Tax and cryptocurrencies in Portugal
It is well-known that the market for cryptocurrencies is expanding both in Portugal and globally. Naturally, more and more people are interested in this type of investment both personally and commercially.
Currently the most well-known and valuable cryptocurrency is Bitcoin. In November of 2021, one Bitcoin was valued at € 56,000. However, similarly to shares on the financial market, there are more than 8800 cryptocurrencies in circulation with different values.
If your business is interested in entering the cryptocurrency market or wants to invest in cryptocurrency, it is important to be aware of the tax implications of doing so in Portugal.
The problem lies in the lack of specific legislation in this regard in Portugal and we would not blame you for having doubts, given the confusing nature of the issue.
For this reason, we will briefly and simply explain everything you need to know about cryptocurrencies and their fiscal implications in Portugal.
What are cryptocurrencies?
Without going into too many technical details, cryptocurrencies are a type of digital money that are currently not governed or regulated by any central bank.
These digital assets are digitally stored using “blockchain” technology. This technology is made up of a decentralized and invariable database which operates according to mathematical formulas and principles.
Cryptocurrencies are issued and, usually, regulated by their developers. The processes underlying cryptocurrencies can be more easily understood by dividing the process into four stages:
- Cryptocurrency mining;
- The creation of portfolios and addresses;
- Cryptocurrency transaction verification;
- The conclusion of these transactions.
However, there are countless people and companies involved in this market, including users, miners, exchange service providers, portfolio managers, trading platforms, so-called “mixers” or “tumblers”, developers, issuers, and sellers.
In practice though, you only need to focus on certain aspects of cryptocurrencies, for example: what can they be used for?
How can cryptocurrencies be used in practice?
In practice, cryptocurrencies have several uses such as:
- Buying and selling;
- Trading between different cryptocurrencies;
- Using them as a payment method in certain domains where they are accepted;
- Gifting and donating.
As anyone who has learned a little about cryptocurrencies knows, it is also possible to obtain cryptocurrency through mining. Mining guarantees the security of the network and is responsible for the verification process. Given the important role played by miners, they are offered incentives for resolving the complex mathematical equations that allow the formation of blocks. However, this is just a very brief overview to give you an idea of what mining entails. Properly understanding this complex process requires a far more detailed explanation.
What does Portuguese law say about the fiscal framework for cryptocurrencies?
Currently there is not yet any specific legislative fiscal framework for cryptocurrency. This does not, however, mean that the Portuguese tax and customs authorities have not made any statements in this regard.
Currently available information from the tax authorities comes in the form of two communiqués in which tax-payers’ queries regarding cryptocurrencies and their VAT codes are addressed. If you would like to consult this documentation, it can be found in the form of two instruction sheets, Processo nº14910 and Processo nº 5717. Nevertheless, given that this information can be a bit confusing, let’s divide it into three topics: the IRS, IRC and VAT tax frameworks.
Nevertheless, given that this information can be a bit confusing, let’s divide it into three topics: the IRS, IRC and VAT tax frameworks.
IRS fiscal framework for cryptocurrencies in Portugal
If you already derive revenue from cryptocurrency investments, you do not yet have to worry about declaring it in your IRS. This is because, currently, the occasional sale of cryptocurrencies is not taxable under Portuguese tax law.
Theoretically, revenue generated from cryptocurrency could be integrated into three IRS categories:
- Professional or business revenues – Category B
- Capital income – Category E
- Capital gains – Category G
Currently, IRS is not payable on capital gains derived from cryptocurrencies. This is because, legally, they do not fall under the definition of capital gains.
About capital income – Category E, only income generated by the investment of capital is taxed. So, as far as the buying and selling of cryptocurrencies is concerned, what we are talking about is revenue gained from direct sales and, for this reason, these revenues are not taxable under Category E.
In terms of professional or business revenues – IRS Category B, trading in cryptocurrencies is only taxable where the sale of cryptocurrencies is your primary activity.
In other words, revenues taxed under Category B derive from the carrying out of an activity and not from returns on investments. For this reason, if the sale of cryptocurrencies is not your primary professional activity, there is no tax framework for them.
If, in contrast, the sale of cryptocurrencies is your primary professional activity, you are required to declare your income thus derived. This is stated in No. 6, Art. 3 of the IRS Code. It is important to note that, in this case, it is obligatory to issue an invoice or a receipt for every sale or service rendered. Furthermore, revenues will be taxed as per legislation pertaining to Category B.
Note: Currently there is no specific information available about cryptocurrencies in terms of the taxation of revenues falling under Category B where the carrying out of a primary professional or business activity is concerned. In addition, there remain doubts concerning the issuing of invoices, given the anonymous nature of many of these transactions.
IRC fiscal framework for cryptocurrencies in Portugal
In terms of the IRC fiscal framework for cryptocurrencies in Portugal, there is currently no publicly available information,
However, it is important to note legislation concerning taxable income in Art. 17 of the Corporate Income Tax Code (CIRC).
It is important to consider, in this regard, that taxable income is constituted by the calculation of the net result for the period and the positive and negative equity variations experienced in the same period and not reflected in that result. All these factors are determined based on accounting process and may be corrected in terms of the CIRC.
Although this explanation can seem quite confusing, it means that any revenues earned by a company must be properly accounted for. As soon as these revenues count towards your taxable income, they are subject to the payment of IRC.
VAT fiscal framework for cryptocurrencies in Portugal
To simplify the VAT framework for cryptocurrencies in Portugal, it is firstly important to understand that remuneration in cryptocurrencies is a rendering of a service subject to VAT but is currently exempt.
The same applies to the exchange of cryptocurrencies for euro or other currencies. Exchange of this kind also constitutes the rendering of services for consideration and, as such, is VAT exempt, in accordance with Art. 9, Sec. 27, Line (d) of the CIVA.
What do I need to remember about tax and cryptocurrencies in Portugal?
In terms of IRS, you have to declare your income and comply with your fiscal and declaratory obligations where cryptocurrencies constitute your primary professional or business activity. In this case you have to declare your income derived from such activities in terms of Category B and issue invoices or receipts whenever you make sales or render services.
Every other situation is exempt or lacks a specific fiscal framework.
In terms of IRC, revenues from cryptocurrencies fall under the accounting of the taxable income of your business as soon as they are subject to the payment of this tax. In terms of VAT there is currently an exemption for remuneration in cryptocurrencies but also for exchange between euros and other currencies.
If you have any doubts about the tax frameworks applicable to cryptocurrencies in Portugal, we can help you at Mário Moura Contabilidade. We are dedicated to remaining current with developments in legislation in order to offer our clients the best possible service in terms of tax compliance.
Please do not hesitate to contact us for anything you or your business might need.
Until next time!