New Rules for Cryptocurrency Taxation in Portugal

The realm of finance has finally found clarity on how cryptocurrency transactions will be taxed. However, the Internal Revenue Service (IRS) isn’t the sole tax authority concerned with such transactions. Additional taxes like stamp duty (IS), IRC, and even IMT come into play. Let’s delve into the specifics.

European Union Regulations Within the European Union, cryptocurrency turnover is now regulated under the Markets in Crypto Assets (MiCA) Regulation. In Portugal, cryptocurrency turnover and transactions are governed by the following regulations:

1. Income Tax Code (CIRS)
2. Corporate Income Tax Code (CIRC)
3. Stamp Duty Code (CIS)
4. Municipal Property Transfer Tax Code (CIMT)

Understanding IRS Taxation

Definition of Cryptocurrency: According to Article 10, Paragraph 17 of CIRS, cryptocurrency is defined as any digital representation of value or rights that can be transferred or stored electronically using distributed ledger technologies or similar ones, such as blockchain.

Exclusions: Not all cryptocurrencies are considered for tax purposes. Paragraph 18 of the same article excludes non-fungible tokens (NFTs).

Categorization of Income: Under CIRS, cryptocurrency operations fall into three income categories:

1. Category B (Income from Entrepreneurial Activity):

• Operations related to cryptocurrency issuance, including mining or transaction processing using consensus mechanisms (PoW – Proof of Work and PoS – Proof of Stake), are categorized as entrepreneurial activities under Article 4, Paragraph 1, Clause “o” of CIRS.
• Taxation can follow either a simplified regime (Article 31 of CIRS) or an organized accounting approach.
• Under the simplified regime (for annual income up to €200,000), specific coefficients are applied to determine the taxable base (Article 31 of CIRS).
• Income from cryptocurrency is considered earned at the time of sale for remuneration, expressed in currency or natural form (excluding cryptocurrencies).
• If cryptocurrencies are also part of the remuneration for the sale, no taxable event or obligation to pay tax arises.
• Organized accounting follows the rules of the Corporate Income Tax Code (CIRC) with adjustments from Article 32 of CIRS.
• The accumulated income is subject to taxation at the general rates set forth in Article 68 of CIRS.

2. Category E (Income from Capital):

• According to Paragraph “u” of Part 2, Article 5 of CIRS, income from capital includes all rewards obtained from cryptocurrency operations.
• However, if the income is received in tokens, no tax is levied.
• All income received in the form of cryptocurrency is exempt from taxation as capital income, and taxation occurs only upon the sale of these cryptocurrencies, following the rules for capital income (Part 11, Article 5 of CIRS).
• Although capital income is subject to withholding tax at a rate of 28% (Article 71, Paragraph “a” of CIRS), income from cryptocurrency transactions is exempt from such withholding by the tax agent (Part 5, Article 101b of CIRS), and IRS must be calculated and paid independently.

3. Category G – Capital Gain Income

Expanding Definition: For transactions involving the purchase and sale of cryptocurrencies not classified as business income or property, a new provision has been introduced to the definition of capital gain. Now, the sale of cryptocurrencies for remuneration is also considered a capital gain (Article 10, Paragraph “k” of CIRS), requiring such transactions to be declared as Category G income (Article 9, Paragraph “a” of CIRS).

Calculation Method: This income corresponds to the difference between the selling price and the purchase price of the cryptocurrency (Article 10, Paragraph “a” of CIRS). Since the selling price of cryptocurrencies is determined as the market value on the date of sale (Article 52, Paragraph 4 of CIRS), expenses related to the acquisition and sale of cryptocurrencies are allowed to be deducted (Article 51, Paragraph “b” of CIRS). The FIFO (First In, First Out) method is applied to determine capital gain income, similar to securities (Article 43, Paragraph 6 of CIRS).

Taxation and Reporting: Capital gain income is subject to a special rate of 28%, as specified in Article 72, Paragraph 1 of CIRS. However, taxpayers have the option to include this income in their taxable income using the progressive tax scale. If aggregation is chosen, capital gain income will be added to other income, and after relevant deductions (Article 22, Paragraph 1 of CIRS), the tax rate will be determined according to Article 68 of CIRS (Article 22, Paragraph 10 of CIRS). In the case of aggregation and a negative balance calculated from the sale of cryptocurrencies in the current year, it can be carried forward for the next five years (Article 55, Paragraph “d” of CIRS). If you have owned the cryptocurrency for more than 365 days, no capital gain tax arises upon its sale due to Article 10, Paragraph 19 of CIRS. However, if you exchange one asset for another during ownership, the holding period starts anew from the date of such exchange.

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