The popularization of cryptoassets has caused the Treasury experts to put the magnifying glass on these digital assets. The commission of experts for the tax reform convened by the Minister of Finance, María Jesús Montero, is looking for ways to bring to the surface some profits that escape the tax authorities, as well as redesigning taxes to better tax digital currencies.
Citizens still have many doubts about how to manage these assets. Above all, because they still lack a specific regulation. The European MICA regulation is still in the process of being approved and is not expected to be applied until at least 2024. In this regard, one of the issues that most concerns investors is how cryptocurrencies are taxed. Doubts range from when they must be declared, to what taxes must be paid, to what penalties violators may face for not complying with the Treasury.
In this publication we review the considerations to take into account when filing our Personal Income Tax having carried out transactions with cryptocurrencies during the tax year.
Taxpayers can buy and sell virtual currencies and, when such transactions are not carried out within the scope of an economic activity, they can give rise to a capital gain or loss for the difference between the transfer value and the acquisition value. According to the practical manual of the Renta 2021 of the Tax Agency, depending on the type of transaction carried out we can distinguish the following assumptions:
A) Exchange of virtual currency for fiat currency.
Articles 35, 14 and 46.b) of the Personal Income Tax Law will be applicable to these transactions. As we have already seen, "exchange of virtual currency for fiat currency" will be understood as the purchase and sale of virtual currencies through the delivery or receipt of euros or any other foreign currency of legal tender or electronic money accepted as a means of payment in the country where it has been issued.
The sale of virtual currencies in exchange for euros or other legal tender, carried out outside of an economic activity, will give rise to a capital gain or loss, the amount of which will be determined by the difference between the respective transfer and acquisition values. In order to determine the respective acquisition and transfer values in the manner provided for in Article 35 of the Personal Income Tax Law, all expenses arising from the performance of such transactions shall be computable provided that they are directly related to such transactions and are paid by the taxpayer (e.g. transaction or deposit commissions).
For the purpose of determining the corresponding capital gain or loss, and to the extent that the Personal Income Tax Law does not establish a different specific rule to identify, in the case of homogeneous virtual currencies (e.g. bitcoin), those that are deemed to have been transferred, it should be considered that in the event of partial sales of virtual currencies that were acquired at different times and at different values, those that are transferred are those acquired first (FIFO criterion, acronym in English for First In First Out).
As regards the temporary allocation of the gain or loss, in accordance with Article 14 of the Personal Income Tax Law, it will occur at the time the virtual coins are delivered by the taxpayer under the purchase and sale contract, regardless of the time at which the sale price is received, and therefore the gain or loss must be allocated to the tax period in which the delivery was made.
The amount of capital gains or losses arising from the transfer of virtual currencies in exchange for money constitute savings income because they derive from the transfer of a capital item in accordance with the provisions of article 46. b) of the Personal Income Tax Law and are included and offset in the savings tax base in the manner and within the limits established in article 49 of the same Law.
The sale transactions of virtual currencies in exchange for euros carried out outside an economic activity must be included in the personal income tax return corresponding to the tax period in which such transactions have been carried out in the section "Capital gains and losses derived from transfers of other assets" by entering in box [1626] the key 0, which corresponds to "Virtual currencies". Taxation depends on the amount of the capital gain generated and ranges from 19% to 26% in 2022.
B) Exchange of one virtual currency for a different one.
Articles 37.1.h), 14 and 48.b) of the Personal Income Tax Law shall apply. The exchange of a virtual currency for a different virtual currency constitutes, as they are different goods, an exchange, in accordance with the definition contained in article 1,538 of the Civil Code, which provides that: "An exchange is a contract whereby each of the contracting parties undertakes to give one thing in order to receive another".
Such exchange, when carried out outside an economic activity, gives rise to an alteration in the composition of the net worth, since an amount of one virtual currency is replaced by an amount of another different virtual currency, and on the occasion of this alteration a variation in the value of the net worth is evidenced in the value of the virtual currency that is acquired in relation to the value at which the virtual currency that is given in exchange was obtained. Consequently, the exchange between different virtual currencies carried out by a taxpayer outside an economic activity gives rise to the obtaining of income that is classified as a capital gain or loss.
To quantify the capital gain or loss, the specific valuation rule for swaps provided for in Article 37.1.h) of the Personal Income Tax Law is applied, according to which the capital gain or loss will be determined by the difference between the acquisition value of the virtual currency delivered and the higher of the two following values:
- The market value of the virtual currency delivered.
