Cryptocurrency Taxation in Portugal
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Portuguese Central Bank’s position on cryptocurrencies
Since there is no central entity that guarantees the irremovability and finality of payment orders, virtual currency cannot be considered a safe currency, as there is no certainty of its acceptance as a means of payment. The same is to say that the Portuguese Central Bank (Banco de Portugal) does not technically recognise cryptocurrency as currency per se due to lack of monetary policy regulation.
Portuguese Tax and Customs Authority’s position
It is the understanding of the Portuguese Tax and Customs Authority that, “cryptocurrencies are not technically considered “currency” because they do not have a legal tender or liberating power in Portugal, however, (…) they can be exchanged, with profit, for real currency (…), with specialized companies for the effect, with its value, compared to the real currency, being determined by the online demand for cryptocurrencies”. Its position is, therefore, in line with that of the Portuguese Central Bank.
As such, income resulting from the sale of cryptocurrencies will not be taxable under the Personal Income Tax Code, within the scope of category E (referring to capitals), nor subject to being taxed under category G (referring to equity increases, as capital gain).
Furthermore, it is also the understanding of the Portuguese Tax and Customs Authority that the profits obtained from the sale of cryptocurrencies are not taxable under the Portuguese tax system, unless by their regularity ends up constituting a professional or entrepreneurial activity of the taxpayer, in which case it will be taxed as a qualifying income under the category B (freelancing) of the Personal Income Tax Code.
Last, but not least, the Portuguese Tax and Customs Authority issued clear guidelines in January 2019 providing many answers to questions related to dealing with cryptocurrency, reporting obligations, cryptocurrency invoicing rules, rules for initial coin offerings,etc…
European Court of Justice and VAT
Jurisprudence of the European Union Court of Justice (EJC) on bitcoin, states that its sale is an onerous activity, subject to VAT, but covered by the exemption, as with other means of payment with a liberating value . “Considering the decision handed down by the ECJ (…) the exchange of cryptocurrency for‘ real ’currency constitutes a provision of services carried out against payment, exempt from VAT”.
Thus, the Portuguese Tax and Customs Authority concludes that although “cryptocurrency remuneration is a service provision subject to VAT”, the VAT code article that defines the exemptions covers “also cryptocurrency transactions”.
In the medium-long run
It is expected that, in the medium term, cryptocurrencies will be regulated and their tax regime concretely defined. In fact, its regulation may not imply taxation of the income derived from them. However, it is expected that it may eventually pass through its classification as financial assets, and through its classification as a security or derivative – not as a currency for purchase and sale transactions – with a consequent change in the definition of a security. Should this be the case, the respective income, obtained by taxpayers who do not engage in any activity related to cryptocurrencies, could eventually be taxed as passive income, such as capital income (for examples as dividends in proportion to the original investment) or capital gains.
Although Portugal has great conditions, from a personal income tax and VAT standpoint, for those who income is generated through cryptocurrencies, some uncertainty remains due to the fact that there’s no regulatory framework, which in turns makes it difficult for individuals (and companies) to open bank accounts in the country to be used for the purpose of trading.
Further to the above, crypto traders opting for taking up residency in Portugal, and more specifically Madeira Island (due to is safe haven status during the Covid-19 pandemic) for tax purposes, may combine the above benefits with the ones available under the Non-Habitual Resident taxation regime, under which most the foreign sourced income is exempt.
MCS and its team has more than 20 years of experience in assisting international investors and expats making their move to Portugal and Madeira Island. Should you request our assistance do not hesitate to contact us.