Ever since the Bitcoin phenomenon started in 2009 there has been confusion on whether tax is payable in Spain and how exactly Spanish taxes should be applied.
Cryptocurrencies like Bitcoin, Ethereum, Litecoin, Ripple, Luckypig, Dogecoin and countless others have come into existence over recent years and more are created each year. They exist in a kind of virtual reality that uses ‘blockchain’ technology to account for transactions. Blockchain technology guarantees the reality of the existence of these assets, and purchase and sale transactions. The assets can be traded using a virtual exchange located in the ‘ether’ but nominally located in one country or another. As such such trading is almost entirely outside the scope or control of the financial authorities of developed countries, which inevitably results in deep distrust and frequent accusations that cryptocurrencies are used by criminals and terrorists and facilitate money laundering.
None of this has stopped people all over the world from enthusiastically investing and trading in these assets.
Cryptocurrencies are not generally regarded as true money but are nearly so and can be exchanged for conventional national currencies in specialised online exchanges. Cryptocurrencies can sometimes be used as ‘real’ money to purchase or sell goods or services. Even Tesla started accepting payment for vehicles in bitcoins although this was stopped this a few months later.
Despite widespread public acceptance of cryptocurrencies, Governments and conventional financial institutions continue to have a deep dislike for what they regard as an anarchic form of money and are scrambling to find ways to regulate and control its use. Conventional banks coming into contact with customers with these assets are paranoid that they could be involved with money laundering offences and criminal activity and so they close customer accounts, usually without any objective proof whatsoever.
This unfounded discrimination has got so bad that one of the Spanish banks we use have refused to allow us to transfer the salary of our staff to their Revolut account, claiming that this online challenger bank was blocked because it allowed its customers to buy and sell cryptocurrencies.
Attempting to understand the true (or philosophical!!) difference between cryptocurrency and ‘real’ money is a tough challenge. We should bear in mind that ‘Real’ money is nothing more than a promise by the central bank of a country to pay the bearer of a banknote a sum of money (whatever that represents!). Wikipedias entry on this subject makes this clear. However, in reality we accept money at its face value because a banknote (or more usually an accounting notation in a digital bank balance) can be reliably exchanged for other goods or services for the same perceived value.
Cryptocurrencies are often criticised for not having any real or intrinsic value, but history has shown many, many examples of central banks debasing their currency by ‘printing money’ to the point of wiping out the real value of the savings accumulated by people who believed that the value of the currency they had saved was ‘real’. It isn’t and to this extent it has been argued that that there is not much difference between the two, except that cryptocurrencies cannot be manipulated by incompetent or corrupt politicians or bankers.
Recent financial crises have led to central banks printing money in vast quantity to bale out Governments and now we are seeing the inevitably high inflation. At its simplest, inflation is a the process that reduces the real value of money. The cynical would say that creating inflation is deliberate and a great way of depreciating the enormous debts accumulated by Governments around the world!
For almost ten years, Spanish tax legislation contained virtually no provisions that specifically explain how cryptocurrencies should be treated. This means that for many years we had to ‘interpret’ as best we could the rules for each type of tax to decide what we should declare and how we should calculate any taxes that might be payable. In recent years, the tax office has issued a small number of rulings that have clarified the main questions posed by taxpayers on the tax treatment of cryptocurrencies. However, the situation in Spain remains very confused, as indeed is the case in most countries. In the UK, HMRC has issued detailed guidelines, but even these have been criticised for being impractical and/or unreasonable.
So for the time being we need to act with great caution and take note of tax rulings as they are published.
The tax office issued a ruling in 2018 that explains that there are two possible treatments depending on the activity that is being conducted by the individual. The two possible treatments are that income is being generated is a return on investment or as a result of an “economic activity”. In mid 2021 the tax office issued further rulings which has certainly helped further to clarify the tax regulations that apply.
Here is our understanding on how cryptocurrencies should be treated in the Spanish tax system, based on the tax rulings that have been issued so far.
