In a previous article, we considered friendly countries for crypto-assets and their understanding of crypto assets. Here, we are discovering tax laws in the European Union and leading European jurisdictions. Do European states have common practices in terms of crypto taxation? How do taxes differ among them? Let’s figure it out.
EU Crypto Taxation: Overview
The EU’s jurisdiction is among the pioneers in crypto acceptance. In 2012, the ECB (European Central Bank) issued a legal definition of cryptocurrencies, which was updated in 2015. Cryptocurrencies got the following definition: “virtual currency is a digital representation of value, not issued by a central bank, credit institution or e-money institution, which, in some circumstances, can be used as an alternative to money”.
Crypto Acceptance: Some History
European countries always follow the government’s rules. In 2017, some of them gathered to discuss the necessity of crypto taxation in Europe.
At the end of 2017 and the beginning of 2018, within the framework of the EU FinTech Action Plan, the European Commission required the European financial supervisory authorities, including EBA, EIOPA, ESMA, to examine whether EU financial law was suitable for new types of crypto assets (e.g., BTC).
In the middle of 2018, worries about cryptocurrency regulation surged as the number of cybercrime, money laundering, tax evasion, and terrorism issues rose. Such cases led to a million-dollar loss across EU countries.
At the beginning of 2019, the European Banking Authority published its Report with Advice for the European Commission, claiming crypto assets didn’t commit the EU law to a large extent. Simultaneously, it mentioned non-negligible consumer protection and money laundering risks.
Later, the EU claimed cryptocurrencies were not assets but definitive property taxed like other real estates. Thus, it became mandatory to provide accurate data of crypto properties to the country’s respective government.
The Union continues working on the regulation as years of work on anti-money-laundering, and tax transparency directives haven’t provided clarity on the decentralized, partially anonymous nature of crypto assets.
However, the Union is anticipated to enter a new phase of cryptocurrency regulation. Currently, providers of crypto assets report to the government under the EU’s fifth anti-money-laundering directive.
A digital finance strategy that is expected to digitize the financial sector and a Regulation of Markets in Crypto assets (MiCA) that will allow passporting for providers of crypto assets and implement strict regulations on capital requirements and investor rights are on the way.
A Directive on Administrative Cooperation (DAC8) is supposed to help authorities automatically exchange data about crypto assets and e-money. It will support the taxation of income and revenue from investments and payments made with crypto assets, e-money, and other digital products.
To provide workable laws, there should be clear definitions of the subjects. Up until now, the EU hasn’t had a legal definition for crypto assets. They are qualified as 'financial instruments,' while utility tokens or payment tokens don’t fall under this term.
Under the MICA, a crypto asset can be defined as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology”. However, the definition doesn’t include the difference between centralized and decentralized cryptosystems.
As every country in Europe has its own legislation, crypto rules differ significantly among countries. Let’s consider leading states in terms of cryptocurrency regulation.
Germany: Crypto Taxation
The German Federal Central Tax Office, or Bundeszentralamt für Steuern (BZSt), is a major authority that regulates cryptocurrencies. It classifies cryptos as private money, not foreign currency, legal tender, or property, for tax purposes.
The Federal Ministry of Finance claimed crypto transactions made by individuals were excluded from VAT for all EU member states. According to German law, the tax year lasts until December 31. Taxes must be paid by July 31.
Taxes for Individuals
If an individual sells cryptocurrencies under 600 Euros, they don’t have to pay taxes. Such small transactions are subject to tax law 23 EStG. At the same time, an individual can hold cryptocurrencies for over a year without paying taxes in case of any increase in the value of a later-sold cryptocurrency.
If cryptos are sold within the year, income tax is applied. Section 23 of the German Income Tax Act determines the tax treatment of speculative transactions made with private money as cryptos are defined as ordinary intangible assets.
Crypto trading is regulated by Section 22 of the Income Tax Act. The amount gained or lost during trading is taxed as income no matter if an individual trades one cryptocurrency for another or one crypto for fiat currency. It’s also allowed to deduct fees as part of the cost basis.
At the same time, when a crypto transaction is defined as a financial instrument (for instance, swaps or futures), it may be impossible to net gains or losses against passive crypto investments.
Taxes for Crypto Mining and Purchases for Individuals
If an individual mines cryptos, mining is treated as other income under Section 23 of the Income Tax Act. The net profit on the crypto is a taxable amount. To make it clear, if an individual mines Bitcoin, the sale price of the cryptocurrency at the time of disposal is taxed. The costs associated with mining are subtracted.
