Cryptocurrencies and the technology that supports and surrounds them have already become a reality. It is becoming a part of the daily lives of people and companies. It’ll be common to hear, “Hey, I want to pay you with bitcoins.” This is why it’s important to know how to exchange them smoothly.
(Article updated in January 2023. This text does not include investment advice or tax advice, the only information that we believe can shed light on how to properly declare your cryptos.)
A cryptocurrency is a virtual currency that we can exchange for other traditional currencies. We can use crypto as a means of payment or investment. In the EU, the CNMV has warned more than once that central banks or authorities do not back these currencies.
When we talk about cryptocurrencies, we are not only referring to Bitcoin. We are also referring to all those virtual currencies or crypto assets whose major feature is blockchain technology. Examples are Ethereum, Ripple, Litecoin, Dash, Solana, Dogecoin, Polkadot, etc.
Are Cryptocurrencies Taxed?
Cryptocurrencies are no longer just a way to invest your money; they are also a way to pay for things that aren’t regulated by banks. The Tax Agency has had its sights set on these transactions for several years. In 2018, it was already a part of its annual plan for controlling taxes and customs. Its goal is to look into the tax effects of new technologies like blockchain and cryptocurrencies in particular.
The Tax Agency is sending information requests to people and businesses that buy or sell cryptocurrencies. These are mainly financial institutions, exchange bureaus, payment gateways, and entities linked to ATMs. It also applies to companies that accept payments with cryptocurrencies. In addition, it is also working on adding new tax information models so that it can get information from these kinds of bodies. This will help to control and monitor all taxpayers who have cryptocurrencies as assets in the EU.
How to Regulate the Taxation of Cryptocurrencies
Before starting with the control, it would be of more benefit if the regulation of cryptocurrencies could begin. This would let us know exactly what to do when we own and work with cryptocurrencies. But as in other areas, technology is moving faster than regulation. Presently, the EU does not have specific accounting or tax legislation on cryptocurrencies. There are only binding consultations of the Directorate General of Taxation that show the taxation of transactions for specific issues raised in these consultations. We will highlight some of the interests, though there are a few in the works. As we write this post, we will have to work through publications one by one.
Unfortunately, just because there aren’t any particular regulations doesn’t mean there aren’t any taxes that need to be paid. To determine them, we must distinguish how we are using this type of currency. We’re going to look at a few cases based on the ways they have been interpreted so far (we still say there is no regulation). We suggest that you pay attention to the recent changes in how cryptocurrencies are regulated. If you have any doubts, you can seek professional advice.
1. Cryptocurrencies as a means of payment.
Are cryptocurrencies subject to VAT?
No. The transfer of virtual currencies is not subject to VAT. It only works when we buy goods or services as if we made them in euros. This means that both the buyer and the seller don’t have to pay VAT on the sale of cryptocurrencies.
In the binding consultation V1885-21, the Directorate General of Taxes says that “bitcoins, cryptocurrencies, and other digital currencies are currencies because the financial services linked to them are exempt from VAT.” The transfer of bitcoins (and other cryptocurrencies) is subject to and exempt from VAT (art. 20. Uno.18o IVA).
The law that regulates this tax says that money transfers to pay for goods or professional services will be exempt from this tax. Since we do not use virtual currencies to pay for goods and services, this tax does not apply to them.
2. Cryptocurrencies as an investment.
In this case, we use cryptocurrencies as an investment through a broker. Let’s see the taxes that would have to be paid for it.
IRPF-Taxation of cryptocurrencies in the income tax return.
Trading in cryptocurrencies can lead to a capital gain or loss if it changes the way the taxpayer’s assets are made up (Article 33 of the Personal Income Tax Law).
If we invest in cryptocurrencies, we will have to declare the gains directly on the tax return. We will incorporate this into the capital gains of the savings tax base.
Capital gains are the difference between the value at the time of the transfer and the value at the time of the purchase. For example, if you buy a Bitcoin for 1,000 euros, that will be the acquisition value, and if you then sell it for 6,000 euros, that will be its transfer value, giving rise to a gain of 5,000 euros.
If we carry out more than one transaction with cryptocurrencies, we must apply the FIFO (first in, first out) criterion. In other words, the value of the first transaction is the same as the value of the first cryptocurrency that was sold.
Taxation depends on the amount of capital gain generated. With the numbers in the example above, the tax payable would be 19%.
The amount of tax you will have to pay depends on the amount you have earned.
|SAVINGS TAX BASE: CAPITAL GAINS||IRPF RATES 2022|
|From 0 to 6,000 euros|| |
|From 6,000 to 50,000 euros|| |
|From 50,000 euros to 200,000 euros|| |
|More than 200,000 euros|| |
If a legal entity carries the transaction out, such as a limited or public limited company, profits made with cryptocurrencies are declared for corporate income tax purposes. Taxation is generally at a flat rate of 25% of the profit.
If you have made losses on the transaction, we can offset them against other capital gains of the year or income from movable capital up to 25% of their value. If there is no option to offset them, we can offset them over the next four years.
