Taxation of cryptocurrencies

Spanish domestic law contains no specific tax rules on cryptocurrencies. The tax regime applicable to transactions involving virtual currencies has been taking shape through the binding rulings (consultas vinculantes) issued by the Directorate General for Taxation (hereinafter, the DGT). We will analyze the various taxes to which cryptocurrency transactions are subject from three perspectives:

• As a means of payment
• As an investment
• As an activity

1. Taxation under Value Added Tax (VAT, IVA)

1.1. Cryptocurrencies as a means of payment

The delivery of cryptocurrencies by exchanges or exchange houses engaged in the purchase and sale of cryptocurrencies (the delivery of cryptocurrencies in exchange for euros) in return for a commission constitutes a transaction that is subject to but exempt from VAT, pursuant to Article 20.One.18, letters h) and i), of the VAT Law (LIVA). This is the position taken by the DGT, which considers that virtual currencies act as a means of payment and are therefore included within the concept of “other negotiable instruments” referred to in Article 135.1(d) of the VAT Directive.

Input VAT borne on the acquisition of goods and services used to carry on the activity will not be deductible.

1.2. Mining as an economic activity

For VAT purposes, mining is considered a transaction not subject to the tax, since there is neither a relationship between the service provider and the recipient of the service nor any remuneration constituting consideration for the service provided, given that the cryptocurrencies obtained are generated automatically by the network.

Input VAT borne on the acquisition of goods and services used to carry on the activity will not be deductible.

1.3. Blockchain advisory and research as an economic activity

According to the DGT, the economic activity of providing advisory and research services relating to blockchain technology networks is subject to VAT at the 21% rate, provided that the services are deemed to be supplied within the territory where the tax applies.

2. Taxation under Personal Income Tax (IRPF)

2.1. Mining as an economic activity

Where cryptocurrency mining is carried out by an individual who, for that purpose, uses material and human resources in a manner that entails organizing, on his or her own account, means of production and human resources, or either of them, with the aim of participating in the production or distribution of goods or services, the income obtained will qualify as business and professional income. The expenses of the activity will be deductible, and the net income will be determined by applying the Corporate Income Tax (IS) rules and will be included in the general tax base.

2.2. Acquisition of cryptocurrencies as an investment

The purchase and sale of cryptocurrencies, provided that it does not take place in the course of an economic activity, gives rise to a capital gain or loss, calculated as the difference between the transfer value and the acquisition value.

To determine the acquisition and transfer values, the commissions paid to exchange houses will be taken into account, provided that they are directly related to the transactions carried out. For these purposes, the amount of the commissions will be added to the amount paid on acquisition to arrive at the acquisition value and subtracted from the actual amount paid in the transfer to arrive at the transfer value.

Where a taxpayer holds homogeneous cryptocurrencies acquired at different exchange houses, in different years, and at different acquisition values, and makes a partial sale, the capital gain or loss will be calculated using the FIFO method, with the units acquired first being deemed to have been transferred for the purposes of determining their holding period and acquisition value.

The gains or losses generated are included in the savings tax base and are allocated to the tax year in which the change in net worth (alteración patrimonial) takes place, which is deemed to occur upon delivery of the virtual currencies or the placing of the sale order, regardless of when the price is received. This is without prejudice to the possible application of the special timing rule for installment or deferred-price transactions under Article 14.2(c) of the Law.

Where, instead of a sale of cryptocurrencies for euros, one virtual currency is exchanged for another (for example, bitcoins are exchanged for ripples), the transaction is taxed as a swap (permuta), and the capital gain or loss is computed as the difference between the acquisition value of the asset transferred and the higher of the following two:

a) The market value of the asset delivered.

b) The market value of the asset received.

Since cryptocurrencies have no official quoted price, the market value will be the price that independent parties would agree for their sale at the time of the swap.

It should be borne in mind that the disappearance or loss of the cryptocurrency account from the platform or website on which the cryptocurrencies were deposited does not give rise to a capital loss computable for IRPF purposes, unless the credit right becomes judicially uncollectible. However, the loss may be allocated to the tax year in which one year has elapsed since the commencement of judicial proceedings (other than insolvency proceedings) for the enforcement of the claim without the claim having been satisfied. In that case, since it is a capital loss that does not derive from a transfer, it must be included in the general tax base.

