eBook Tax On Cryptocurrencies

Are you one of those who have heard of cryptocurrencies but are not sure what they are or what benefits they can offer you?

More and more financial experts consider that these virtual stocks are the future of investment. So you must familiarise yourself in detail with what they are, how they are taxed and the possible ways of investing with them.

Does it sound complicated? Don’t worry: in the following pages, we’re going to give you all the information you need to handle cryptocurrencies successfully without running into any problems with the authorities over the income generated.

Getting into the world of cryptocurrencies has never been so easy!

1. What are cryptocurrencies?

Cryptocurrencies are digital means of exchange. In other words, they are not physical money that you can carry in your wallet to pay for things; to use them, you have to turn to virtual channels. Another feature of these virtual currencies is that they are decentralised. What does this mean? Essentially, that any bank, company or service do not control them. They are, therefore, completely independent of a country’s economy.

It is also worth stressing that these currencies use cryptographic methods to secure the financial transactions conducted with them, even the simplest transfers. In addition, the creation of new units is controlled to make sure they cannot be copied. So they have major security requirements: more than some national currencies!

1.1. The value of cryptocurrencies

Are you wondering what a cryptocurrency is worth? The fact is that this is an impossible question to resolve because there is no single answer. The value of these assets is inherently variable, and they are currently subject to speculation processes similar to those of the stock market.

In other words, more and more people are creating service portfolios to buy cryptocurrencies and then sell them. They thereby obtain income, and all these purchase and sale operations determine the actual value of each cryptocurrency. So if you are going to operate with them, it’s crucial to find out their current price.

1.2. Characteristics of cryptocurrencies

• They are a fast form of payment, as there are even applications and prepayment cards that enable you to carry out the transaction with just a few clicks.
• They reduce the cost of transactions, which represents a saving for users. This is because an open-source code is used to carry them out, so no intermediary is required.
• They are controlled through a blockchain, which makes it possible to keep a record without involving any third parties. This technology has therefore become an essential element for cryptocurrencies to work. We must remember that these are public records, of which there may be millions of copies. So to falsify a value of one of these currencies, you would have to change the records of all the computers on which they are stored, which is impossible since it is an entirely open, public database.
• They facilitate international transactions since payments can be made with the same virtual currency from anywhere in the world.
• Holders of these virtual currencies have a digital signature that allows them to manage their holdings on the web with complete security guarantees.
• They are not subject to inflation, although their value may vary at any moment owing to fluctuations in supply and demand. This is because a maximum supply cap is set on the amount of currency issued.
• They are characterised by their transparency, thanks to the fact that blockchain technology makes it possible to keep a complete record of all transactions.

1.3. Uses of cryptocurrencies

We have already said that these currencies are an effective payment method because of their security and speed in all kinds of transactions. In any case, it must be emphasised that cryptocurrencies are increasingly used as an investment method.

There are various ways of investing these assets and achieving a financial benefit, from trading to cryptocurrency mining. To make the right choice that will enable you to earn cryptocurrencies, an indispensable requirement is that you should be very familiar with the virtual currencies you are going to opt for and the various ways of exploiting them.

1.4. How cryptocurrencies are classified

Given their relative novelty in the market, there is still a great deal of controversy surrounding the legal classification of cryptocurrencies. They are considered a means of payment or taxation, and this has a series of tax consequences. The experts highlight the following points in this respect:

• f they are equated with financial swaps, their taxable value will be the market value of the goods or services received.
• If these virtual currencies are equated with foreign exchange, their tax contribution base will be the euro equivalent of the cryptocurrencies paid.
• If cryptocurrencies are regarded as goods, their delivery will always be subject to IVA (VAT).
• Finally, if they are taken as a foreign currency, it will be regarded as an operation not subject to IVA.

1.5. Types of cryptocurrencies

The first currency of this kind to be created was the famous Bitcoin, which is still fully effective in the cryptocurrency market. In 2009 an article was published by its creator, known by the pseudonym Satoshi Nakamoto, in which he described it as a PSP payment system. Subsequently, his first software created to manage the bitcoin network was described.

Ethereum, on the other hand, is an operating system created to complement Bitcoin. Its uses extend beyond the financial sphere; it was designed to be able to be applied to creating apps for personalised crowdfunding, for example. Its corresponding cryptocurrency is called ether, and you can also make payments and carry out safe operations with it in your everyday life.

Litecoin is another currency of this kind, created to make instantaneous and practically cost-free international payments. It is notable for being very simple to operate and needing a very short confirmation time for transactions, so it’s an ideal option if you need to move small amounts of money quickly.