The Binding consultation V0808-18 makes it clear that capital gains from the sale of virtual currencies should be counted at the time of delivery, regardless of when the sale price is received.
Consultation 0999-18 is notable, which clarifies how the exchange between different cryptocurrencies is taxed.
This is the notice that we have seen during 2021 in the tax data of the Tax Agency of several taxpayers:
“The data that the State Tax Administration Agency has shows that you have done business with cryptocurrencies.” We want to remind you that the money you make from these transactions is personal income that is taxed as capital gains. Therefore, these gains must be included in box 389, which is headed “Other capital gains,” to be included in the savings tax base.
This is because the banks provide information on the operations, and it is a way for the tax authorities to check that cryptocurrency operations are being carried out.
What if my cryptocurrencies are stolen?
In these cases, which we hope will not happen to you, we consider the amount of the stolen coins a capital loss, as explained in the binding consultation V1979-15
Form 720, assets and rights abroad, and future 721.
This information return is filed for assets and rights abroad exceeding 50,000 euros. The law against fraud says that starting in 2021, if you have more than €50,000 in cryptocurrencies in foreign exchange, you will have to file the controversial Form 720. In fact, in 2022, there is already talk of the creation of a similar tax form (there is talk of a form 721) from which the Tax Agency would be informed, on the one hand, as a taxpayer, of the cryptocurrencies that are “held” in foreign exchange. This would oblige European exchanges to report the amounts and holdings of cryptocurrencies held by their clients.
This tax is based on who owns all assets and rights with economic value. According to the binding consultation V0250-18, cryptocurrencies must be included in this tax because they are a form of wealth. Bear in mind that there may be regional bonuses that will determine whether we file the wealth tax.
The valuation is at a market price determined on the date of the accrual of the tax, i.e., December 31st of each year. As we are talking about a very volatile currency, it is possible that on the same day the value can transform.
Inheritance and Gift Tax
If you inherit cryptocurrency or get it as a gift, you must report it on your Inheritance and Gift Tax return, taking into account the rules of your autonomous community, such as exemptions and allowances.
3. Cryptocurrencies as an economic activity.
Cryptocurrencies are not created but discovered.
Mining is the process of using a computer’s processing power to check transactions in virtual currency by doing calculations. In exchange, we get cryptocurrencies. Cryptocurrency mining is an economic activity and, as such, is subject to taxation.
Even though there isn’t a specific heading for “cryptocurrency miners,” they have to register under heading 831.9 of Section 1 of the tax on economic activities. The binding consultation V2908-17 explains this.
Binding consultation V3625-16 states that mining services are not subject to VAT. This means that VAT doesn’t have to be paid for the money made when we turn cryptocurrencies into regular money. We should note that it will not be possible to deduct VAT on expenses related to the activity.
Personal income tax / Corporation tax
How are miners taxed?
There is a requirement to sign up and pay taxes on income and costs related to the business, such as computer equipment, graphics cards, electricity bills, rent, etc. We can deduct these if they meet the rules set by the tax authorities.
The difference between eligible income and deductible expenses is that we should settle profit in the IRPF as income from economic activities or in the corporate income tax depending on whether we do the activity as an individual or a legal entity.
Not only do you have to pay taxes, but you also have to meet your Social Security obligations and, if necessary, pay the self-employed fee.
Buying and selling cryptocurrencies
Consultation V2012-21 clarifies that this type of operation should not be an economic activity. So we should tax it, as we have explained in the IRPF section, on capital gains and losses from cryptocurrencies.
This is a cryptocurrency custody service, or deposit service. In this way, we think that this kind of service is an economic activity that needs to pay VAT and is not exempt from it, as stated in the recent binding consultation V2679-21. This is because we can’t call this kind of service “financial,” which means it doesn’t get the exemption that it does. The tax authorities think it’s a service that’s similar to renting safety deposit boxes, so they charge 21% VAT on it.
The Tax Agency defines “staking” as an alternative to mining for making blocks and making sure they are correct in the binding consultation. By keeping their coins locked up in a digital wallet, cryptocurrency owners can make money through this process. It is similar to traditional deposit operations. The balances are blocked, and the investor cannot use them freely.
Regarding staking, we have to differentiate between the profit and the service. On the one hand, is the profitability derived from the process. Since the return is the result of a transfer of cryptocurrencies, it will not be subject to VAT for professionals or companies. For individuals, we will consider this amount of income to be from movable capital.
On the other hand, there is the service itself. We use the term “binding consultation” to describe a consultant who, by subscribing to a smart contract service, lets their clients join staking operations with other investors and pays them a percentage of the profits for this service. We would not define this percentage as a financial service, and it would be subject to and not exempt from VAT.
Taxation of NFTs
This is a subject we could write about at length. Here is another subject that we are sure will be of interest to you.
If you carry out transactions with cryptocurrencies and have doubts about how to declare them, you can contact our experts in fiscal and tax matters. We recommend that you keep track of all transactions and operations, as the Tax Agency could ask for this information if they want to check or inspect your business.
We hope these concepts related to the taxation of cryptocurrencies are clear to you. We encourage you to share your thoughts in the comments.