- The market value of the good or right received in exchange.
For the purposes of subsequent transfers, the acquisition value of the virtual currencies obtained through exchange will be the value taken into account by the taxpayer by application of the rule provided in the aforementioned Article 37.1.h) as the transfer value in such exchange.
As regards the market value corresponding to the virtual currencies that are exchanged, it is that which corresponds to the price agreed for their sale between independent parties at the time of the exchange.
The temporary imputation of the gain will occur, in accordance with Article 14 of the Personal Income Tax Law, at the time of the exchange of the virtual currencies. Whereas, the capital loss that may arise in an exchange between different virtual currencies must be accredited (at the request, where appropriate, of the tax inspection bodies) through the means of proof generally admitted in Law.
As in the previous case, the amount of the capital gains or losses resulting from the swap transactions between different virtual currencies, constitute savings income in accordance with the provisions of article 46. b) of the Personal Income Tax Law and are included and offset in the savings tax base in the manner and with the limits established in article 49 of the same Law. Therefore, in the same way, the gains or losses resulting from these operations added to the previous ones will be included in the same box [1626].
C) Property losses. Claim for non-return of deposited coins or bankruptcy of the virtual currency trading platform.
We will apply the provisions of articles 14.2.k) and 45 of the Personal Income Tax Law. In these cases, the amount of a loan not repaid on maturity does not automatically constitute a capital loss, since the creditor maintains its right to the loan, and the special rule of temporary imputation provided for in article 14.2.k) of the Personal Income Tax Law for these cases of uncollected loans must be applied.
Pursuant to Article 14.2.k) of the Personal Income Tax Law, capital losses arising from overdue and uncollected credits may be allocated to the tax period in which any of the following circumstances occur:
- The effectiveness of a debt reduction established in a judicially homologated refinancing agreement referred to in Article 71 bis and the fourth additional provision of Law 22/2003, of July 9, 2003, on Insolvency, or in an out-of-court payment agreement referred to in Title X of the same Law.
- That, being the debtor in insolvency proceedings, the agreement in which a reduction in the amount of the credit is agreed to become effective in accordance with the provisions of Article 133 of Law 22/2003, of July 9, 2003, on Insolvency Proceedings, in which case the loss will be computed by the amount of the reduction.
- Otherwise, that the bankruptcy proceeding concludes without the credit having been satisfied, except when the conclusion of the bankruptcy is agreed for the causes referred to in sections 1, 4 and 5 of Article 176 of Law 22/2003, of July 9, 2003, on Bankruptcy.
- That a period of one year has elapsed since the beginning of the judicial proceeding other than bankruptcy proceedings for the purpose of enforcing the claim without the claim having been satisfied.
When the credit is collected after the computation of the capital loss referred to in this letter k), a capital gain will be imputed for the amount collected in the tax period in which such collection occurs.
As regards the type of income, since it is a capital loss that has not been disclosed on the occasion of the transfer of assets, it will form part of the general income and must be included in the general taxable income of the IRPF (articles 45 and 48 of the IRPF Law).
As we can see, the Tax Agency has clarified the treatment that taxpayers must give to capital gains or losses derived from the purchase and sale of virtual currencies when such transactions are not carried out within the scope of an economic activity for Personal Income Tax purposes.
In practice, a non-professional investor or trader may make several thousand virtual currency exchange transactions per year, which complicates the task of calculating the resulting capital gains or losses. For this reason, there are software programs such as Cointracking, Cointracker or Koinly. They import the data from the exchanges or wallets where the taxpayer has stored its cryptoassets. Generally, this import is done manually by downloading the history of movements of the exchange or wallet in .CSV format (Excel file) or by automatic connection with API keys to them. The program generates a report of capital gains and losses that shows a final amount that will be the one to be placed in the box [1626] key 0, which corresponds to "Virtual currencies".
We have reviewed the basic issues for filing our tax return, however, there are other factors that we will have to take into account if we are advanced investors such as, for example, operations involving staking, airdrops, rewards, nfts or DeFi.
If you need help in preparing your tax report or filing your tax return, please do not hesitate to contact us. We hope you found this information useful.
Thank you very much for your time.
Cryptocurrency income tax return : Vicox Legal : Vicox Legal Cryptocurrency Advisor
