What are Cryptocurrencies?
Firstly, we need to understand what cryptocurrencies are and how they work. Cryptocurrencies are digital currencies; these are not regulated, they do not belong, nor are they emitted by any State or Central Banking. Like any other currency, it serves to make payments for services and purchase goods.
Cryptocurrencies have a particularity: the digital system in which they are is decentralized. In other words, all transfers and payments are always registered on the network but anonymously.
Currently, there are more than 5,500 cryptocurrencies. Of which United Nations Fiat recognizes 180 currencies fiat (emitted for a State, regulated for central banking). Cryptocurrencies are used in 195 countries being that the Cryptocurrency best-known and with more value is bitcoin.
Over time cryptocurrencies have been a decoy for many because of the high profits they promise to give. However, before investing and immersing in the universe of cryptocurrencies, it is necessary to understand how they work.
It is essential to know that concerning the prevention of the money laundering of capital and financing of terrorism, the Portuguese Central Bank is very limited. The Portuguese Central Bank does not inquire about things like the sustainability of the platforms or regulates the relations with the customers.
The only thing that the legislation does is to give some advice, which are:
- All “virtual assets” are speculative. And with the pandemic, the behavior of cryptocurrencies has always been this way. Also, it does not offer diversification concerning shares. So, it is not recommended investment in Cryptocurrencies.
- If you still choose to buy “virtual assets,” be cautious and use only sites that comply with the law. These must be registered in the Portuguese Central Bank. They must follow procedures such as “Know Your Client” (verification of the identity of the customers). In no way, condone with entities that may be linked to criminal behavior.
What does Portuguese legislation say about the tax environment for cryptocurrencies?
Cryptocurrencies have gained significant importance in the current financial overview and especially after the pandemic. They are a decoy for all those who want a high financial return, so there is a great desire to be recognized by the tax authorities. However, to date, specific legislation to fit the fiscal level does not exist.
Since it is an instrument that generates income, it is natural that there are many doubts about them. The Autoridade Tributária (Portuguese Tax Authority) has already addressed these same doubts.
Everything necessary to know and information about cryptocurrencies can be found in two orders. In these, the Autoridade Tributária (Portuguese Tax Authority) answers all relevant questions of taxpayers and thus deals with the framework of cryptocurrencies and Code (VAT). You can consult the documentation in two doctrinal sheets, which are in the case no. 14910 and case no. 5717.
To understand this information that is confusing, the idea is to divide it into three sections: The tax environment in the IRS, the tax environment in the IRC, and VAT.
What is the fiscal environment of cryptocurrencies in Portugal in the IRS?
Although several years have passed since the appearance of the cryptocurrency, the truth is that the Autoridade Tributária (Portuguese Tax Authority) did not modify its position since the year 2016. Thus, the most important thing to retain is that cryptocurrencies are generally not taxable. Unless these are ordinary professional activities, in this case, they will be taxed in category B.
Nevertheless, it is highly recommended that you always keep a record of all your transactions made because you certainly do not wish to have to explain to the Tax Authority your provenance of the money.
As previously stated, at least for now, you don’t have to worry as you don’t need to report on your tax return.
In any case, theoretically, there are three categories of income that are generated by cryptocurrencies at the tax return level.
- Corporate or professional income – Category B;
- Capital income – (Category E);
- Equity accruals (capital gains) Category G.
One of the added values in cryptocurrencies is not paying IRS.
Very important also is to know what to make concerning the incomes of capital. We speak of Category E. the gains, which are taxed, are generated by the application of captains. Therefore, in the case of talking about the purchase and sale of cryptocurrencies, we can say that we talk about income obtained by the sale of entitlement and, for this reason, are taxed as being category E.
Concerning business or professional income, we enter category B of the IRS, and cryptocurrencies only have a tax framework if there is the sale of cryptocurrencies as usual activity, as mentioned earlier.
In other words, income in category B is always taxed according to the function of the exercise of an activity and not based on a payment. So, if we talk about the sale of cryptocurrencies as not your usual professional activity, they will have no tax framework.
Now everything changes if your professional activity is the sale of cryptocurrencies. If this is the case, you must fulfill your declaratory obligations. It is imperative to make it clear that, therefore, in this case, there is always an obligation to issue an invoice or invoice receipt whenever you make a sale or provide a service. In this case, it must be taxed following what the law defines for category B.
Lastly, but not less important, there are many uncertainties mainly because of the anonymity of these transactions. Also, the information about cryptocurrencies is not specific to them, so they are taxed according to category B if it is not a habitual professional or business activity.
The Fiscal environment of the Cryptocurrencies in Portugal in the IRC
As we have seen so far, there are numerous challenges that the sale of cryptocurrencies poses regarding regulation and the tax framework, but this cannot in any way stop investors and entrepreneurs or any of us benefit from the sale of cryptocurrencies to do it legally.
So, we should explore this topic which is something confusing but quite essential. When there is no information on the tax framework in Portugal in the IRC, we must refer to an Article 1717 of the CIRC, which contains everything that is legislated in terms of taxable profit.
For this same reason, we must consider that the taxable profit consists of the algebraic sum of the net income for the period, and the positive and negative changes in the same period are not reflected in that result. All these factors are determined based on accounting and possibly corrected according to CIRC.
