Previously from Andorra Insiders we explained the treatment of cryptocurrencies and bitcoin in Andorra. However, we have verified that, despite the fact that the vast majority of jurisdictions in all the countries of the world are pointing in the same direction and it is already very clear, ordinary people ignore the tax treatment of these assets, especially in Spain.
That is why, taking as an example that country (Spain) for being our closest country and the origin of our main clients and, considering that it is similar for most countries in the world, in this article we are going to explain the tax treatment of cryptocurrencies. All in order to clarify doubts and prevent people from taking unnecessary risks and paying taxes incorrectly or, worse still, not paying taxes thinking that they are doing things right.
The initial problem
When establishing a legal and regulatory framework, formal definitions must be established to adhere to. Cryptocurrencies born with Bitcoin in 2009 are such a new asset that, during the first years, it was not very well known what definition these assets fit into, which on the one hand are completely intangible, on the other they are completely decentralized (for example, ¿ Does the owner of bitcoin really have the asset, or does the network have it?), they constitute a separate market and are completely different from those before them. It didn't matter either, they weren't relevant enough to care about yet. It was the time of the "early adopters."
So that we get an idea of what do we mean by legal definitionsIf we consider that bitcoin is a common and current good, if I were to mine BTC and sell said Bitcoin to third parties, I would have to charge them VAT and bill them for the sale of a final commercial product. In addition, the location of the Bitcoin created and the operation carried out would have to be specified (for example, if, being Spanish, I sell recently mined Bitcoin to an Italian, should I invoice Spanish or Italian VAT? Bitcoin? Or no indirect tax?).
On the other hand, if we consider Bitcoin not as a common and current commercial good, but as a currency or means of payment, the regulatory norms and the legal and fiscal treatment of the entire market would be very different. Among other consequences, the sale of these assets would no longer be burdened with indirect taxes as it was previously. It is because of that the legal definition of cryptocurrencies is crucial to establish a regulatory framework and its tax treatment. In the absence of specific legislation, they are an indeterminate legal concept.
Jurisprudence as a source of law in cryptocurrencies
Due, among others, to the short time they have said assets, their enormous growth and rapid evolution, and above all the innovative, technological and disruptive nature of these digital assets, practically the only way to establish its legal treatment has been through jurisprudence. Completely bureaucratic, rigid, outdated and inefficient institutions such as those of European countries and Europe itself lag behind the progress of a technology like this of distributed consensus algorithms.
Even more so considering that the objective of cryptocurrencies is to eliminate intermediaries and minimize the necessary trust in exchanges and financial operations. Not only is it that this market evolves at rates that are almost impossible for current institutions to assume, it is that they almost go against them., proposing a more efficient way of organizing society.
Bitcoin as a means of payment
Thus, the first relevant event in this regard was the Judgment of the Court of Justice of the European Union (CJEU) in case C-264/14 of October 22, 2015. In it, it was admitted that Bitcoin was a means of payment or "virtual" currency although not legal tender (and, by extension, the rest of cryptocurrencies, although these and their uses are highly variable and some of them are probably interpreted differently). And therefore, The operations carried out with them, such as the sale or exchange for other fiat currencies, are exempt from being taxed by Value Added Tax (VAT).
This is due to the fact that they can benefit from the exemption applied by the VAT Directive to operations relating to "foreign exchange, banknotes and coins that are legal means of payment", although the operations "are benefits of
services performed for consideration within the meaning of the Directive, since they consist of changing different means of payment and there is a direct relationship between the service provided and the consideration received, that is, the margin constituted by the difference between, by a On the other hand, the price at which you buy the currencies and, on the other hand, the price at which you sell them to your customers.
Therefore, By assigning Bitcoin the legal category of means of payment as virtual currency, it was exempt from indirect taxes. The same has happened with Tax on Patrimonial Transmissions (ITP), a fairly widespread tax at the European level. However, and as we will see later, this also established jurisprudence for tax treatment in other taxes. For example, exchanging cryptocurrencies in this way becomes equivalent to investing or speculating in the Forex currency market.
Taxes on cryptocurrencies in Spain
As it could not be otherwise, the tax treatment of crypto assets in Spain has been established through the Binding inquiries from the Directorate General of Taxes that can be found at this link, establishing jurisprudence from some first cases on the general rules to apply.
Value Added Tax (VAT)
Following the judgment of the CJEU, in Spain since 2015 Bitcoin has been considered a means of payment, and therefore its transmission and sale have been declared exempt from VAT as established by the Law itself (article 20.1.18). This is due to the fact that the same exemption assumptions apply as in the cases of operations related to traditional currencies. This applies even if there is a profit or commission involved, since they are understood within the concept of "other commercial effects" (art 135.1.d) to act as a means of payment, thus remaining outside the application of this tax.
