By Marcos San Martín, attorney
The cryptocurrency market is a hot topic in 2024. Bitcoin, the pioneer of crypto assets, is showing an upward trend that has pushed it to its all-time highs in 2024, reaching $100,000 and sparking great enthusiasm among investors. However, this boom also brings a crucial issue to the forefront of the discussion: the income tax implications of profits earned through cryptocurrencies.
Thus, the recent increase in cryptocurrency prices not only represents an opportunity for those who invested in them, but also a responsibility towards tax authorities. As a digital asset with fluctuating value, the holding and transfer of these cryptocurrencies, as well as activities related to those transfers, generate actions that may be subject to both direct and indirect taxation.
Next, we will examine some of the tax implications in the operational scope of cryptocurrencies from the perspective of the Personal Income Tax (IRPF).
Personal direct taxation of individuals (IRPF)
In accordance with Art. 6 of Law 35/2006, of November 28, on the Personal Income Tax (hereinafter called LIRPF), the IRPF taxes the income obtained by the taxpayer as long as they are considered a tax resident in Spain.
Among the operations related to cryptocurrencies that can generate income for the taxpayer, the following are particularly significant: (I) The acquisition of cryptocurrencies in the primary market through the so-called mining process, and (II) the transfer of cryptocurrencies (either as an asset itself in exchange for a currency, or as a means of payment for the acquisition of goods or services)
I. Obtaining Cryptocurrencies Through the Primary Market Using the Mining Procedure
First of all, and in very simple terms, it is important to understand what the primary market is in the context of cryptocurrencies and the so-called mining process.
Regarding the primary market, we can say that it is where a new digital asset is offered to the public for the first time; in other words, this market offers newly created cryptocurrencies that were previously owned by no one.
In this regard, in some cryptocurrencies, such as Bitcoin, mining is the main mechanism for introducing new coins into the primary market and validating transactions in a blockchain network, which is a kind of virtual ledger. To carry out this process, miners use computational equipment to solve complex mathematical problems.
Miners are rewarded for their work, as when cryptocurrencies are mined, a valuable service is provided to the blockchain network: the decentralized recording and validation of transactions. As a result, when a miner solves the logical-mathematical problem posed by the network, they are rewarded with an incentive, which consists of a set of units of the mined cryptocurrency in the primary market.
That being said, to analyze the potential taxation under IRPF of the incentive obtained by miners—assuming they are individuals—the income derived from their mining activity could be classified under the following categories: (I) income from employment, (II) income from economic activities, or (III) capital gains and losses.
- Income from employment: According to Art. 17 of the LIRPF, for the income obtained by the miner to be classified as employment income, it would be necessary for the miner to provide their services within the framework of an organization operated by a third party dedicated to obtaining new cryptocurrencies, all under a relationship of subordination and dependence. However, considering the way in which cryptocurrencies are created, it becomes difficult to classify the income obtained by miners as employment income, since the individual or legal entity responsible for controlling and issuing the original cryptocurrencies is unknown.
- Income from Economic Activities: The binding consultation V3625-16 by the DGT supports classifying the activity of cryptocurrency mining as an activity subject to the Economic Activities Tax, as it meets the following requirements: (I) the activity is carried out within national territory, and (II) the activity involves the independent management of production means and/or human resources with the purpose of participating in the production or distribution of goods. Thus, although the consultation doesn’t explicitly mention this, the fact that mining is classified as an economic activity according to the Economic Activities Tax (IAE), and given that both this tax (Art. 79.1 TRLRHL) and the IRPF (Art. 27.1 LIRPF) share the same definition of economic activity, it can be concluded that the income derived from cryptocurrency mining is taxed as income from economic activities. The income will be valued at the market price of the cryptocurrency at the time of payment, and this will be considered the acquisition value for future transfers. However, it will be important to monitor any official statement from the DGT or jurisprudence that explicitly certifies the classification of this type of income in the context of IRPF.The income will be quantified according to the rules set forth in Articles 27 to 32 of the LIRPF, and will be included in the general tax base (Arts. 45 and 48 LIRPF).
- Capital Gains or Losses: Regarding the classification of income received as capital gains, Art. 33.1 of the Personal Income Tax Law (LIRPF) expressly establishes the residual nature of capital gains and losses in relation to the two previous classifications. Therefore, considering that mining activity should be regarded as an economic activity, there will be few cases where it can be argued that the miner does not meet the requirements of Art.27.
CLARIFICATIONS: VAT (IVA)
Despite considering mining activity as a provision of services for the purposes of Personal Income Tax (IRPF) as an economic activity, the Spanish Directorate-General for Taxes (DGT), in the context of indirect taxation, stated in its binding ruling V3625-16 that mining activity does not result in a situation where there is a relationship between the service provider and the recipient. It concluded that "due to the lack of a direct relationship between the service provided and the compensation received as indicated, the mining services subject to the consultation will not be subject to Value Added Tax (VAT).
This interpretation may conflict with the previous classification of mining activity as an economic activity. However, it can be defended under the principle of compartmentalization, whereby the DGT's criteria regarding VAT do not apply in the context of direct taxation. Therefore, for Personal Income Tax (IRPF) purposes, there is indeed a provision of services.
