The Russian Federation is in the early stages of crafting legislation when it comes to regulation and taxation of blockchain-related activities and products. The first step toward creation of a regulatory framework is the Federal Law of the Russian Federation on Digital Financial Assets (DFA), Digital Currency, and Amendments to Certain Legislative Acts of the Russian Federation, which entered into force on January 1, 2021.
The Ministry of Finance of the Russian Federation developed a special package of amendments to financial regulations presently in force that will address further use of digital currency based on the Law on DFA. The amendments are currently under interagency discussion and public debate.
The proposed amendments are more restrictive in nature than permissive. If adopted, the new rules and procedures will restrict mining, trade, and circulation of digital currency in the Russian Federation. Mining will be allowed but without receiving digital tokens as a reward of mining (stacking) activities.
Also, the government of the Russian Federation has introduced a draft bill on amendments to the Tax Code of the Russian Federation, which regulates circulation and taxation of digital assets and digital currency, imposing a regime similar to personal property taxation.
The increased prominence of the blockchain and crypto products (currencies, tokens) and the fast-growing cryptocurrency market required introduction of regulatory measures by the Russian Federation authorities. Russia’s government and the Federal Assembly (the Parliament), as well as blockchain and crypto enthusiasts and lawyers, are engaged in discussions about the legal definitions of these products and the methods for incorporating them in the legal system, and about how to determine the applicable taxation procedures.
Тhe definition of digital rights was incorporated in Russian legislation in 2019 through amendments to article 141.1 of the Civil Code of the Russian Federation. Digital rights in Russia are limited to relations regarding property rights exercised in digital format. They are applicable to the issuance and use of tokens and codes for cybercurrency operations in a way similar to general regulations on securities. Article 141.1 of the Civil Code states that digital rights can be used within an information system created by a financial institution for the purpose of conducting and monitoring digital operations.
In 2018, Russia’s government submitted to the State Duma (the lower house of the Parliament) the draft of the Federal Law on Digital Financial Assets. Over the course of two years, the bill underwent significant changes. In its original version, the bill was intended to regulate the relations arising from the issuance, registration, and circulation of digital property, and the exercise of rights and fulfillment of obligations under so-called smart contracts. It also would have introduced, among other things, definitions of other related concepts, such as ”mining,“ “validation,” and ”smart-contracts.“ The bill proposed to treat tokens and cryptocurrency as types of digital financial assets. It provided for a procedure to issue and circulate tokens. The issuance of tokens would be public and accompanied by an investment memorandum. However, these provisions were not included in the final version of the bill signed by Russian President Vladimir Putin on July 31, 2020. The new Federal Law on Digital Financial Assets and Digital Currency regulates relations arising upon the issuance, recording, and circulation of digital financial assets (DFA), and relations in connection with circulation of digital currency.
II. Definitions and Terminology of the Law
Under the new Law, DFA are registered and recorded digital rights that can be viewed as analogues of securities but placed through a blockchain. DFA include monetary claims, the ability to exercise rights to emission securities (including the rights to demand the transfer of the securities), and the right to participate in the capital of nonpublic stock companies. Security and utility tokens are also considered digital financial assets and are treated as such. Additionally, essentially establishes procedures analogous to an Initial Token Offering but omits any procedure for an Initial Coin Offering. The Law recognizes tokens as DFA.
A. Regulations for DFA Operations and Distribution
The list of permitted transactions using DFA is not exhaustive. In particular, DFA can be sold, purchased, pledged, inherited, or exchanged for other digital rights.
The Law creates specialized entities called Information System Operators (ISOs), to record and maintain information about the issuance and circulation of DFA. Transactions with DFA must be conducted through an ISO. ISOs are primarily banks or other credit organizations or exchanges. The Law sets out the requirements for ISOs, which must be Russian entities included in the register maintained by the Central Bank of Russia. The law extends other regulatory functions of Russia’s Central Bank to operations with digital currency.
The issuance of DFA is accompanied by documentation similar to the prospectus for emission securities and should contain, among other things, information on the volume of the issue and the scope of the rights possessed by DFA owners.
The Law also defines procedures for the issuance and circulation of digital currency in the Russian Federation. It requires that all transactions and other DFA-related operations be made with the use of the domain names and network addresses located in the Russian national domain zone or by the use of information systems or technical means located in the territory of Russia and included in the Russian information infrastructure. According to the Law, digital currency is a collection of electronic data representing monetary forms other than the currency of Russia or other countries.
B. Mining, Staking, and Airdropping
Article 14 of the Law deals with the circulation of digital currency. Despite the fact that the exact definitions of mining, stacking, airdropping or hard fork are not used in the text of the Law, it defines DFA operations, covering activities such as the following:
- [T]he organization of issuance of digital currency utilizing domain names and network addresses located in Russian domain zone and/or utilizing information systems, technical equipment and/or software-hardware systems, located on Russian territory as parts of Russian informational infrastructure.)
- [T]he issuance of digital currency is an activity involving Russian information infrastructure and /or user equipment located in Russia aimed at enabling the use of digital currency by third parties.
