The tax regime of crypto active assets foreseen in the draft law of the State Budget for 2023
Crypto assets are digital representations of assets based on blockchain technology (technology that allows the distributed recording of electronic transactions) not issued by a central bank, credit institution, or electronic money institution. They can be used as a form of payment in a community that accepts it or have other purposes, such as granting the right to use certain goods and services or a financial return.
At a time when the first real estate transactions with cryptocurrency are beginning to emerge (in May 2022 the first real estate property was transacted in cryptocurrency – 3 bitcoin, about 110,000 euros – made through barter, occurring the exchange of the digital asset for the right to the property without any prior conversion into euros), the legislator comes, through the draft law of the general state budget for 2023, to present the tax framework it advocates for crypto active assets.
Until now, Portugal has been considered a “crypto-friendly” country not by virtue of a regime that concretely created favorable taxation of income arising from operations with these assets, but by virtue of the absence of regulation.
On the part of the Tax Authority, two doctrinal sheets have been produced so far in response to binding information requests (Doctrinal Sheet no. 1490 with the ruling of 1/4/2019 and Doctrinal Fact Sheet 5717/2015 with the ruling of 27/12/2016), where the specific issue of the sale of cryptocurrency to individuals is analyzed and where it is concluded that “the sale of crypto active assets is not taxed under the Portuguese tax system unless its regularity constitutes a professional or business activity of the taxpayer, in which case it will be taxed under category B”.
One of the novelties of the draft State Budget Law for 2023 is, therefore, the creation of a specific legal framework for the taxation of crypto-active assets, which covers IRS, IRC, Stamp Duty, and IMT.
IRS Taxation
Regarding IRS, the legislative proposal establishes a taxation regime on gains and income from crypto active assets, distinguishing the situations of purchase and sale of these assets – which are included in category G, from other operations related to them and which are deemed to generate income in the scope of a professional or business activity, and as such included in category B.
The notion of crypto assets arises under category G, and closely follows the one adopted by the Bank of Portugal, establishing that it consists of “any digital representation of value or rights that can be transferred or stored electronically, using distributed recording technology or other similar”.
Taxation in category B – crypto active issuance operations and transaction validation
Thus, income resulting from operations related to the issue of crypto-active assets, including the mining or validation of crypto-active transactions through consensus mechanisms, will now be considered a business and professional income, taxed as such, either under the simplified regime, for taxpayers who meet the respective requirements, or under the organized accounting regime. In the first case, the draft law establishes that the applicable coefficient is 0.15, which means that 15% of income will be subject to taxation at the general progressive rates set out in Article 68 of the IRS Code. Under the organized accounting regime, the full amount of the income will be deductible from the expenses effectively incurred to obtain it and the difference will be subject to tax also in accordance with the rates set out in article 68.
Taxation in category G – onerous transfer
As regards the purchase and sale of crypto active assets which do not constitute securities (a question which is assessed caustically using the criteria defined in article 1 of the Securities Market Code), they will be taxed under Category G, among the capital gains defined in article 10 of the IRS Code.
Here the proposal distinguishes from the outset, short-term gains, regarding assets held for less than 365 days, establishing that the difference between the realization value (market value at the date of disposal) and the acquisition value (from which it will be possible to deduct expenses inherent to the acquisition) net of the part qualified as capital income, will be taxed at a flat rate of 28%, with the possibility for the taxpayer to opt for aggregation of this income, thus subjecting it to the general progressive rates provided for by the IRS Code.
Contrary to what will now happen with capital gains arising from the disposal of securities and shares for taxpayers in the last personal income tax bracket, where the aggregation is compulsory, aggregation remains optional for crypto-active capital gains. The possibility of carrying forward any negative balance calculated each year, in the five subsequent years, is provided for, and subject to aggregation.
As for long-term gains arising from disposed of assets held for more than 365 days, the draft law establishes a tax exemption, considering, for the purposes of counting this holding period, also those acquired before 1 January 2023.
The draft law also provides in the scope of the IRS Code that natural or legal persons or other entities, even if without legal personality, which provides custody and administration services for crypto active assets or the management of trading platforms, must report to the AT any operations carried out with their intervention in relation to any taxpayer.
IRC Taxation
With regard to CIT, the draft law provides that income from activities related to crypto active assets, the issuing or validation of transactions through consensus mechanisms, will be considered as commercial activities subject to taxation, and under the simplified regime, the coefficient established is the same as that provided for IRS, i.e. 0.15, applicable to income that is not considered capital income, nor does it result from the positive balance of capital gains and losses and other asset increases.
Stamp Duty Taxation
The draft State Budget bill for 2023 provides for Stamp Duty on free transfers of crypto active assets. The applicable rate will be 10% and the taxable amount will be determined according to i) the specific rules foreseen in the Stamp Duty Code, ii) the value of the official quotation when it exists; iii) the value declared by the head of the couple or beneficiary, which should, as much as possible, approximate the market value, without prejudice of the market price.
It establishes territorial rules stating that transactions with crypto-assets deposited in institutions with head office, effective management, or permanent establishment in Portugal are deemed to be in national territory, or, in the case of non-deposited crypto-assets, in successions due to death when the transferor is domiciled in national territory and, in other free transfers, when the beneficiary is domiciled in the national territory.
According to the draft law under analysis, commissions, and consideration for the provision of crypto active services charged by or with the intermediation of entities domiciled in Portugal, or whenever the client of these entities has registered his domicile in Portugal, will also be subject to Stamp Tax at a rate of 4%.
The burden of the tax falls on the client of the providers of crypto active services, and in this case, the territoriality rules determine that the tax will be due whenever the service provider or the client of these services is domiciled in Portugal, being domicile considered to be the residence, head office, effective management, subsidiary, branch, or permanent establishment.
Relevance for IMT
As regards the amendments to the IMT Code, it should be noted that the draft 2023 State Budget Law clarifies that the value of crypto assets given in exchange (determined under the Stamp Duty Code) must be considered for the purposes of determining the value of the act or contract subject to IMT, the value of the respective official quotation being relevant here, whenever such quotation exists, or its market value.
In general terms, this is the taxation proposal through which, according to the legislator, it is intended to provide legal certainty and security to transactions involving crypto-assets and at the same time foster the crypto-economy. Time and practical application will show if it serves the purpose of fostering the digital economy, for now, we will only say that in the purchase and sale of crypto-active assets, considering the IRS tax exemption applicable to long-term gains, Portugal maintains this regime some attractiveness.
Vera Calheiros, Of Counsel from BAS Advogados
