Taxes, Bitcoin, and Virtual Currencies: How to declare cryptocurrencies to the Tax Authority
Until recently it was unclear whether you had to pay taxes on your bitcoin, but it seems that the Tax Office has got down to business and is developing regulations in this regard. Rest assured: In a short time you will have to declare your cryptocurrency gains.
Can I legally trade cryptocurrencies? Do I have to pay income tax on my bitcoins? Do I have to submit model 720?
DO NOT PANIC! We have prepared an easy-to-follow updated guide for you to learn everything related to Tax Office, Taxes, Bitcoin, and virtual currencies.
If you buy cryptocurrencies, it is important that you learn how to declare bitcoins to the Tax Authority.
Currently, European legislation does not exercise effective control over cryptocurrencies. However, there is no Public Treasury that does not want to know how their taxpayers use money. Therefore, they are starting to develop legislation around cryptocurrencies.
According to current legislation, all profits you obtain are taxable, regardless of their origin. Therefore, if we stick to it, you must also pay taxes on bitcoin earnings.
Depending on the activity you perform with your bitcoins, the taxes will be different, so we have divided the article into the following sections:
- Taxes for bitcoin as an investment.
- Taxes for bitcoin as a form of payment.
- Taxes for bitcoin mining.
In addition, we will inform you about the obligation to submit the 720 model and the recent statements by the Spanish Government.
Taxes on Bitcoin in Spain
This article applies Spanish legislation. It is not applicable to regulations in other countries, although the regulation is likely to be very similar.
Table of Contents - Taxes, Bitcoin, Treasury, and cryptocurrencies
The taxation of cryptocurrencies
Currently, there is no exhaustive control over cryptocurrencies and you probably won't be surprised by the Tax Agency. However, at the beginning of 2018, the Spanish Ministry of Finance published the new Action Plan for Tax and Customs Control. It highlighted that during this exercise, the tax authority would intensify control over the cryptocurrency market.
Later, in April 2018, Hacienda requested financial information from 60 entities related to bitcoin.
What does this mean?
Initially, these activities were aimed at combating individuals who were attempting to evade taxes with bitcoin. However, it means that the Spanish tax authority is taking the first steps to develop legislation for bitcoin and cryptocurrencies.
What will be the future of taxation applicable to cryptocurrencies?
Virtual currencies are not physical assets that are owned, they are currencies. The most logical thing is that the regulations will be developed in a similar way to the FIAT currency market.
In a summarized and approximate way, it would be something similar to what Japan is developing:
- To operate in a country, exchanges would need licenses granted by the Public Treasury of each country. In addition, they will have the obligation to report directly to the Public Administration all the operations that their users carry out on their platforms.
- In the country, foreign exchanges can also operate, as long as (i) they have a license granted by another country and (ii) the country of residence and the country in which they operate have agreements to share tax data. An exchange from a country that does not have this kind of agreements with Spain will be illegal.
In summary, the treatment will be similar to that of banks and brokers currently. It is the most logical thing.
In this way, anyone who invests in bitcoin must declare it and pay taxes. Buying bitcoins from operators without licenses or from countries outside the common market will be dangerous and possibly illegal.
But the truth is that we are still far from all this. It seems that it will take at least a few years before Governments regulate cryptocurrencies. Despite this, currently, citizens must declare all the profits they obtain, including bitcoin gains.
Below, we show you the current way to declare bitcoins, to avoid receiving any letters from the Tax Agency.
Bitcoin Taxes as an Investment
The taxation of bitcoin is similar to any other investment product.
If you have bought bitcoin and have held them without selling, you have not made any real profit. Therefore, you do not have to declare it.
Once you sell your cryptocurrencies, you will be obligated to declare them.
How to declare cryptocurrencies
The correct way to declare bitcoins is through the Income Tax Return. Specifically, you must include it in the box for taxable income from savings within capital gains.
You will have to indicate that you had an asset called Bitcoin and enter the profits you have obtained with it. Only profits, not the total operation and excluding commissions.
The declaration of bitcoin transactions is subject to income tax. In other words, you will pay between 19% and 23% on the profits obtained.
Example of IRPF calculation on bitcoin
We'll give you an example to help you understand it better.
Imagine that you buy a certain amount of bitcoin for €3,000, paying a €5 commission. After a few days, you sell it for €3,100 with another €5 commission. You will have earned €100 and paid €10 in commissions, so your actual profit will be €90.
For profits below €6,000, the income tax rate is 19%. Therefore, you would keep €72.90 and owe €17.10 in taxes to the tax authorities for your bitcoins.