On the other hand, Regarding the mining of cryptocurrencies, it is also an activity exempt from VAT taxation, since it is not considered that there is a direct relationship between the service provider and the recipient, since this activity automatically generates the cryptocurrencies that the miners keep. It is an argument similar to that used in the sale, in which it was not considered that there was a direct relationship between the service provided and the consideration received.
In this sense, you can search using the previous link for the queries V3625-16, V1028-15, V1029-15, V2034-18, V1747-18, V1748-18, V2670-18 and V2846-15 to see that they all follow this argument and this treatment. The latter, very interesting, sentences the activity through ATMs and automatic machines. In this case, the subject will be considered an entrepreneur for VAT purposes. since there is a consideration for its services, "since it is dedicated to the purchase and sale of virtual currency through ATMs and vending machines in exchange for a commission."
Individual Income Tax (Personal Income Tax)
Regarding personal income tax, If a natural person carries out operations with cryptocurrencies, they will obtain returns derived from economic activities, either through mining or intermediation. in the purchase and sale of cryptocurrencies resulting in affected activities by the general base of this tax, either a non-professional or professional individual (with certain requirements). These returns are affected both when carrying out the activity on their own account and working for another as an employee.
On the other hand, the sale of these crypto assets, provided that it is not carried out in the sphere of an economic activity, will result in a capital gain or loss, which will result from the difference between the acquisition price and the transmission price (art. 34). Like any other asset, this consideration of capital gain or loss of each of the different operations It is therefore integrated into the savings base of the personal income tax return, as stated in articles 33 et seq. of the law.
Regarding the moment of sale and price of transmission, the moment in which the delivery is made is considered of virtual currencies by the taxpayer by virtue of the sale contract, regardless of when the sale price is received.
Therefore, effectively, cryptocurrencies are taxed for capital gains and losses when purchases and sales (investments) are made with them, compensating the losses with the gains and declaring and paying taxes by the net at the end of the fiscal year on the basis of personal income tax savings. All this is corroborated by the queries V0808-18, V1604-18 and V0999-18.
Is it taxed only when changing to fiat? Or should I pay taxes every time I change cryptocurrency?
This is the most confusing aspect in the crypto world, that is why we have given it a specific section for it. Currently, there are exchanges or exchange houses in which once you buy a cryptocurrency, you can exchange one for another or "buy" for example Ethereum using Bitcoin. As a consequence, the Hoax that you only have to pay taxes when that capital is reintroduced in fiat currency, like the euro, and that meanwhile the returns obtained with the exchange between cryptocurrencies are not considered settled.
The truth is that this is completely false, and is corroborated by the General Directorate of Taxes (DGT) when it spoke before the consultations V1149-18 and V0999-18. The exchange between different virtual currencies is considered a swap and it is carried out as a private investment, and therefore that exchange operation results in a modification of the composition of the patrimony (loss or gain) that must be taxed in personal income tax based on the savings base compensating some operations with others as we have mentioned previously.
The equity difference obtained will be calculated according to article 37.1.h of the LIRPF “by the difference between the acquisition value of the asset or right that is assigned and the higher of the following two: the market value of the asset or right delivered. And the market value of the good or right that is received in exchange ”. That is to say, the market value is that which corresponds to the agreed price in the cryptocurrency exchange at the time that said exchange occurs, being able to prove by means of proof admitted by law according to article 106.1 of the General Tax Law.
By last, The taxpayer must notify the Tax Administration of the swap operations between the different cryptocurrencies that modify their patrimony, presenting the self-assessment of personal income tax concerning the tax period in which the patrimony variation is made. Thus, with each operation with cryptocurrencies, the difference in euros between the moment of sale and the moment of purchase must be computed, and it must be considered equity variation subject to personal income tax based on the savings base.
Regarding corporation tax, three cases of possible operations can be distinguished:
- Investing in cryptocurrencies through the company, which carries out purchases and sales in exchange for legal tender money to keep those assets in its patrimony. In that case, a profit or capital loss will be obtained from the legal entity, which will have to be recorded in the profit and loss account of the company.
- Allow payments in cryptocurrencies for the services offered: the amount must be accounted for in order to establish the corresponding income tax base.
- Intermediary companies in the payment of cryptocurrencies: their income will derive from the commission received in exchange for this intermediary activity.
- Bitcoin or other crypto mining companies: it is understood that this works under the form of a legal entity and is valued as income in the percentage received from the activity of the creation of the mined blocks.
Economic Activities Tax (IAE)
As expected, activities carried out with cryptocurrencies will be subject to taxation by the Spanish IAE when carried out within a business environment. Also noteworthy is the binding query to the General Directorate of Taxes V1028-15, which indicates that the activity carried out by a company with the sale of cryptocurrencies in automatic machines will be subject to taxation in the IAE.
