Navigating the tax implications of cryptocurrency can be complex. This guide provides a clear overview of key concepts and obligations. Please note: this information is for educational purposes and does not constitute financial or tax advice. Always consult a qualified tax professional for guidance tailored to your specific situation.
Understanding Cryptocurrencies
In late 2008, an individual or group using the pseudonym Satoshi Nakamoto published a whitepaper titled "Bitcoin: A Peer-to-Peer Electronic Cash System." This document proposed a solution to the high costs associated with third-party intermediaries in electronic payments by creating an independent network based on peer-to-peer electronic cash.
Months later, the Bitcoin network launched, and the first electronic coins were issued. This marked the birth of a new concept of currency operating outside traditional government and institutional control: cryptocurrencies.
These are virtual currencies (non-physical) that use cryptography as a means of control. They can be traded and exchanged for traditional currency and used for various commercial transactions, just like any other currency. In fact, they have been authorized as a legal payment method since 2015.
Today, numerous other cryptocurrencies (such as Litecoin, Ethereum, Monero, and Neo) have emerged, each with its own unique features and protocols.
How Cryptocurrencies Are Taxed
When including cryptocurrencies in your tax return, you must always declare any gains. Reporting losses is not mandatory but is highly recommended. Doing so allows you to offset future gains with these losses, potentially reducing your tax liability.
Investors holding cryptocurrencies abroad with a total value exceeding €50,000 must complete Form 721. This enables the tax authority to obtain a detailed view of each taxpayer's crypto assets held outside the country. Failure to declare these assets can result in significant penalties, with fines potentially reaching up to €200,000.
Reporting Cryptocurrencies in Your Tax Return
It is mandatory to include gains from cryptocurrency operations in your tax return. While reporting losses is optional, it is advisable to do so to facilitate future compensation.
First, it is crucial to distinguish the type of income or yield obtained to declare it correctly:
- Transfer Gains: The most common type, including gains from buying/selling cryptocurrencies and swaps.
- Gains Without Transfer: Arise from promoting or issuing new cryptocurrencies (e.g., airdrops) or from referral programs. These are considered rewards, not profits from trading.
- Capital Yields: Refer to what is commonly known as staking—a form of deposit offering yields in exchange for holding cryptocurrencies for a set period.
- Economic Activity: Profits derived from cryptocurrency mining or trading on behalf of third parties.
You must mark box 1626 on the tax return, indicating the date and acquisition value of the cryptocurrencies. The tax program will then automatically calculate the gain or loss for the period.
If you buy and sell multiple cryptocurrencies throughout the year, the tax authority uses the FIFO (First-In, First-Out) principle as a reference for calculating the value difference.
Latest Updates and Key Forms
Form 721
Form 721 replaces the now-obsolete Form 720. This form must be submitted by all taxpayers with cryptocurrency balances exceeding €50,000. It requires personal user details, the public address identifying the declared electronic wallet, and the units of cryptocurrencies held at the start and end of the tax year.
Forms 172 and 173
Forms 172 and 173 focus on companies with tax residency that are participants in the cryptocurrency market. This includes:
- Exchange agencies.
- Virtual wallets.
- Companies launching initial offerings of crypto assets.
These companies are obligated to submit these forms, reporting operations conducted both domestically and abroad, including:
- Acquisitions.
- Transmissions.
- Barters.
- Transfers.
- Payments.
Beyond the type of operation, they must provide additional data such as tax identification, volume, amounts, etc.
Cryptocurrency Mining
The process of verifying cryptocurrency transactions and releasing new units is called "cryptocurrency mining." Miners aim to solve the algorithm governing a specific cryptocurrency to earn a reward of electronic currency.
For VAT purposes, mining operations are considered non-taxable. This is the criterion adopted by the European Union and respected by the Spanish Tax Agency, as they are not considered onerous operations. Since there is no final client or recipient of the mining service, no invoice is issued, and thus VAT does not apply. Consequently, miners cannot deduct the VAT paid on expenses like rent, electricity, or hardware purchases.
Buying and Selling: VAT and Income Tax
Consider a practical example. Imagine you are self-employed and engage in buying and selling bitcoin as a business activity.
The situation would be as follows:
For IAE (Economic Activities Tax) purposes, you must register under the corresponding activity epigraph. The challenge is identifying the correct one. The 8th Rule of the Instruction for the Application of Tariffs states that business, professional, and artistic activities not specified in the Tariffs should be provisionally classified in the group or epigraph dedicated to activities not classified elsewhere (n.c.o.p.), resembling those of a similar nature.
Therefore, as this economic activity is not explicitly covered in the Tax Tariffs, it must be classified under epigraph 831.9 of the first section, "Other financial services n.c.o.p."
