How Is Cryptocurrency Taxed in Spain – 2021 Update

The cryptocurrency market is quite volatile and changeable, and banks constantly warn about the risk of investing in cryptocurrencies. Still, digital currencies are often seen as a form of decentralization in the issuance of money and therefore of limitation in the power that, until now, the banks have had.

The reality is that the data shows how cryptocurrencies are generating interest that increases by the day. For example, ING’s Annual Mobile Banking Report states that:

• 32% of Spaniards expect to invest in cryptocurrencies from now on.
• Up to 38% of Spaniards consider that cryptocurrencies are the future of payments.
• 37% think that they are the future of investments.
• On the other hand, Latin America is the region where cryptocurrencies have later been established. They are growing the most since they are seen as a way to avoid problems that occur in those countries, such as inflation.

How to declare cryptocurrencies in Spain?

The way to declare cryptocurrencies in Spain depends on the use made of digital currencies. In this sense, we can distinguish:

• Use as a trader. In this case, a person buys cryptocurrencies and pays for them with his own money. The purchase is usually made through an internet platform called an exchange. The purchase itself does not generate a return, so it is not taxed.
  • Personal income tax. If the person who acquired the cryptocurrencies sells them, a return can be produced by the difference between the acquisition and transmission value. The capital gain or loss must be declared. The gain must be included in the taxable income of personal income tax savings. The loss will also be included and offset against earnings for that year or subsequent years.
  • VAT. Suppose there is a commercial relationship between the person who handles the cryptocurrencies and the Exchange platform. In that case, it is considered that economic activity is carried out, and VAT must be declared.
• Use for cryptocurrency mining. Cryptocurrency mining involves the use of a computer to validate and process blockchain transactions in exchange for remuneration.
  • Personal income tax. Mining activity is considered an economic activity, and the declarant may deduct the expenses associated with that activity.
  • IAE. Due to the development of economic activity, the person who carries it out must register with the IAE.
• Use as a broker. In this case, a natural person receives money from others to invest in cryptocurrencies and is paid a commission. In this case, it is considered that economic activity is carried out, so the income obtained will be declared in income tax as income from the activity. On the other hand, the VAT exemption from financial services mediation is applied. The broker must also register with the IAE.

Along with all the above, it should be considered that cryptocurrencies should be considered when valuing wealth for Wealth Tax. Cryptocurrencies must also be included in Form 720 (Informative Declaration of Assets and Rights abroad) in the event that the requirements of said form are met.

What’s new in 2021 to declare cryptocurrencies

In July 2021, Law 11/2021, of July 9, on prevention and fight against tax fraud was approved. The objective of this law is to avoid tax evasion and opacity in the use and investment of cryptocurrencies.

The new regulations establish certain obligations and regulations that affect when declaring cryptocurrencies:

• The companies that manage cryptocurrencies must report the balances and the identity of the holders of each balance.
• The Exchange platforms must inform the addresses, tax identification, prices and dates of each operation.
• In the case of people who have cryptocurrencies abroad, that is, who have Bitcoin or other digital currencies in an international wallet, they must report the virtual currencies they are holders of. In this case, they must be included in Form 720, provided that their valuation is greater than 50,000 euros.

If the obligation to declare the virtual currencies in Form 720 is not fulfilled, large penalties may be imposed, up to 5,000 euros for each data relating to each virtual currency. This means that in the event that you forget to comply with the obligation to declare cryptocurrencies, you can suffer very burdensome consequences from an economic point of view.

What do you need to declare cryptocurrencies correctly?

To declare cryptocurrencies correctly, it is essential to have the help of an advisory specialised in the taxation of digital currencies that performs the following services:

• Previous analysis of the client’s situation. The benefits obtained, the way to use cryptocurrencies and the tax forms to present are evaluated.
• Asset valuation. All assets are valued according to the criteria established by the Tax Agency.
• Elaboration of Forms. Depending on the previous analysis, the corresponding Tax Forms must be prepared: VAT, Personal Income Tax, IAE, Form 720.
• Presentation of Forms. Next, the submission of the forms previously made will be made and within the legally established deadline.
• Processing of appeals. If there are discrepancies with resolutions of the Tax Agency, the corresponding resources must be prepared and presented.

In short, the way cryptocurrencies are taxed is nuanced year after year. It is essential to be attentive to the new obligations to comply with them and avoid sanctions and inspections.