPIT.

While foreign tax resident individuals are subject to taxation with Bulgarian withholding tax only for certain types of Bulgaria-sourced income listed by law (unless a relief is available un- der an effective double taxation treaty), Bulgarian tax resident individuals are subject to taxation with Bulgarian tax for their worldwide income.

As a general rule, the acquisition and holding of cryptocurrencies do not constitute a stand-alone taxation trigger under Bulgarian law and no personal income tax is levied upon the occurrence of such events.

However, this is not the case with the sale/exchange of cryptocurrencies which may give raise to tax liabilities in Bulgaria (for the purposes of comprehensiveness, other crypto-related activities, such as “mining” will also have Bulgarian tax implications).

According to the case law (circular letters) of the Bulgarian National Revenue Agency, there are two options for treatment of the income realized by Bulgarian tax resident individuals as a result of transactions (sale/exchange) with cryptocurrencies. Which one of these two options will apply would depend on the exact circumstances and in particular – on whether the relevant individual performs such transactions sporadically and as an exception, or often and by way of occupation with a commercial purpose. In case a Bulgarian tax resident individual carries out transactions with cryptocurrencies sporadically, the income realized as a result of such transactions is treated as income from the disposal of rights over financial assets (due to the fact that – as indicated above – the LPIT treats cryptocurrencies as financial assets for Bulgarian tax purposes). In such case, Bulgarian personal income tax is levied at a flat rate of 10%. Alternatively, in case a Bulgarian tax resident individual carries out transactions with cryptocurrencies often and by occupation with commercial intent, it is the position of Bulgarian tax administration that for Bulgarian tax purposes such transactions should be treated as commercial activity and the individual – as a sole proprietor. Under Bulgarian law, in respect of transactions with cryptocurrencies an individual who is a Bulgarian tax resident is acting as sole proprietor within the meaning of the Bulgarian Law on Commerce, whether formally registered as such or not, is subject to taxation with a Bulgarian income tax levied at a flat rate of 15%.

Bulgarian corporate income tax

The main legal framework of the taxation of legal entities in Bulgaria is provided by the Law on Corporate Income Tax, whereas Bulgaria, being a Member State of the European Union, has fully transposed the European tax legislation.

Bulgarian tax resident entities are liable for Bulgarian corporate tax determined for the fiscal year and they are subject to unlimited corporate income tax liability, which provides for taxation of the income on a worldwide basis. Conversely, entities which are not resident for tax purposes in Bulgaria (and which do not carry out business in Bulgaria through a permanent establishment) are subject to taxation with Bulgarian withholding tax only for their Bulgaria-sourced income.

As a rule, capital gains realized by a Bulgarian legal entity as a result of the sale of financial assets are reflected in the selling entity’s overall financial result for the respective year. If the financial result for a given year is positive (i.e., profit), such a positive result (profit) will be subject to Bulgarian corporate tax levied at a flat rate of 10%.

Bulgarian value added tax

Pursuant to the practice of the Bulgarian tax authorities (which is based on the case law of the ECJ), transactions with cryp- tocurrencies constitute VAT-exempt supplies (qualified under the VAT exemption for financial services).

No, crypto assets are currently not explicitly recognized as a type of traditional property (neither tangible, nor intangible) under Bulgarian laws, nor have they been equated to such by way of court authority of Bulgarian courts. Under Bulgarian laws, non-traditional types of objects (such as energy for example) are recognized as a type of property through specific provisions in the property legislation. To date, such provisions have not been introduced with respect to crypto assets and therefore they remain outside the scope of traditional property laws.

Crypto assets are currently not recognized as a type of traditional property under Bulgarian law and as such property laws (regarding tangible or intangible assets) do not apply to them.

Other than that, the contractual aspects of the case (in the example above – the sale of the assets) will be governed by Rome I Regulation (Regulation 593/2008, of June 17, on the law applicable to the contractual obligations), whereas the proprietary aspects of the case shall be resolved pursuant to the Bulgarian Private International Law Code (“CIPL”), according to which a conflict of laws scenario that involves rights over traditional property shall be resolved in favour of the law of the country where the property is located. In addition, the CIPL provides that the assessment as to whether an asset constitutes traditional property and what type thereof shall also be made in accordance with the laws of the country where the property is located.