For VAT purposes, sales operations are considered taxable but exempt from payment.
**For Income Tax (IRPF) purposes, exchanging bitcoins for euros or other cryptocurrencies could be understood as returns from economic activities, considering the cryptocurrencies as stock-in-trade since they are the article you buy to sell.
Bitcoin ATMs
Bitcoin ATMs are one of the most common ways to buy cryptocurrencies. These machines look and function like traditional ATMs but with some key differences.
At a bitcoin ATM, instead of logging into your account and transacting with a bank card, you must deposit cash and provide a wallet address to receive the purchased cryptocurrencies.
Bitcoin ATMs connect users to a cryptocurrency exchange. The exchange acts as an intermediary, allowing users to place orders to buy or sell cryptocurrencies.
These ATMs typically request personal data and a bitcoin account, which can be created by providing an email, username, and an official identification document (ID or passport). Once the data is entered, the account is registered, and a receipt with a QR code containing the digital account details is printed.
You can buy bitcoin or other cryptocurrencies (depending on the ATM) with cash, at an exchange rate set by the ATM's integrated exchange.
To purchase cryptocurrencies, follow these steps:
- Deposit the amount of euros you wish to spend into the ATM.
- Confirm the recipient wallet address.
- Confirm the amount to be purchased.
- Once the data is confirmed, the bitcoin is transferred to the indicated address.
For a streamlined experience managing and tracking these transactions, consider using specialized portfolio tools.
Penalties for Non-Declaration
The Annual Plan for Tax and Customs Control highlights the "tax risks" of cryptocurrencies and announces measures to control them. This includes fines of up to €5,000 for users and investors who deceive or conceal information about their use and ownership.
These penalties are outlined in the Draft Law on measures for the prevention and fight against tax fraud. Fines of up to €5,000 can be imposed “for each data or set of data referring to the same account that should have been included in the declaration or were provided in an incomplete, inaccurate, or false manner, with a minimum of €10,000.”
The same amount applies if “in the case of non-compliance with the obligation to report on titles, assets, securities, rights, insurance, and income deposited, managed, or obtained abroad referring to each asset item individually considered according to its class, that should have been included in the declaration or were provided in an incomplete, inaccurate, or false manner, with a minimum of €10,000.”
Penalties also apply for delayed submission of information related to held cryptocurrencies. “The penalty will be €100 for each data or set of data referring to each asset item individually considered according to its class, with a minimum of €1,500, when the declaration has been submitted late without prior request from the Tax Administration.”
Furthermore, “the submission of the declaration by means other than electronic, computer, and telematic means when there is an obligation to do so by these means will be penalized.”
These fines apply to Form 720. For Income Tax (Renta), the penalty is typically a minimum of 26% of the unpaid tax. For instance, if you gained €5,000 from swaps, you should have paid €950 in tax (19%). The minimum penalty on this unpaid amount is 26%, i.e., €247 (if accepting the penalty, not appealing, and paying on time)—though it can be much higher under certain circumstances.
If you voluntarily file a supplementary return after the deadline, declaring your late gains, you will face a surcharge of 5%, 10%, 15%, or 20%, depending on how long you delayed from the original filing date.
Frequently Asked Questions
What is the main form I need for declaring foreign crypto assets?
The key form is Modelo 721, which must be submitted if the total value of your cryptocurrencies held abroad exceeds €50,000 at any point during the tax year. It requires details of your wallets and the holdings within them.
Do I need to declare cryptocurrency if I only made a loss?
While declaring losses is not mandatory, it is highly recommended. Reporting a loss allows you to carry it forward and offset it against any future capital gains you might make from cryptocurrency transactions, reducing your future tax liability.
How is cryptocurrency mining treated for tax purposes?
Income from mining is generally treated as income from an economic activity. However, for VAT purposes, mining operations are considered non-taxable because they are not seen as a supply of service to a client. Miners cannot deduct VAT on associated expenses.
What is the FIFO principle?
FIFO (First-In, First-Out) is the accounting method mandated by tax authorities. It means that when you sell or dispose of cryptocurrency, it is assumed you are selling the units you acquired first. This method is used to calculate the cost basis and thus the gain or loss on the transaction.
Are there penalties for using a Bitcoin ATM?
Using a Bitcoin ATM itself is not penalized. However, any gains generated from subsequently selling or exchanging the cryptocurrency purchased from an ATM must be declared. The penalties are for failing to declare the income or assets, not for the method of acquisition.
What happens if I make a mistake on my declaration?
If you discover an error, you should file a supplementary tax return as soon as possible. Voluntary correction typically results in a lower surcharge (ranging from 5% to 20% based on the delay) compared to the minimum 26% penalty if the error is found by the tax authority first.