On October 10th, the Portuguese Government presented the Proposal of a State Budget for 2023 (the “Proposal”), which will be under discussion in the Portuguese Parliament during next month. A final wording of the Proposal is to be voted late November.
In particular, this Proposal’s first wording brings to the spotlight, for the first time in Portugal, the tax framework to be applicable to certain crypto-assets-related situations. Although the Proposal is subject to modifications throughout its discussion in Parliament, please find below our executive comments on the matter.
1. Non-professional trading of crypto-assets
- Current tax framework: Under current applicable rules, accruals deriving from the trading of crypto-assets that do not qualify as securities, when made at a private/non-professional capacity, should not be subject to personal income tax. It follows, that gains deriving from such transaction should not even be reported on the annual income tax return.
- Proposed tax framework: Under the Proposal, accruals deriving from the trading of crypto-assets, when made at a private/non-professional level, are expressly qualified as taxable capital gains (Schedule G – windfall gains). The scope of trade for these purposes should encompass not only the trading of crypto-assets for fiat currency but also the exchange of any crypto-assets for other crypto-assets (e.g., exchange of non-fungible tokens for stablecoins).
For these purposes, the Proposal has put forward a very wide definition of crypto-asset, scoped as “any digital representation of value or rights that may be electronically transferred or stored based on the distributed ledger technology”, thereby including not only crypto-currencies (e.g., bitcoin and stablecoins) but also utility tokens, security tokens and non-fungible tokens.
Under the Proposal, the gains/losses should result from the difference between (i) price of sale/exchange and (ii) price of purchase/exchange, deducted from any costs incurred in direct connection with the purchases and sales (e.g.,trading fees).
- Exemption: Notwithstanding, under the Proposal gains deriving from the trading of crypto-assets held for a period of at least 365 days should be exempt from personal income tax, provided such crypto-assets do not qualify as securities under the applicable Portuguese securities framework.
Conversely, the following gains from the trading of crypto-assets should be subject to personal income tax at a flat 28% rate (eventually aggravated to 35% in the event of connection with a blacklisted jurisdiction for Portuguese tax purposes):
(i) Gains from the trading of crypto-assets that qualify as securities under the applicable Portuguese securities framework;
(ii) Gains from the trading of any other crypto-assets held for less than 365 days.
Alternatively, instead of subjecting such gains to personal income tax at such flat rate, taxpayers may elect to subject them to under progressive rates that range from 14.5% up to 53%, through the income aggregation mechanism (‘englobamento’).
Any losses derived from the trading of crypto-assets may be carried forward for a 5-year period, provided the taxpayer elects for income aggregation.
It follows from the above that, since all trading of crypto-assets should become reportable in the annual income tax return (even if exempt), it will be essential that tax payers harvest documentation evidencing the relevant information, namely purchase amounts and dates of every crypto-asset traded, which, according to our experience, may be often challenging.
In order to ensure visibility and compliance with the new framework, the Proposal intends to introduce a new reporting obligation under which any taxpayer (individual or institutional) that renders custodial or administration services on behalf of third parties in connection with crypto-assets or that manages any crypto-asset trading platform should be required to report all transactions made by any Portuguese resident taxpayer on an annual basis.
According to our experience this reporting obligation may be difficult to enforce upon non-residents, although, at an international level, the OECD is negotiating with 100+ jurisdictions a global automatic reporting framework for crypto-asset transactions.
2. Professional trading, issuance, mining and validation of crypto-assets
- Current tax framework: Under current applicable rules, income deriving from the above-mentioned activities should be subject to personal income tax, although there is substantial lack of clarity upon the applicable taxable bases.
- Proposed tax framework: Under the Proposal, and although the wording is not completely clear, self-employed taxpayers that carry out any or a combination of the above-mentioned activities and whose yearly income from such sources does not exceed € 200k, should become subject to the following rules:
(i) For income derived from the trading or issuance of crypto-assets, when made in a professional capacity, ai appears that the taxable base will be limited to 15% of the annual turnover, meaning a deemed profit of 15% of the turnover. In its turn, such deemed profits amounts should be subject to personal income tax at progressive rates ranging from 14.5% up to 51.5%.
(ii) For income derived from mining and validation of crypto-assets, and although the wording is particularly unclear in its respect, it appears that the framework detailed in the previous paragraph will not extend to such activities and, therefore, that the taxable base should be limited to 35% of the annual turnover, meaning a deemed profit of 35% of the turnover. In its turn, such deemed profits amounts should be subject to personal income tax at progressive rates ranging from 14.5% up to 51.5%.
Considering the unclear wording of the framework under the Proposal around this matter, and the plausibility that the intention was to cover all professional income obtained in connection with crypto-assets under the reduced 15% deemed profit framework, we believe that this matter could be subject to a clarification during discussion of the Proposal in Parliament.
For income deriving from any of the above-mentioned activities, whenever the taxpayer’s yearly income from such sources does exceed € 200k, taxable base should correspond to the actual profits (income deducted from costs incurred in connection with the activity) and should be subject to personal income tax at rates ranging from 14.5% and 53%.
3. Gift tax (Stamp Duty)
- Current tax framework: Under current applicable rules, gifts of crypto-assets should not be subject to any gift taxation (Stamp Duty).
- Proposed tax framework: Under the Proposal, the following gifts of crypto-assets should become subject to Stamp Duty:
(i) Gifts ofcrypto-assets deposited/held through an institution located in Portugal;
(ii) Gifts of crypto-assets non-deposited with any institution located in Portugal (e.g.,held through private wallets – hot or cold –, hardware wallets and physical crypto-assets) whenever the beneficiaries of the gifts are taxpayers resident in Portugal.
The taxable base for such gifts should consist primarily on the official exchange rate at the date of the gifts or, secondarily, on the value reported by the beneficiaries of the gifts (although this value should be as close to market-value as possible). The applicable Stamp Duty rate should be of 10%, to be levied over the beneficiaries of the gifts.
- Exemption: A general exemption from gift tax to gifts between spouses, parents, children, grand-parents and grand-children should be extended to crypto-assets gifts.
4. Estate tax (Stamp Duty)
- Current tax framework: Under current applicable rules, inheritance of crypto-assets following a succession process should not be subject to any estate taxation (Stamp Duty).
- Proposed tax framework: Under the Proposal, the following transfers within succession processes should become subject to Stamp Duty:
(i) Inheritance of crypto-assets deposited/held through an institution located in Portugal;
(ii) Inheritance of crypto-assets non deposited/not held through any institution located in Portugal whenever the deceased person was taxpayer resident in Portugal.
The taxable base for such inheritance acquisitions should consist primarily on the official exchange rate at the date of death or, secondarily on the value reported by the beneficiaries of the estate (although this value should be as close to market-value as possible). The applicable Stamp Duty rate should be of 10%, to be levied over the beneficiaries of the estate.
- Exemption: A general exemption from estate tax to inheritance between spouses, parents, children, grandparents and grandchildren should be extended to crypto-assets inheritances.
Interested in any of these topics?
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