Note: Updated as of 10-03-2022 according to the latest regulatory changes.
Cryptocurrencies (bitcoin or analogues) are virtual currencies that allow purchases of goods and payment for services over the Internet, as well as being traded on over-the-counter financial markets.
It is nothing new to say that the cryptocurrency market has been booming for the last decade, but it has been particularly booming in recent years, especially since prestigious companies, such as Tesla and Paypal in the US, have accepted payment for their goods and services in bitcoin. Moreover, the European Court of Justice has already recognised bitcoin as a means of payment.
However, despite the important position it is assuming in the world financial markets, there are still many doubts about its future. tax treatment of cryptocurrency transactions.
For this reason, it is interesting to analyse some of the most frequently asked questions that arise for users of bitcoin and other virtual currencies and to comment on the criteria of the Directorate General of Taxes (DGT) in those cases in which it has ruled on queries about cryptocurrencies.
What are cryptocurrencies?
First of all, it should be recalled that for the DGT bitcoins, cryptocurrencies and other digital currencies are foreign currenciesThe tax treatment of shares or participations in entities is therefore the same as for foreign currencies.
In the absence of a definition in Spanish law of what is meant by "virtual currencies", also known as "virtual currencies" or "virtual currencies", the Spanish law does not define what is meant by "virtual currencies".cryptocurrenciesThe concept contained in Directive (EU) 2018/843 on the prevention of the use of the financial system for the purpose of money laundering or terrorist financing can be used, where virtual currency is considered to be: "... virtual currency".a digital representation of value that is not issued or guaranteed by a central bank or public authority, is not necessarily linked to a legally established currency, and does not have the status of currency or legal tender, but is accepted by persons or entities, as a medium of exchange, and can be transferred, stored and traded electronically".
Taking into account the above definition, virtual currencies are intangible goods, computable in units or fractions of units, which are not legal tender, which can be exchanged for other goodsincluding other virtual currencies, rights or services, if accepted by the person or entity transferring the good or right or providing the service, and which can generally be acquired or transferred in exchange for legal tender.
Given that each virtual currency has its origin in a specific computer protocol, different scope of acceptance, different liquidity, value and denomination, the different virtual currencies are different goods from each other.
1) Personal income taxation of cryptocurrencies
There are many questions that taxpayers have about the implications of cryptocurrency transactions on their income tax returns.
How is the sale of cryptocurrencies taxed on my income tax?
Now that the concept of cryptocurrency has been clarified, the big question is how to tax the sale of cryptocurrencies.
The sale of cryptocurrencies in exchange for euros (FIAT) is considered an alteration of assets in the terms of article 33 of the Personal Income Tax Law, and therefore will give rise to a capital gain or loss which will be included in the savings income.
This gain is determined as the difference between what the taxpayer invested in the purchase of cryptocurrencies (including the management costs of the purchase) and what has been obtained from their sale (minus the costs inherent to that sale), all in the equivalent amount in euros.
It should be remembered that the tax rates for savings income are 19% on the first 6,000 euros of taxable income, 21% up to 50,000 euros, rising to 23% up to 200,000 euros and, from 1 January 2021, reaching a rate of 26% above 200,000 euros.
Considering the profits that are sometimes made with this type of virtual currency, it is important to know that the maximum tax rate is limited to 26%.
What if mining activities are carried out?
DGT that in its binding consultation V3625-16described the cryptocurrency mining activity as "Bitcoin mining operations are those that allow the creation of new blocks from which new Bitcoins are derived and which are remunerated by the system with a quantity of Bitcoins. Mining activity does not lead to a situation in which there is a relationship between the service provider and the recipient of the service and in which the remuneration paid to the service provider is the countervalue of the service provided in the terms provided for in the case law of the Court, in particular in the Tolsma case referred to above, so that no actual recipient or customer of the mining activity can be identified, insofar as the new Bitcoins are automatically generated by the network". has been clear on this point.
When what is being done is mining activitiesthen this activity is considered, for personal income tax purposes, to be a performance of economic activity and is included in the general tax base like any other economic activity carried out.
What happens if I exchange one cryptocurrency for another?
An example would be where a person exchange bitcoins for ethereum. For tax purposes, this transaction is treated as a sale of bitcoins and a purchase of ethereum. Therefore, this transaction is taxed as a sale of bitcoins and a purchase of ethereum, the person is taxed on the sale of bitcoins even if he/she has reinvested the full amount of the sale in another cryptocurrency: ethereum.
This is similar to when a person exchanges shares of one company for shares of another company in his or her portfolio (i.e. exchanging shares of Banco Santander for shares of BBVA). In this case, a sale of the Banco Santander shares must be included in the income tax return.
This is further confirmed by the DGT in its Binding Consultation V1149-18 where he concludes that: "the exchange of one virtual currency for a different virtual currency constitutes a swapand causes a change in the composition of the assets, as an amount of one virtual currency is replaced by an amount of another, different virtual currency, and this change results in a change in the value of the assets in the form of the value of the virtual currency being acquired in relation to the value at which the virtual currency being exchanged was obtained."
