There has been going for the last years, ongoing activity in the cryptocurrency business in Spain. However, as it usually happens, governments and regulations are many steps behind the market. Cryptocurrencies taxation is not an exemption. More than two years ago, we wrote about cryptocurrency taxation, and a lot has happened since then.
In this post, we will clarify all your tax-related queries regarding this vibrant business that cryptocurrencies are.
Table of contents
- What is cryptocurrency?
- Cryptocurrencies and the personal income tax in Spain
- Obtaining returns on interest paid by online platforms.
- Returns from cryptocurrency mining.
- Obtaining returns for acting as a broker or investment fund.
- Cryptocurrencies and wealth tax
- Cryptocurrencies and the informative declaration assets abroad
- How can we help you?
What is cryptocurrency?
A cryptocurrency is a virtual currency that allows its users to buy objects and pay for services with companies that accept payment with virtual currencies.
Cryptocurrencies are a digital medium of exchange. Being bitcoin the first cryptocurrency that began to operate in 2009. Since then, more than 2,000 virtual currencies with different characteristics and protocols have appeared.
However, a vast majority of users use them as a method of investment or speculation, and not as a digital medium of exchange.
Some of cryptocurrency characteristics
- Decentralized currencies not controlled by any bank.
- Controlled through blockchain, which is a database of the financial transactions that are carried out.
- Very secure currencies, precisely because of blockchain technology.
- Reduce the cost of transactions since there are no intermediaries such as banks.
- Facilitate the speed of payments since they are made in a few minutes.
- The value of cryptocurrencies depends on the purchase and sale operations programmed by the people who want to buy or sell these virtual currencies.
European regulations on Cryptocurrency
Cryptocurrency is seen by many as the future when banks will no longer have control over the capital flow. Although there were relatively few regulations in Europe and the crypto market kept benefiting from this situation. In light of this, several countries have formed a coalition to regulate crypto business. As such, Spain together with France, Malta, Italy, Portugal, Greece, and Cyprus established Mediterranean Seven. It aimed to centralize efforts regarding cryptocurrency and bring one solid strategy.
Cryptocurrencies and the personal income tax in Spain
The taxation of the operations will depend on the activity the taxpayer is performing with the cryptocurrencies.
A trader is a person who acquires cryptocurrencies and pays for them with his money.
Internet platforms facilitate the acquisition of properties. The acquisition does not generate any return that can be taxed.
The investor simply waits for the stock to increase in value to sell and earn a return.
The difference between the value at which the cryptocurrencies were acquired and the value at which they are sold generates a capital gain or loss that must be declared.
In Spain, the capital gain will be included in the Personal Income Tax Savings Base and the percentage to be applied will vary between 19% and 26%.
Personal income tax rates for crypto-traders
- The First 6.000 Euros of Capital gain will be taxed at 19%.
- Following 44.000 Euros at 21%.
- Following 150.000 Euros will be taxed at 23% and
- Over 200.000 Euros of Capital Gain, the tax rate will be 26%.
On the other hand, if the trader has suffered a capital loss, it can be compensated with the gains. In case the losses exceed the gains, the non-offset losses can be compensated in the declarations of the following four years, up to a limit of 25% of the gains of each the following years.
Therefore, it is a common practice that if you are planning to have a significant capital gain from the sale of bitcoins or any other cryptocurrency, you sell an asset at a loss to reduce the overall taxation.
I sell but do not take the money out of the virtual wallet, do I have to pay taxes?
If you do not take out the virtual money, from a tax point of view these coins do not have any real value until they are converted into national currency, i.e. euros. This means that if you do not convert bitcoins and/or cryptocurrencies into euros you will not have to pay income tax on them.
Should trading platforms apply the withholdings on these capital gains?
In practice, trading platforms and virtual wallets should withhold a 19% withholding tax on the profits obtained by selling cryptocurrencies, although many of them do not do it. However, this does not mean that the profits are not subject to taxes, only that the withholdings will not have been paid to Spanish Tax Authorities.
What if a bitcoin or another cryptocurrency is exchanged for another virtual currency?
