Portugal has changed its tax policy on crypto assets taxation. From January 1st of 2023, upon the approval of changes in the law, specifically to the Personal Income Tax Code by the General State budget for 2023, it has introduced new challenges for all the stakeholders operating in Portugal, such as individual investors, short-term sellers, derivative and leverage traders. From this date, All investors that had chosen Portugal as their residency country will face new regulations and tax obligations to comply.
We understand that this law has been designed primarily for long-term holders; whoever keeps their tokens for an extended period (>365 days) will make their financial life and reporting easier. Nonetheless, we know this is a different reality for 80% of crypto investors, with multiple transactions and investing using complex tools and products.
This article aims to provide a comprehensive guide and answers to the most frequent situation of crypto taxation in Portugal only from the Personal Income tax perspective. The way we propose presenting the information here will be:
a) Crypto taxation in Portugal – Cryptocurrencies taxation;
b) Taxation according to different categories of income;
c) Opening up an Individual professional activity for crypto mining, crypto validation, and issuing of crypto tokens;
d) Opening an Individual professional activity as a Cryptocurrencies trader;
e) Examples and frontier cases.
f) Final remarks and conclusions.
Crypto Taxation in Portugal for 2023, what did it change?
The law has introduced a legal concept of a Crypto Asset in article 10.º n.º 17 of the Personal Income Tax Code (Código do IRS):
“For the purposes of this Code, it is considered crypto asset all digital representation of value or rights that can be transferred or stored electronically using Distributed Ledger Technology (DLT) or another similar technology.”
From this definition, we can extract that many different blockchain realities are covered, and many assets will fall under the scope of this definition.
One interesting question to be discussed is if a stablecoin, under the definition set above, might be considered or not a crypto asset.
In our opinion, since it is an asset that was “created” on the:
i) Blockchain (DLT technology); and
ii) can be stored electronically (with the use of a wallet); and
iii) represents value or the right (in case it is fully backed).
Leave us little room to doubt that a stablecoin is, in fact, for the application of tax Law a crypto asset.
Please find here more information about what a stablecoin is and why in our opinion fits into the criteria defined in the law for the crypto assets.
The law foresees two specific exclusions from this regime:
A) Non-fungible tokens – NFTs , are expressly excluded.
Click here for more information about taxation NFT taxation.
B) The sale of crypto assets that do constitute securities.
What is taxed?
In broader terms, the taxation law will cover capital gains/trading, staking, validation, mining, salary paid in crypto tokens, and issuance of tokens of any token that falls under the above definition set in article 10.º n. 17 of the Código do IRS.
Category G (Capital Gains) – Capital Gains for the sale of crypto tokens:
Under Article 10, the sale of crypto assets that do not constitute securities is taxed as capital gains (profits from sales). This includes the difference between the realization and acquisition amounts. However, gains obtained and losses incurred from the sale of crypto assets held for a period of 365 days or more are excluded from taxation.
Tax Rate: If the purchase sale of crypto were performed without the holding period of 365 days, it would be taxed at the tax rate of 28%, in the event of selling it into FIAT.
Purchase of 1 BTC on 01/01/2023 for $ 16.700
Selling of 1 BTC on 10/06/2023 for $ 20.700
Fees for the CEX are $ 100
$ 20.700 – $ 16.700 – $ 100 = $ 3.900
Having the exchange rate converted to Euros is mandatory ~€ 3.698,44
Effective Tax to be paid: 28% X € 3.698,44 = € 1.035,56
The law allows the crypto investor to offset their gains with all the necessary expenses they had to support to perform their trades/sales.
The case above is straightforward with 1 per-1 transactions, but a crypto investor is often involved in multiple transactions using numerous centralized and decentralized trading platforms. Which rule shall I use in case of various transactions?
For these complex situations, the law sets the rule of FIFO – First in, First Out, to compute our transactions. Investors will have to use our oldest purchases to reference the sale.
The FIFO method will be applied for each case if the crypto trader trades using multiple platforms.
Click here to learn more about FIFO.
If the crypto investor faces a typical exchange situation from exchanging X ETH for X BTC, then there is no taxation to be applied for that immediate transaction. Attributing to the crypto assets received the acquisition value of the crypto assets delivered, determined by its market value.