Regarding mining, as indicated by the DGT in the binding consultations V3625-16 and V2908-17, the activity of the cryptocurrency miner is considered economic activity according to the Tax on Economic Activities (IAE). Therefore, a census declaration must be made at the beginning of the mining activity, registering in epigraph 831.9 of the first section, corresponding to Other NCOP Financial Services.
Wealth Tax (IP)
According to articles 24 and 28 of the Law, The entire value of the cryptocurrencies owned by the holder of the same must be credited to the IP as of December 31 according to its market value at that time. This is indicated by the binding consultation V2289-18, in which it was determined that it must be declared as if it were a capital in foreign currency, being valued at the accrual date, at market price in euros annually on December 31.
In this way, They will be accounted for together with other assets and rights of which it is the owner, taking into account the net worth deducting the corresponding charges and encumbrances that decrease the value, and the corresponding debts or personal obligations for which it is affected. To do this, they are treated as if it were capital in foreign currency since they are considered virtual currencies, as established in the binding consultations V0590-18 and V0250-18.
Inheritance and Gift Tax (ISD)
In this tax it is also possible to distinguish two different cases:
- If it is a transmission mortis causa (when a holder of the same dies and his heirs receive them) this tax is applied, and the market value of the cryptocurrencies at the time of their transmission will be taken into account.
- If it is a live transmission This tax is also applied taking into account the value of the cryptocurrencies in the market when this donation occurs, but in addition, the donor will pay personal income tax due to the increase or reduction of his patrimony for the transmission carried out, in turn the donee will be taxed by the ISD.
Property Transfer Tax (ITP)
In this tax, there can also be the case of a transmission of some cryptocurrencies in exchange for others, in the following two situations:
- If a exchange of cryptocurrencies between individuals, the taxable event is subject to this tax.
- If a swap between an employer or professional and a private individualIn the case of the employer or professional, this tax will be subject to VAT, while in the case of the individual the taxable event will be subject to the tax on onerous capital transfers.
Actions taken from the Tax Agency
After the 'boom' of 2017 due to the Bitcoin halving of 2016 international institutions began to take cryptocurrencies seriously. Christine Lagarde, the then Director of the IMF and current president of the European Central Bank, said that "the authorities should remain open and develop an impartial regulatory framework that reduces risks while allowing the creative process to bear fruit" in the field of cryptocurrencies.
In the last quarter of 2018 these began to form part of the agenda of the European Union and even of the OECD itself. In any case, due to the complexity of these assets, it is very difficult to establish an international legal framework, which is why each country is opting for a regulation individually. Currently within the framework of the European Union, the only existing regulation is that relating to the prevention of fraud, money laundering and financing of criminal activities.
In the Spanish sphere, the binding consultations of the General Directorate of Taxes explained above, as well as the model 720, are of vital importance. destined to know the goods and rights that are abroad. The AEAT reflects that its physical location must be determined based on the location of the Exchange where the cryptocurrencies are located, or on the location of the wallets or the virtual ledger, to take into account their tax treatment.
Currently there is no specific regulation that establishes the treatment of these assets. As in almost all disruptive advances, the technology started by Bitcoin is ahead of regulations and institutions and, for now, in Spain there is no specific tax or accounting legislation for cryptocurrencies. The binding consultations of the General Directorate of Taxes and the judgment of the Court of Justice of the European Union is practically the whole anchor to hold on to in this regard.
Even so, and out of prudence, for now we must stay with the following conclusions, roughly:
- The sale of crypto assets are not subject to VAT, because they are considered a means of payment and therefore are exempt from this tax. Even so, it should be noted that this depends on the specific currency or cryptocurrency, since many of them have very particular characteristics and therefore could have a different treatment.
- However, such operations constitute a gain or loss of equity to be taxed for personal income tax on the basis of savings. For this, the difference between the transmission price and the acquisition price is taken into account and the losses are offset with the gains throughout the year to pay the net tax.
- When exchanging one cryptocurrency for another one must be taxedAs with the sale, it results in a capital gain or loss that must be declared and taxed for personal income tax through the savings base, taking the difference in value between the time of purchase and the time of sale.
- Activities with crypto are accounted for in corporation tax as income or as an increase or loss of equity, and it must be reflected in the declaration of said tax.
- They must be declared in the Wealth Tax. As if it were a capital in legal tender currency and accounting them together with the other assets and rights that are owned, and with the updated value as of December 31 or when the year ends.
At Andorra Insiders We remember and recommend to follow scrupulously and strictly what the Law establishes, which in the absence of specific legislation and due to prudence is marked by the binding consultations made to the DGT and explained and detailed in this article. Do not trust what other users say, and check the queries for yourself.