Portugal State Budget 2023 Proposal – Taxation of cryptoassets

The Portuguese Government’s 2023 Budget Proposal finally provides a clear taxation framework for cryptoassets/cryptocurrencies. The proposal has yet to be approved in the Parliament.

The lack of regulation regarding the taxation of capital gains on cryptocurrencies has turned Portugal into a prominent destination for crypto investors and is considered a crypto tax haven. Nevertheless, the existing tax loophole paradigm leads to insecurity and uncertainty concerning tax planning and compliance.

No earnings arising from the disposal of crypto activities obtained by individual investors are subjected to taxation, provided they are not day traders liable to tax under the business or self-employed income rules.

The proposed amendments will impact the following:

• Personal Income Tax
• Stamp duty
• Property Transfer Tax

 

Personal Income Tax

Capital Gains

In 2016, the Portuguese Tax Authority issued a binding ruling regarding capital gains taxation, whereby income derived from cryptocurrencies was not deemed taxable under category G (capital gains). Only income derived from professional activities was taxable.

The non-taxation of that income under category G (capital gains) lies with Portuguese Personal Income Tax being a schedular system. The existing exhaustive list of taxable events did not include the sale of cryptoassets.

With the 2023 Budget Proposal, the Government will terminate this loophole, and capital gains will be taxed at a flat rate of 28% if the assets are held for less than 365 days. Taxpayers can also opt for the aggregation method and consequently be taxed per the progressive rates. Conversely, the sale of cryptocurrencies held for more than 365 days will be tax-exempt.

Losses arising from the disposal of crypto assets will be deductible for five years for taxpayers that choose aggregated taxation at progressive rates.

Similarly to other capital gains, the taxable amount will be the difference between the realization value (presumed to be the market value on the date of sale) and the acquisition value (net of the part qualified as capital income and related expenses).

 

Professional and Business Activities

The State Budget expressly qualifies that the issuance, mining, and transaction validation (using consensus mechanisms) operations-related income is to be taxed under category B (Professional and business activities).

Under the simplified regime (applicable to taxpayers with annual earnings falling below the EUR 200.000 threshold), a coefficient of 0,15 will apply, meaning that only 15% of the income will be subjected to taxation. For operations with crypto assets, including issuing, mining, or validations of crypto-related transactions, a coefficient of 0,75 applies.

There’s also the possibility of opting for taxation under organized accounting (profit).

 

Stamp Duty

Operations liable to Stamp Duty will now include cryptoassets.

Portugal will introduce a 4% tax on commissions charged by brokers of crypto activities if the crypto service provider or the customer are tax residents in Portugal. The transfer of cryptoassets will be liable to Stamp Duty if the assets are deposited with an institution with residence, management, or a permanent establishment in Portugal.

Donations will be taxable if transmitted to a beneficiary domiciled in Portugal. In this case, a 10% rate applies unless it’s possible to claim an exemption. The tax payment will be enforceable due to the need to present proof of Stamp Duty payment to the custodian entity in order to withdraw the assets.

An exemption is available for donations to spouses, descendants and ascendents.

For Stamp Duty taxation, the concept of crytoasset is as follows: All the digital representation of value or representation of rights that can be transferred or stored electronically using distributed ledger technology or similar technology.

 

Property Transfer Tax

The State Budget clarifies that Property Transfer Tax is due on acquiring real estate using cryptoassets as a means of payment.

 

Our comments

The adoption and implementation of these measures are vital for further clarification.

The new measures may have a limited negative impact on the attractiveness of Portugal as a destination for crypto investors. In the medium term, however, it will boost Portugal’s standing as a go-to place to do business in the crypto space.

In the past, many investors needed clarification on why Portugal was a crypto tax haven, being misled about the scope of the existing loopholes. But on the other hand, a coherent legislative framework is always a challenge to progress.

As more regulation is enacted, a coherent regulatory framework will provide the tools and the confidence for investors (from both the traditional and disruptive sectors) to further increase their exposure to crypto as a new asset class.

Long-term hodlers are in the best position to benefit from the soon-to-be framework. In a bear market, that’s a plus.

Ancillary disclosure obligations must be enforced on custodians and service providers, as reporting to the Tax Authorities will be mandatory.

On the other hand, the absence of a market or expert survey while drafting the proposal led to its incompleteness. Additional rules should have been implemented regarding the assessment of the taxable basis and further clarification regarding realization events for capital gains tax purposes particularly. We hope the practice will lead to better and more complete guidelines by the Tax Authorities.

In conclusion, the new provisions are not the worst, but they are still a long way to a coherent and complete framework.

Please contact us should you require any assistance in relation to Crypto businesses or Tax matters.

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