Investment in digital assets such as cryptocurrencies, utility tokens, and security tokens is growing incredibly and has led to the need for urgent regulation worldwide.
Back in 2015, Action 1 of the OECD BEPS framework had already identified the cryptocurrency environment as an emerging trend requiring monitoring by tax policy makers aiming to evaluate the underlying implications for tax systems. In October 2022, the OECD published its final guidance on the Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard. This set forth a global tax transparency compliance framework with model rules for the automatic reporting and exchange of taxpayer information between countries relating to financial accounts and crypto-assets.
Still, the lack of consensus among tax authorities over how to treat such matters increases the challenges in this field.
Portugal has been, until the end of 2022, one of the few countries in Europe where cryptocurrency transactions (for example, capital gains) were not subject to personal income taxation.
Even though a specific tax regime applicable to crypto-assets has never been enacted, in a tax ruling published in 2016, the Portuguese tax authorities took the stance that the sorts of transactions that lead to taxable capital gains for personal income tax purposes are defined in a closed list. Given that gains arising from the sale of cryptocurrencies are not in the list, the tax authorities concluded that such operations should not lead to personal income tax, unless the income is obtained within the scope of a business or professional activity.
The spreading of this understanding quickly turned Portugal into an attractive destination for cryptocurrency investors. However, from 2023, the state of the art regarding the crypto-assets tax framework will experience significant changes.
The Portuguese State Budget for 2023 closed the previous tax loophole that (based on the tax authorities’ understanding) prevented the taxation of crypto-assets.
The definition of a crypto-asset for personal income tax purposes is presented as “any digital representation of value or rights that can be transferred or stored electronically using distributed ledger technology or similar”, excluding single crypto-assets and non-fungible crypto-assets. This clearly refers to the concept addressed in the agreement reached within the scope of the Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and Amending Directive (EU) 2019/1937. The definition is comprehensive, intending to cover most crypto-assets.
As regards personal income tax, the approved regime expressly sets forth that gains from the disposal of crypto-assets shall qualify as capital gains. The standard 28% flat rate will apply to a positive balance of capital gains and losses arising from the disposal of said assets unless they are held for more than 365 days, in which case an exemption will be available (but which is not applicable to crypto-assets classified as securities).
The ordinary carry-forward regime of losses shall apply (except when the beneficiary or the payor is domiciled in a blacklisted jurisdiction), meaning that a negative balance between capital gains and losses can be carried forward for five years if the taxpayer opts to be taxed under the applicable progressive rates (up to 53%, including a solidarity surtax).
Income derived from operations with crypto-assets is expressly qualified as professional and commercial activities taxed as business income if taxpayers have not exceeded €200,000 ($210,000) of gross business income in the previous fiscal year, as follows:
15% of the gross income from the majority of crypto-assets operations carried out under a business activity shall be taxable at progressive rates (without accounting for any other deductions/costs). In this case, the effective tax rate should never exceed 8% of gross proceeds.
95% of the gross income from mining will be taxable at progressive rates.
The tax implications addressed above only apply, in general, where the consideration for operation is made in fiat currency (i.e., crypto for crypto operations benefit from a deferral regime).
The new regime includes an exit tax provision for crypto-asset holders, under which a change of residency is deemed as a disposal event, except when the taxpayer or the counterparty is resident in a member state of the EU or the European Economic Area, or any other country with an agreement with Portugal that provides for the exchange of information for tax purposes.
The tax regime approved in November 2022 seems to be driven by the need to balance different interests along with international and domestic political pressure: on one hand, the need to embrace a clear set of rules addressing the taxation of crypto-assets, and on the other, the goal to keep attracting crypto investors and preserve competitiveness within the crypto ecosystem.
The attractiveness of the new tax framework will essentially lie in the favourable tax regime that will exempt capital gains arising from the disposal of crypto-assets held for more than one year (similarly to the German regime) and in the reduced effective rate that will be levied, in most cases, on income obtained by taxpayers enrolled in a business activity.
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