Taxation of cryptocurrencies

Since their creation in 2009, crypto-assets have attracted the curiosity of many investors, but there are still numerous questions regarding these assets, a lot because of their deregulation, including for tax purposes.

Crypto-assets are digital financial assets based on distributed ledger technology (DLT), a technology that allows for data and transactions to be recorded in a network of servers collectively managed and shared in a synchronized and decentralized way among its participants, with no need for intermediaries to be involved in the processing. These assets are usually classified in three main categories: payment tokens (or cryptocurrencies, such as bitcoins), used as unit of account and means of payment, utility tokens, which represent a right to receive future goods or services, and security tokens, which provide their owners with a contractual right to cash or another financial asset.

In fact, the features that make crypto-assets unique – such as the lack of centralized control, (pseudo-)anonymity, valuation difficulties, hybrid characteristics between intangible assets and financial instruments – are also the ones responsible for the challenges raised to the policymakers of various fields, including the tax policymaker, both because of the difficulty to define a tax framework that covers all their different facets, as well as to set such framework considering the permanent and rapid changes in the nature of these assets.

For instance, as regards their accounting classification, with no international guidance issued about how crypto-assets should be classified, they are being treated according to their type. In case of cryptocurrencies, they are usually classified as intangible assets, according to IFRS IAS 38 (or as inventory in accordance with IFRS IAS 2 when an entity holds these assets for sale in the ‘ordinary course of business’), utility tokens are treated as a prepayment for goods and services under IFRS 15, and security tokens as financial assets subject to IFRS 9.

Nevertheless, worries about money laundering, terrorism financing and tax evasion led the G20 leaders to call the discussion about the taxation of crypto-assets, from which resulted the publication, in October 2020, of OECD’s report “Taxing Virtual Currencies”, which offers a comprehensive analysis of the approaches and policy gaps across the main tax types for a variety of countries and provides a number of recommendations to help policymakers wishing to improve their tax policy frameworks in this matter. Among the recommendations it was already highlighted the need to provide a clear, regularly updated and consistent (with the treatment of other assets) guidance for the tax treatment of cryptocurrencies. In Portugal, contrary to the European trend, this has not been done yet.

In fact, in Portugal there are only three known Binding Opinions published by the Portuguese Tax Authorities about cryptocurrencies taxation, which clarify that for Personal Income Tax (IRS) purposes, the income related to virtual currencies is not taxed because it is not included neither in the definition of capital gains nor in the definition of capital income, unless obtained in the context of a professional or business activity. For VAT purposes, the Portuguese Tax Authorities have followed the understanding of the European Justice Court in case Hedqvist (C-264/14), considering that, in case of bitcoins, being comparable to fiat currency, its mere transfer is not subject to VAT, and the onerous exchange of bitcoins for fiat currency or vice-versa, is a services provision subject to VAT but exempt under article 9(27)(d) of the Portuguese VAT Code (article 135(1)(e) from the VAT Directive).

So, what should we expect as regards the taxation of cryptocurrencies in Portugal, considering the developments in other countries?

As regards income taxation, very few countries consider virtual currencies to be a fiat currency, given their limited acceptance, lack of intrinsic value (they are not linked, in the majority of cases, to the value of any commodity or foreign currency), lack of backing by a Public Authority, not being a legal tender in any jurisdiction (which recently changed with El Salvador being the first country declaring legal tender of bitcoin), besides being highly deregulated. As a result, the majority of countries have declared these to be a form of property for tax purposes.

In this context, some countries consider there is a taxable event upon the creation of the currency (sometimes, depending if it happens in the context of an activity or habitually); other times, only upon its disposal, treating it as capital gains taxed under the general rules with a base cost of zero (with some exceptions, when exchanged for other cryptocurrencies).

As a result, when exchanged for goods or services, the transaction of cryptocurrencies is treated as reciprocal transactions – which may be problematic, considering the valuation difficulties as well as the intent of using them as means of payment while most taxpayers are not equipped to calculate the gains or losses resulting from their daily transactions.

As regards donations and inheritances, the regulation is scarcer, with jurisdictions where the donation is treated as disposal, under the rules of capital gains, and other where no taxable event is deemed to occur. In the same way, the loss/theft of cryptocurrencies is sometimes considered as a capital loss, and in other cases, disregarded.

In contrast, for VAT purposes, the majority of countries have been treating cryptocurrencies as fiat currency, following the referred ECJ’s decision in case Hedqvist. In fact, after this decision, the VAT Committee of the European Commission adopted this same approach, defining the VAT framework of various activities related to virtual currencies, which has been adopted by most EU countries:
• Exchange of virtual currencies for other currencies (virtual or not): not subject to VAT.
• Use of virtual currency for acquiring goods or services: not subject to VAT (even if the provision of the goods or services is subject to VAT).
• Creation of new virtual currencies (mining): generally, not subject to VAT.
• Services related to exchange of virtual currencies: VAT exempt, with some exceptions (namely, for services related to intermediation supplied by exchange platforms).

Finally, as regards property taxes (inheritance, donation, wealth and transaction taxes), although it seems likely that virtual currencies will be subject to these taxes, since they are generally treated as property for tax purposes (except as regards VAT), there are still few guidelines about their application.

Hence, in face of this uncertainty, diversity of frameworks and increasing adoption of guidelines in other European countries, it is with great expectation we await to see what will be the Portuguese position regarding the regulation of these matters in the near future, without loosing sight of the opportunity given to the Portuguese policy maker for continuing to attract investors to national territory.