Accordingly, exchange between different virtual currencies carried out by the taxpayer outside the scope of an economic activity dThis gives rise to income which is classified as a capital gain or loss. in accordance with the aforementioned Article 33.1., the quantification of which must be carried out in accordance with the provisions of Articles 34.1.a), 35 and 37.1.h) of the LIRPF".
How does holding a cryptocurrency investment affect me in Renta, and what if the investment has appreciated since I bought it?
The mere holding of cryptocurrencies (HOLD) has no income tax implications.. Even if the valuation of your investment in cryptocurrencies is rising, as long as it is not transferred, there is no change in your assets and therefore it is not subject to taxation.
2) Impact of cryptocurrencies on other taxes
a) Wealth tax
However, although the mere holding of cryptocurrencies in no way affects the Renta as we have seen, it should be noted that has an impact on wealth tax.
It should be remembered that this tax obliges tax residents in Spain to pay tax on the value of their worldwide wealth. This tax is also levied on the assets of non-residents located in Spain.
The tax is calculated on the person's worldwide wealth on 31 December. and, for this purpose, all assets and rights of economic content attributable to it must be considered, including investment in cryptocurrenciesThe same would be true for foreign exchange investment.
Therefore, the investment in cryptocurrencies counts towards the tax base, valued at their equivalent market value in euro as at 31 December each yearas expressly stated by the DGT in its Binding Opinions V0250-18 y V0590-18.
However, it should be remembered that Wealth Tax is exempt on the first 700,000 euros of taxable income and, furthermore, the main residence is exempt on up to 300,000 euros of value, so most taxpayers are not even obliged to file or pay this tax. Furthermore, some autonomous communities, such as Madrid, have reduced this tax to 100%.
As far as VAT is concerned, the Directorate General for Taxation has been clear in several consultations, among which the following binding consultation can be highlighted V1274-20stating that "Bitcoins, cryptocurrencies and other digital currencies are currencies and therefore the financial services linked to them are exempt from Value Added Tax under the terms established in Article 20.1.18 of Law 37/1992".
This assumes that, Both the sale and purchase of cryptocurrencies are subject to and exempt from VAT.
Similarly, the DGT argues in the aforementioned consultation that the development of cryptocurrency mining activities do not confer the status of an entrepreneur. or professional to the person exercising it and, therefore, such activity shall also not be subject to value added tax.,
Therefore, we should not forget that, as a consequence of the above, neither the purchase and sale of cryptocurrencies nor the mining activity gives the right to deduct input VAT on purchases of goods and services related to this activity.
c) Corporate income tax: What if it is a company that invests in cryptocurrencies?
The legal entity (company) is not subject to personal income tax or wealth tax. In this case, both the purchase and sale of cryptocurrencies will be recorded in the entity's accounts as for any other currency or financial asset, and will be liable to corporate income tax on the profits arising from the sale of cryptocurrencies..
Remember that the general corporate tax rate in Spain is 25%, which can be 15% for the first two years of activity if you are entitled to apply the Incentives for Small Businesses. That is why, except for very high profits originating from cryptocurrency transactions, in general, it may be more profitable for tax purposes to carry out transactions as an individual.
Let's look at a comparative numerical exampleAssume an initial investment of €20,000 in cryptocurrencies which, after a few years, are transferred and converted into euros for a value of €270,000. The gain obtained would be €250,000.
(*) If it is a natural person who has carried out the operation, it would involve him/her a tax payment of 57,880 €. (19% over EUR 6.000 + 21% over EUR 44.000 + 23% over EUR 150.000 and 26% over the remaining EUR 50.000)
(*) If the transferor is a legal entity taxed at the general corporate income tax rate of 25%, the amount of tax payable would be 62,500 €. (25% on €250,000 profit).
As can be seen, in this case, despite the substantial gain of 250,000 euros, it is more economical, from a tax point of view, to carry out the operation as an individual.
d) Tax on Economic Activities (IAE)
On the other hand, there is also the question of whether bitcoin transactions are subject to business tax.
In this regard, the Directorate-General for Taxation concluded in its Binding Consultation that V2012-21 stating that "Buying and selling bitcoins or cryptocurrencies for itself, either by natural persons or by legal persons or entities without legal personality, does not constitute economic activityThe Commission considers that, in the case of such a sale and purchase, it is neither a business nor a professional transaction, so that for such a sale and purchase no IAE taxation is applicable.
Therefore, as the mere holding or buying and selling of cryptocurrencies for himself does not constitute a taxable event, the applicant is not subject to this tax.
However, if it is going to provide services to third parties, either buying and selling or mining cryptocurrencies, it will be subject to IAE as it constitutes an economic activity and, in both cases, it must register under heading 831.9 of section one of the Tariffs "Other financial services n.e.c.".
Therefore, Nor does cryptocurrency trading accrue or affect Business Tax.
