How to declare cryptocurrencies?

Do you have cryptocurrencies and are not sure what taxes to pay? In recent years, cryptocurrencies have been gaining relevance as a means of payment and as an investment. This has meant that questions have been raised regarding their taxation and states have begun to develop regulations aimed at clarifying their taxation and controlling the fraudulent use of these currencies. In this post, we tell you how to declare cryptocurrencies and what advances are currently being made in Spanish regulation on this topic.

How are cryptocurrencies used?

As outlined in the introduction, cryptocurrencies have two main uses:

• As a means of payment. A Judgement of the Superior Court of Justice of the European Union of October 22, 2015, considered Bitcoin a means of payment and not a financial value. When goods or services are bought with cryptocurrencies, VAT is applied to the transaction, which the buyer will have to pay, except in cases where the operation is not subject to VAT or is exempt.
• As a form of investment. In this case, taxes such as personal income tax or wealth tax, among others, will also have to be paid.

Is there a Spanish regulation on how to declare Bitcoins and other cryptocurrencies?

The first thing to know is that Spanish tax legislation does not mention how to declare Bitcoins and other cryptocurrencies. There is no regulation as to how they are taxed, or concerning the obligations of the platforms that use virtual currencies.

However, there are several aspects to consider in relation to the regulation of cryptocurrencies:

• There are several binding taxpayer inquiries, resolved by the General Directorate of Taxes, related to the taxation of earnings obtained with cryptocurrencies. For example, according to the binding consultations V808-18 and V0999-18, when one virtual currency is exchanged for another, there is an alteration in equity (which can be a gain or a loss), which must be included in the personal income tax return.
• In the Annual Tax and Customs Control Plan 2018, one of the study objectives already included “the tax incidence of new technologies, such as Blockchain, and, especially, cryptocurrencies.” In addition, the 2020 Annual Tax and Customs Control Plan establishes that “The actions initiated in previous years will continue, in relation to the fiscal risks observed in operations carried out with cryptocurrencies.”
• In the last personal income tax campaigns relating to the 2018 and 2019 fiscal years, the Tax Agency sent a notice to certain taxpayers informing them that it was aware that they had carried out operations with cryptocurrencies and that, if there were profits, these they had to be declared. This was possible because the Treasury sent information requests to entities that intervene in the acquisition or sale of cryptocurrencies, mainly financial entities, intermediaries such as exchange houses, payment gateways and entities linked to ATMs, and companies that accept payments with cryptocurrencies.
• The Treasury may initiate an investigation into anomalous inflows of capital in bank deposits or track the exchange of virtual assets for euros in the exchange platforms that we have linked to our bank accounts. In both cases, financial institutions (banks, savings banks, etc.) can receive instructions from the Tax Authority to report transactions (transfers, inputs and outputs) with platforms that facilitate cryptocurrency trading which appear in the current accounts of customers.
• There is a Draft REFORM of the Law on Prevention of Fiscal Fraud which has not yet been approved (the COVID-19 crisis has paralysed legislative activity), which will force platforms that operate with cryptocurrencies Hacienda periodically inform data taxpayers who cryptocurrencies operations and the number of such transactions. In this draft, it is also stipulated that taxpayers must declare investments in cryptocurrencies through Form 720 (statement of assets and rights abroad).
• There is also a Draft Reform of the Law on Money laundering which, pending approval, will force platforms that operate with cryptocurrencies to appear on a public register and report operations where taxpayers may be suspected of money laundering (mainly to control possible capital movements of criminal organisations).
• Finally, it is important to note that a Directive of the European Parliament and of the Council of May 30, 2018 (EU-2018/843) on cryptocurrencies is in force, mainly related to the prevention of money laundering, but that opens the possibility for the exchange of information between EU countries regarding their citizens’ investments in cryptocurrencies.

Is it necessary to declare cryptocurrencies to the Treasury?

The answer is that it is necessary to declare Bitcoin and other cryptocurrencies to the Treasury. The following taxes must be declared and paid as applicable:

• Personal income tax. The capital gains or losses that occur as a result of the sale of Bitcoin or other cryptocurrencies.
• Wealth Tax. If the taxpayer is obliged to make this declaration, they must include the value of the cryptocurrencies at the time of the tax declaration and pay according to the applicable rate.
• Inheritance and Donations Tax. If a person receives an inheritance including cryptocurrencies, this must be included in the ISD statement.
• VAT. The activity of currency exchange for Bitcoin or the sale of cryptocurrencies is considered to be included in the scope of VAT.
• Form 720. Clarity around Form 720 and cryptocurrencies is lacking, since the legal nature of cryptocurrencies does not seem to be included in the assets to be declared and the fact that they are available on a foreign intermediation platform does not imply that the asset is abroad since it is something intangible.

As a consequence of all the above, it is evident that the Tax Agency currently has at its disposal various means to obtain information about cryptocurrencies by requiring certain entities to provide this, and, in addition, the approval of specific legislation on cryptocurrencies is imminent.