Finally, it is worth highlighting Dash, a cryptocurrency designed solely to enable you to go shopping so that it could be regarded as an alternative to the popular PayPal system. Its transactions are speedy, and for this reason, it is increasingly used in a range of commercial contexts.

2. Taxation of cryptocurrencies in Spain

One of the cryptocurrency market’s significant challenges is explaining how they are taxed in Spain, especially bearing in mind that these stocks are not widely used in that country, either when making investments or using them as a payment system. If you have a portfolio of cryptocurrencies, you need to know that their taxation system is different depending on what use you will put them to. We shall therefore examine each case separately.

2.1. Use of cryptocurrencies by a trader

You can opt to invest in cryptocurrencies through a specialised trader. In this case, the professional will make the purchase transaction and pay for it with their own money. This operation is most commonly carried out through the Internet Exchange platform. It does not generate dividends of any kind and is therefore not subject to any taxes. Starting from this basis, various situations that affect the general taxation of cryptocurrencies can arise.

If the cryptocurrencies purchased increase in value and the trader decides to sell them, they give rise to a capital gain that must be declared. It will be included in the IRPF (personal income tax) savings base, and a percentage of between 19% and 26% is applied.

What happens if the sale of these stocks generates losses? In this case, they will be offset by the possible earnings in the current year, and if there are no such earnings, by those that may occur in the next four years.

Some trading platforms that work with these stocks pay interest to the buyer. If this happens, the amount received is considered a return on investment capital and is included in the taxable savings base, with the exact percentages mentioned above.

Another possibility to bear in mind is that the exchange may pay the trader remuneration for bringing new clients to the platform. This financial amount is considered in various ways by the General Directorate of Taxes. If there is a pre-established employment relationship, the revenue received is regarded as earned income for tax purposes.

If, on the other hand, there is a commercial relationship between the platform and the trader, the returns generated are regarded as being derived from economic activity. In this case, IVA (VAT) liability can be seen from three different perspectives:

1. If the Exchange platform is based in the European Union, the taxation-at-destination rule applies. This means that if it is located in Spain, tax is paid there.
2. If it is in another EU country, the recipient must charge theirself IVA (VAT).
3. If the platform is based outside the countries of the European Union, the actual use-of-services rule applies. Services used in Spain will therefore be taxed there.

2.2. Use for cryptocurrency mining

Before analysing how the benefits obtained through crypto mining are taxed, we need to know what this technique involves. It is a process by which blockchain transactions are validated and processed in exchange for receiving remuneration in cryptocurrencies. In other words, these stocks are not created but discovered by people who devote themselves specifically to this activity.

The crypto mining procedure is based on the following steps, which you must keep clearly in mind to make sure that your investment is viable and provides good results at all times.

1. Cryptocurrency users make virtual transmissions.
2. The transactions are recorded in the blockchain, which acts as a comprehensive stock ledger.
3. Because they work with very powerful computers, the miners are capable of recording all these transactions and confirming them.
4. The miners receive a commission in cryptocurrency in exchange for this work.

The main possible objectives of crypto mining also need to be taken into account. The most important of these are the following:

• Obtaining stocks at the request of a third party. In this case, the miner will bill the amount of the coins obtained and receive their income at the same time or deferred.
  
• Obtaining cryptocurrencies to sell them. In this case, there is therefore no income until the transaction takes place.
• Obtaining coins as an investment. In this situation, the income is frozen until the stocks are sold.

As you can see, this activity generates income which can be more or less substantial depending on the assiduousness of the miners. Tax must be paid on these returns, keeping two crucial factors in mind:

1. The first is that on income tax returns, mining is considered an economic activity. Those who conduct this activity can therefore deduct the expenses related to it.
2. The second is that to be able to show that you are practising an economic activity, you must comply beforehand with the submission of the following documents: registration for IAE (Economic Activities Tax) and RETA (the Special Scheme for Self-Employed Workers), submission of Form 130 (income tax payments on account) and Form 190 (annual summary), registration in the Register of Intra-community Operators (ROI) and submission of Form 347 (information return on transactions with third parties).

2.3. Taxation of cryptocurrencies in the case of brokers

If you turn to a broker to make cryptocurrency investments on your behalf, you must bear in mind that the tax arrangements, in this case, are different from the previous examples. This professional receives your money and invests it in the best cryptocurrency stocks so that you obtain benefits. And in return for this work, they receive a commission.