II. Transmission of cryptocurrencies on the secondary market
On the other hand, there is the secondary market, which is the most common and where most people who do not have cryptocurrency investment as their professional activity operate. Here, we are talking about a financial environment where the asset previously issued (in the primary market) is bought and sold between investors. Therefore, in this market, the cryptocurrency itself is not created; rather, an interface is established for users to exchange their cryptocurrencies at the value set for each one.
Having defined both markets (primary and secondary), we can assert that they are closely interconnected, given that the generation and allocation of cryptocurrencies in the primary market stem from the resolution, by miners, of the logical-mathematical problems posed to confirm a transfer of cryptocurrencies that already exists in the secondary market. Consequently, the activity of miners in solving mathematical problems, through which they receive newly issued cryptocurrencies in the primary market, enables the assurance of transactions in the secondary market.
With this in mind, when assessing how to classify income derived from the transfer of cryptocurrencies in the secondary market for Personal Income Tax (IRPF) purposes, it is essential to distinguish whether the taxable transaction is carried out by a professional as part of their professional activity or by an individual privately, outside the professional sphere.
Therefore, it is essential to separate the following two scenarios:
- a) Transfer of cryptocurrencies by professionalsIn this case, we refer to the transfer of cryptocurrencies by individuals or legal entities whose professional activity is based on the buying and selling of digital assets and intermediation in such transactions, commonly referred to in the cryptocurrency sector as exchangers. These professionals carry out their activity using websites or virtual platforms that connect cryptocurrency buyers and sellers, receiving a commission in return for their services.Here, it must be understood that the income obtained by the exchanger within the framework of their professional activity would be classified as income from economic activities according to the provisions of Art. 27 of the LIPRF. This is because: (I) the income comes from personal labor and/or capital, and (II) the exchanger organizes, on their own account, the means of production and/or human resources with the aim of participating in the production or distribution of goods.
- b) Transmission of cryptocurrencies by individuals who don’t engage in professional activitiesThis scenario may be the most common, as the proliferation of exchange platforms such as Binance or Coinbase has facilitated and brought the individual investor closer to the world of cryptocurrencies.This type of investor typically acquires cryptocurrencies at a certain price and subsequently transfers them: I. In exchange for a currency: In this case, the cryptocurrency is transferred as an asset itself, and in return, euros or any other legal foreign currency is received, which would constitute a sale. II. In exchange for another cryptocurrency: In this scenario, numerous binding consultations from the DGT (see the consultation V2005-22) have stated that it constitutes a swap or barter. III. In exchange for the acquisition of goods or services: Once again, it is considered a swap, as the transfer of cryptocurrencies is made to a third party who accepts them as a means of payment in exchange for the goods or services provided. Having said that, in all the cases mentioned above, when evaluating the income obtained by the taxpayer as a result of the transfer or exchange of cryptocurrencies, it is essential to refer to the concept of capital gains and losses defined in Article 33 of the LIRPF. According to this provision, a capital gain or loss is understood to exist if the following three conditions are met:- A variation in the taxpayer's net worth is generated. - The variation is due to a change in the composition of the net worth.- The income generated is not classified by legal regulations as income from work, economic activities, or movable capital.In general, therefore, the transfer or exchange of cryptocurrencies by individual investors would be classified as a capital gain or loss for the purposes of personal income tax (IRPF).
Determination of capital gain in income tax: calculation
The quantification of the capital gain will be determined by the general rule of Art. 34 of the LIRPF, which is the difference between the acquisition and transfer values of the cryptocurrencies. Both the acquisition and transfer amounts will be adjusted by any expenses incurred by the taxpayer, such as commissions charged by exchangers.
The resulting capital gain or loss will be included in the savings base, where the tax rates currently range between 19% and 28%. Losses obtained from the transfer of a cryptocurrency can be offset against gains obtained from the transfer of another cryptocurrency, and even if after offsetting the losses against the capital gains there is still a negative balance, up to 25% of the income from movable capital ( e.g Interest from bank accounts, bonds, obligations, dividends from shares, and, generally, fixed-income securities) can be offset, which is a different type of income to the capital gain.
Furthermore, if the taxpayer does not have sufficient capital gains or income from other sources to offset the losses in the year of the loss, they can carry forward the offset for up to four fiscal years.
CLARIFICATIONS
Personal Income Tax (IRPF) does not tax unrealized or latent capital gains. Therefore, the variation in the value of cryptocurrencies held by the taxpayer in their portfolio, resulting from market fluctuations, does not, in itself, generate a taxable capital gain under the IRPF.
Although the mere holding of cryptocurrencies does not constitute a taxable event under the IRPF, this does not prevent taxpayers who are subject to the Wealth Tax from having to declare the value of the cryptocurrencies they hold in their portfolio as of December 31.
Regarding staking – earning returns by depositing certain cryptocurrencies into digital wallets – the DGT has clearly classified these earnings as movable capital income obtained through the third-party use of own capital. These returns must be included in the savings base of the IRPF (see consultation V1766-22).
Conclusion
The cryptocurrency revolution is not only transforming markets but also reshaping the rules of the fiscal game. In this context, understanding how activities related to these assets are taxed is crucial for any investor, whether individual or professional. However, it’s not just about fulfilling tax obligations; there are strategies to explore that can optimize the financial impact of your decisions.
That is why taxation is not only a duty but can also be a strategic tool to maximize the returns on your crypto investments.
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