The popularity of bitcoin (cryptocurrency) has grown worldwide, being the currency that most valued in 2016 and 2017 compared to gold as a safe haven asset. In fact, in 2020, the value of this “currency” increased by around 150%, being used by several investors as protection against the expected devaluation of the dollar in the period of economic recovery. Increasingly, cryptocurrencies are considered as an investment to be taken into account, having a high financial return (and associated financial risk). Bitcoin is not the only cryptocurrency that exists, but it is the oldest and the one with the most weight in the market, its name being a true identifying mark of the globality of these assets.
Designed by Satoshi Nakamoto (pseudonym of the creator or team of Bitcoin creators) the cryptocurrency works as virtual money, made through codes and not paper. Bitcoin is an online currency with P2P payment traffic (peer to peer), that is, it does not need a central intermediary server, being controlled by an interconnected database system (peer-to-peer network) that hold a permanent transaction register (blockchain), protecting the cryptocurrency from counterfeiting or theft, as well as the identity of its holder.
In Portugal, last September, Banco de Portugal (BdP) announced that it would take over the supervision of entities that manage virtual assets, or cryptocurrencies, in compliance with the law that transposes the European directive on the prevention of money laundering and financing of terrorism.
Thus, Banco de Portugal becomes responsible for the registration of entities that exercise “exchange services between virtual assets and currencies or between one or more virtual assets”, “virtual asset transfer services” and / or “custody services or custody and administration of virtual assets or instruments that allow to control, hold, store or transfer these assets, including private cryptographic keys”, as announced.
The Central Bank clarifies, however, that its performance is limited to the prevention of the aforementioned crimes, “not extending to other domains, of a prudential, behavioural or other nature”.
In 2018, Banco de Portugal and the Securities Market Commission (CMVM) had already issued several alerts for risks related to the so-called virtual currencies, which can be consulted on the respective websites. Experts in the field advise to research these assets on sites that comply with the law, being registered with the Bank of Portugal (there is still no list of entities to consult).
Despite the above, more and more investors are looking to enter the cryptocurrency segment. One reason may be related to its great potential for short-term profitability, despite the risk, while still being a financial asset that can be revalued in the future. That is, we can sell these assets when they have appreciated in the market and thus obtain a financial return. Another advantage may be related to its liquidity, that is, it is possible to exchange these currencies for cash. Finally, the fact that they are not yet subject to any efficient government policy or control can be seen as a plus for some, and their value is only influenced by the basic rules of the supply and demand market.
In tax terms, cryptocurrencies have no legal framework in Portugal, however there is some binding information issued by the Tax Authority, at the request of specific taxpayers, who earn this type of income. At the moment, AT defended that these incomes should be taxed under the IRS code.
AT defends that these types of investments can be understood as income from capital obtained abroad, and therefore taxpayers in this condition should tick them in annex J, when delivering the IRS model 3 declaration. If the taxpayer chooses not to include this income, it will be taxed at the rate of 28% or 35%. If they choose to combine, such income will be included in the rest of the income and the rate applied in accordance with article 68 of the CIRS (Personal income Tax Code).
Nevertheless, this opinion (because it is an opinion) we believe that the Tax and Customs Authority seeks, through administrative means, to create a new Law.
The truth is that this reality – cryptocurrency – does not seem to fit into any of the rules governing the IRS Code (except if it is the taxpayer’s professional activity).
Thus, and since the determination of the incidence of taxes falls within the exclusive competence of the Assembly of the Republic, gains (non-professional) resulting from investments in cryptocurrency should be considered as not subject to taxation. This is, therefore, one more factor contributing to Portugal’s attractiveness for investors.
Despite these opinions so far, there is a lack of specific and clear regulation of the taxation of this income, but it is likely that this fact will change soon, similar to what happened in France, for example, in which this issue was definitively regulated. For now, this favourable fiscal situation, due to lack of regulation, can be seen as an opportunity for many cryptocurrency investors.
Cryptocurrencies – legal framework and taxation in Portugal29 March, 2021
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