Finally, since cryptocurrencies do not qualify as shares (acciones or participaciones), they do not fall within the scope of the exit tax (impuesto de salida) regulated in Article 95 bis of the Personal Income Tax Law (LIRPF). Consequently, if an individual resident in Spain who holds a cryptocurrency account moves his or her residence abroad, thereby ceasing to be a taxpayer, any gains that may have accrued will not be taxed under that regime.

3. Taxation under Corporate Income Tax

3.1. Intermediation as an economic activity

If the exchange is a legal entity that receives a commission for its services, it will be taxed under Corporate Income Tax.

3.2. Mining as an economic activity

Where cryptocurrency mining is carried out by a legal entity, it will be taxed under Corporate Income Tax.

3.3. Accounting for cryptocurrencies

Under the direct assessment method (estimación directa), the Corporate Income Tax base is calculated by adjusting, through the application of the provisions of the Corporate Income Tax Law, the accounting profit or loss determined in accordance with the rules set out in the Commercial Code, in the other laws relating to such determination, and in the provisions issued to implement those rules. Accordingly, it is necessary to determine how transactions involving cryptocurrencies should be recorded in the accounts.

Query 38-14 of the Spanish Institute of Accounting and Auditing (Instituto de Contabilidad y Auditoría de Cuentas, ICAC), the only one issued to date, sets out the accounting treatment of virtual currencies. The ICAC concludes that, on the basis of the 2007 General Accounting Plan (PGC), virtual currencies must be recognized as intangible assets to the extent that they meet the requirements of Recognition and Measurement Standard (NRV) 5 of the PGC, unless the currencies have been acquired for the purpose of carrying on a business of buying and selling them, in which case they must be classified as inventories under NRV 10 of the PGC.

However, it should be noted that this query was issued before the PGC was amended in December 2016, under the new wording of which “intangible assets are assets with a finite useful life and must therefore be subject to systematic amortization. (…) Where the useful life of these assets cannot be estimated reliably, they shall be amortized over a period of ten years.” This new wording of the PGC conflicts with the economic reality of cryptocurrencies, since they are non-fungible assets that are neither consumed nor depreciated through use, and consequently no systematic and rational amortization based on their useful life can be established. It therefore does not appear that virtual currencies should be recognized as intangible assets, but a pronouncement from the ICAC on this matter will have to be awaited.

Furthermore, after the ICAC query, the DGT issued Binding Ruling V1029-15PDF of March 2015, according to which virtual currencies act as a means of payment and are therefore included within the concept of “other negotiable instruments,” a position that does not appear to be aligned with the ICAC query.

Once again, we see the need for specific legislation on these currencies in both the tax and the accounting spheres.

4. Taxation under Wealth Tax (IP)

Given that virtual currencies qualify as a means of payment, they must be reported for Wealth Tax purposes together with the individual’s other assets, valued at their market value as of December 31, that is, at their equivalent value in euros on that date.

5. Taxation under Business Activities Tax (IAE)

The buying and selling of cryptocurrencies and cryptocurrency mining will be subject to the IAE when these activities are carried on in the course of a business. However, the Tax Rates (Tarifas) of the tax contain no specific headings covering these activities, so their classification must follow the criteria laid down by the DGT.

Accordingly, the purchase and sale of cryptocurrencies through vending machines is to be classified provisionally under heading 969.7 of section one, “Other automatic machines.” However, where that activity (buying and selling) is carried on through the development and operation of a proprietary web application, the DGT clarifies that it must be classified under heading 831.9 of section one of the Tax Rates, “Other financial services n.e.c.” According to the DGT, cryptocurrency mining must also be classified under this same heading.

6. Reporting on Form 720 (return on assets and rights held abroad)

The Preliminary Draft Law on measures to prevent and combat tax fraud, transposing Council Directive (EU) 2016/1164 of July 12, laying down rules against tax avoidance practices that directly affect the functioning of the internal market, and Council Directive (EU) 2017/1852 of October 10, 2017, on tax dispute resolution mechanisms in the European Union, and amending various tax rules, introduces the obligation to report on Form 720 the ownership of cryptocurrencies held abroad.

For these purposes, cryptocurrencies held in the wallets of exchanges that have their tax domicile abroad must be reported.

We hope this post sheds some light on the matter, bearing in mind that in Spain the only regulation of these currencies is that relating to the prevention of fraud, criminal activities, and money laundering, resulting from the transposition of European Union Directives.

The taxation of transactions involving these currencies ought to be governed by laws and regulations. In their absence, it has been shaped by the administrative doctrine issued by the Directorate General for Taxation.