Potentially, practical issues and further conflicts can arise from the fact that in the absence of crypto-assets regulation and relevant authority of the Bulgarian courts, currently there are no instructions for courts or authorities containing guidance in carrying out the assessment where a crypto-asset shall be considered located, which allows for different ad hoc solutions and could lead to difficulties in determining the substantive law of which particular country shall regulate the status of the respective crypto assets and the rights of their holders.

A smart contract has the essential features of a contract under Bulgarian law and therefore, will be capable of transferring crypto-assets. Those features are: (i) expression of will - one may consider the statement under a smart contract to be a statement in electronic form under Art.2 of the Bulgarian Law on the Electronic Document and the Electronic Certification Services; and (ii) agreement - the parties to the smart contract can freely determine the terms of the agreement, so that until their will coincide there is no contract, but when they reach an agreement, the system considers the agreement to be concluded. As long as there is no contradiction with or circumvention of the law, good morals, or an impossible object, the contract is not apparent and there is no requirement for the form for its validity, the smart contract will be legally binding between the parties.

Bulgarian law does not allow for crypto-assets to be taken as a type of debt security recognized by law. Securities available under the domestic law are numerous clauses and may only have as a subject matter particular types of assets specified by law – e.g., mortgage for real estate properties, ordinary pledge for movables, or registration pledge for receivables, commercial going concern, shares, defined or non-defined pools of assets, etc. Given that crypto assets are currently not recognized by Bulgarian law as traditional assets, they may not be legally provided as a recognized form of security in this country.

Based on the principle of contractual freedom, under Bulgarian law, a contract may be constructed in a way that resembles a classical security incorporation agreement and achieves a similar effect – by providing for example, that the incorporating party shall give the beneficiary / receiving party full access to the respective wallet where the crypto assets are being stored until the proper performance of a monetary or another type of obligation by the incorporating party. Such construction, though, may not provide that upon default the creditor will become the owner of the crypto assets – such clause will be null and void under Bulgarian law. In addition, that construction will not qualify as security over an asset under Bulgarian law, will be a purely contractual undertaking, and will lack legislative guarantees that are essential to any type of traditional security (i.e., claim ranking privileges over the security object, valid security rights vis-à-vis third parties, etc.).

Lastly, Bulgarian law does recognize claim receivables as one of the typical valid subjects of security rights. Therefore, if a crypto asset is structured in a way that confers its respective holder rights to certain payments (periodic, such as interest payments or a lump sum), the holder can validly incorporate security over the claims for such payments.

No. Bulgarian tax legislation does not provide for any relief or special treatment (neither in general for any type of assets nor for crypto assets in particular) related to market volatility or fluctuations for the purposes of taxation of inherited assets with inheritance tax. The general rule under Bulgarian law stipulates that, save for certain expressly regulated types of assets (e.g., real estate, motor vehicles, etc.), Bulgarian inheritance tax is calculated at the date of the inheritance event on the basis of the relevant asset’s market value at the time. No deviations from this general rule are provided in relation to fluctuations in the relevant asset(s) market.

On 31 December 2024, the Council of Ministers of Bulgaria introduced a new MCA Bill for approval by the Bulgarian Parliament. The new legislation will supplement the authorisation requirements under MiCA. The Bulgarian Parliament is expected to adopt the MCA at some point in 2025.

In 2023, the EU adopted MiCA as part of its Digital Finance Strategy, setting uniform rules for crypto-assets across all member states, including Bulgaria. As an EU regulation, MiCA applies directly in Bulgaria based on the principle of direct effect, without needing transposition into national law.

MiCA does not apply to the blockchain or distributed ledger technologies underlying cryptocurrencies, nor to digital currencies issued by states and regulated by central banks. All other cryptocurrencies that do not qualify as financial instruments, including utility tokens and payment tokens, are regulated.

MiCA attempts to address some of the risks inherent to the decentralization of crypto (such as fraud, cyber-attacks, or accidental loss of funds and the practical inability to refer them to the competent authorities) by providing consumer protection, transparency, and governance standards for cryptocurrency exchanges.

MiCA also provides for extensive regulation of stablecoins (EMTs and ARTs) and subjects them to strict regulatory standards of transparency, operation, and governance. MiCA envisages that stablecoins need to be authorized by regulatory institutions to be traded within the EU and the authorization requirement will also apply to stablecoins already in circulation. As a result, when the regulation comes into force, existing stablecoins will have to seek authorization from the regulatory authorities to be traded in the EU.

Bulgaria follows the overall trend across the EU to wait out the introduction of crypto assets regulation at the EU level and reveals nothing different or unusual in this regard.