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Cryptocurrencies – taxation in Spain

Ever since the Bitcoin phenomenon started in 2009 there has been confusion on whether tax is payable in Spain and how exactly it should be applied.

Cryptocurrencies like Bitcoin, Ethereum, Litecoin, Ripple and the many others that come into existence each year, live in a kind of virtual reality that uses ‘blockchain’ technology to guarantee the reality of their existence and purchase and sale transactions.

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.

So far, Bitcoin remains the leading cryptocurrency used in the world. Governments and conventional financial institutions have a deep dislike for this anarchic form of money and are scrambling to find ways to regulate and control its use, often accusing users of anti-money laundering offences and criminal activity, without any proof whatsoever.

This unfounded discrimination has got so bad that one of the Spanish banks we use refused to allow us to transfer the salary due to one 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. ‘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!). 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 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.

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’ the general rules to decide what we should declare and how we should calculate any taxes that might be payable. In 2018, the tax office issued several rulings that clarified the main questions posed by taxpayers on the tax treatment of cryptocurrencies.

Income tax

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.

In the case that the cryptocurrency purchase and sale is an infrequent event for the individual then the sale of cryptocurrency should be treated as generating capital gains on the date of the transaction. The sale price in Euros is compared to the Euro equivalent purchase price of the units sold to arrive at the taxable profit.

The rates that apply are the usual investment tax rates of between 19% and 26%.

If, however, the individual is engaged in a business activity and is receiving cryptocurrency in exchange for goods sold or services rendered then Euro value of the cryptocurrency received should be treated as trading income and then earned income taxes apply between 19% and 48%, depending on where in Spain the individual resides.

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 the valuation rule is the same as a conventional financial investment.

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.

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.

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!

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!!

We don’t expect these anomalies to continue much longer so we anticipate that, at least for cryptocurrencies, the M720 next year will require declaration.

Spence Clarke & Co specialises in the provision of Spanish tax, legal, audit and accountancy services, mainly to foreigners with interests in Spain. Our cross-border knowledge helps clients adapt to the Spanish system with the minimum of doubt and disruption. If you have any questions about this article or any other matter contact us, with no obligation, to see how we can help you.