How to declare cryptocurrencies to the tax authorities
Over the last few years many people have started to use cryptocurrencies as money to pay for goods or services or to invest. However, few people are aware of the taxation regulations of cryptocurrencies or how cryptocurrencies have to be declared.
The Treasury is considering including cryptocurrencies in the declaration of assets abroad. For this reason, the Tax Agency plans to include them in the model of assets and rights abroad in form 720. This model is currently being studied by the European Court of Justice following the reasoned opinion from Brussels in which it questions its application due to, among other issues, the high fines it establishes, which can reach up to 150%.
On the other hand, the Tax Agency published an increase in the surveillance of cryptocurrencies for the year 2021 and is preparing a specific plan for the control of these assets, as well as demanding information from taxpayers on these investments.
The 2021 Annual Tax and Customs Control Plan, published on 1 February by the Directorate General of the State Tax Administration Agency of the Spanish Government (https://www.boe.es/diario_boe/txt.php?id=BOE-A-2021-1379) analyses the rise of virtual asset markets, in particular cryptocurrencies, which generates tax risks that require specific actions to obtain information.
Coinbase Inland Revenue
In order to facilitate voluntary compliance with the tax obligations arising from the transactions carried out and to facilitate the control of their correct taxation. The State Tax Administration Agency plans to carry out the following actions in relation to cryptocurrencies in 2021:
a) Obtaining information from various sources on transactions carried out with cryptocurrencies. It is envisaged to incorporate it into the foreign assets and rights model, as well as the establishment of a stand-alone reporting obligation on cryptocurrencies.
b) Systematisation and analysis of the information obtained, for the purpose of facilitating the control of the correct taxation of the operations carried out and the origin of the funds used in the acquisition of cryptocurrencies.
c) Enhance international cooperation and participation in international fora to obtain information on transactions in cryptocurrencies and other virtual assets.
The Treasury also highlights the technological advances that facilitate the use by organised crime of the deep internet for the trafficking and trade of all kinds of illicit goods, as well as the use of cryptocurrencies as a means of payment, continue to represent one of the most demanding challenges today. Digital money and the trend to reduce the use of cash has led to an increase in the use of cryptocurrencies as a means of payment, with more than 6,500 cryptocurrencies in circulation by the end of 2020.
Most of the world's central banks are developing their digital currencies, including the European Central Bank with the creation of the digital Euro, in which Spain participates. The Treasury will promote initiatives to strengthen collaboration with service and e-commerce providers, as well as training and education actions to ensure that the staff of operational units are properly prepared in this area.
Among all the measures set out in the tax control plan is the promotion of artificial intelligence, big data and data mining to tackle tax fraud. The Treasury analyses millions of pieces of data that provide evidence of fraud.
For this new year, the Tax Agency has launched a specific line of control over taxpayers with large estates who choose to live outside Spain and seek to evade taxes, something that will be checked by means of these massive data analysis tools. Among the Agency's priorities is the control of "delocalised" taxpayers or those who "pretend to live" abroad, which is a continuation of the systematic residence analysis launched last year on a large number of high net worth individuals who were listed as non-residents.
The 2021 Annual Tax and Customs Control Plan also includes specific actions to investigate taxpayers' relatives. The Tax Agency will analyse people linked to a citizen to look for signs of asset or corporate fraud.
The analysis of the flow of funds, compared with declared income, net worth, bank accounts, real estate and financial assets, will enable the Tax Administration to obtain data that will serve to detect inconsistencies in wealth, expenditure and consumption, or even solvency that cannot be explained by the known income obtained by the taxpayers or by the family units of which they form part.
Form 720 on cryptocurrencies
On the other hand, the State Tax Administration Agency of the Ministry of Finance foresees for 2021 the approval of the Law on Measures to Prevent and Combat Tax Fraud, a reform bill that is currently in the amendment phase, which deals, among other issues, with the new reporting obligations on the holding and operation of cryptocurrencies.
Regarding the holding of cryptocurrencies, the cryptocurrencies held must be included in form 720. Report on balances of the different currencies in custody, with identification of the holders, authorised or beneficiaries of these balances with power of disposal, held by persons or entities resident in Spain that provide services to safeguard private cryptographic keys on behalf of third parties, to maintain, store and transfer virtual currencies.
It also establishes the obligation to provide information to the Tax Agency on transactions involving virtual currencies: acquisition, transmission, exchange, transfer, collection and payment of cryptocurrencies in which they are involved. This same obligation also extends to those who carry out initial offerings of new cryptocurrencies. The information must include the VAT number and address of the parties involved, the type and number of coins, the price and the date of the transaction.
The information return on assets and rights abroad by means of Form 720 is a mandatory return if the taxpayer, whether an individual or a legal entity resident in Spanish territory, has assets and rights abroad that exceed 50,000 euros in any of the groups that make up the return, and is therefore not obliged to report those groups in which the sum of the assets and rights does not exceed this amount.
The law divides the assets and rights to be reported into three distinct groups, establishing for each of them certain exemptions from reporting. These groups are:
- Accounts in financial institutions located abroad.
- Securities, rights, insurance and income deposited, managed or obtained abroad.
- Immovable property and rights to immovable property situated abroad.
The penalties for failure to report assets abroad range from €5,000 per item of information, with a minimum of €10,000. The tax authorities impose the fine if they find that the data have not been reported correctly.
It is not yet clear from which balance and from what amount of the acquisition, transfer, exchange or transfer transaction they will have to be reported. This is to be developed when the law is passed.