In this case, since there has been an alteration of your assets, you would have to pay taxes if there has been a Capital Gain, as there have been two operations: the sale of the first cryptocurrency and the acquisition of a new cryptocurrency.
The value at which the first virtual currency was acquired and the value of the sale of that currency before acquiring the next one should be considered in order to know the capital gain generated.
This difference generated will be taxed as capital gain, as indicated above.
Obtaining returns on interest paid by online platforms.
Certain online platforms where cryptocurrencies are deposited pay interest to the buyer.
This interest will be considered in the Personal Income Tax as savings income, and, as such, will be taxed at the same tax rates stated above.
Returns from cryptocurrency mining.
Cryptocurrency mining is the activity carried out when a specific computer (or several of them!) is/are used to validate and process blockchain transactions in exchange for remuneration in cryptocurrencies.
For Personal Income Tax purposes, cryptocurrency mining is considered an economic activity and the income obtained will be included in the general taxable base, and subject to the corresponding progressive tax rate.
Since it is considered an economic activity, the person mining cryptocurrencies will have to pay taxes on the profits obtained from this activity, which means that will be able to deduct the expenses associated with this activity.
To carry out this activity, a series of formal requirements must be met, such as:
- Registration before Spanish Tax Authorities in the IAE with the Model 036 or 037.
- Registration before Spanish Social Security Authorities in the RETA.
- Filing in of the quarterly forms on Payment into Account of the Personal Income Tax, and its annual summary.
- Registration in the Register of Intra-Community Operators (ROI) and filing in of the corresponding quarterly forms on intracommunity operations.
- Filing in of the annual informative form on operations with third parties.
Obtaining returns for acting as a broker or investment fund.
In this case, an individual receives money from other individuals to invest it and receives a commission for it.
With regards to the Spanish Personal Income Tax, the income perceived from this activity is resulting from economic activity, and therefore, will be subject to the corresponding progressive tax rate on the general income.
To carry out this activity, the same formal requirements as above must be met.
With regards to the VAT, it could be considered that the exemption on financial services mediation is applicable if certain requirements are met, such as:
- The mediator must put the investors in contact with the entity to sign the contracts.
- The mediator will have the capacity to negotiate and advise on behalf of the investor.
- The mediator must be active in attracting clients.
Cryptocurrencies and wealth tax
As you know, in certain regions of Spain there is a Wealth Tax, which will tax your worldwide net wealth. In Madrid, there is no Wealth Tax, but other regions have certain thresholds above which you will have to pay Wealth Tax (i.e. in Catalonia, it is 500.000 Euros, in Comunitat Valenciana it is 600.000 Euros and in Andalusia, it is 700.000 Euros).
If an individual has cryptocurrencies, these must be considered when determining the value of that person’s wealth.
To determine the value of the cryptocurrencies to be declared in the Wealth Tax, the value as of December 31st of the corresponding tax year must be declared.
Cryptocurrencies and the informative declaration assets abroad
Before going any further, please note that in the 2020 Informative Form on Goods and Assets Abroad, form 720, cryptocurrencies must not be reported.
Probable future of cryptocurrency declarations in Spain
Due to the need to control the activities that we have detailed above and that are carried out with cryptocurrencies, in October 2020 the Law on Measures to Prevent and Combat Tax Fraud was approved, and it will likely come into force during the first quarter of 2021.
- Exchange platforms that custody cryptocurrencies will have to report the balances held by cryptocurrency holders and the operations carried out with them (acquisition, transmission, exchange, transfer, collection, and payment).
- Cryptocurrencies must be included in the Informative Form on Goods and Assets Abroad (Form 720).
As you already know, the obligation to declare such cryptocurrencies will arise if their aggregated value is over 50,000 euros. Penalties for not filing the 720 Form can be severe, as they can reach 10,000 euros and there will be a penalty also in the Personal Income Tax Return that can reach up to 150% of the income not declared.
How can we help you?
If you would like to have more information or have any questions about Tax procedures regarding cryptocurrency in Spain. Please do not hesitate to contact us directly. Write to us, we would be happy to assist you!