In the fall of 2020, the Draft Law on Digital Assets was presented, which was adopted on December 29, 2020, in the National Assembly and became applicable from June 29, 2021. It is commendable to note that Serbia is among the first countries to regulate this area, which represents an important step in adapting our legal system to new technological and economic trends.

1. Definition of Digital Assets

According to the law, digital assets are defined as "a digital record of value that can be digitally bought, sold, exchanged, or transferred and can be used as a means of exchange or for investment purposes". This definition encompasses various types of digital assets, including virtual currencies and digital tokens.

Virtual currency is digital property not issued by any public institution, not guaranteed by the central bank, and not recognized as legal tender. It lacks the legal status of money or currency, but physical and legal entities accept it as a medium of exchange, and it can be bought, sold, exchanged, and stored electronically. From this definition, it can be concluded that virtual currencies cannot be used as legal tender, as the only legal tender in Serbia is the dinar.

Digital tokens are digital records that contain property rights, such as claims to a specific monetary amount or managerial rights. The issuer of a digital token may include certain rights or services in it, or the right of the digital token user to receive specific services. One of the essential reasons for dividing virtual currencies and digital tokens from a regulatory and supervisory perspective is that the National Bank of Serbia (hereinafter: NBS) is responsible for virtual currencies, while the Securities Commission (hereinafter: Commission) is responsible for digital tokens. Here we will list the secondary legislation issued by the Commission, which NBS and every physical or legal entity should consider when providing services related to digital assets.

Commission's secondary legislation:

• Rulebook on whitepapers and subsequent whitepapers related to digital tokens;
• Rulebook on preventing market abuses in the digital token market;
• Rulebook on advertising an initial offer of digital tokens without an approved whitepaper and advertising related to digital tokens without an approved subsequent whitepaper;
• Rulebook on the conditions for managing the information and communication system of providers of services related to digital tokens;
• Rulebook on the conditions and manner of determining and verifying the identity of a natural person using electronic means of communication;
• Rulebook on the content and form of records kept by providers of services related to digital tokens holding users' funds or digital tokens;
• Rulebook on the method of calculating minimum capital and reporting on minimum capital of providers of services related to digital tokens;
• Rulebook on detailed conditions and procedures for granting and revoking consent for the provision of services related to digital tokens in a foreign country;
• Rulebook on implementing the provisions of the Law on Digital Assets related to granting permission for providing services related to digital tokens and the consent of the Securities Commission.

NBS's secondary legislation:

• Decision on implementing the provisions of the Law on Digital Assets related to granting permission for providing services related to virtual currencies and the consent of the National Bank of Serbia;
• Decision on the method of calculating minimum capital and reporting on minimum capital of providers of services related to virtual currencies;
• Decision on detailed conditions and procedures for supervising providers of services related to virtual currencies and issuers and holders of virtual currencies;
• Decision on the content of the registry of providers of services related to virtual currencies and the detailed conditions and manner of keeping that registry;
• Decision on detailed conditions and manner of keeping records of holders of virtual currencies;
• Decision on the content and form of records kept by providers of services related to virtual currencies holding users' funds or virtual currencies;
• Decision on detailed conditions and procedures for granting and revoking consent for the provision of services related to virtual currencies in a foreign country;
• Decision on the conditions for managing the information and communication system of providers of services related to virtual currencies;
• Decision on conducting foreign currency payments in connection with transactions involving digital assets;
• Decision on preventing market abuses in the virtual currency market;
• Decision on implementing the provisions of the Law on Digital Assets related to approving a whitepaper for issuing virtual currencies.

In case a natural or legal person wishes to issue digital tokens, the request for approval of publishing a whitepaper should be sent to the Commission for approval. A whitepaper is a document similar to a prospectus in the issuance of securities, which the issuer is obliged to publish and which contains information about the issuer of digital assets, the digital assets themselves, and the risks involved. It allows investors to make a rational investment decision and assess the risks associated with investing in digital assets.

It is essential to note that all financial institutions supervised by NBS (banks, insurance companies, financial leasing companies, payment institutions, etc.) cannot hold digital assets or instruments related to digital assets. They are also prohibited from providing services related to digital assets or being users of such services.

2. Legislative Framework for Digital Assets

The Law on Digital Assets represents the first legal act in Serbia that recognizes and regulates the field of digital assets. Alongside this law, other tax laws have been amended to introduce digital assets into the Serbian legal system as a taxable category. Until 2020, digital assets were not regulated by any law, and they were not defined as a taxable category, which did not prevent the Tax Administration from treating digital assets as income not explicitly listed as taxable by the law, thus subjecting them to a tax rate of 20%.

