Q&A on the Portuguese new crypto-assets tax regime for 2023
Q&A1: How are crypto-assets treated for Portuguese tax purposes?
A1: For Portuguese tax purposes, crypto-assets are treated, as from 1 January 2023 onwards, as property for income tax purposes, unless it constitutes a security. Crypto-assets are not treated as currency.
Q&A2: What is a crypto-asset for Portuguese tax purposes?
A2: For Portuguese tax purposes, crypto-assets means “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology (DLT) or similar technology”. Nonetheless, strictly for income tax purposes the so-called unique non-fungible crypto-assets such as NFTs are excluded from the definition of crypto-assets. Read more on distributed ledger technology.
Q&A3: Are NFTs therefore excluded from income tax?
A3: The answer is yes for the “true” NFTs or the NFTs that cannot be replicated or forged. This should not be the case for fractionalized NFT (known as F-NFT) as then the NFT has been divided into smaller pieces and sold separately. It remains unclear the outcome for the issuance of NFTs in a large series or collections (as it may be an indicator of fungibility). For other taxes NFTs are covered. Read more on NFTs.
Q&A4: When crypto-assets are sold are they taxed under capital gains or business income?
A4: The answer depends if (a) there is business activity performed in the form of a commercial activity; and/or (b) income is derived from crypto-assets mining activity. In both (a) and (b) cases, business income will arise, and taxpayers will be taxed under Category B specific rules on income (including passive income and gains connected to that activity), see answer to Q12. Outside those cases, the taxation of crypto-assets traded and held by individuals is framed as passive income generally taxed at flat rate of 28%.
Q&A5: How are then crypto-assets taxed under capital gains?
A5: Gains arising from the disposal of crypto-assets (that do not constitute securities) held for 365 days or more are exempt from taxation. Outside the 365 days holding period, gains are taxed at a flat rate of 28%. Taxation under capital gains category is deferred to the moment of conversion/exchange for: (a) legal tender; (b) assets other than cryptocurrencies (such as real estate); and (c) services. Transfers between owned wallets, address or accounts is a non-taxable event.
Q&A6: Is exchanging one crypto-asset for another crypto-asset a taxable event?
A6: Direct exchange of a crypto-asset for another crypto-asset is a taxable event but does not lead to taxable income. For short-term exchanges (crypto-assets held for less than 365 days are exchanged), the holding period is reset and the acquisition costs of the “new” crypto-asset is the same as the acquisition costs of the “old” crypto-asset. If eventually taxable income in connection with “new” crypto-asset is later realised, the original acquisition costs of the first crypto-asset in a sequence of non-taxable exchanges is relevant for calculating the taxable gain. For long-term exchanges (crypto-assets held for more than 365 days are exchanged), both the holding period and acquisition cost are reset, meaning any gains or losses are considered to be realised but exempt.
Q&A7: If crypto-assets are held for less than 1 year how are then capital gains calculated?
A7: The holding period begins on the day after the crypto-asset was acquired/exchanged and ends on the day the crypto-asset is disposed/exchanged. The balance of gains and losses from disposal of crypto-assets held for less than 365 days is determined by the difference between the realization value and the acquisition value (net of any part qualified as investment income). To calculate a capital gain, taxpayers should: (i) follow a first-in-first-out (FIFO) rule per crypto-asset service provider, whereby first crypto-assets purchased chronologically are the first crypto-assets counted for disposal purposes; (ii) use acquisition costs of exchanged crypto-assets carried-over to received crypto-assets in absence of a taxable realization. Holding period takes into account crypto-assets acquired before 1st January 2023.
Q&A8: If a crypto-asset is held for more than 1 year is it therefore always exempt of taxation?
