Mikel Ruiz de Gauna Bilbao explain us the taxation of Cryptocurrencies
Last Wednesday, 31st October, marked 10 years since the day when, under the pseudonym of Satoshi Nakamoto, the foundations were laid for the first cryptocurrency in history, the “Bitcoin”. Nine years later, in December 2017, this was a common term in the conversations of any coffee shop or hairdresser in the country.
It was at that time when the first tax concerns arose. How do you declare investments made with virtual currencies? Should they be treated the same as traditional currencies? How should the profits generated be calculated? When should such a profit be declared? What if a loss occurs?
The Departament de Tributs i de Fronteres (Tax and Customs Department, hereinafter, DTF) has responded to most of these issues in the Personal Income Tax (hereinafter, IRPF) through the Binding Consultation CV0130-2018 issued on 17/09/2018.
As was foreseeable, and just like in other countries, the DTF categorises the nature of the income from the purchase/sale of virtual currencies as a capital gain or loss. This classification is based on the provisions of article 24.1 of the IRPF Act, “For the purposes of this tax, the changes in the value of the taxpayer’s assets which are apparent due of any alteration in their composition are considered as ‘capital gains and losses’, unless they are considered income under this Act”. Consequently, the taxpayer who has carried out such transactions must incorporate the profit obtained within the tax on savings base in their IRPF (Personal income tax) declaration unless such income has been incurred as a result of an economic activity. The calculation of this capital gain, or capital loss, must be made by the difference between the sale value and the acquisition cost as stipulated in Article 25.1 of the IRPF Act “In cases of transfer for consideration or profit, the difference between the acquisition and transfer values of the assets”.
The DTF also points out that there is no specific standard within the scope of the IRPF for transactions with virtual currencies that govern the concepts of “acquisition value” and “transfer value”. For this reason, the Binding Consultation makes the following clarification: “in order to determine the profit or loss that may arise in the exchange of a certain virtual currency to euros the transfer value, determined as the amount in euros received at the time of the conversion of the virtual currencies, must be compared with the euro value of these currencies when they were purchased. In the event that the investor has carried out more than one transaction with the same virtual currency, the valuation shall be carried out by applying any generally accepted valuation method that allows for the valuation, in a reasonable, reliable and suitable manner, of the virtual currency portfolio owned by the taxpayer. In any event, once a certain method has been chosen, it must be maintained at least until the transfer of all homogeneous virtual currencies”.
The last relevant point is the analysis of the temporary allocation. That is, when the asset alteration should be considered as made and therefore, at what time the generated profit or loss should be declared. In this regard, the consultation answers two recurring questions.
The first needs some context. Due to the special idiosyncrasies of these assets, the exchange transactions of cryptocurrencies to euros are carried out through intermediaries. Therefore, when an investor makes a sale, they do not immediately receive the euro equivalent, but rather said amount is deposited in the intermediary’s account and from there they must process a transfer to their personal account. There the doubt arises, should it be taxed at the time the currency is converted or when the amount is finally paid in euros? The answer is clear, “regardless of the moment when the consultant receives the payment in their account, the capital profit or loss shall be allocated at the time the virtual currency is exchanged into euros”.
The second question is easier, what happens when the sale of the virtual currency is not made in exchange for euros but is rather exchanged for a different virtual currency? The DTF considers that, although the sale has not been a conversion to euros, the investor must pay “when a virtual currency is exchanged into another different virtual currency, given that there is a change in the value of the taxpayer’s assets, and a capital gain or loss will also be generated for the purposes of the tax, provided that this return is not classified as economic activity income”.
In summary, the transfer of virtual currencies implies an alteration to the investor of their assets generating a capital gain, or loss, that must be included in the IRPF savings base for the difference between the transfer value and the acquisition value. This allocation shall be carried out in the tax year in which such transfer has occurred irrespective of whether the sales value has been materialized in euros or in another virtual currency. and whether the investor has received the payment into their personal account or not.
Mikel Ruiz de Gauna Bilbao
Wealth Services Andbank