Cryptocurrencies: possible news in Spain. What should I keep in mind?

During these weeks, we are receiving many calls from clients asking us what are the implications derived from their investments made in cryptocurrencies and what they should take into account when dealing with “Hacienda” (the Spanish Treasury).

It is obvious that we are witnessing an evolution towards a cashless society and the consolidation of online banking. Most of the transactions we carry out on a daily basis, are made with virtual money.

What are cryptocurrencies?

Among the referred “virtual money” we find cryptocurrencies, which are a type of digital currency. They are considered trust coins, because they are based on cryptography and the so-called “blockchain“, which in theory, guarantees their security, since they cannot be hacked.

According to the European Parliament, a virtual currency is a “digital representation of value, not issued or guaranteed by a central bank or by a public authority, not necessarily associated with a legally established currency, which does not have the legal status of currency or money, but accepted by natural or legal persons as a means of exchange and that can be transferred, stored and traded electronically. “

However, the main difference with traditional currencies is that cryptocurrencies are not regulated by national banking authorities or conventional financial systems.

Cryptocurrencies are a type of money that only exists on the Internet and it is only possible to store them in a digital purse or “wallet”.

To be able to acquire cryptocurrencies there are two options:

1. Generating cryptocurrencies through “mining”.
2. And by exchange. Buying cryptocurrencies from people or companies that have them, for example, through “exchange offices” or brokers, which are platforms that act as intermediaries.

Cryptocurrencies in Spain and its impact of different taxes

In Spain, there is no specific regulation around cryptocurrencies. However, the “Dirección General de Tributos” (hereinafter, DGT), has ruled on the matter in some resolutions and has clearly established that cryptocurrency users must pay taxes in certain situations.

In relation to the Personal Income Tax, we can conclude, taking into account the resolutions from he DGT the following:

1. The mining of cryptocurrencies is an economic activity, and therefore there will be an obligation for the “miner” to pay Personal Income Tax in respect of the income obtained through this activity, in addition to complying with the corresponding Social Security obligations.
2. Operations carried out with cryptocurrencies give rise to capital gains and losses, which the taxpayer will have to integrate in the relevant Personal Income Tax Return, even if it has not been converted to fiat (that is, legal tender). For example, if we buy 100 btc at € 5,000 and exchange them for another cryptocurrency at a time when the valuation the 100 btc is € 7,000, we would have a capital gain of € 2,000, regardless of whether we have not made the change to “real” money.
3. If no operation is carried out with cryptocurrencies, the mere increase in the valuation of the wallet will not give rise to any capital gain or loss. In other words, if a digital portfolio increases in value during the year, but it has not been operated with, there will be no capital gain to declare.

With regard to Net Wealth Tax, the valuation of the wallet on December 31 each year, must be taken into account to conclude whether, jointly with the with the value of the rest of the assets and rights, a person may be required to file a Net Wealth Tax Return.

Cryptocurrencies and Form 720

In respect of the obligation to report cryptocurrencies in the Informative Declaration of assets and rights located outside of Spain (Form 720), articles/studies that have been published conclude the following:

1. Cryptocurrencies are based on cryptography and on the blockchain, which is a single record, agreed and distributed in several nodes of a network (that is, it would be like the accounting book in which transactions are recorded). Consequently it would be difficult to determine where the cryptocurrencies are located.
2. Cryptocurrencies do not have a fit in any of the three blocks of assets/rights about which there could be a reporting obligation.

Obviously they are not real estate. On the other hand, the wallet is not considered an account in a financial institution. And finally, even though there is a figure of exchange houses that can manage the exchange of cryptocurrencies, in no case is there a transfer of our funds to these exchangers.

Thus, in relation to Model 720, there will be no obligation to report on investments in cryptocurrencies.

What to expect in the future?

Be must be aware that on October 13, 2020, the Spanish Council of Ministers approved the “Draft Law on Prevention and Fight against Tax Fraud”, transposing Directive (EU) 2016/1164 , of the Council, of July 12, 2016, which establishes rules against tax avoidance practices that directly affect the functioning of the internal market, the modification of various tax rules and the regulation of gambling

Although we will have to wait for the final details of this Law, we can anticipate that it establishes the obligation to provide in Form 720 “Information on virtual currencies located abroad of which it is the holder, or with respect to which has the status of beneficiary or authorized or in any other way holds power of disposal, guarded by persons or entities that provide services to safeguard private cryptographic keys on behalf of third parties, to maintain, store and transfer virtual currencies“.

In light of the above, it is more than likely that from 2021 cryto-investments must be reported in Form 720. We will have additional information about the details to be provided and about what will be the group of assets/rights where cryto must be included, once the Law is approved.

At albea, we will closely follow possible changes in this regard. In the meantime, if you have any questions regarding your tax obligations, do not hesitate to contact us.