Income tax
In the case that the cryptocurrency trading is regarded as an investment activity then, no problem, profits and losses should be treated as subject to income tax as capital gains . The sale price of the cryptocurrency is converted into Euros on the date/time of sale and this is compared to the Euro value of their purchase price to arrive at the taxable profit. It is important to remember that the exchange of crypto coins, even if you do not receive any cash from it, is also considered a taxable event.
The rates that apply are the usual investment tax rates of between 19% and 28%, which is reasonably competitive compared to other European countries.
The confusion that arises relates to the reference to an “economic activity” in the ruling. What is an “economic activity”? If you apply logic (always a mistake with tax law!) then buying and selling cryptocurrencies would seem to be “an economic activity”. If this were the case then investment income tax rates would not apply and instead the general income tax rates would apply and these rates are between 19% and 50%. These rates vary depending n the region of Spain..
The difference in the tax rates is very significant.
So this ruling has caused some confusion because of its reference to an “economic activity”, without going into precisely what this means. However, The term “economic activity” has special significance in Spanish tax law and has a precise, if a bit long winded, definition.
Literally translated, the definition of “economic activity” is: “Earned income from economic activities shall be considered to be income which, deriving from personal work and capital together, or from only one of these factors, involves the taxpayer’s own use of means of production and human resources, or one of both, for the purpose of participating in the production or distribution of goods or services.“
The underlined section of this definition is critical because it will immediately become apparent that a person who buys and sells cryptocurrencies, even if they are at it all day, is not producing or distributing anything. Therefore dealing in cryptocurrencies should not be considered to be an economic activity but as an investment activity, at the lower tax rates.
The next problem that arises is that some traders use ‘bots’ that can carry out hundreds of bring and selling transactions each day. These bits are automatic procedures incorporated into an online trading platform, and very clever they are too. How can you report hundreds or thousands of transactions in your income tax return?
The answer is relatively simple, make sure that you have a reliable and easily understandable printed report for the trading over the calendar year that details the individual transactions showing the profits and losses, and then enter the overall net profit or net loss in your tax return. I emphasise that this is not strictly speaking correct as the profit or loss on each separate sale transaction ought to be declared but this would be a practical impossibility and tax inspectors do not cause problems with this as long as they are provided with easily understood statements. There are online platforms that can do this job for you, as they will produce suitable reports adequate for Spanish income tax purposes, some of examples are CryptoTax, Coinpanda, Cryptio, Koinly, taxbit…
Wealth tax
Another ruling in 2018 makes it clear that on the 31 December each year the taxpayer must work out the Euro value of the cryptocurrency units they own, wherever in the world they are ‘located’, and declare this value in their wealth tax declaration for the year.
This differs to the rule concerning the valuation of a conventional bank account which requires the taxpayer to calculate the highest value of the 31 December and the average value held in the last three months of the year. In effect this valuation rule is the same as that for a conventional financial investment like shares in a company.
The valuation adopted by the individual must be provable and it would be desirable to print out the source of the valuation from the relevant cryptocurrency exchange.
In general, a person is entitled to claim a general exemption of 700.000€ so tax is only payable if total assets, including the crypto currency exceeds this value. There are Spanish regions that offer exemptions to this tax, such as Andalucía. Please feel free to have a look to our article in this respect https://www.spenceclarke.com/articles/wealth-tax-has-finally-gone-in-andalucia-is-andalucia-now-a-tax-haven/
M720 – declaration of foreign assets
For the uninitiated, the M720 declaration is an information only declaration for the ownership of foreign assets that usually has to be filed each year.
The M720 rules are always the craziest and how to handle cryptocurrencies is no exception. This kind of thing causes us great amusement, but then we are accountants so don’t think too badly of us!
Just like a ton of gold bars stashed in a bank vault in Geneva or a multimillion personal loan to a non-Spanish company, you can have billions in cryptocurrency and you don’t have to declare their existence in the M720.
You still have to declare the billions in you wealth tax return though!!
As usual with the Spanish tax office, they will not leave these anomalies to continue much longer so we anticipate that, at least for cryptocurrencies, there will be a new declaration (the M721) that will be dedicated to the reporting of these assets probably from 2024 in respect of the year 2023.
