Cryptoassets: Taxation, control, and security for a booming investment. One of the biggest difficulties is the need for a clear and agreed definition of what constitutes a digital asset. 11% of Spaniards already have investments in cryptocurrencies. This boom has recently prompted the Tax Authorities to require companies to declare their clients’ cryptocurrency balances. But is a cryptocurrency the same as a crypto asset? When must each of them be declared? Where are they held? What are the obligations of the companies that custody and safeguard these digital assets?
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Crypto-Asset types
The first thing to be clear about is digital assets, a broad concept encompassing any item that can be created and exchanged on a blockchain. They generally fall into five categories
- cryptocurrencies
- stablecoins
- NFTs
- central bank digital currencies
- security tokens.
Since 2021, Spanish taxpayers have been obliged to declare the gains from their cryptocurrency investments in their personal income tax returns. However, they only have to report when they transacted digital assets with cryptocurrency profits or obtained capital gains or yields.
There are doubts about the necessity of reporting cryptocurrency assets, but some wonder if not informing them makes one traceable through technology. Although cryptocurrencies are generally more private than traditional financial transactions, tax authorities can still track these transactions.
Blockchain transparency
Cryptocurrencies use blockchain technologies to record transactions in a public and unalterable ledger, allowing for complete traceability of all transactions. Tax authorities can utilize blockchain analysis tools to track transactions and identify patterns that may indicate fraudulent activity or tax evasion. Additionally, exchanges and platforms used for purchasing and selling cryptocurrencies are bound by KYC regulations, requiring them to collect information about their users and their transactions, which authorities can request.
On the other hand, anti-fraud law 11/2021 establishes reporting obligations on economic transactions involving cryptocurrencies. Platforms must inform the Tax Agency of the acquisition, transmission, exchange, transfer, collections, and payments in virtual currencies. According to the law, this obligation only affects Spanish platforms or permanent establishments in Spain.
Taxing abroad crypto-assets
However, when it comes to foreign exchanges outside the E.U., Tax agencies do not oblige them to inform about their user’s movements, although users do have to declare the gains in the annual tax campaign. If you purchased from a bank account or card in Spain, the Treasury knows about it, although not of the amount or the cryptocurrency purchased.
In this regard, the Ministry of Finance in Spain is preparing a new regulation on cryptocurrencies that will oblige taxpayers to declare the cryptocurrencies they hold abroad and companies that provide custody, investment, or intermediation services to inform the Tax Agency about their clients’ balances and transactions. The regulation will come into force in 2024 to respond to operations carried out during the 2023 fiscal year. With this regulation, Spain is ahead of the novelties brought about by modifying the E.U.’s DAC 8 (administrative cooperation directive).
The MiCA regulation
A significant challenge in regulating digital assets is the need for a universally agreed definition of a digital asset. The MiCA and MiFID II regulations, which apply to European Member States, have provided more detailed guidelines. However, there still needs to be more international standardization, making the regulation of these assets even more complex, despite the improvements brought by MiCA. Additionally, governments must determine their legal and tax treatment.
Authorities must clarify the tax treatment of cryptocurrencies and other digital assets to avoid confusion among investors and encourage growth in the digital asset market. Law transparency is an area that needs improvement in terms of clear and specific regulations.
Entities operating in the cryptocurrency market do not have mandatory reserve funds like banks, and this is an area that needs improvement. However, the private sector has already started to address this issue by offering insurance that surpasses banks’ deposit guarantee fund. As the cryptocurrency market is constantly evolving, it is essential to ensure safety measures are in place.
The self-custody alternative
In conclusion, the Treasury can track those users who are likely to evade taxes, except for users who use self-custody, i.e., who have their assets on their computer. In that case, neither the Treasury nor anyone else can know who is behind that money. This option allows the user to have 100% control of his assets, but in exchange, it involves many risks because, if the user loses these keys, he will lose his assets. In other words, it is like having all the money under the mattress and not in the bank.
However, it’s important to note that each country has its regulations and laws. In Germany, for instance, cryptocurrencies are classified as private money and are subject to taxation. On the other hand, France treats cryptocurrencies as capital gains, which means they tax them differently. It’s worth noting that crypto taxation in Europe is a complex and constantly evolving topic. Some countries have yet to provide clear guidance on taxing cryptocurrencies, while others have recently implemented new regulations.
If you are a crypto investor or trader in Europe, we strongly recommend seeking professional advice on handling your taxes. It’s crucial to comply with local laws and regulations to avoid legal issues.
Cryptocurrency taxation in the U.S.
The Internal Revenue Service (IRS) treats cryptocurrencies as property for tax purposes. You may be liable to a capital gain tax if you sell or exchange (asset premutation) your cryptocurrency for fiat currency (such as U.S. dollars).
The volume of tax you owe will depend on how long you hold the crypto before selling or exchanging it. If you keep it for less than a year, they’ll require you to pay short-term capital gains taxes, typically higher than long-term capital gains taxes. It’s fundamental to keep records of all your cryptocurrency transactions so that you can accurately report the gains or losses on your tax return.
In addition to selling or exchanging cryptocurrency, there are other ways authorities may require you to report cryptocurrency on your tax return. For example, if you received cryptocurrency as payment for goods or services, you must inform that income on your tax return. The same applies if you earn cryptocurrency through mining.
It’s important to note that the IRS is cracking down on cryptocurrency tax evasion. They have issued warning letters to taxpayers who believe they have not accurately reported their cryptocurrency transactions. If you need help reporting your cryptocurrency on your tax return, it’s best to consult a tax professional.
Overall, cryptocurrency taxation in the United States is complex, but it’s essential to be conscious of the tax implications of your cryptocurrency transactions to avoid any potential legal issues. Keep precise records and consult a tax professional if you need help reporting your cryptocurrency on your tax return.