Example B :
Purchase of 1 BTC on 01/01/2020 for $ 7.220
Selling of 1 BTC on 02/02/2024 for $ 20.700
Fees for the CEX are $ 100
In this case, the investor held their tokens for more than 365 days; therefore, all profit is exempt from taxation.
Category B ( Professional Activity)- Crypto Mining and Validation:
For the cases of miners and validators, the law sets that their mining or validation of transactions through a distributed ledger technology on the Blockchain is a professional activity.
Therefore these types of income, maybe be taxed as any other professional activity and up to a tax rate of 53% of Personal income tax.
Please check the section below to learn more about the possibilities of using organized accounting vs simplified accounting.
Category E (Capital Yields) – Staking, Lending, and Providing Liquidity through Liquidity Pool(s):
Capital income is considered to be the yield and other economic advantages, whatever their nature or denomination, whether monetary or in kind, derived directly or indirectly from patrimonial elements, goods, rights, or legal situations of a movable nature, as well as from their modification, transfer or termination, except gains and other income taxed in different categories.
With the new changes, the law started to tax any forms of remuneration (income) resulting from operations relating to crypto actives; this covers staking or liquidity providing, where we “deposit” some crypto to get a yield out of it.
However, we will have to make two distinctions on this specific topic:
a) The case the investor / staker / LP provider gets his yield paid in FIAT; or,
b) The case the investor / staker / LP provider gets his yield paid in Crypto;
If the staker earns yield in FIAT or another type of kind payment (except crypto), according to the law, this is a taxable event taxed at 28%.
On the other hand, if we consider the classic example of staking Ethereum or Cardano, the yield is paid in crypto. In this and similar cases, the income provided takes the form of crypto assets, and they are taxed as capital gains only at the time of their disposal and not at the moment they are earned.
In other words, yields from staking paid in crypto are only taxed when you sell and according to the capital gains rules described above. Attributing to the crypto assets received the acquisition value of the crypto assets delivered, determined by its market value.
Please check the section below to learn more about the possibilities of using organized accounting vs simplified accounting.
Opening of a Tax Activity and different options for accounting
If you are doing, for instance, crypto mining, you will be required to open a professional activity with the tax authorities and register yourself as a miner. This option is left to a trader if he chooses to perform his activity in a professional way vs a traditional trader.
In these cases, there is a choice to be made and apply a special simplified tax regime if the total turnover is not superior to the gross amount of €200.000,00 annually for the activities of trading, issuing tokens, mining, or validator.
In this event, the taxpayer can opt between two possibilities to organize his tax activity and pay taxes according to two regimes; he has the choice between
i) generic rates tax rates using an accountant to assess his profit; or,
ii) using a simplified activity.
In the event of opting for organized accounting, the taxpayer will be taxed on his annual profit, calculated based on his P&L, and will be paying taxes according to the generic personal income tax rates, up to 53%.
In the simplified version of accounting, there is no need for an accountant. Instead of computing the annual profit, the crypto investor, miner, or validator will have to use his total turnover, have it apply a coefficient, and pay according to the generic tax rate. There are two possibilities:
a) 0.15 for sales of goods and products, operations with crypto assets, except mining crypto assets (Trading); and
d) 0.95 to income from mining crypto assets (mining).
Example A :
If a trader sells tokens in the amount of € 100.000 on turnover, it will apply a coefficient of 0,15= € 15.000.00 and will pay tax only based on this, which will have an effective tax rate extremely low in this case. In other words, it will be considered 85% as costs and expenses.
However, it doesn’t count for losses or costs. There might be better options for some crypto investors.
If a miner of BTC has his mining operation set in Portugal and mines an amount of € 1.000,00, he will have a coefficient of 0.95 = € 950,00. This means €50,00 as a cost and the remaining as profit, and he will pay according to the tax rate applicable to his specific case.
Category A and B (Salaries and Professional Payments):
Working and receiving payment or some asset other than cash is considered income in kind. Hence, under the current and previous rules subject to taxation to the generic tax rates. The cash equivalence of income in kind, including when it takes the form of crypto assets, is determined according to the rules outlined in Article 24 of the Personal Income Tax Code ( Código do IRS).
What are Crypto Derivatives, and are they Crypto?:
As per the simple definition on Cointelegraph :
Simply put, a derivative is any product or contract with a value determined by an underlying asset. In traditional financial markets, derivatives derive their value from assets such as stocks, bonds, interest rates, commodities, fiat currencies, and cryptocurrencies, hence the name.
