CASE STUDY: CRYPTOCURRENCY

Case study: Cryptocurrency Investment

Factual Background

  • Mr X, a tax resident in Spain, has some savings in the bank and, given that these savings are not generating returns in the bank (quite the opposite considering the devaluation that the currency could have), decides to invest in the world of cryptocurrencies since it is a booming sector and may be of great importance in the future.

  • Mr X decided to invest, opened an account on an exchange platform (such as Binance) and deposited a total of 2,000 euro. On 01/10/2020, he acquired Bitcoins for a total amount of 1,000 euro (receiving a total of 0.11048503 BTC since the BTC/EUR exchange rate was 9,051 euro). Later, on 17/11/2020, since the value of Bitcoin was growing, he decided to invest another 1,000 euro (receiving a total of 0.0671727 BTC since the BTC/EUR exchange rate on that date was 14,887 euro). In total, Mr X has 0.17765773 BTC.

  • To diversify the investment while staying within the world of cryptocurrencies, Mr X decided to invest some of his BTC to acquire Etherum (ETH). Therefore, on 21/12/2020 he acquired 1 ETH (valued at the ETH/EUR exchange rate of 495 euro) exchanging it for some of his BTC. Mr X’s cryptocurrency assets went from 1 ETH to a total of 0.15101747 BTC (part of the BTC used to acquire the Etherum is discounted).

  • Seeing the evolution of his investments, he decided to recommend investing in the world of his cryptocurrencies to his brother. So, he passed the link for his referral code to his brother to register on Binance (Exchange platform) and therefore received a percentage of the investment made by his brother.

  • As of 18/01/2021, Mr X’s BTC (0.15101747 BTC) had a value of 4,539.07 euro (BTC/EUR exchange rate at 30,050 euro), and the Etherum had a value of 1,020 euro.

  • The couple also failed to report their earnings from rental of this property.

Issues raised
by the client

  1. Has the acquisition of BTC on the Exchange platform generated any taxes?
  2. Has the exchange of BTC for ETH generated any income that is subject to taxation?
  3. Has the return generated by the growth of BTC and ETH’s value generated an obligation to declare any tax?
  4. Does the amount received as a “referral” paid by Binance, because his brother registered on the platform with his code, need to be declared?
  5. What documentation is required to justify any capital gain or loss in the event of a possible verification by the tax administration?
  6. Should cryptocurrencies be declared in model 720?

Answers to the questions raised

  1. Simply acquiring BTC or another cryptocurrency in exchange for FIAT has not generated any return. One of Mr X’s assets has simply been exchanged for another; in this case, euros for BTC.
  2. When cryptocurrencies are exchanged (either Cryptocurrency-FIAT or Cryptocurrency-Cryptocurrency), there is an alteration in equity that reveals a change in the equity value. In these cases, to determine any capital gain or loss, the difference between the acquisition value and the transfer value is verified.
  3. No, the increase in the value of a cryptocurrency has not generated any tax. The tax must simply be declared when the cryptocurrency is exchanged. Notwithstanding the preceding, the value of cryptocurrencies (as well as other personal assets) must be taken into account to determine whether or not there is an obligation to declare capital gains tax (review the exemption limit established by each Regional Community).
  4. Yes, it must be declared in the personal income tax return (income that can be integrated into the general tax base).
  5. The transfer documents are required to prove the traceability of all the transactions made.
  6. At this time, no. Although the Draft Law on measures to prevent and fight tax fraud (which we understand will be approved in the first quarter of 2021) will introduce critical new aspects concerning holding cryptocurrencies and, specifically, will establish the obligations to declare the information on the cryptocurrencies of which the person is the holder abroad or of which he/she has the status of a beneficiary or in some other way as such that disposal rights are held (only if the total value exceeds 50,000 euro) in the 720 Form.

Ilustraciones de vectorpouch / Freepik

Anything else?

Applicable legislation and related articles

The taxation of cryptocurrencies is regulated by the following legislation:

General Tax Law (Law 58/2003, of December 17, General Tax).
Personal Income Tax Law (Law 35/2006, of November 28, on Personal Income Tax).
Personal Income Tax Regulation (Royal Decree 439/200, of March 30, approving the Regulation of Personal Income Tax).