- Arranging circulation of the digital currency is a provision of services with the purpose of facilitating civil law transactions and/or trading operations resulting in the transfer of digital currency from one holder to another with the use of the Russian information infrastructure.
These activities are considered services and will be regulated as such by federal legislation.
The Law explicitly prohibits use of digital currency as a means of payment for goods, works or services by Russian legal entities, Russian branches or representative offices of foreign legal entities, individual Russian taxpayers, and individuals residing in Russia more than 183 days a year. Enforcement of this provision began on August 26, 2020, when Russia’s government blocked the country’s top crypto exchange aggregator.
Also, under the Law, DFA cannot be advertised as a means of payment for goods, works or services in Russia. Article 29 (1) states ‘’ [a]n advertisement is not permitted until a decision on the DFA’s issuance has been published as prescribed by law. Any advertisement materials may not promise any profit on the DFA or contain any projections in relation to the growth of their market value and must state the name of the DFA issuer, indicate the website displaying the resolution on the DFA issue and summarize any restrictions for non-qualified investors, as well as warning the readers that the DFAs are “highly risky” financial instruments associated with a potential loss of money.
In addition, the Law outlaws exchange operations with cryptocurrency on the territory of the Russian Federation, and makes judicial protection of claims related to such operations or transactions possible only if digital currency possessions or transactions were declared in the manner prescribed by law. Declaration of an ownership or right of ownership of the digital assets and digital currency to the national tax agency is mandatory and is a requirement for defending digital rights in a court trial.
III. Tax Treatment of Block Rewards
While the Law on DFA legitimizes DFA operations and locally issued digital currency, the Central Bank and the Ministry of Finance of the Russian Federation are introducing detailed regulations in their respective fields.
In November 2020, the Ministry of Finance of the Russian Federation drafted a package of documents regulating the circulation and possession of cryptocurrency, as well as defining responsibility for violation of the established rules.
In line with the approval of this package, on December 1, 2020, the government of the Russian Federation submitted to the State Duma the Bill on Amendments to the Tax Code of the Russian Federation. The new bill on taxation of cryptocurrency was developed on the basis of and in conformity with the provisions of the Federal Law on Digital Financial Assets and Digital Currencies.
The bill would establish requirements for declaring cryptocurrency by citizens, individuals or legal entities operating in the Russian Federation and impose tax liability for unlawful failure to declare information or declaring false information about transactions with cryptocurrency. The amendments provide for the recognition of cryptocurrency as an asset and set out its taxation accordingly.
Under this bill, citizens and lawful residents of the Russian Federation, registered legal and corporate entities, registered representatives of foreign companies and international institutions on the territory of the Russian Federation are obliged to declare information about obtaining the right to dispose of digital currency, including through third parties, to submit a report on transactions with digital currency, and on digital currency balances.
Article 38 states that cryptocurrency shall be treated as “assets” subject to a mandatory declaration to the Russian tax authorities.
The draft bill also introduces liability for tax offenses for unlawful failures to present, or present on time, reports about operations involving digital currencies, as well as presenting reports containing inaccurate information. In such cases, the penalty must be 10% of either the total value (in rubles) of the cryptocurrency received or the cryptocurrency transferred. The penalty would be deducted from the larger amount of these options. The value of the cryptocurrency reported will be calculated by the national tax agency based on the prices at the moment of transactions.
Furthermore, those individuals and legal entities who have the right to use digital currencies would have an obligation to inform tax authorities of such a right, the turnover of their accounts, and the balances in cases where the amount of operations exceeds the equivalent of RUB600,000 (about US$7,800) in a calendar year. Failure to inform is punishable by a fine of RUB50,000 (about US$670.00). Failure to provide data on transactions with cryptocurrency, as well as nonpayment of tax on transactions that were settled using digital currency, would be fined in the amount of 40% of the unpaid tax.
The Bill has not been adopted yet. It is under consideration by the State Duma, where its adoption is now expected during the spring session.
IV. Recent Regulatory Initiatives
During the period from September until December 2020, a number of documents on the rules and procedures of taxation of cryptocurrency were issued by the Russian Federation.
On October 6, 2020, the Department on Taxation Policy of the Ministry of Finance of the Russian Federation issued an explanatory letter on taxation of cryptocurrency operations.
According to this letter, profits received from digital currency operations should be considered income and taxed as such on individuals or enterprises. Article 41 of the Russian Tax Code defines principles for calculating the income tax and makes profits received as economic gain in monetary form or in kind the basis for calculation. However, regulations regarding taxation of income received from cryptocurrency transactions are not currently in place.
In addition, the letter states that, because chapter 25 of the second part of the Tax Code, which determines taxation of profits of organizations, does not include a definition of the income tax acquired through cryptocurrency operations, taxation of this type of income will be conducted through general taxation procedures.
Also, in mid-October 2020, the Central Bank of the Russian Federation issued a draft Notice (Instruction), which would introduce rules on differentiation between “qualified” and “non-qualified” investors for acquisition of DFA if adopted. The text of the Notice imposes a cap for non-qualified investors on obtaining DFA in the amount of RUB600,000 (about US$8,190) per annum.