A8: In principle, yes. In any case, there is a specific provision that provides that the long-term tax exemption (and the crypto-for-crypto exchange deferral) is not applicable if proceeds are paid by person/entity resident outside EU/EEA without a bilateral/multilateral exchange of information agreement covering tax with Portugal. Most jurisdictions have adopted the common reporting standard (CRS) so the list of non-CRS countries is limited. In any case, this may prove a problematic provision as there is no clear identifiable jurisdiction for either payor or source of income in blockchain based transactions.
Q&A9: Are expenses and losses incurred in crypto-asset trading taken into account?
A9: Expenses necessary and effectively borne on acquisition or disposal of each crypto-asset are deductible (i.e. itemized expense). Short-term losses can be carried-forward for 5 years but the use of such losses in a future tax year obliges the taxpayer to opt for progressive taxation (up to 48% plus surtaxes). Losses where counterparty is resident in blacklisted jurisdiction may not be offset against other capital gains (rather odd rule as cryptoassets generally have no identifiable counterparty). Case-by-case analysis recommended before using losses carried-forward.
Q&A10: How the taxation of staking rewards is framed for income tax purposes?
A10: As most holders of crypto-assets are mere investors lacking technology and know-how to directly validate transactions within blockchain protocol, they generally “delegate” their validation rights to third-party validators in return of earning staking rewards. This remuneration (and off-chain staking remuneration) is qualified as investment income (Category E) but tax is deferred to the moment of the disposal of those cryptoassets received as capital gains. This means those crypto-assets earned will have a zero acquisition cost for future disposal purposes. Other staking rewards directly from blockchain-based consensus mechanisms will likely be framed as mining income and taxed as business income (category B). Please see our DeFi table of transactions.
Q&A11: Is therefore an individual who mines crypto-assets engaged in a trade or business subject to tax on the income derived from those activities?
A11: Yes. The tax regime provides specifically as of 1 January 2023 that operations related to the issuance of crypto-assets, including mining or the validation of crypto-asset transactions through consensus mechanisms (excluding those performed via Staking as a service or SaaS) are taxed as business and professional income (Category B). Read more on consensus mechanisms.
Q&A12: How is then business income from crypto-assets taxed?
A12: Business income is taxed at progressive marginal tax rate up to 48% plus additional solidarity surtax of 2.5% on income between €80,000 and €250,000 and 5% on income exceeding €250,000. Income is either taxable within the so-called “simplified regime” or under the “organised accounts” regime, as follows:
The "simplified regime" is applicable to individuals that have not exceeded in the previous fiscal year €200,000 of gross annual amount of business income, with taxable income being determined by application of a legal established coefficient of (a) 95% for crypto-asset mining gross income earned or; (b) 15% for crypto-asset transactions gross income (without accounting any other deductions/expenses). Income crypto-asset transactions (not income from mining) is only considered realized or earned at the moment of actual disposal for consideration.
For taxpayers above €200,000 threshold or that opt to taxed under the “organised accounts” regime, the taxable base is determined in a similar way to a company, accounting for any deductible expenses. Mark-to-market accounting will generally apply.
Q&A13: What happens upon ceasing to be tax resident in Portugal or closing the business activity?
A13: For purposes of capital gains, an exit tax was put in place whereby an individual ceasing to be tax resident in Portugal will be deemed as having disposed the cryptoassets. Tax base is the market value of assets deducted their acquisition cost, with the general long-term gains exemption applicable. The same deemed disposal rule at market value applies when closing a the business activity.
Q&A14: Do crypto-assets received by an employee or independent contractor for performing services constitute employment or self-employment?
A14: Such income qualifies as a paid-in-kind remuneration that is taxable for the employee/contractor and potentially subject to PAYE withholding tax obligations for the payor. The cash equivalent of income is determined in the following order: (1) official listed price; (2) official purchase quotation; or (3) market value, determined in conditions of competition. Token incentive plans should follow the same tax rules as traditional equity incentive plans.
Q&A15: How are transactions exchanging crypto-assets for real estate taxed?