The income tax brackets, according to current legislation, are:
Profit IRPF Up to €6,000 19% Between €6,000 and €50,000 21% More than €50,000 23% The income tax is calculated based on annual profits. All of them. This means that if you earn more than €50,000 in a year (through work, investments, or anything else), you will have to pay 23% of all your earnings to the tax authorities. Including the profits you have obtained from trading with bitcoin.
If I have losses, do I also have to declare bitcoin?
Yes, you are obliged to do so. In this case, you will have a tax advantage, so it would be convenient.
In the Tax Declaration, you can offset losses with other capital gains you may have had during that year. For example, if you make a bitcoin transaction where you lose €100 and have earned €300 in the stock market, you can offset and pay IRPF for only (300-100) €200.
The Tax Agency also allows offsetting losses not only in the current year, but up to the next 4 years. For example, if you have had losses from trading with cryptocurrencies in 2017 and have not had any profit, you will be able to offset it with the profits you may obtain in the following 4 years, until 2021.
What if I make exchanges between other cryptocurrencies?
This case is a bit more complicated. Every time you exchange cryptocurrencies (for example, from bitcoin to ethereum), it represents a change in your assets. According to current regulations, the losses or gains of each operation must be assessed and declared individually. These operations would also be subject to personal income tax (IRPF) in the case of individuals.
The cases explained here, to which income tax (IRPF) applies, are for legal entities. That is to say, if you or I invest in cryptocurrencies.
In the case of an investor being a company, the profits obtained with cryptocurrencies are declared in the Corporate Tax (Impuesto de Sociedades). It is a fixed tax with which around 25% of the profits are paid.
Maybe a video about taxes on virtual currencies can help you understand it better?
Taxes for using bitcoin as a form of payment
It is possible to acquire different goods or services with bitcoin and other cryptocurrencies. In addition, it is an authorized form of payment in Europe since October 2015.
In these cases, VAT must be paid, just like any purchase made in euros.
Therefore, the buyer does not have to declare anything. It is the seller who will have to report all their transactions carried out with cryptocurrencies and pay it in quarterly VAT settlements.
In addition, selling in bitcoins will generate profits that will have to be declared in the Personal Income Tax (IRPF) if the seller is self-employed, or in the Corporate Tax if the seller is a registered company.
The only exception would be the acquisition of cryptocurrencies with euros, which would be treated as an investment.
Taxes in bitcoin mining
The cryptocurrency miner has expenses, such as equipment and electricity costs, and a profit, the cryptocurrencies.
Therefore, it is a professional activity and they are required to pay taxes. In the case of an individual, the tax to be paid would be the Economic Activities Tax, in addition to the Personal Income Tax (IRPF). In theory, they should also register as self-employed and pay social security.
However, the taxation of miners is still uncertain. Binding consultations have been made to the Tax Agency and the answers have been very ambiguous to establish a tax regime for bitcoin mining.
The modelo 720 for Bitcoin and cryptocurrencies
In October 2018, the Government presented the Draft Law against Tax Fraud to combat new forms of evasion, which made a direct reference to virtual currencies.
The text emphasizes the need to obtain information on the possession and operations with virtual currencies. This will affect exchanges, whether national or foreign, which will have to provide this information to the Tax Agency.
It will also affect users of virtual currencies, as the Tax Agency will be aware of your cryptocurrency operations: You will have to pay taxes on your bitcoins if you don't want to face a nice fine.
In addition, this text also refers to the obligation to submit the modelo 720 for cryptocurrencies and Bitcoin. Therefore, although it is a Draft Law, it seems that in Spain we will be required to submit it soon.
So, do I have to submit the modelo 720 to declare bitcoins?
Remember that the Modelo 720 must be submitted whenever you have more than €50,000 abroad (adding up all your foreign assets: properties, stocks, cryptocurrencies...).
In other words, if you have the good fortune of owning more than €50,000 abroad, you will have the misfortune of having to submit the modelo 720 for your cryptocurrencies (not now, in the near future). Otherwise, you will not have this obligation.
Conclusion on how to declare cryptocurrencies
- Currently there is no control or regulation over the cryptocurrency market. However, even though it may be difficult for the tax authority to discover your cryptocurrency transactions, you are required to pay taxes on bitcoins.
- The taxes currently imposed on bitcoin and cryptocurrencies are income tax, value-added tax (VAT), and Economic Activities Tax.
- Soon, filing model 720 for bitcoin will be mandatory.
In conclusion, if you have traded with bitcoins and need to file your tax return, it is advisable to seek a good tax advisor.
Found it interesting? Learn much more about bitcoin in our cryptocurrencies guide.