The taxation of cryptocurrencies in personal income tax: What every professional or individual investor should know

Monday, December 16, 2024

Marcos San Martín

The cryptocurrency market is generating a lot of buzz in 2024. Bitcoin, the pioneer of crypto assets, is showing an upward trend that has taken it to its all-time highs in 2024, reaching \$100,000 and sparking great enthusiasm among investors. However, this boom also brings to the forefront a crucial issue: the income taxation of profits obtained through cryptocurrencies.

Thus, the recent increase in the price of cryptocurrencies not only represents an opportunity for those who invested in them, but also a responsibility toward tax authorities. As a digital asset with fluctuating value, the holding and transfer of these cryptocurrencies, as well as the activities associated with such transfers, generate actions that may be subject to direct and indirect taxation.

Below, we will examine some of the tax implications in the operational scope of cryptocurrencies from the perspective of Personal Income Tax.

Taxation under direct taxation of individuals (Personal Income Tax)

In accordance with Article 6 of Law 35/2006, of November 28, on Personal Income Tax (hereinafter LIRPF), Personal Income Tax applies to the income obtained by the taxpayer, provided they are considered a tax resident in Spain.

Among the operations related to cryptocurrencies that may generate income for the taxpayer, the following stand out in particular: (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 in itself in exchange for a currency, or as a means of payment for the acquisition of goods or services).

I. Acquisition of cryptocurrencies through the primary market by means of the mining process

First of all, and very briefly, it is important to understand what the primary market is in the context of cryptocurrencies and the so-called mining process.

With regard to the primary market, we could say that it is where a new digital asset is offered to the public for the first time; that is, in this market, newly created cryptocurrencies are offered that have not previously been owned by anyone.

In this regard, in some cryptocurrencies such as Bitcoin, mining is the main mechanism for introducing new coins into the primary market and for validating transactions on a blockchain network, which functions as a kind of virtual ledger. To carry out this process, miners use computer equipment to solve complex mathematical problems.

The work of miners is compensated, since when cryptocurrencies are mined, they provide a valuable service to the blockchain network: the decentralized recording and validation of transactions. Consequently, 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 so-called primary market.

That said, when analyzing the potential taxation under Personal Income Tax (IRPF) that the receipt of this incentive by miners may entail —assuming they are individuals—, for IRPF purposes the income obtained from their mining activity could fall into the following categories: (I) employment income, (II) income from economic activities, or (III) capital gains and losses.

Employment income: Considering the provisions of Article 17 of the LIRPF, for the income obtained by the miner to be classified as employment income, it would be necessary for them to provide their services within the framework of an organization of a third party dedicated to the creation of new cryptocurrencies, all under a relationship of subordination and dependency. However, given the way cryptocurrencies are created, it is difficult to classify the income obtained by miners as employment income, since the natural or legal person who controls and is responsible for the original issuance of the cryptocurrencies is unknown.
Income from economic activities: Binding ruling V3625-16 of the DGT supports classifying the activity of cryptocurrency mining as an activity subject to the Economic Activities Tax (IAE), since it meets the following requirements: (I) the activity is carried out in national territory, and (II) the activity involves the self-management of production means and/or human resources with the aim of participating in the production or distribution of goods. In this way, and although the ruling does not expressly mention it, the fact that mining activity is considered an economic activity under the IAE —and given that both this tax (Article 79.1 TRLRHL) and Personal Income Tax (Article 27.1 LIRPF) share the same definition of economic activity— it can be concluded that income derived from cryptocurrency mining is taxed as income from economic activities.
The income obtained will be valued at the market price of the cryptocurrency at the time it is received, this being the acquisition value for future transfers. Nevertheless, it will be important to keep an eye out for an explicit statement by the DGT or case law that expressly confirms the classification of this type of income within the scope of Personal Income Tax.
The income will be calculated according to the rules set out in Articles 27 to 32 of the LIRPF, and will be included in the general taxable base (Articles 45 and 48 LIRPF).
Capital gains or losses: Regarding the classification of the income received as capital gain, Article 33.1 of the LIRPF expressly establishes the residual nature of capital gains and losses in relation to the two previous classifications. Therefore, considering that mining activity must be regarded as an economic activity, there will be few cases in which it could be argued that the miner does not meet the requirements of Article 27.

DETAILS: VAT

Although mining activity is considered a provision of services for the purposes of its taxation under Personal Income Tax as an economic activity, the DGT, in the field of indirect taxation, has indicated in its ruling V3625-16 that mining activity does not lead to a situation where there is a relationship between the service provider and its recipient. It concludes that <<due to the lack of a direct relationship between the service provided and the compensation received under the stated terms, the mining services in question will not be subject to Value Added Tax>>

This interpretation may conflict with the previous classification of mining activity as an economic activity; however, it can be defended under the principle of separability, meaning that the DGT’s criteria regarding VAT do not apply within the scope of direct taxation and, therefore, for Personal Income Tax purposes there is a genuine provision of services.

II. Transfer of cryptocurrencies in the secondary market

On the other hand, we have the secondary market, which is the most common and in which most people who do not have crypto asset 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 created for users to exchange their cryptocurrencies at the value set for each one.