Crypto derivatives work like traditional derivatives in the sense that a buyer and a seller enter into a contract to sell an underlying asset. Such assets are sold at a predetermined time and price. As such, derivatives do not have an inherent value but rely on the value of the underlying asset. For example, an Ethereum derivative relies on and obtains value from the value of Ethereum.
Derivative trades also do not hold nor own the underlying asset. The most popular crypto derivatives types are futures, options, and perpetual contracts.
These contracts can be used to trade any number of assets and carry their own risks. They can vest several forms of derivatives, namely: a) Futures, b) Options (Calls and Puts), c) Leverage, d) perpetual contracts, and others.
How should they be taxed?
Currently, the Portuguese Personal Income Tax Code ( Código do IRS ) defines that operations related to derivative financial instruments, except gains with interest rate swaps, are taxed at 28%.
The current law does not directly exclude crypto derivatives, as it is explicitly done with interest rate swaps. And if we use the definition that derivatives are financial contracts set between two or more parties that derive their value from an underlying asset, group of assets, or benchmark, we are left to think that they may be taxed at the rate of 28% and may not benefit from the special regime of crypto assets.
This is an open question that will leave many questions to clarify, especially for some investors who do short-term, leverage investments or margin calls, on crypto.
Exit Tax: The Law in both situations, for capital gains and professional activity, did define that the loss of the quality of tax resident in Portugal is equivalent to a sale of all crypto assets. This is highly controversial, and we can expect a considerable amount of legal litigation. Also, it leaves room for other types of transactions between stakeholders.
Cash-out and Sale Rule: So, it seems the goal of the regime is to tax only when a crypto investor has a FIAT withdrawn from the Blockchain ecosystem. Therefore, all stakeholders must have all transactions well documented in the near future to understand how the Tax Authorities will want to have the report done, even if the transaction is not taxed.
One specific rule applied for crypto, and well-defined, is that when it comes to crypto assets, it is presumed that the sale price is the market value at the date of disposal.
The offset of losses: The new law also allows individuals to offset tax due on cryptocurrency gains with losses from other investments and can be carried forward for a period of 5 years.
Airdrops: A common question in crypto is how to tax or treat an Airdrop as a taxable event. This situation is not specifically predicted in the law. However, we can find parallelism with what it is and say with security that it will be taxed according to sale market value if converted into FIAT.
- Portugal has recently changed its tax policy on cryptocurrency taxation, which will take effect on January 1st, 2023.
- The new law defines cryptocurrencies as “digital representation of value or rights that can be transferred or stored electronically using Distributed Ledger Technology (DLT) or another similar technology,” and covers capital gains/trading, staking, validation, mining, salary paid in cryptocurrencies, and the issuance of cryptocurrencies.
- Non-fungible tokens are excluded from this definition and from taxation.
- No taxation on crypto-crypto transactions.
- Capital gains from the sale of cryptocurrencies held for a period of 365 days or more are excluded from taxation, while gains from the sale of cryptocurrencies held for less than 365 days are taxed at a rate of 28%.
A lot more could be written about this topic, and due to the new field of study, Blockchain and crypto taxation in Portugal, many questions and challenges will be frequent. However, we intend to continue to study and tackle the best way to proceed together with all of the clients.
In preparing this article about crypto taxation, we have considered the law, administrative and jurisprudential interpretations that exist on the subject to date, which are subject to change. However, it is a new field and a new Law open to interpretations; the ones here are exclusive to our own authority and are not supported in any legal or administrative understanding, especially according to stablecoins being a crypto asset or other matter.
Our understanding must be re-evaluated if there are changes to the facts and/or assumptions of the respective law, including interpretative changes. We are not obligated to update this article when it is produced changes after the date of issue.
Our opinion expressed here is not binding for the tax or judicial authorities and does not guarantee that these authorities cannot take contrary positions. This document is for informative purposes only and does not allow any third party use of its contents.
This article is for informational purposes only and is not intended to be exhaustive in relation to the matters covered here and all requirements/applicable law and rules or exceptions and it includes hypothetical situations in order for the client to better understand the taxation in any way it contains guidance or advise to any regime or particular situation.. However, if you still need to be completely clear and continue with doubts, or if you want our help, feel free to contact us through email@example.com.
Written by Rodolfo José Santos