It must be said that there are no specific regulations to be applied in this situation, but if you opt to work like this with this type of stock, you must take the following factors into account:

• It is an economic activity. You must therefore declare the income you obtain as a result of these investments as earnings from economic activities for income tax.
• As regards IVA (VAT), it must be emphasised that the exemption for financial service intermediaries applies, provided that the requirements established by the General Directorate of Taxes are complied with: the intermediary must recruit clients actively, must put investors in touch with the service provider for the signing of contracts, and may negotiate and provide advice on the investor’s behalf.

In addition, it must be pointed out that to work as a broker, the following administrative requirements need to be complied with beforehand: IAE registration, RETA registration, submission of IRPF Forms 130 and 190, ROI registration, submission of Form 147, and IVA Forms 303 and 390.

2.4. Measures to prevent and combat tax fraud

Cryptocurrencies are currently regulated by the measures to combat fraud established in a bill that includes numerous provisions.

One of these is the obligation for people and organisations resident in Spain and those permanently established abroad that maintain and transfer virtual currencies regularly to provide information. Specific details of the balances of each virtual currency must be given, identifying the holders, authorised users or beneficiaries of these stocks.

Moreover, exchange platforms and sites engaged in buying and selling cryptocurrencies resident in Spain or permanently established abroad must provide full information on the transactions carried out, whether these are purchases, transfers or swaps of virtual currencies. In addition, they must provide a list of names of all the individuals involved in these transactions, including their tax identifiers, the number of virtual currencies owned, the price of these currencies and the date on which the purchase transaction took place.

As well as these specific details, which determine the tax payable on earnings derived from investment in cryptocurrencies, you need to have detailed knowledge of two items that play an essential role in these procedures: the Impuesto del Patrimonio (Capital Gains Tax) and the Form 720 declaration.

2.5. Capital Gains Tax

The Impuesto del Patrimonio (Capital Gains Tax) is a direct personal tax levied on the ownership of capital based on its net value over a certain period of time. It affects physical persons and is a supplementary tax to IRPF (personal income tax). It is essential to point out that it is a state tax, but its yield is assigned to the autonomous communities. When paying tax on the ownership of cryptocurrencies, you, therefore, need to take account of the relevant specific legislation in the region where you live to make sure everything is correct.

As you have seen from our examination of taxation of cryptocurrencies, in many cases, these stocks represent an increase in your capital resources. Therefore, to act by existing legislation, you must take them into account when establishing the value of your general assets. To do so, you will have to take the value of the cryptocurrencies you own on 31 December of the financial year for which you are submitting your tax return as reference information. Once this figure is known, you must find out whether you exceed the minimum for exemption established in each autonomous community. If so, you will have to pay Capital Gains Tax.

2.6. Personal Income Tax (IRPF)

Have you invested in cryptocurrencies and don’t know how their yield may affect your income tax return? You need to be aware that it is taxable by simplified or normal direct evaluation. Therefore, you will have to comply with the obligations established in both methods, whether you have obtained these benefits through mining activity or from Exchange platforms or by buying and selling these virtual stocks.

2.7. Form 720

The Law on Measures to Prevent and Combat Tax Fraud aims to exercise complete control over cryptocurrencies to ensure that they are taxed in compliance with all the legal requirements. The existence of this law means that Exchange platforms must provide information on the balances of holders of cryptocurrencies, as well as the transactions they carry out with them.

In addition, physical persons must include the cryptocurrencies in their possession whose value exceeds €50,000 in Form 720. This form corresponds to the declaration of goods and rights located abroad. Those liable for tax payments must use it to provide the Tax Administration with the following information:

• Accounts abroad that are open in institutions devoted to banking or credit trading are beneficiaries or authorised users.
• Information on securities, assets, stocks or representation rights of equity capital or resources located abroad.
• Information on real property located abroad and rights over it.

Being familiar with tax Form 720 is essential to carry out the taxation procedures for the cryptocurrencies you have invested with every assurance of success.

3. Frequently asked questions on cryptocurrencies

After reading all this information on cryptocurrencies and how they are taxed, no doubt you still have any questions about these virtual assets. Here is a list of the most common ones to help you understand this world.

Are they backed assets?

The backing for these currencies is the blockchain network and its ability to provide security and transparency for transactions related to these assets. So they are not investment assets with material goods such as gold or silver behind them.

Does someone administer them?

The cryptocurrency network is decentralised. It is only administered by miners, professional specialists who use cryptographic algorithms to process the thousands of transactions carried out every day with these stocks.

Why do they have a variable price?

Supply and demand for a particular cryptocurrency in the market are what sets its final value. In any case, not everything is left to chance, as only a certain amount of these assets can be issued. This means that the supply is controlled. Moreover, suppose you decide to invest in these currencies. In that case, you must bear in mind that major political, social and economic events at a global level can affect their value at a particular time.