This explanation is somewhat complicated, but the vital thing to consider is that whatever income a company has earned must always be recorded for accounts purposes. Therefore, income is part of the clearance of taxable profit, for these same reasons are subject to the payment of IRC.
Although this explanation may seem complex, regardless of the income earned by an undertaking, these must be recorded financially. Thus, this income counts in the calculation of your taxable income, so they are subject to the payment of IRC.
The environment for VAT on cryptocurrencies in Portugal
As for VAT, it is first essential to understand that the remuneration in cryptocurrencies is a service provided subject to VAT but presently exempt.
The same happens when you exchange cryptocurrencies for euros or another currency. This exchange constitutes a done rendering of services the onerous heading, however, also is exempt of VAT, as subparagraph d), of paragraph 27), the article 9º of the CIVA.
Everything you need to consider in the fiscal environment of cryptocurrencies in Portugal.
As you may have noticed from everything you have read about the IRS, you only must declare your income. They only have a tax framework if they are habitual professional or business activity. If so, you already know you should do it through category B, and you should always issue invoices or invoices-receipt whenever you sell or provide services.
Other situations are excluded because they do not have a fiscal framework.
Speaking of IRC, the income of cryptocurrencies is accounted for to determine your company’s taxable profit. In this way, they are subject to the payment of this tax. In VAT, there is an exemption for remuneration in cryptocurrencies and the exchange of cryptocurrencies for euros or any other currency.
Advantages and cons of cryptocurrencies
As they save on the commissions usually charged by intermediaries, the primary beneficiaries are nothing less than service users. However, technological disruption also has losers, given that many of these intermediaries (bankers, notaries, among others) may, in the short term, observe that their work becomes obsolete. Decentralization, combined with the lack of regulation, makes the world of cryptocurrency a lawless space. The user is solely responsible for the security of his assets, and unfortunately, the high profits draw the attention of malicious agents. As assets, cryptocurrencies are highly volatile. Volatility can, in some cases, reach 100 percent. By comparison, stocks typically range between 20 and 30 percent. As fewer tech-knowers adopt cryptocurrencies, a bit of regulation will undoubtedly be beneficial. This is a European standard for regulating crypto-asset markets, MiCA (Markets in Crypto-Assets). This regulation has several important objectives, such as defining a legal framework for crypto assets, essential for resolving disputes in the real world, establishing protection for users and investors, giving financial stability, and supporting innovation.
It is essential to highlight that the cryptocurrency world in Portugal continues to be a grey area for most parts of the country. If, on the one hand, the law does not prohibit cryptocurrency exchanges, on the other hand, it does not give these “digital assets” a specific status.
In this way, it is not forbidden to mine bitcoins. From the fiscal point of view, what one knows is that “the sale of bitcoins it is not taxable in IRS face to the Portuguese fiscal order, in the scope of category E (capitals) or G (more-values). If transactions are made in the context of professional or business activity, it is necessary to declare the income and pay the respective tax. In this way, the taxpayer will be taxed in category B”.
Where do cryptocurrencies go in Portugal?
Bank of Portugal has already licensed some investment and transaction platforms for virtual assets. Among them stand out three: Cryptoloja, which is based in Estoril and has trade name Smart Token, Guimarães & Matosa, based in Braga with trade name Mind The Coin, and Luso Digital Assets, based in Funchal, Madeira. In addition to providing exchange services between virtual assets and fiat currencies, it was allowed to transfer virtual assets, such as “cryptographic keys”.
Is Portugal “crypto-friendly”?
Portugal is highly sought after by people who hold investments in crypto assets because Portugal is “crypto-friendly.” However, it should be stressed that it is not that Portugal is a friend of cryptocurrencies but that legal and fiscal regulation is absent. But the truth is that the non-taxation of cryptocurrency income is a great attraction for new tax residents in Portugal.
Investing in cryptocurrency is Good or Bad?
Investing in cryptocurrencies has aroused a lot of curiosity in recent times. Especially after last year, they reached never seen values, and some even got gains in the three digits. And this is something that attracts investors.
At the end of last year, the SEC, being a kind of CMVM of the United States, accepted the first Bitcoin ETF, thus leaving the currency to be traded – and consequently supervised – on the Stock Exchange. Norway has legalized it as a form of payment, and it has become increasingly easy to buy these coins.
We can say that there is a trend in favor of buying crypto, but is it worth it? Since there are so many shadows, such as the tax authorities ignore cryptocurrencies and does not recognize cryptocurrency income. In other words, they cannot be taxed.
We know that cryptocurrencies are highly volatile. So, if you are looking for something more stable, that doesn’t run the risk of losing large amounts, this is not the way for you. On the other hand, if you are prepared to take high risks, this may be the right path for you.
It is important to know what currency you are going to invest in, and where you are going to invest. The simplest is to access a Crypto Exchange, which is nothing more and nothing less than an online exchange. Here you can exchange your euros for cryptocurrencies, and it does not require you to have great knowledge about them. According to Forbes magazine, the best exchanges to invest in are: Binance.US, Coinbase and Kraken. But the list is much broader, so if you want to invest in these currencies, the ideal is to do some research. Finally, and if you really want to invest in these currencies, the ideal is to always start with low values. In this way, you can get acquainted with this new world of cryptocurrencies and check if it is something you really want to invest in and if you really have a knack for the business.
If you want to get a cryptocurrency license in Portugal, please contact our team of experts.