Tax Natives crypto tax Archives

Payments of cryptocurrency as earnings

27 September 2022 2:39 pm Leave a Comment

Introduction

This article considers the tax implications of an employer making payments to its employees in cryptocurrencies such as bitcoin and Ethereum.

The German authorities have determined that cryptocurrency is not any of the following:

a foreign currency;
legal tender; or
property

Is crypto non-cash compensation?

If cryptocurrencies are given to employees for nil, or under market, consideration in exchange for providing their services then this is likely to be taxable earnings.

This ‘remuneration’ could be:

a cash payment within the meaning of Section 8 (1) of the German Income Tax Act (EStG); or
a payment in kind within the meaning of Section 8 (2) sentence 1 of the EStG. Pursuant to Section 107 (2) of the Trade, Commerce and Industry Regulation Act (GewO)

What is the tax position on such payments?

First of all, payments of emuneration in cryptocurrencies is taxable This is the case regardless of whether it is a cash benefit and as a benefit in kind.

The tax is levied on employees as wage tax in accordance with Section 38 of the German Income Tax Act (EStG). The tax point is at the time of the ‘inflow’ of the cryptoassets.

The tax authority will only accept euros for the payment of payroll taxes.

As such, where remuneration is paid wholly (or the majority is paid) in cryptocurrency, then some of it will need to be sold or exchanged for immediately for fiat in order to pay the tax.

How will the tax authority ever know?

This must be the most asked question to tax advisers around the world!

However, the tax office learns about cryptocurrencies through various sources, including the reporting obligations that are imposed on employers.

In addition, many crypto intermediaries require identification in order to use their marketplaces so cryptocurrencies are not as anonymous as many might believe. Indeed, transactions on the blockchain are immutable and, by and large, fully traceable.

Further, the tax authorities can also make targeted inquiries in accordance with Section 93 of the German Fiscal Code (AO) in order to obtain information.

If you have any queries about cryptocurrency or the cryptoassets in Germany, or German tax more generally, then please do not hesitate to get in touch.

The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.

Germany cryptocurrency tax: clarification issued

31 May 2022 10:29 am Leave a Comment

Germany cryptocurrency tax: Introduction

In an eagerly anticipated announcement, the German Federal Ministry of Finance (BMF) has clarified its view on the taxation of cryptocurrencies.

In addition to the position on the buying and selling of crypto, the guidance also sets out the position on activities such as mining, staking, lending, and other transactions.

The nature of cryptocurrencies

The German tax man has determined that units of cryptocurrencies are economic goods. These ‘goods’ are attributable to the owner as the holder of the private key.

In cases where the wallet and private key is managed by a third party provider (such as Coinbase or Binance) then the asset is attributable to the beneficial owner of the cryptoassets.

Key issue: Private activity v commercial activity

Like many jurisdictions, the key issue for determining the tax position on any profits generated is whether the transactions take place through personal activity or in the conduct of a commercial activity.

In this regard, the BMF has confirmed that investors who hold their cryptocurrency as personal assets can sell them free of tax as long as they hold the assets for at least one year.

This is welcome as, in previous missives, the BMF had stated that the holding period was ten years for private investors.

This one-year period does not apply if the cryptocurrency is held as business assets.

Again, as per other jurisdctions, in many cases the distinction between commercial and private activity might be a blurred one and is an area ripe for dispute.

It should be noted that if cryptocurrencies are held by a domestic corporation such as a GmbH then the income is always considered to be commercial.

Mining and Forging activities

The authorities have also set out the position for other blockchain activities including:

Mining in a proof of work consensus mechanism; and
Forging in a proof of stake consensus mechanism

It seems to be the case that the German tax authorities will assume that such activity is commercial in nature.

The block creation leads to an acquisition (not to a production!) of the asset, which has to be recognized at the market price at the time of acquisition (profit-increasing). Only at the time of the realization of the proceeds from a future sale are any acquisition costs to be deducted from the profit.

Only the staking (without taking over the block creation), as well as, if applicable, the participation in mining and staking pools or a cloud mining service may again fall within the scope of private asset management. However, again, this depends on the individual case.

Airdrops

The authorities has also set out its view on the acquisition of cryptocurrencies received by private investors in the context of airdrops. Here, the receipt of the new tokens may be taxable where the recipient of the airdrop has dome something in return for the airdrop.

Perhaps surprisingly, the authority considers it sufficient for this purpose that the recipient is required to provide contact details on an online form.

Where nothing is done in return for the airdrop then there are no tax consequences (although German gift taxes might be in point on the receipt).

Conclusion – Germany Cryptocurrency tax

Of course, this additional clarity is helpful. Of course, the fact that an private investor can dispose of assets free of tax after 12 months is very welcome for relevant investors.

It remains to be seen whether there will be further missives from the German tax authorities that include their position regarding Non‑Fungible Tokens (NFTs) and other types of assets and activities.

If you have any queries about this article, German cryptocurrency tax, or the matters discussed more generally, then please do not hesitate to get in touch.

Portugal crypto tax: Buying and selling crypto assets in Portugal

18 May 2022 8:32 am Leave a Comment

Introduction – Portugal crypto tax

Portugal is often held up as an attractive place for crypto investors. More generally, it has an attractive regime for migrants moving to Portugal, who might be able to avail themselves of its Non-Habitual Residence (“NHR”) regime.

