Legal aspects of transactions using cryptocurrencies and tax treatment of cryptocurrency income

Virtual or crypto assets (including cryptocurrencies) are a recent asset class that has attracted many investors. They are the most visible and well-known aspect of blockchain as a technological and financial phenomenon.

The existence of multiple ways of investing and dealing in cryptocurrencies, which may look unfamiliar to traditional investors, further enhance the complexity of finding a legal haven.

Portugal lack of capital gains tax on the disposal of cryptocurrencies has attracted many investors and businesses to Portugal.

Introduction

Virtual or crypto assets (including cryptocurrencies) are a recent asset class that has attracted many investors. They are the most visible and well-known aspect of blockchain as a technological and financial phenomenon.

Companies have also been attracted to blockchain technical solutions for their businesses.

This technology has led to new forms of financing, liquidity, and production of speculative products with high investment returns. But, on the other hand, there are risks such as price volatility, poor investor/consumer protection, and complexity in its creation or custody.

However, legal uncertainty is part of dealing with cryptocurrencies. Regulatory and tax aspects can be highly ambiguous.

Crypto assets are digital assets based on distributed ledger technology (DLT), such as a private or public blockchain. Such cryptographic and peer-to-peer technology allows for data and transactions to be recorded in a network that is, as a rule, collectively managed.

Despite a pressing need for clear rules, most aspects of crypto assets are unregulated. The legal qualification of crypto assets derives from their functional variety, based on each asset’s functions and uses.

Doctrine and regulators worldwide have chosen to categorize crypto-assets based on their function. A usual classification of assets adopted worldwide is payment tokens, security tokens, and utility tokens. Each asset category has its features and utilities. On the other hand, each cryptocurrency faces distinct legal, regulatory, accounting, and tax issues.

Portugal’s stance on cryptocurrencies

The Portuguese regulator’s stance on crypto assets is that they can only serve as a means of payment if contractually agreed between the parties of a transaction and are not legal tender (currency).

Therefore, applicable legal framework should be determined and measured given existing regulatory frameworks.

Licensing regimes

The Portuguese transposition of the Fifth Directive on AML (Directive 2018/843 of the European Parliament and of the Council of 30 May 2018) has directly impacted cryptocurrency businesses. In addition to extensive AML and KYC procedures being enforced on some crypto businesses, regulatory registration is now required.

The Bank of Portugal is the competent authority for overseeing the activities of entities providing virtual assets services and compliance with the legal and regulatory provisions governing AML.

The new law expands the scope of compliance requirements. It creates new obligations to be adopted by entities operating with virtual assets. In addition, the new legal framework provides the mandatory registration of such entities with the Bank of Portugal, regardless of other licensing requirements.

When carried out within Portuguese territory, the following activities require previous registration with the Bank of Portugal:

•exchange services between virtual assets and fiat currencies or between one or more forms of virtual assets;

•transfer services regarding virtual assets;

•safekeeping and/or administration of virtual assets or instruments that enable the control, ownership, storage, or transfer of such assets, including private encrypted keys.

For regulatory purposes, individuals, legal persons, or other entities incorporated or established in Portugal conducting activities related to virtual assets must file for licensing. Furthermore, non-resident individuals, legal persons, or other entities pursuing activities related to virtual assets must also apply for a license if required to register with the Portuguese tax authorities.

Virtual assets, such as cryptocurrencies include any form of digital representation of value that is not connected to a legal currency and lacks the legal status of fiat currency/legal tender.

The new regulations apply to custodians of assets, exchanges, and some wallet services. Entities operating without such registration are in breach of law.

Taxation of cryptocurrency income

Under Portuguese tax law, individuals are taxed under Personal Income Tax (“PIT”), comprising several income categories.

The Portuguese Personal Income Tax system is a schedular type of system whereby income is divided between categories. Each category focuses on a list of taxable events.

Capital Gains, in particular, are taxed under category G, which encompasses a list that currently does not include all types of gains, nor includes gains derived from the disposal of cryptocurrencies. Therefore, such gains are excluded from tax.

However, transactions using cryptocurrencies covered by other PIT categories can still be taxable — such as Category E (Investment income) and category B (Self-Employment income). For instance, Category B shall apply to day traders of cryptocurrencies.

Furthermore, payments made using cryptocurrencies will be taxable under general terms (such as Salaries — Category A or payment of contract fees — Category B).

In addition to this tax break, investors may also benefit from the general conditions of the Non-Habitual Tax Residency Regime.

The NHR regime is a special tax regime for inbounds designed to offer attractive tax-saving opportunities to value-added professionals, entrepreneurs, and investors who want to reside and do business in or from Portugal.

This regime is available to any individual who was not a Portuguese tax resident in the previous five years before moving to and becoming a tax resident in Portugal.

In contrast to the taxation regime of ordinary residents, the non-habitual residency regime provides special exemptions and tax rate caps. Tax exemptions exist for specific types of income, mainly passive income such as dividends and interest.

There is no wealth tax in Portugal, and the remittance of funds is tax-free. Moreover, as no inheritance tax is levied and there is no gift tax on donations made to family members, Portugal is also a great jurisdiction to avoid a decrease in estate value through tax leakage.

Acquisition of real estate using cryptocurrencies

Although cryptocurrencies are not considered currency in Portugal, it is possible to acquire Portuguese real estate by exchanging it for cryptocurrencies, provided the sellers agree to this form of payment.

The exchange of cryptocurrencies for real estate property shall trigger the same taxes applicable to property sales for consideration using fiat currencies. Therefore, the seller is still liable to capital gains tax.

In addition, the exchange is liable to Property Transfer Tax and Stamp Duty.

Property Transfer Tax is payable on the transfer of real estate properties and the transfer of any rights in rem. It must be paid by the buyer. Other acts and contracts where the transfer of real estate property rights is deemed to have taken place are also liable to Property Transfer Tax.

Disclaimer

This publication or document contains general information and is not intended to be comprehensive nor provide legal or tax advice or services. It should not be acted on or relied upon, or used as a basis for any decision or action that may affect you or your business. Professional legal advice should be requested for specific cases. We do not undertake any continuing obligation to advise on future legal amendments or the impact on the conclusions herein. Prior results do not guarantee a similar outcome. The contents of this publication or document may not be reproduced, in whole or in part, without the express consent of GFDL.

The information contained in this webpage is not to be used in place of proper and complete professional advice, as it does not constitute a binding legal opinion, nor does it not consider the particularities of your case.

Please seek advice before making any transactions. Contact us.