This post aims at explaining how Bitcoin transactions are taxed, directly (income tax, assets tax, inheritance tax) and indirectly (VAT).
1. Personal Income Tax
Trading with Bitcoins (or even the purchase of other cryptocurrencies using Bitcoins) may result in “capital gain or loss”, insofar as the assets of the taxpayer change (art. 33 of the Income Tax Law).
But should such capital gain be included in the taxable savings?
The general answer is that if these gain is a result of the transfer of assets, they shall be deemed `income from savings´ (art. 46. b) of the Income Lax Law.
Especially remarkable on account of its importance and the frequent news are the alleged `theft´ of Bitcoin. In these cases, the General Tax Directorate pointed out that (i) the said theft should be considered an equity loss; (ii) loss will be part of the taxable income and (iii) the allocation of the loss may only be performed when the same accrues legally uncollectable, or, where appropriate, in case of acquittance in insolvency proceedings, or if one year elapsed since the judicial claim.
However, if Bitcoins were mined and the taxpayer performs this activity on a regular basis, they may be developing an economic activity, and therefore they must pay for the generated profit at the general income tax rate.
2. Capital Gains Tax
Since this tax is applied to assets and interests as at 31 December every year, if the taxpayer is required to submit tax return they must include the value of the Bitcoins at the close of the market on that day in the tax return and pay the corresponding taxes.
3. Inheritance and Gift Tax
In the event of inheritance or gift of Bitcoins something similar happens. Since the Inheritance and Gift Tax is applicable to the purchase of assets against consideration by individuals, the taxpayer (or the heir or donee) must declare the `real value´ of the Bitcoins received and pay the applicable tax.
VAT is applicable to transactions carried out as an economic activity, i.e., operations aimed at taking part in the production or distribution of goods or services. This first delimitation raises the question of whether Bitcoin mining operations or sale transactions or exchange for legal tender coins may be deemed as carried out as an economic activity and falling under the scope of application of the tax.
The referred Directorate General resolved that the mining of Bitcoin is not an economic activity as the Bitcoin received for such work are not a consideration for provision of services of any kind, as “no recipients or clients may be identified, as these Bitcoins are automatically generated by the network.” As a result, the mining activity is excluded from the VAT application (see V3625-16, of 31 August).
By contrast, currency exchange with Bitcoin or the sale of cryptocurrency is thought to fall within the scope of the tax and may be deemed as business.
This shall on no account affect the purchase of goods or services using Bitcoin as payment, which will be subject, as any other transaction, to VAT if the seller is a business and to Transfer Tax in other cases.
5. Form 720
Finally, the big question that arises is whether keeping Bitcoins in an “Exchange” or foreign brokerage platform requires to report ownership in form 720, or `disclosure statement of property and interests located abroad´ where its value exceeds EUR50,000.
It is not an easy question. Arguments in favour of their non-inclusion in form 720 insofar as (i) its legal nature does not seem to match assets to be included in this form according to the additional provision no.18 of the General tax Law, and (ii) its availability to trade on a Foreign Exchange does not necessarily imply that the asset is located overseas, given its intangible nature.