However, where the NHR regime is clear, the tax law around crypto-assets is more as a result of what the law does NOT say.

Portugal as a growing hub for crypto

As stated above, Portugal has become a popular destination for those seeking a safe harbour for crypto gains.

It is estimated that between March and May 2020, the purchase and sale of cryptocurrencies in Portugal increased by 60% year on year. However, up until now, the Government has not acted to clarify or expand its legislation to cater for this relatively new asset.

Current position

In Portugal, there are three potential categories under which gains on the buying and selling of cryptocurrencies could be caught. These are as follows:

Capital Gains (Category G) – such as sale of an apartment or shares
Capital Yields (Category E) – such as property rental or dividends
Professional Income (Category B) – Consultancy fees etc

In respect of the first of these, the tax code specifies which cases will be subject to tax a as a capital gain. However, the class of items is an exhaustive list. In other words, the law only applies to something which is on the list. As crypto assets are not on the list they are not taxable.

In respect of Category E, this does not apply as the buying and selling of cryto-assets is not a yield on capital.

Category B is the one where we might fall into the tax trap. However, it is only likely to apply to certain cases. This category will apply where any crypto profits are as a resuly of a regular professional activity. Of course, this might be relatively easy to determine in extreme cases, but the lack of certainty for those in more marginal cases is a concern.

A change in the winds?

The current position means that Portugal is on a list of countries that still do not tax profits from this type of asset. Hence, why Portugal has become an attractive destination for crypto investors.

However, nothing lasts forever.

Indeed, on 13 May 2022, finance minister Fernando Medina confirmed that the Government is contemplating how it might tax crypto gains in the future. He did say there were no firm proposals to introduce any such legislation.

If profits from the buying and selling of crypto assets was brought into the tax net in Portugal, then it would seem likely they would be subject to tax at 28%.

However, Mr Medina did acknowledge that an imposition of high levels of tax might “bring revenue down to zero” so he is at least aware of the tight rope his Government might be treading.

If you have any queries about this article, Portugal crypto tax, or the matters discussed more generally, then please do not hesitate to get in touch.

Crypto tax Ireland – Buying and selling crypto

17 May 2022 7:18 pm Leave a Comment

Introduction – crypto tax Ireland

Like most jurisdictions around the world, there are no specific tax rules that apply to the buying and selling crypto assets in Ireland.

Therefore, like those other jurisdictions, the tax position on the sale of crypto assets will be subject to general Irish tax law principles.

In addition, the Irish Revenue has also issued guidance in some particular areas.

This article will mainly discuss cryptocurrencies – such as bitcoin, Ethereum and Dogecoin. The position for non-fungible tokens (“NFTS”) and other digital assets might differ.

Buying cryptocurrency

As one might surmise, the purchase of cryptocurrency is unlikely to give rise to any direct tax implications. For instance, there is no stamp duty on crypto assets (as there might be on the purchase of shares, for instance). Further, it is unlikely there will be any VAT implications where we are looking at an investor or trader buying and selling crypto-assets.

However, the purchase of the cryptocurrency will be relevant for determining the base cost of the crypto when the investor decides to sell the assets.

Sale of crypto-assets by individuals

General

The Irish tax position will depend on the Irish residence position of our crypto-investor. Specifically, whether they are:

Resident for tax purposes in Ireland; or
They are not resident for tax purposes in Ireland

Irish resident individuals selling cryptocurrency

If an Irish resident individual sells such an asset at a gain then it will usually be subject to capital gains tax. This is currently 33%.

Where the disposal results in a loss, then this capital loss can generally be:

Used in the current year against other gains; or
Carried forward to future years

The position is slightly different if the person is carrying on a ‘trade’ of dealing in crypto. Here, any profit on the sale of crypto would be subject to income tax. Marginal income tax rates of up to 55% – where one includes social charges – might therefore be payable.

It is worth noting that a trading classification is only likely in exceptional cases with the trading needing to be carried out in a deliberate and commercial fashion.

Non-resident individual

A non-Irish resident individual (who is also non-ordinarily resident) is liable to Irish CGT on gains arising in Ireland from the disposal of Irish ‘specified’ assets only (e.g. land and buildings in Ireland). As such, crypto gains should not be taxable.

Sale of crypto-assets by Companies

An Irish resident company that disposes of crypto at a gain will be subject to capital gains tax at 33%. Similarly, losses will also be treated in the same way as set out above for individuals.

Where such a company conducts a ‘trade’ of dealing in crypto, then it’s profits will generally be subject to corporation tax at 12.5%.

Again, the threshold at which activities might be considered a trade is a high one. However, it is generally thought that a company might satisfy this more easily than an individual.

Mining cryptocurrencies

General

The Irish Revenue has not provided any guidance on the position when it comes to the mining of cryptocurrencies.

If they follow the UK tax authorities position on the same activity, then the treatment will depend on whether:

The person is conducting a trade of mining crypto; or
The person’s activities fall short of a trade

Trade

Here, the person will be taxable on the trading profits generated from the mining activities.

A company will pay tax at 12.5% but an individual will be subject to tax at their marginal rates.

No trade

Where the activities fall short of a trade, then the income received by the person will be treated as ‘miscellaneous’ income.

Miscellaneous income tends to qualify for fewer reliefs than trading income.