Taxation of cryptocurrencies: A complete guide.

Cryptocurrencies have become a trend for many companies and self-employed workers, who are seeing how trading in them can turn into a real headache when filing their Personal Income Tax (IRPF) return.

In light of this situation, and following the Government’s approval of the Bill on Measures to Prevent and Combat Tax Fraud, we are sharing this guide, which summarizes everything you need to bear in mind to understand how reporting cryptocurrencies in 2021 will affect your taxes.

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 for all kinds of commercial transactions, just as you would with any other currency. In fact, in Spain, they have been authorized as a legal means of payment since 2015.

How are cryptocurrencies taxed?

When including cryptocurrencies in your Personal Income Tax return, you must always report gains. Reporting losses, on the other hand, is not mandatory but optional. It is, however, advisable to do so in order to offset losses against gains in the future.

How are they reported in the Personal Income Tax return?

Income from cryptocurrencies is divided into four main categories:

1. Gains and losses from transfers: this includes our swaps, trades, purchases and sales… The typical activity of buying, selling, and exchanging cryptocurrencies. In addition, it also works as a cryptocurrency trading service (cryptocurrency exchange). It can be used both on a mobile phone and through its website.

2. Investment income: this refers to interest, staking… These are platforms to which we have sent cryptocurrencies and which generate a return for us. 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 track the evolution of their value, and which also allows you to generate automatic interest or returns on the cryptocurrencies it holds in custody for you.

3. Gains and losses without a transfer: these are airdrops, referral programs, hard forks… In other words, a cryptocurrency appears in our wallet that does not come from having transferred another asset, but appears for other reasons (holding a certain asset, recommending a piece of software…).

4. Business activity: this refers to mining (the specific activity of mining), trading or buying and selling cryptocurrencies on behalf of third parties…

Gains and losses from transfers and investment income are taxed in the special part for income tax purposes, whereas gains and losses without a transfer and business activity are taxed in the general part of income tax.

Wealth Tax (IP) and cryptocurrencies

Wealth Tax is levied on the net assets of individuals and is complementary to IRPF. It covers all the assets held by a self-employed worker. Each Autonomous Community (region) sets a threshold above which this return must be filed.

If the total value of your assets as of December 31, 2020 (homes, investment funds, shares, cryptocurrency balances…) exceeds the threshold set by your Autonomous Community, you are required to report it. On average, the threshold is usually around €600,000, but it depends on each specific Autonomous Community. It is therefore very important that you check the threshold that will apply to you, as it varies from one region to another.

Form 720 (return on assets and rights held abroad)

Form 720 is an informational return on assets and rights located abroad. This form is used to report all accounts, real estate, insurance policies, income, securities… located outside Spain that you have held at any time during 2020. Although it is informational in nature, this does not mean that filing it is not mandatory. In fact, the deadline for filing it is March 31, 2021.

Legislative developments in 2021

One of the major developments regarding cryptocurrencies that 2021 has brought is that the Council of Ministers has finally approved the Bill on Measures to Prevent and Combat Tax Fraud.

The document is currently going through the parliamentary process, but the major development is that it expressly introduces the obligation to report cryptocurrencies on Form 720.

In addition, there are two new reporting obligations relating to the holding of and transactions in virtual currencies, which are set out in the thirteenth additional provision of Law 35/2006:

– An obligation is introduced to provide the Spanish Tax Agency (AEAT) with information on the balances held by holders of virtual currencies. This obligation falls on those who provide services for safeguarding private cryptographic keys on behalf of third parties that enable the use and holding of such currencies, including providers of exchange services for those currencies if they also provide the aforementioned custody service.

– And, for these same persons or entities, an obligation is established to provide the Tax Agency with information on the transactions in virtual currencies (acquisitions, disposals, swaps, transfers, collections, and payments) in which they take part. This same obligation also extends to those who carry out initial offerings of new cryptocurrencies.

Fines for failing to report cryptocurrencies in Spain

The 2021 Annual Tax and Customs Control Plan highlights the “tax risks” of cryptocurrencies and announces measures to control them. These include penalties of €5,000 for users and investors who mislead the authorities or conceal information about their use and ownership. The fines are set out in the Bill on Measures to Prevent and Combat Tax Fraud currently going through Congress.

The text establishes two new reporting obligations relating to the holding of and transactions in virtual currencies: the “provision of information on the balances held by holders of virtual currencies, as well as on the transactions in them. That is, acquisitions, disposals, swaps, transfers, collections, and payments.”

Failure to comply may result in fines. “Failure to file on time, and filing incomplete, inaccurate, or false informational returns referred to in this additional provision, shall constitute tax infringements,” which are classified as “very serious” tax infringements.

Fines of up to €5,000 will be imposed “for each item or set of items of data relating to the same account that should have been included in the return or that were provided incompletely, inaccurately, or falsely, with a minimum of €10,000.”

The same amount will apply “in the case of failure to comply with the obligation to report on securities, assets, instruments, rights, insurance policies, and income deposited, managed, or obtained abroad, relating to each asset individually considered according to its class, that should have been included in the return or that were provided incompletely, inaccurately, or falsely, with a minimum of €10,000.”

There will also be penalties for late submission of information relating to the cryptocurrencies held in a portfolio. “The penalty shall be €100 for each item or set of items of data relating to each asset individually considered according to its class, with a minimum of €1,500, where the return has been filed late without a prior request from the tax authorities.”

Furthermore, “filing the return by means other than electronic, computerized, and telematic means shall be penalized where there is an obligation to file by such means.”