Having defined both markets (primary and secondary), we can state that they are closely interconnected, since the generation and allocation of cryptocurrencies in the primary market arises from the resolution, by miners, of the logical-mathematical problems posed to confirm a cryptocurrency transaction that already exists in the secondary market. Consequently, we can see how the activity of miners in solving mathematical problems —through which they receive newly issued cryptocurrencies in the primary market— serves to guarantee transactions in the secondary market.

That said, when assessing how to classify under Personal Income Tax (IRPF) the income derived from the transfer of cryptocurrencies in the secondary market, it is key to distinguish whether the taxable transaction is carried out by a professional within the scope of their professional activity or by a private individual outside the professional sphere.

Therefore, it is essential to distinguish between the following two scenarios:

Transfer of cryptocurrencies by professionals

In this case, we are referring to the transfer of cryptocurrencies by natural or legal persons whose professional activity is based on the purchase and sale of digital assets and the intermediation in such transactions, which in cryptocurrency jargon is known as <<exchangers>>. These professionals, in order to carry out their activity, use websites or virtual platforms that connect cryptocurrency buyers and sellers, receiving a commission as compensation for their services. Here, we must understand that the income obtained by the <<exchangers>> within the framework of their professional activity would be classified as income from economic activities in accordance with the provisions of Article 27 of the LIRPF. This is so, given that: (I) it is income derived from personal work and/or capital, and (II) the <<exchanger>> they independently organize the means of production and/or human resources with the purpose of participating in the production or distribution of goods. This income will be included in the general taxable base of the taxpayer’s Personal Income Tax and will be determined in accordance with the direct estimation method, either in its normal or simplified form, based on the calculation rules of Article 28 of the LIRPF.

Transfer of cryptocurrencies by individuals not engaged in professional activity

This scenario may be the most common, given that the proliferation of <<exchanges>>, such as Binance or Coinbase, has made it easier for individual investors to access the world of cryptocurrencies. This type of investor typically acquires cryptocurrencies at a certain price and subsequently transfers them:

In exchange for a currency: In this case, the cryptocurrency is transferred as an asset in itself, and euros or any other legal foreign currency are received in return, which would constitute a purchase and sale transaction.
In exchange for another cryptocurrency: In this case, numerous binding rulings of the DGT (see ruling V2005-22) have stated that it is considered a barter transaction.
In exchange for the acquisition of goods or services: Again, this is considered a barter transaction, since there is a transfer of cryptocurrencies to a third party who accepts such transfer as a means of payment in return for the goods/services provided.

Determination of capital gain in income tax: calculation

The calculation of the capital gain will be determined by the general rule of Article 34 of the LIRPF, which is the difference between the acquisition value and the transfer value of the cryptocurrencies. Both the acquisition and transfer amounts will include or deduct the expenses borne by the acquirer, such as the commissions charged by the <<exchangers>>.

The resulting gain or loss will be included in the savings taxable base, where the current rates range between 19% and 28%. Losses arising from the transfer of one cryptocurrency may be offset against gains obtained from the transfer of another cryptocurrency, and even if, after offsetting losses with capital gains, there is still a negative balance, up to 25% of the income from movable capital (such as interest from bank accounts, bonds, debentures, stock dividends, and, in general, fixed-income securities) may be offset, as this type of income is different from capital gains.

Likewise, if in the year of the loss the taxpayer does not have sufficient gains or income from movable capital to offset, the compensation may be carried forward over the following four tax years.

DETAILS

Personal Income Tax does not tax unrealized or latent capital gains; therefore, the variation in the value of cryptocurrencies held by the taxpayer in their portfolio, caused by market fluctuations, does not in itself generate a taxable capital gain under Personal Income Tax.

Although the mere holding of cryptocurrencies does not create a taxable event for Personal Income Tax purposes, this does not preclude the obligation, in the case of being subject to Wealth Tax, to declare the value of the cryptocurrencies held by the taxpayer in their portfolio as of December 31.

As for <<staking>> —earning profits by depositing certain cryptocurrencies in digital wallets—, the DGT has been clear, classifying this income as investment income obtained from the transfer of own capital to third parties, which must be included in the savings taxable base (see ruling V1766-22).

That said, in all the aforementioned cases, when assessing 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 gain or loss defined in Article 33 of the LIRPF. According to this provision, a capital gain or loss exists whenever the following three requirements are met: – That there is a variation in the value of the taxpayer’s assets. – That the variation arises as a result of a change in the composition of the assets. – That the income generated is not legally classified as employment income, business income, or investment income. As a general rule, therefore, the transfer or exchange of cryptocurrencies by individual investors would be classified as a capital gain or loss for Personal Income Tax purposes.

Cryptocurrency taxation: turn your investment into a smart strategy

The cryptocurrency revolution is not only transforming markets but also reshaping the rules of the tax game. In this context, understanding how activities related to these assets are taxed is key for any investor, whether individual or professional. But it is not only about meeting tax obligations; it is also possible to explore strategic approaches that optimize the financial impact of your decisions. Our Tax Department can provide you with comprehensive advice on the taxation of these innovative financial assets.

That is why taxation is not only a duty; it can also be a strategic tool to make the most of your investments in the crypto world.

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