Cryptocurrencies such as Bitcoin (BTC) or Ethereum (ETH) are here to stay. Without specific regulation and in an environment of economic uncertainty, they have become attractive assets for speculators and the curious. In this article we discuss the taxation of cryptocurrencies such as bitcoins in Spain.
On Wednesday 13 January 2021, the president of the European Central Bank (ECB), Christine Lagarde, called for global regulation of cryptocurrencies such as bitcoin, classifying them as “highly speculative assets”. If we remember the 2008 crisis, we can recognise the symptoms of another bubble.
Surrounded by controversy due to the possibility of their use for money laundering, it is clear that these alternative financial systems must be regulated. The European Commission tried to close this loophole by publishing a proposal for a Regulation on crypto-asset markets known as MiCA (Markets in Crypto-Assets). It is expected to see the light of day in 2021 or 2022.
This is too long for a sector that is advancing at the click of a button and is worth 500 billion dollars (410 billion euros) worldwide.
This article reviews the basic concepts related to cryptocurrencies and their taxation.
What are crypto-currencies?
Cryptocurrencies, unlike legal tender, generally lack a supervisor or regulator in charge of their control (“Monetary Policy”). They are digital representations of an ethereal or immaterial value behind which there is only the price that the parties agree upon.
Cryptocurrencies are based on registry technology and shared data and exist outside the control of governments. In Spain, so far, they lack specific legal regulation and are not recognised either as legal tender or as foreign currencies or similar. However, there are countries in the process of developing cryptocurrencies for the purposes of future legal tender. In organisations such as COINMAP.org you can find establishments that accept this type of instrument.
At the date of publication of this article there are more than 2000 cryptocurrencies in circulation, the best known being BITCOIN (BTC), LITECOIN (LTC), ETHEREUM (ETH), RIPPLE (XRP), EOS (EOS) and TETHER (USDT).
How are cryptocurrencies such as bitcoin obtained?
In cryptocurrency trading, the user exchanges a “real” currency such as euros for cryptocurrencies that he deposits in his virtual wallet. Due to the high volatility of the exchange, the value of the exchange varies from day to day and always generates a profit or loss. Cryptocurrencies as a means of payment are, as yet, rarely accepted in businesses in our country, although their use is spreading, mainly in online commerce and technology.
Mining is the use of computers to verify transactions made with a virtual currency. Miners are those who make their computing power available to the network. In exchange for making your computer available, you become a miner and receive consideration for it in that virtual currency.
Mining, for tax purposes, is treated as an economic activity (an asset is being produced), so it must be included in your income or corporate tax return. This alternative is less popular than buying and selling as it requires a high level of technical knowledge and extensive technological resources.
Are they safer?
On the one hand, it is an investment in a highly volatile market. The investment itself is not very different from investing in the stock market (the stock exchange) or the foreign exchange market (FOREX). However, regulation in the sector is more complex due to the fully digital nature of the product.
Apart from the inherent risks of any financial investment (possibility of losing the invested capital, volatility, etc.), there are two risks particular to cryptocurrencies:
- Exchange risk: many people have their cryptocurrencies stored in an exchange (similar to a current account in a bank). The bankruptcy of the exchange would mean the loss of the money. It is necessary to pay attention, above all, to the country where the Exchange is constituted.
- Risk of digital theft or loss: we are talking about digital assets, files on a computer. A malicious actor could steal these files (as happened to the Spanish 2gether) or you could lose them and, without backups, lose your money (as happened to The Big Bang Theory in S11E09).
Taxation of cryptocurrencies How are bitcoin or cryptocurrencies taxed?
A virtual wallet has the same consideration as a bank account, being the 19% withholding tax on the profits obtained by operating with any type of virtual currency when we must declare them.
If we do not make any movement with the money in cryptocurrency and it is kept in the wallet, it will have no real value, as it has not been converted into a national currency such as the Euro. You will only have to declare and pay taxes in case of transactions with these cryptocurrencies.
Taxation of cryptocurrencies in income taxation (IRPF, IRNR and IS)
A virtual wallet is treated in the same way as a foreign currency bank account. When we put money in, we buy currency in exchange for euros, and when we take it out, we sell currency in exchange for euros. The euros we give or receive for each currency unit of the cryptocurrency is the “exchange rate”.
The difference between what we gave and what we received is, for tax purposes, a capital gain or loss to which the same rules apply as for investments in stock markets. The tax rate for personal income tax is 19 to 21%, and for corporate income tax it is 25% in general.
As with other financial investments, taxation occurs when the gain materialises: when the cryptocurrency is sold and euros are received in exchange.
In the case of mining, this is considered an economic activity (organisation of material and personal means to produce a good or service), so it will be necessary to register with the Tax Authorities (AEAT) and the Treasury (TGSS). We can also deduct the expenses inherent to the activity: electricity, mining equipment, ……
Value added tax (VAT) taxation of cryptocurrencies
Given the assimilation of cryptocurrencies to traditional currencies, their exchange is considered a transaction exempt from VAT (LIVA, art.20.Uno.18º), especially after the CJEU ruling C-264/14 of 2-10-15 which declared applicable art. 135.1.e of Directive 2006/112 (VAT Directive).
Taxation of cryptocurrencies in wealth taxation
As with any asset subject to valuation, this must be taken into account when filing a wealth tax return. With the same valuation rules applicable to other financial assets.
The same exemption limits and tax rates will therefore apply.
Bitcoin and the environment
We noted above that the current iteration of cryptocurrencies and blockchain rely on complicated calculations to authenticate transactions.
The mathematical calculations of a computer have a direct relationship with power consumption. In other words, each cryptocurrency transaction has a direct cost in electricity: about 621 KWh (500,000 times the energy needed for a credit card transaction).
A recent Nature magazine article showed that the environmental impact of BTC alone could raise the planet’s temperature by 2 degrees Celsius (and, remember, there are 1999 other cryptocurrencies out there).
A fad or a trend that is here to stay?
The invention of bartering was followed by the use of precious metals in a balance, then minted coins, and then banknotes and promissory notes guaranteed by their issuers, which led to the creation of currencies.
Cryptocurrencies are the 21st century’s technological application to means of payment.
Many entities and institutions are interested in developing these technologies, for example to eliminate interbank settlement houses. Cryptocurrencies, and especially blockchain technology, are here to stay.
Of course, that cryptocurrencies are here to stay does not mean that today’s cryptocurrencies are tomorrow’s cryptocurrencies. It is very likely that of the 2000 cryptocurrencies in circulation today, no more than half a dozen will survive and that they will coexist with other more modern, regulated and less volatile cryptocurrencies.
If you are curious or you think it is an interesting alternative for you as an investor, we recommend that you always manage it from a platform that allows you to control your portfolio and issue the performance report you need so that a tax advisor like us can prepare your tax return or make a simulation of the tax impact of your portfolio.
Some popular ones are Cointracking, Cointracker, Koinly, which in the same way that a bank or stock market investment platform provides you with the performance data to make your tax return will allow you to extract that information easily.
If you have made investments in cryptocurrencies without managing them from a platform we can also help you, it is a laborious process but we will help you to reconstruct the operations you have made and to manually calculate the returns they have generated.
Like any other asset, proper tax planning can reduce the tax burden and improve the final result of any operation. Do not hesitate to contact our team of tax experts.
We are here to help you if you have specific doubts about the taxation of cryptocurrencies such as bitcoin, subscribe to our news to stay up to date.