Reporting Capital Gains from Crypto Under Portuguese Tax Law
With the release of the tax return for 2023 to be submitted on 2024, there is finally a first insight on how crypto-assets will be reported in for tax purposes in Portugal.
That does not mean it is all clear. Far from that, as there are several points that are unclear and may require clarification on how to align the rules with the reporting obligations.
First it is good to recall the 5 key principles when holding crypto-assets as a passive investment outside a trading activity.
Gains arising from the disposal of crypto-assets that do not constitute securities held for 365 days or more are exempt from taxation (and losses disconsidered).
Gains arising from the disposal of crypto-assets held for less than 365 days are taxed at a flat rate of 28%.
Direct exchange of a crypto-asset for another crypto-asset is a taxable event but does not lead to taxable income. Taxation under capital gains category is deferred to the moment of conversion/exchange for: (a) legal tender; (b) assets other than cryptocurrencies; and (c) services/goods. Transfers between owned wallets, address or accounts should be a non-taxable event.
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. To calculate a capital gain, taxpayers should follow a first-in-first-out (FIFO) rule per crypto-asset service provider.
Long-term tax exemption and the crypto-for-crypto exchange deferral is not applicable if proceeds are paid or received from person/entity resident outside EU or EEA without a bilateral or multilateral exchange of information agreement covering tax with Portugal.
For more detail on the Portuguese tax regime on crypto read our Q&A.
Having these principles in mind, let’s see how the new tax return was drafted for passive capital gains. There are bassically 3 reporting options for capital gains:
Annex G – This annex is generally for capital gains considered to be Portuguese source gains;
Annex G1 – This annex is generally for exempt capital gains; and
Annex J - This annex is generally for foreign source income, including capital gains.
In Annex G (Portuguese source gains), the taxpayer has to fill:
BOX18A - to declare income arising from sale of crypto-assets held for a period of less than 365 days (or when taxpayer ceased his status as tax resident in Portugal); and/or
BOX18B - to declare income arising from the sale of crypto-assets if proceeds are paid or received from person/entity resident outside EU or EEA without a bilateral or multilateral exchange of information agreement covering tax with Portugal.
These boxes require the taxpayer to include acquisition cost and date, sales value and date and conected incurred (such as gas fees?). More contentious, it required the taxpayer to include: (a) the Portuguese tax number and country of the entity providing custody and administration of crypto assets on behalf of clients (i.e. CASP); and (b) country of the counterparty to the crypto transaction. See the extract of the tax return:
3 points may need perhaps clarification:
The reportable transactions in centralized exchanges are to be considered in Annex G regardless of the location of the actual centralized exchange used (CASP) and if this entity has or not a tax identification number (TIN) in Portugal ? If there is no TIN, should taxpayer include a Zero TIN instead?
As losses where counterparty is resident in blacklisted jurisdictions may not be offset against other capital gains, this particular point needs clarification. From the literal point of view, the opposing party of the seller is the acquirer and "counterparty" is a term often associated with traditional finance (TradFi). In Blockchain, it does not make much sense to use this term, as smart contracts in the token sale process are self-executing contracts and the counterparty is not known to the seller. In a centralized exchange (CEX) environment, what happens is that the CEX matches buy and sell orders from its users and executes the trades on their behalf (it is not properly a counterparty). Who is then counterparty of a crypto-asset transaction? Taxpayers should perhaps not include any counterparty when filing the tax return.
Box18B is relevant because when filled it will lead to taxation and even if it mistakenly refers only to jurisdictions with tax treaty, the fact is that the Law has a much wider scope. Most jurisdictions in the world have adopted the common reporting standard (CRS) and many are members of the Convention on Mutual Administrative Assistance in Tax Matters, so the list of jurisdictions that do not exchange information with Portugal is rather limited. Due to uncertainties on where is a CEX located or incorporated, it should be actually the Portuguese tax authorities to draw-up such list of tainted jurisdictions or non-CRS jurisdictions. Leaving this to taxpayers will not promote compliance.
Finally, the reporting option in Portugal for crypto-assets was to perhaps “ignore” or not report the cases of short term exchange of a crypto-asset for another crypto-asset which despite being a taxable event it does not lead to taxable income (working like a like-kind exchange). But if the tax return does not actually explain this, perhaps many taxpayers will end up reporting the short term transactions even when they simply swapped tokens. This is a new regime in a very technical subject, so it is crucial to provide guidance on how in practice it works for swaps when crypto-assets that are held for less than 365 days are exchanged. Based on the law, the holding period is reset and the acquisition costs of the “new” token is the same as the acquisition costs of the “old” token. Without guidance, there will be confusion in the market.
In Annex G1 (Portuguese exempt gains), the taxpayer has to fill:
BOX7 - to declare income arising from the sale of crypto-assets held by the holder for a period longer than 365 day (or when taxpayer has ceased his status as tax resident in Portugal). See the extract of the tax return:
2 points may need perhaps clarification:
The Portuguese law provides that in swaps of long-term held tokens (crypto-assets held for more than 365 days), both the holding period and acquisition cost are reset, meaning any gains or losses are considered to be realised but exempt. There is also the inclusion of the Portuguese TIN and Country of CASP (as in the prior reporting of short term gains) but does this indicate that other gains undertaken outside a CEX should not be reported in this exempt gains? There is no concrete reference that this reporting should be applied on all swaps of crypto-assets regardless of the type of platform (CEX or DEX) where they are realized.
We already mentioned the oddity to have the identification of counterparty as in Blockchain there is no identifiable counterparty but for exempt gains this point is also not relevant (as also long term losses are disconsidered). Only in case of short term losses, when the taxpayer would choose to carry forward the losses such identification could be said to be relevant.
In Annex J (Portuguese foreign income), the taxpayer has to fill:
BOX9.4A - to declare foreign income arising from sale of crypto-assets held for a period of less than 365 days (or when taxpayer ceased his status as tax resident in Portugal). These boxes also requires to include: (i) country code of the source of income; (ii) tax paid abroad; and (iii) country of residence of the counterparty. See the extract of the tax return:
3 points may need perhaps clarification:
Source is traditional international tax term, but tokens are associated with the blockchain network rather than a specific geographic location or issuer (like shares or bonds). Including a reference to source will raise confusion. In many tokens there is no centralized issuer and could be unincorporated Decentralised Autonomous Organisations (DAOs). What is the source if taxpayers dispose BTC or ETH in a DEX platform? Or source is the place where conversion/exchange for: (a) legal tender; (b) assets other than cryptocurrencies; and (c) services/goods occurs?
Why include tax payable abroad in crypto-asset when these type of assets are not taxed under a source/residence principles like other assets? As the item is included, perhaps a clarification is needed if any tax credit would be actually available?
By including (again) the country of counterparty, can the taxpayer assume that this is not the same as the source of the transaction?
Conclusion
In light of the unique crypto challenges and given that this represents a new tax regime, it becomes imperative for Portuguese tax authorities to provide clear guidance, fostering an environment that incentivizes compliance and ensures accurate reporting. The Portuguese tax regime is also well positioned to become an international benchmark. Providing comprehensive guidance promotes the Portuguese tax regime as a progressive and internationally recognized framework for crypto taxation.
Thank you.
© Kore Partners, 2024
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