Goods and services purchases are classified as trading crypto. Let’s consider an example. If an individual gets €8,000 worth of Bitcoin and buys a good with that Bitcoin when it’s now worth a total of €10,000, they will pay tax only on the €2,000 net gain on that Bitcoin. It’s possible to avoid the tax when holding the cryptocurrency for over a year before buying a good.
Taxes for Businesses
Crypto assets of businesses are taxed similarly to other assets. The regulation applies to any company that relates to cryptocurrencies in any way. At the same time, if it’s a partnership, its crypto holdings are subject to income tax, and they are taxed the same as for individuals.
Thus, it’s recommended to check tax implications for various corporate entities to define the right tax legislation. Corporations must pay taxes for crypto holdings even when keeping them for over a year.
Portugal: Crypto Taxation
We are considering the jurisdiction of Portugal as it has recently appeared in lists of favorable places for cryptocurrencies. In the country, cryptocurrencies and virtual currencies are not technically classified as money as there is no legal tender. Still, cryptos can be exchanged, with a profit in the end, for fiat currencies at exchanges, while prices are determined by the demand for the cryptocurrency.
Although Portugal is considered a friendly jurisdiction, there are no specific regulations that would deal with crypto taxation. Meanwhile, the Portuguese Tax Authority has released three official decrees for linking information related to cryptocurrencies: one related to personal income tax (December 2016); the other two in terms of value-added tax (January and July 2019).
These rulings can be used as precedents when the Portuguese Tax Authority interprets existing tax regulations and defines whether a certain fact or action should be subject to Portuguese tax in case of cryptocurrency and cryptocurrency-related activities.
In 2016, the Portuguese Tax Authority defined that gains by natural persons should not be taxed if they are derived from the valuation or sale of cryptocurrencies. The exclusion occurs if income corresponds to the individual’s main permanent activity. In this case, it can be under Portuguese tax. Still, this ruling didn’t cover income from other cryptocurrency-related activities.
In 2019, the Portuguese Tax Authority confirmed the precedent from the Court of Justice of the EU to argue that although cryptocurrencies were similar to a “means of payment” and therefore subject to VAT, they were excluded from taxation by application of VAT exemption rules.
Switzerland: Crypto Taxation
Although Switzerland is a non- EU member, it is a popular financial center and can be called a leader among European countries in crypto acceptance. That’s why it’s not a surprise the country has an outstanding crypto acceptance around its cantons.
Taxes for Individuals: Wealth Tax
In Switzerland, cryptocurrencies are classified as assets comparable with bank deposits. That’s why they are subject to wealth taxes.
To be taxed, cryptocurrencies have to be converted into Swiss francs. The FTA (Federal Tax Administration) releases year-end rates for conversions for several cryptos, including Bitcoin, Ethereum, Ripple, Bitcoin Cash, and Litecoin. If there is no conversion rate defined by the FTA, the individual must declare crypto at the year-end price of the trading platform via which the buy/sell transactions were executed. There might be a situation when the year-end price at the trading platform can’t be determined. In this case, the individual declares a cryptocurrency at the original purchase price in Swiss francs.
Still, laws in cantons vary. Thus, they should be checked in advance.
Taxes for Individuals: Income Tax
In most cases, capital gains on an individual's cryptocurrencies are excluded from income tax. However, if they are a part of the business assets because the individual is registered as a professional securities firm laid out in circular no. 36 of the FTA, capital gains are taxed as income.
Cryptocurrencies Held by Legal Entities: Capital Tax
A legal entity is subject to annual capital tax. Thus, each legal entity declares cryptocurrencies in tax assessment. The rate of cryptocurrency is defined either as a cost of acquisition or should be converted at the year-end exchange rate determined by the FTA if this value is lower.
Cryptocurrencies Held by Legal Entities: Corporate Income Tax
Corporations must pay corporate income tax on any net taxable earnings from the cryptocurrency’s sale. Non-realized gains are paid according to Swiss corporate income tax in the case of accounting at current market prices in accordance with the Generally Accepted Accounting Principles (“GAAP”) of the corporate investor.
Cryptocurrencies Held by Legal Entities: Value-Added Tax
Cryptocurrencies are treated as legal tender. It means that cryptocurrency trading or exchange activities or any additional services related to such trading or exchange activities are excluded from VAT.
We would like to highlight Zug, where taxes can be paid in BTC and Ethereum. Also, Zug has the lowest taxes among the cantons. It’s worth mentioning that each canton has its own regulations.
The European Union is one of the friendliest jurisdictions for cryptocurrencies held by individuals and corporations. Still, the law is not yet complete. An additional pitfall is differences in regulations among countries. Non-EU member Switzerland is defined as the most developed crypto jurisdiction, favorable conditions for individuals and companies dealing with cryptocurrencies.