The fraud myth

Ignorance leads many people to think that cryptocurrencies are a fraud since they are not coins you can physically hold in your hands. Nothing could be further from the truth: essentially, it is a potentially disruptive technology that breaks with traditional investment patterns but has historical, informational and transactional elements that can easily be checked.

Why can’t you hold a crypto coin in your hand?

If this is the first time you’ve come into contact with these currencies, this is bound to be one of the questions that automatically occur to you. The point is that we are speaking of digital coins with a cryptographic security system. So it makes no sense to mint physical coins to represent them, especially when cash is in widespread decline in our society.

How can something virtual have value?

Yes, cryptocurrencies are virtual, and it may be hard for you to understand how they can be given real value. It’s not so strange: in present-day society, we pay for online services, such as audiovisual content. If these coins are useful, it’s logical that they should also have a real value.

What am I buying when I purchase a cryptocurrency?

Purchasing these assets takes the form of transferring coins from one point to another, without passing through any intermediary, swiftly and without having to pay a high price for it. After buying them, you will have the necessary authorisation to use them in a network shared with other users in the same situation as you.

Are cryptocurrencies anonymous?

Are you thinking of buying these coins but worried about the security of your personal information? In that case, you need to know that transactions with cryptocurrencies are traceable in the blockchain and enable you to keep your identity protected. Similarly, they offer you complete control of your money.

Are they a form of illicit financing?

This is another of the most important false rumours circulating about cryptocurrencies. We must bear in mind that although the transactions conducted with these currencies are anonymous, each user has a public key that is recorded with their data. The possibility of these funds being used for illicit activities is, therefore, tiny.

Can your cryptocurrencies be stolen?

One of the points that mainly concern those thinking of investing in cryptocurrencies is whether they can be stolen. In other words, whether your balance can disappear from your account once you have obtained it. Well, you do not need to worry about this happening: remember that these currencies have a cryptographic code that makes it possible to track every transaction carried out with them. Therefore, your investment results would only be in any danger if someone had access to your keys for your portfolio.

Is investing in cryptocurrencies profitable?

This is undoubtedly the question asked by all those thinking of trying this investment area for the first time. The fact is that these virtual coins can offer you high profitability, provided you know their value and how they work in the market. Having a broker or a person with extensive knowledge of this kind of asset will be indispensable for you to succeed in optimising your investment in these currencies. Remember that their value is inherently very volatile, so it’s very important to be able to detect the best moment to purchase a particular currency, as well as how long you should hold onto it for its value to increase enough to provide a profit without leading you to incur losses.

¿Es rentable invertir en criptomonedas?

Sin duda, esta es la pregunta común entre todos aquellos que piensan en probar este campo de inversión por primera vez. La verdad es que estas monedas virtuales pueden ofrecerte una alta rentabilidad siempre que conozcas su valor y su funcionamiento en el mercado. Contar con un broker o con una persona que tenga amplios conocimientos en este tipo de activos te resultará indispensable para lograr optimizar tu inversión en estas monedas. Recuerda que se caracterizan por tener un valor muy volátil, por lo que es muy importante saber detectar el mejor momento para adquirir una determinada divisa, así como saber cuánto debes retenerla para que su valor se incremente lo suficiente para dar beneficios sin hacerte caer en pérdidas.

4. Conclusions

Cryptocurrencies are a form of payment used increasingly often in all kinds of financial transactions. Still, they are also an investment option to which many physical persons and legal entities are turning to obtain financial returns. In any case, whether you decide to acquire these virtual currencies to operate or to invest, you must be aware that you need to pay tax on them correctly to avoid problems with the public authorities.

Bear in mind that these stocks are still very little known in many respects, so paying the taxes arising from the returns they provide may be complicated for those unfamiliar with this sector. All the signs are that the future of investments involves knowing these virtual currencies and the advantages they can offer. If, in addition, you are capable of fulfilling all the legal requirements established for paying the corresponding taxes, you will succeed in optimising your presence in this market with financial profits that can be considerable, depending on how much you have invested.

Becoming familiar with the existing types of cryptocurrencies, how they can be acquired, and how to apply them to obtain financial profits is an important step for those starting in this world. If this is your situation, we recommend that you do not hesitate to take all necessary precautions to pay tax. Be sure to consult a tax expert to advise you on declaring the income generated and what taxes to pay. Moreover, they will be able to make the relevant returns for you promptly and correctly.

Then you will have nothing more to worry about than enjoying the benefits these stocks have to offer you. Having the services of professional specialists will guarantee peace of mind for you when it comes to enjoying the advantages of cryptocurrencies.

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