3. Tax Treatment of Digital Assets for Individuals

The Law on Personal Income Tax (hereinafter: PIT Law) regulates the taxation of income for individuals obtained from the sale or transfer of digital assets. According to this law, individuals are required to calculate, report, and pay capital gains tax on the profit made from the sale of digital assets. The tax rate for capital gains for individuals is 15%. This is also the most common practice in countries like the United States, Australia, and the United Kingdom. This means that if taxpayers have a positive difference between the purchase and sale price of digital assets, they must pay a 15% tax on the realized difference. It is essential to note that in the case of a negative difference or capital loss, the taxpayer can offset it against future capital gains within a period of 5 years. According to the PIT Law, the purchase price of digital assets would be the amount documented by the taxpayer as actually paid to an authorized service provider related to digital assets, such as an exchange, while the selling price would be the price at which the individual made the sale. In the case of mining, the purchase price would be the cost incurred by the taxpayer in acquiring digital assets, which can be documented (e.g., electricity bill, purchased equipment, etc.).

A novelty in the law is that it allows for the payment of bonuses in digital assets to employees, which would then be part of their wages, and on which the employer would have to calculate and pay taxes and contributions. In this case, the purchase price for the employee would be the value on which the employer paid taxes and contributions. In such a case, the employee would be required to pay capital gains tax on the difference between the purchase price received from the employer and the price at which they would sell the digital asset to a third party.

Inheritance and Gift Tax

Regarding the tax treatment of digital assets acquired through inheritance and gifts, the Law on Property Taxes (hereinafter: Property Tax Law) also applies, which provides for the taxation of digital assets acquired through inheritance and gifts. According to this law, if the testator and heir or donor and gift recipient are in the first line of inheritance (spouses and descendants), there is no tax obligation. If they are in the second line of inheritance (spouses and parents and their descendants) or any further line of inheritance or not related at all, the tax rate is 1.5%. Additionally, there is no gift tax on the value of digital assets up to 100,000 dinars from the same donor in a calendar year.

Tax Incentives

The PIT Law provides two tax incentives as significant encouragement for the development of the digital assets market in the Republic of Serbia. The first is tax exemption, where taxpayers who invest money obtained from the sale of digital assets within 90 days from the sale date in the basic capital of a company in Serbia or in the capital of an investment fund would be exempt from 50% of the capital gains tax. The second is also a tax exemption for taxpayers who have owned digital assets for at least 10 years, where they are entirely exempt from paying capital gains tax.

The deadline for submitting a tax return to determine capital gains tax is 120 days from the end of the quarter in which income from the sale of digital assets was realized. It is essential to note that capital gains income is not subject to mandatory social security contributions. Additionally, the profit made from the transfer of digital assets is not subject to annual personal income tax.

4. Tax Treatment of Digital Assets for Legal Entities

One of the most important laws concerning the taxation of digital assets for legal entities is the Law on Corporate Income Tax (hereinafter: CIT Law). According to this law, the profit of legal entities obtained from the sale or transfer of digital assets is subject to taxation, as it is for individuals, by capital gains tax. The main difference compared to the PIT Law, which regulates the taxation of capital gains for individuals, is that instead of being required to submit a tax return within 120 days, the determined difference, i.e., capital gain for legal entities, is included in the taxable profit, which will be paid through corporate income tax at the end of the calendar year. The purchase price is the amount that the taxpayer documents as actually paid, and if the property is acquired through mining, the purchase price will be the value of the digital asset recorded in the books of the taxpayer.

It is crucial to note that if a legal entity has permission to provide services related to digital assets and if a legal entity trades in digital assets as part of its core business activity, it is not required to pay capital gains tax.

In addition to capital gains tax, digital assets are also subject to Value Added Tax (VAT), but only in certain cases. Interpreting the Value Added Tax Law (hereinafter: VAT Law), the turnover of digital assets may be subject to VAT if it is not covered by the VAT exemption under Article 25, paragraph 1, item 1a) of the VAT Law, for example, if it involves the exchange of virtual currencies for other virtual currencies or digital tokens representing securities.

The VAT Law unambiguously stipulates a VAT exemption in the case of the transfer of virtual currencies and the exchange of virtual currencies for fiat currencies. However, it leaves open the possibility of calculating and paying VAT in the case of the turnover of digital tokens as securities. This creates a legal gap that the legislator or the Ministry of Finance needs to address to eliminate ambiguities and different interpretations.

Tax Incentives

As with the PIT Law for individuals, the CIT Law provides that capital gains made from the sale of digital assets will not be included in the tax base if the funds are invested within that tax period in the basic capital of a company or in the capital of an investment fund in the Republic of Serbia. This encourages companies to invest in other legal entities in the territory of the Republic of Serbia, which aims to strengthen competition and the growth of the digital assets market.

5. Legal Uncertainty and Future Development

Although the Law on Digital Assets represents a certain step in regulating the taxation of digital assets in Serbia, there is still legal uncertainty regarding certain aspects, such as the treatment of Non-Fungible Tokens (NFTs). The future development of this area may lead to further amendments to the law to adequately regulate the tax treatment of digital assets.

Given the increasing popularity of digital assets and their significance in modern business, it is crucial that the tax system keeps pace with these changes and provides a clear and favourable tax treatment for digital assets. This will contribute to the development of the digital economy and Serbia's competitiveness in the global market.