Form 721 and Cryptocurrencies: How Does It Work? Information Return on Virtual Currencies Held Abroad.

Form 721 is a new tax form for reporting cryptocurrency holdings abroad. It will start to apply in 2024, in respect of the 2023 tax year. Its purpose is to give the Spanish tax authorities actual knowledge of holdings of digital virtual currencies, particularly given that most of them are held on exchanges located abroad.

One of the traditional features of virtual currencies is their ability to evade the oversight of the tax authorities of different countries. In this regard, steps began to be taken in Spain from 2021 onward to tackle this problem.

Criterion for defining a virtual currency

A virtual currency is defined as a digital representation of value that is neither issued nor guaranteed by a central bank or public authority, is not necessarily attached to a legally established currency, and does not possess the legal status of currency or money, but is accepted as a means of exchange and can be transferred, stored, or traded electronically.

Who is required to file Form 721?

The following are required to file Form 721:

• Individuals and legal entities resident in Spanish territory

• Permanent establishments in Spanish territory of non-resident individuals or entities

• Estates in abeyance (herencias yacentes), joint ownership arrangements (comunidades de bienes), and other entities that, lacking legal personality, constitute an economic unit or a separate pool of assets capable of being taxed.

This new obligation will apply to all virtual currencies located abroad of which the taxpayer is the holder, or in respect of which the taxpayer is a beneficiary or an authorized person or otherwise has power of disposal, or of which the taxpayer is the beneficial owner.

Filing Form 721 will only be required if the total value of the cryptocurrencies held abroad exceeds €50,000 as of December 31.

Filing Form 721 will be mandatory both where the taxpayer still holds cryptocurrencies as of December 31 of the relevant tax year (in this case, 2023) and where it does not. In the latter case, the information to be provided will be that corresponding to the date on which the holding was extinguished.

When is Form 721 filed?

The first returns relating to the reporting obligations on virtual currencies held abroad must be filed from January 1, 2024 through March 31, 2024, in respect of holdings during the 2023 tax year.

How is Form 721 completed?

Form 721 must contain certain minimum information, namely the following:

• Full name, or corporate name or full company name, and, where applicable, the tax identification number in the country of tax residence of the individual or entity providing services to safeguard private cryptographic keys on behalf of third parties.

• Full identification of each type of virtual currency.

• Balances of each type of virtual currency as of December 31, expressed in units of virtual currency, and their value in euros.

Filing the return in subsequent years will only be mandatory where the combined balance has increased by more than €20,000 compared with the balance that gave rise to the filing of the last return.

Penalties for failing to file Form 721

The penalties for failing to file Form 721 will be the same as those for Form 720 (return on assets and rights held abroad), which does not cover cryptocurrencies.

In principle, a fine of €300 will apply for failing to file Form 721 when required to do so by the tax authorities, as well as a fine of €150 for incorrect filing. A fine of €20 may also apply per record not reported or requested, or a fine of €10 per record reported incorrectly.

The statute of limitations for these penalties will be 4 years, or 5 years in the case of a tax offense and 10 years for aggravated tax offenses.