3) New reporting obligations for cryptocurrencies
Until now, the Tax Administration lacked a specific instrument for the control of transactions carried out with cryptocurrencies. With the entry into force this year of Law 11/2021, of 9 July, on measures to prevent and combat tax fraud, two new reporting obligations for cryptocurrencies have been incorporated that allow the AEAT to control transactions carried out with these virtual currencies.
a) Informative declaration of assets abroad
Cryptocurrency investors often wonder what the Form 720 is and whether they are obliged to file it.
Form 720 is an information return on assets and rights located abroad that obliges tax residents in Spain to declare the assets and rights they have outside our borders. The model included three reporting obligations in the same declaration and required its completion when any of the three blocks of assets exceeded a value of €50,000 on 31 December.
In particular, the types of goods subject to the reporting obligation were:
- Accounts in financial institutions located abroad.
- Securities, rights, insurance and income deposited, managed or obtained abroad.
- Immovable property and rights to immovable property situated abroad.
Furthermore, once you have filed the 720 form in the first year in which you are obliged to do so because the value of any of the blocks exceeds the threshold of 50,000 euros, you are not obliged to report again in subsequent years unless the combined value of any of the blocks varies, upwards or downwards, by more than 20,000 euros.
However, with the entry into force of the aforementioned Law on the Prevention of Tax Fraud, a fourth block to be reported has been added: "...".virtual currencies located abroad of which it is the holderor in respect of which one has the status of beneficiary or authorised or otherwise has the power of disposal, held by persons or entities providing services for safeguarding private cryptographic keys on behalf of third parties, for holding, storing and transferring virtual currencies"..
This new obligation will be documented through a new declaration for cryptocurrencies: Form 721.The regulatory development of which is still pending.
Therefore, from 2023in accordance with the new regulation of the model, if a person resident in Spain holds investments in cryptocurrencies in exchanges from other countries (hot wallets) y the valuation of your investmentin the equivalent amount in euro, at the end of the calendar year exceeds 50,000 euros then that person will be obliged to file this Form 721 information return regarding the holding of cryptocurrencies in 2022.
However, according to the wording of the law, we understand that this obligation does not affect the cryptocurrencies stored in personal wallets (cold wallets).
In addition, the regulation of the Law on the Prevention of Tax Fraud added an additional sanctioning regime which provided for a fine of 5,000 euros. for each piece of data or set of data referring to each virtual currency individually considered, depending on its type, which should have been included in the declaration or which should have been reported incompletely, with a minimum penalty of 10,000 euros. However, following the CJEU ruling of 27 January 2022, this penalty regime will not come into force, as the burdensome penalty regime of Model 720 has been annulled as disproportionate.
(b) Exchange reporting obligations
This new reporting obligation requires that persons or entities resident in Spain that (i) provide services for safeguarding private cryptographic keys on behalf of third parties or (ii) that to provide exchange services between virtual currencies and legal tender or between different virtual currencies or intermediate in such transactions, will have to report all transactions carried out.
Thus, the Treasury has established forms 172 and 173 to document the new reporting obligations. These forms, which are still pending regulatory development, will be compulsory for tax residents in Spain, regardless of the place where they provide services and the location of the coins or their holders.
While form 172 is expected to oblige companies and individuals to report their own and their customers' virtual currency balances, form 173 would oblige companies to report all transactions they carry out, both in Spain and abroad: acquisition, transmission, exchange and transfer, as well as receipts and payments made in these currencies.
Payment in cryptocurrencies How is the collection of goods and services in cryptocurrencies implemented?
As is well known, it is perfectly possible for sales of goods and services to be paid in cryptocurrencies (virtual currencies) instead of legal tender, if this is accepted by the invoicing entity.
However, the amount of VAT to be reflected on the invoice issued must be calculated in euros, as determined in Article 12 of the Invoicing Regulation, which concludes that "The amounts appearing on invoices may be expressed in any currency, on condition that the amount of tax which, where applicable, is charged is expressed in euros, using for this purpose the exchange rate referred to in Article 79.Eleven of the Tax Law".
This is why, despite the fact that payment in virtual currencies is allowed, the question arises of what is the cryptocurrency equivalent of the price to be paid? what exchange rate applies to settle an invoice?
The Directorate General for Taxation has also ruled on payment with cryptocurrencies and the problem of the applicable exchange rate to euros. Thus, in its binding consultation V3513-19the DGT concludes that "it shall be permissible to use those sources of exchange rate publications which meet certain characteristics such as being representative, not differing significantly from the reference exchange rates published by the ECB, being widely used and accepted for currency conversion, being easily accessible and, finally, being used on a recurrent basis and maintained over time by the taxable person.
This means that each subject will be able to apply the cryptocurrency/euro exchange rate that he/she considers, provided that the fThe sources used as a reference are representative and widely used and accepted.
As can be seen, the legal regulation of virtual currencies is constantly changing and is expected to continue to do so in the coming years. Thus, the European Commission itself has been working for some time now on a european regulation on crypto-asset marketsknown as the MiCA proposal (markets in crypto-assets) which aims to regulate and provide legal certainty for all matters relating to cryptocurrencies and other types of cryptoassets and the technologies that make them possible, such as the blockchain.