On November 11, 2020, the Ministry of Finance of the Russian Federation submitted to the government draft amendments to the Law on DFA aimed mainly at extending rules countering money laundering to transactions with digital currency, recognizing DFA as property, and applying the property tax regime to digital currency assets. 
Property tax is a local tax imposed on owners of specified possessions and calculated according to a formula prescribed by the Tax Code of the Russian Federation. Usually, this tax may vary in an amount ranging from 0.1% to 6% of the total property value.
According to the proposed amendments, it is illegal to receive reward tokens in cryptocurrency. The restriction is envisioned (as an addition to article 14) of the Law on DFA which allows ”mining” but prohibits obtaining profit from mining or stacking activities in cryptocurrency.
Under the draft amendments, legal entities and individual businesses are prohibited from conducting any type of operation with digital currency. However, the amendments provide for three exceptions: an inheritance of digital currency, acquiring digital assets through bankruptcy procedures, or obtaining such assets as a result of enforcement proceedings.
The draft envisions amendments to article 151 of the Criminal Code of the Russian Federation, which prosecutes tax evasion. According to the amendments, for violation of digital currency rules, individuals would face a penalty of RUB100,000 (about US$1,365) and up to seven years of imprisonment, and legal entities could be fined up to RUB1 million (about US$13,650.)
The Russian Association of Cryptoindustry and Blockchain (RACIB) heavily criticized the draft amendments.
Financial disclosure rules for individuals holding or aspiring public office, their spouses, and their children were recently extended to reporting digital assets, currencies or obligations.
Prepared by Iana Fremer
Foreign Legal Analyst
 Federal Law of the Russian Federation on Amending Parts One, Two, and Article 1124 of Part Three of the Civil Code of the Russian Federation, No 34-FZ, adopted on March 18, 2019, art. 141.1, §§ 1, 2, https://perma.cc/2QFH-2U8W (in Russian).
 Federal Law No. 259-FZ on Digital Financial Assets, Digital Currency, and Amendments to Certain Legislative Acts of the Russian Federation, adopted on July 31, 2020, https://perma.cc/5KZV-XDDN (in Russian).
 Id. art.1, §§ 1-3.
 Id. art. 1, § 2.
 Id. arts. 3-13.
 Id. arts. 5-10.
 Id. art. 1, § 3.
 Id. art. 14, § 1.
 Id. art. 14, § 2.
 Id. art. 14, § 3.
 Id. art. 14, § 4.
 Id. art. 14, § 5.
 Federal Law No. 259-FZ, art. 14, § 7.
 Id. art. 29(1).
 Id. art. 14, § 6.
 Evgenia Chernyshova, The Ministry of Finance Has Proposed Imprisonment for Nondeclaration of Cryptocurrencies: What Information Is Required to Turn Such Asset Holders Over to Tax Authorities?, RBC Fin. (Nov. 12, 2020), https://perma.cc/BDT2-M75J.
 Id. ch. 21, art. 1, § 16.
 Id. art. 38, § 2.
 Id. art. 129 (15), § 4.
 Id. art. 129, § 5(8).
 Id. art. 3, § 1.
 Id. art. 3, § 3.
 Letter of the Department of Tax Policy of the Ministry of Finance of Russia, No. 03-03-06 / 1/73953, on the Accounting When Determining the Tax Base for the Income Tax of an Income Received from the Transactions with Cryptocurrency, Garant (Oct. 6, 2020), https://perma.cc/8VSQ-W5F6.
 Id.; Tax Code of the Russian Federation, Parts One and Two, No.146-FZ and No.117-FZ, adopted on July 31, 1998, and Aug. 5, 2020, with amendments and additions, https://perma.cc/C4CN-WNAE (in Russian).
 Central Bank of the Russian Fed’n, Draft Notice, On Digital Financial Assets, the Acquisition of Which Can Only Be Carried Out by an Individual Who Is a Qualified Investor, Not a Non-Qualified Investor, https://perma.cc/Q65J-4KTU (in Russian).
 Russian Fed’n Ministry of Fin., Reference Document No. 05-06-05/76080, On the Amendments to Article 14 of the Federal Law on Digital Financial Assets, on the Amendments to the Criminal Code of the Russian Federation and Article 151 of the Criminal Procedure Code of the Russian Federation, Federal Law (Aug. 28, 2020), https://perma.cc/2RAV-MJGB (in Russian); Press Release, Russian Federation Ministry of Fin., The Russian Ministry of Finance Has Developed a Package of Bills on Digital Currency, (Nov. 11, 2020), https://perma.cc/62CB-5RYB (in Russian).
 Russian Fed’n Ministry of Fin., supra note 37.
 Decree of the President of the Russian Federation No. 778 on the Measures for the Implementation of the Certain Provisions of the Federal Law “On Digital Financial Assets, Digital Currency, and Amendments to Certain Legislative Acts of the Russian Federation, adopted on July 31, 2020,” Dec. 10, 2020, https://perma.cc/C7JX-8DGE (in Russian).
Last Updated: 02/05/2021