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The Crypto Reality Check: Paying Taxes on Your Cryptocurrency Gains

A woman with bitcoin by her eyes Taxes and Cryptocurrency

Beaches, history, food, wine, and crypto. Yes, believe it or not, we’re talking about Portugal and paying cryptocurrency taxes.

Aside from its high quality of life and excellent climate, Portugal has an attractive taxation system for cryptocurrencies, whether you’ve traded crypto regularly or have performed just a few crypto transactions. 

In May, the Portuguese government addressed the legal vacuum regarding how to tax personal income from cryptos, like Bitcoin and Ethereum.

Only capital gains from professional activity or work that can be considered regular are currently taxed. However, Portugal’s government plans to introduce greater taxation laws for investment income from cryptocurrency as soon as possible.

Understanding how to pay taxes on cryptocurrency in Portugal

As of today, there is currently yet no tax legislation governing income from cryptocurrency. Whether it’s individual income tax and their effective tax rates or specific cryptocurrency taxes. 

The Portuguese Tax Authority ruled that income from the sale of cryptocurrency is considered to be a capital gain but cannot be taxed because cryptos don’t appear in Portuguese law.

Under Portuguese law, capital gains are a closed category of income. So only those specifically stated in the tax law can be subject to tax.

Examples of this include gains from the sale of real estate and stocks. Therefore, cryptocurrencies fall into a loophole and are not taxed as capital gains.

If, however, you sell cryptocurrency as your main professional activity, this is treated as income and then taxed as professional income. The individual taxpayer would pay taxes on these gains when it’s the work or business activity. This is vital to understand when paying taxes on cryptocurrency.

Now people are raising questions about how taxation might apply to cryptocurrency. Much speculation has circulated, but the rationale for taxing these financial assets is based on capital gains or investment income. Trades could be taxed as VAT.

How Could Portugal Tax Your Personal Income from Crypto?

If the Government decides to tax crypto income as capital gains, which we believe is the most likely outcome, then income earned from the sale and purchase of cryptocurrencies would be subject to tax and included in the Personal Income Tax (“PIT”) Code. 

Conversely, the government could tax cryptocurrency gains as investment income.. This would be the profit from invested capital. However, Portugal’s Securities Code also does not regulate cryptocurrencies as securities. Therefore, it would be challenging to tax this income as investment income.

The Tax Authority has analyzed the issues of capital gains and profits. However, it has’nt yet decided how to tax income from interest generating cryptos, like Stablecoins. 

Since in this scenario, the cryptocurrency lending results in accrued interest income, this income would qualify as investment income and not capital gains.

Portugal taxes this type of income at a rate of 28%. This is similar to other capital gains tax rates across Europe.

If you pay the interest in cryptocurrency and then sell it and transform it into fiat currency, like euros or dollars, you cannot tax the income received from the subsequent sale again if it was already taxed as interest when receiving it.

Therefore, the Portuguese taxation of cryptocurrencies is still not very effective and clear, since there are still many grey areas and loopholes.

What About Companies and paying taxes on Cryptocurrency?

Profits from cryptocurrency trades are included in the normal business profits and taxed by Corporate Income Tax. This is called “CIT”.  

Portuguese CIT is levied at a rate of 21%. It is added to a 1.5% municipal surtax, called “derrama municipal”. There is also a state surtax, or “derrama estadual” of:

  • 3% on taxable profits of more than €1.5 million
  • 5% on taxable profits of more than €7 million
  • and 9% on taxable profits above €35 million.

This means that the nominal tax rate may reach up to 31.5% for large companies. However, there’s a special reduced CIT rate for small and medium enterprises. Some of their profits are taxed at a lower rate of 17%. However, this is for companies with a revenue of no more than €50 million.

Portugal is fast becoming a hub for companies intending to use tokens, virtual assets in a business scope. For this, however, it’s not enough just to incorporate the company or open a branch or subsidiary. It’s important to understand everything about paying taxes on cryptocurrencty in Portugal.

If the company’s scope is managing virtual assets, then the Bank of Portugal understands activities with virtual assets to be economic activity in the name or on a client’s behalf.

This includes:

  • providing exchange services between virtual assets and fiat currencies or between one or more virtual assets
  • transferring virtual assets
  • and the management of virtual assets or instruments that allow to control, hold, store or transfer these assets. This includes private cryptographic keys. 

Legal persons or entities in Portugal must file a declaration to Tax authorities when working with virtual assets.

There are various incentives for startups and tax benefits for individuals. For example, there is the Non-Habitual Resident regime.

How can a lawyer help you?

Our Corporate team has been working closely with the surge in digital assets for companies in Portugal. Lexidy will advise you on whether you need to have a license and help you apply for it. This will secure your position and protect your rights.

Our role includes:

  • Understanding if the companies activities are regulated
  • Drafting all needed documents for a possible application
  • Communicating with the other party
  • Helping the company and individuals with their taxation
  • Applying for visas and special tax regimes 

By the way, Lexidy accepts payments with Cryptos! Don’t hesitate to contact us today. Speak with team to undestand how to pay taxes on cryptocurrency.

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