Taxation of cryptocurrencies: A complete guide
Cryptocurrencies have become a trend for many companies and freelancers who see how their marketing can become a real headache when filing their Income Tax Return.
In view of this situation, and with the Government’s approval of the Bill on measures to prevent and combat tax fraud, we share this guide that summarises everything you need to bear in mind to find out how declaring cryptocurrencies will affect your taxation in 2021.
Cryptocurrencies are virtual (non-physical) currencies that use cryptography as a means of control. They can be traded and exchanged for other traditional currencies and can be used to carry out all kinds of commercial transactions, just as you would with any other currency. In fact, in Spain, they have been authorised as a legal means of payment since 2015.
How are cryptocurrencies taxed?
When you include cryptocurrencies in your income tax return, you must always declare your profits. In the case of losses, it is not obligatory to reflect them, but optional. Although it is recommended to do so in order to offset losses and gains in the future.
How are they reflected in the Income Tax Return?
Cryptocurrency income is divided into four fundamental blocks:
1. gains and losses from transmission: here we include our swaps, trades, sales and purchases… The typical activity of buying and selling and exchange of cryptocurrencies. In addition, it also functions as a cryptocurrency trading service (cryptocurrency exchange). It can be used both by mobile phone and via its website.
2. Return on capital: this refers to interest, sta€king… These are platforms to which we have sent cryptocurrencies and which generate a return. One of the best known examples of this type of platform is binance, which works as a “virtual wallet” in which you can store your cryptocurrencies and see the evolution of their value, and also allows you to generate interest or automatic returns on the cryptocurrencies they hold for you.
3. Gains and losses without transmission: these are airdrops, referral programmes, hardforks… In other words, a cryptocurrency appears in our wallet and it does not come from having transmitted another asset, but appears for other reasons (for having a certain asset, for recommending a software…).
4. Economic activity: this refers to mining (specific mining activity), trading or buying and selling cryptocurrencies for third parties…
Gains and losses by transfer and capital gains are taxed in the special part for income tax purposes. While gains and losses without transfer and economic activity are taxed in the general part of the income tax.
Wealth tax and cryptocurrencies
Wealth tax is levied on the net wealth of individuals and is complementary to personal income tax. It includes all the assets owned by a self-employed person. Each autonomous community establishes a limit from which this declaration must be made.
If the total of your assets on 31 December 2020 (houses, investment funds, shares, cryptocurrency balance…) is higher than the limit of your autonomous community, you are obliged to declare it. On average, the limit is usually around 600,000 euros, but it depends on each particular autonomous community. It is therefore very important that you check the limit that will affect you, as it varies from one Autonomous Community to another.
Form 720
Form 720 is an informative declaration of assets and rights located abroad. This form provides information on all those accounts, real estate, insurance, income, securities… located outside Spain that you have owned during 2020. Although it is for information purposes, this does not mean that it is not obligatory. In fact, the deadline for filing it is 31 March 2021.
New legislation in 2021
One of the great news regarding cryptocurrencies that 2021 has brought is that the Council of Ministers has finally approved the Draft Law on measures to prevent and combat tax fraud.
The document is currently going through the parliamentary process, but the great novelty is that it expressly incorporates the obligation to declare cryptocurrencies in Form 720.
To this must be added two new reporting obligations relating to the holding and operation of virtual currencies, which are included in the thirteenth additional provision of Law 35/2006:
– It introduces the obligation to provide information to the Tax Agency on the balances held by holders of virtual currencies, by those who provide services to safeguard private cryptographic keys on behalf of third parties that enable the use and holding of such currencies, including providers of exchange services for the aforementioned currencies if they also provide the aforementioned holding service.
– And, for these same persons or entities, an obligation is established to provide information to the Tax Agency on transactions involving virtual currencies (acquisition, transmission, exchange, transfer, collections and payments) in which they are involved. This same obligation also extends to those who carry out initial offerings of new cryptocurrencies.
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Fines for not declaring cryptocurrencies in Spain
The Annual Tax and Customs Control Plan for 2021 reflects the “fiscal risks” of cryptocurrencies and announces measures to control them. These include penalties of €5,000 for users and investors who mislead or conceal information about their use and ownership. The fines are included in the Bill on measures to prevent and combat tax fraud that is being processed in Congress.
The text establishes two new reporting obligations regarding the holding and operation of virtual currencies: the “provision of information on the balances held by holders of virtual currencies, as well as on transactions involving them. That is to say, acquisition, transmission, exchange, transfer, collection and payment”.
If they are not complied with, fines may be imposed. “Failure to submit the information returns referred to in this additional provision in due time and submitting incomplete, inaccurate or false information shall constitute tax offences”, with the classification of “very serious” tax offences.
A fine of up to 5,000 euros will be imposed “for each piece of information or set of information referring to the same account that should have been included in the return or that should have been provided incompletely, inaccurately or falsely, with a minimum of 10,000 euros”.
The same amount shall apply if “in the case of non-compliance with the obligation to report on securities, assets, securities, rights, insurance and income deposited, managed or obtained abroad, referring to each item of property individually considered according to its type, which should have been included in the return or which have been provided incompletely, inaccurately or falsely, with a minimum of 10,000 euros”.
There will also be penalties for late submission of information related to cryptocurrencies in portfolio. “The penalty will be €100 for each piece of information or set of information referring to each asset item individually considered according to its class, with a minimum of €1,500, when the declaration has been submitted after the deadline without prior request from the Tax Administration.”
In addition, “the filing of the tax return by means other than electronic, computer and telematic means will be penalised when there is an obligation to do so by such means”.
