Cryptocurrencies have revolutionized the financial landscape, presenting unique challenges for governments worldwide regarding regulation and taxation. Madeira, a Portuguese island known for its business-friendly environment, has recently implemented a specific cryptocurrency tax regime. This article aims to provide a detailed overview of the Madeira crypto tax laws, offering valuable insights for individuals and businesses operating in this jurisdiction.
Understanding Madeira’s Crypto Tax Categories
To navigate the tax landscape surrounding cryptocurrencies in Madeira, it is essential to have a clear understanding of the different categories of crypto income. The Madeira Personal Income Tax Code classifies crypto income into three main categories: passive income, capital gains, and freelancer/self-employment income.
Passive Income Taxation
In Madeira, remuneration received in fiat currency from passive investments in crypto, which do not involve any crypto transfer, will be subject to a flat tax rate of 28%. This default rule applies when the income does not fall under another category. However, if the income is received in crypto, it will be taxed accordingly, usually at progressive tax rates.
Capital Gains Taxation
Capital gains derived from the sale of cryptocurrencies fall under taxable income. For crypto assets owned for less than 365 days, the gains are subject to a flat tax rate of 28% when converted into fiat currency. However, if the income is received by a Madeiran tax resident who chooses to aggregate it, progressive tax rates between 14.5% and 48% will apply. It is worth noting that “investment/security tokens” are considered securities and taxed accordingly, irrespective of the 365-day rule.
Taxpayers are responsible for providing their tax advisors with FIFO reports concerning each sale made during the year for the purposes of personal income tax reporting obligations.
Freelancer/Self-Employment Income Taxation
Freelancer/self-employment income encompasses operations related to the issuance of crypto assets, including mining or validating crypto transactions through consensus mechanisms for fiat money. Under this category, progressive tax rates between 14.5% and 48% will apply. A 5% fixed presumption of expenses will be applied to income derived from mining operations, with 95% applied to the sale of mined assets. It is important to note that the cessation of activity as a self-employed worker is considered equivalent to the sale of crypto assets.
Furthermore, under the self-employment income rules, the taxpayer is legally required to issue invoices concerning the income received, which may trigger VAT reporting obligations and compulsory registration with the Portuguese Social Security to pay social security contributions.
Common Rules for Crypto Taxation in Madeira
Understanding the standard rules for crypto taxation in Madeira is crucial to ensure compliance with the tax regime. Here are some key points to consider:
- Crypto for Crypto Exchanges: When crypto for crypto exchanges occurs under capital gains income or self-employment income, the taxation will be deferred until the crypto is sold or converted into fiat currency. The acquisition value will be determined using the “first-in, first-out” rule (FIFO), where the crypto sold will be considered the one held for the longest period.
- Offsetting Capital Losses: Capital losses can be offset against gains, except if incurred in jurisdictions classified as tax havens. Madeira’s tax regime considers Double Tax Agreements (DTAs) signed by Portugal, which may impact the taxation of crypto income.
- Exit Tax: If an individual stops being a tax resident in Madeira, an “Exit Tax” of 28% will be imposed on all crypto assets. This tax will apply in the same way as if there had been a sale, based on the difference between the market value and the acquisition value determined through FIFO.
- Donation of Crypto: The donation of crypto will be subject to a Stamp Duty of 10%, or 4%, for fees charged by or with the intermediation of crypto service providers. However, certain exemptions apply to donations between spouses, life partners, ascendants, descendants, or below a certain threshold.
- NFTs: Non-fungible tokens (NFTs) are excluded from taxation. However, it is essential to note that the taxation regime for NFTs may vary compared to investment/security tokens and utility/commodity/payment tokens.
Factors to Consider for Effective Crypto Taxation in Madeira
To ensure effective crypto taxation in Madeira, there are several factors to consider:
Correct Qualification of Assets and Income
A correct qualification of the type of asset and income is crucial in determining its taxation. Understanding the specific characteristics of different cryptocurrencies and their intended use is essential for accurate tax reporting.
Applicability of Double Tax Agreements
The applicability of Double Tax Agreements (DTAs) signed by Portugal, including those with black-listed jurisdictions (tax havens), is also a significant consideration. It is important to note that the new crypto tax regime does not change the applicability of the non-habitual resident (NHR) regime, which may provide certain benefits to eligible individuals receiving crypto income.
Conclusion
Implementing a specific tax regime for cryptocurrencies in Madeira marks a significant step towards providing clarity and legal certainty in the ever-evolving world of digital currencies. Whether you are an individual or a business operating in Madeira, understanding the crypto taxation laws is crucial for compliance and effective tax planning. By considering the different categories of crypto income, standard rules, and essential factors, you can confidently navigate the tax landscape and ensure proper reporting and payment of taxes. Seek the guidance of tax professionals to ensure compliance with the regulations and optimize your tax position in the realm of crypto taxation in Madeira.
Disclaimer: The information provided in this article is for informational purposes only and should not be considered legal or tax advice. Please consult a qualified tax professional for specific guidance tailored to your circumstances.
Miguel Pinto-Correia holds a Master Degree in International Economics and European Studies from ISEG – Lisbon School of Economics & Management and a Bachelor Degree in Economics from Nova School of Business and Economics. He is a permanent member of the Order of the Economists (Ordem dos Economistas)… Read more