A15: The transaction may have income tax implications to the buyer (person exchanging the crypto-assets) depending if gains or losses realized are short-term or long-term. The value of crypto assets given in exchange to seller (generally the listed value of the crypto-asset) is then considered to determine the value of the transaction and payment of real estate transfer tax (IMT) by the buyer. Seller will have the normal tax implications of disposing a real estate and will acquire crypto-assets with the value and date of the exchange transaction.
Q&A16: How is donation or inheritance of crypto-assets treated to tax purposes?
A16: In Portugal, no tax arises on inheritance or donation unless such events (donation or inheritance) would occur outside direct family beneficiaries. Crypto-assets (including NFTs) deposited with Portuguese-based entities (exchange) are deemed to be Portuguese assets to which a 10% stamp tax may apply if gifts/inheritance occur outside direct family. Foreign-held crypto-assets ((including NFTs) may also fall under the 10% stamp tax when the deceased (in case of inheritance) or beneficiary (in case of donation) are tax resident in Portugal and the direct family exemption would not apply.
Q&A17: Is there any taxation on intermediation on crypto-asset trading or services?
A17: Yes. Stamp tax to be levied on commissions and consideration charged by crypto-service providers at 4% rate (same rate for financial services commissions). This tax which is borne by the customer of the crypto service providers and due whenever such providers or final recipients are resident in Portugal. The crypto-assets providers resident in Portugal will be ultimately responsible to deliver that tax and non-residents should appoint tax representative for operations not intermediated by entities domiciled in Portugal. Practical application outside Portuguese territory may prove challenging until cross-border exchange of information mechanisms are in place.
Q&A18: How tax authorities going to trace crypto-asset transactions?
A18: Portuguese tax authorities are granted a wide range of tax information and collection powers, including a requirement for third-party service providers to submit financial data. In addition, as from 1 January 2023, Portuguese based entities providing custody/administration services for crypto-assets on behalf of third parties or managing crypto trading platforms are required to submit an official form to the Portuguese tax authorities, until the end of January of each year, communicating the operations carried out with its intervention relating to crypto-assets. Finally, the future implementation of the OECD Crypto-Asset Reporting Framework (CARF) and DAC8 EU Directive, setting new standards covering exchange of information of crypto-assets and e-money, will provide cross-border tax information of crypto-assets held by resident taxpayers.
Q&A19: What data sources are available to assist taxpayers completing tax obligations?
A19: Since all on-chain transactions are publicly available, there has been growing popularity in the adoption of cryptocurrency tax calculation service providers (crypto tax software) that integrates both programming interfaces (APIs) from exchanges as well as on-chain data associated with a taxpayer’s public wallet address to aggregate the transaction history and produce a tax report based on a set of assumptions. Those APIs software (with read only access) allow to track the cost basis of crypto-assets. For transactions performed via public blockchains, other data sources that may be used include blockchain explorers such as Etherscan.io, Blockstream.info, Blockchain.com or CoinMarketCap.com.
Q&A20: How the Portuguese tax regime compares internationally?
A20: The new tax regime applicable as from 2023 onwards is very competitive internationally, outside the crypto-asset mining activity framed as business activity. For investors and traders engaged in crypto-assets outside a trade or business, the Portuguese tax regime is very attractive because: (i) defers taxation to the moment of Fiat/goods/services realization (suxh as in Austria); (ii) offers the possibility of capital gains exemption for long term holdings - more than 1 year (such as in Germany); (iii) defers third-party staking remuneration to the later realization of the earned crypto-assets; (iv) first-in-first-out rule is calculated per crypto-asset service provider/exchange; and finally (v) short-term losses may be carried-forward.
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Conclusion: Regardless of its volatility and latest stumbles, crypto-assets seem to be here to stay and as time passes it will become more important to have clear tax guidance from the tax authorities to navigate the new rules and help taxpayer develop appropriate processes to document the tax treatment.
NOTE: Text prepared on the basis of the Budget proposal and later proposed amendments. Awaiting publication of final text to enter into force as from 1 January 2023.
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