New Portuguese personal income tax framework applicable to crypto-assets
João G Gil Figueira
GFDL Advogados, Lisbon
Catarina Branco Valada
GFDL Advogados, Lisbon
Introduction
The Portuguese State Budget for 2023 (Law 24-D/2022 of 30 December 2022) introduced new rules for the personal income taxation of income connected to crypto-assets.
The boost to the mainstream adoption of crypto-assets led to the increased attention from tax authorities worldwide to income that otherwise would typically fall outside the scope of taxation or would be incompatible with the rules in place. Until the 2023 State Budget was approved, no tax law provisions were directly applicable to crypto-assets in Portugal.
Background
Personal income tax (PIT) in Portugal follows the principle of worldwide income taxation. Tax residence is the main factor determining the breadth and scope of taxation in Portugal.
Portuguese PIT is characterised by being a schedular tax. PIT applies to typified types of income, divided into the following categories: employment income, business and professional income, capital income (eg, dividends, interest and royalties), real estate income, net worth increases (including capital gains) and pensions. Specific deductions are provided for each category to determine the taxable income amount and the appropriate tax rates.
However, suppose a particular transaction, payment or allocation of wealth is not provided for in the list of taxable income. In that case, the income associated with such a transaction, payment or distribution of wealth may be deemed outside the scope of PIT. The lack of a single and broad concept of income led to the absence of tax on some types of income originating from crypto-assets.
In the past, the Portuguese tax authorities issued several rulings under the binding rulings mechanism, stating that gains from the disposal of crypto-assets were not to be taxed due to this type of asset being absent from the list of taxable capital gains. The capital gains arising from the disposal of crypto-assets could not be assimilated with the disposal of shares or other financial assets. In fact, based on the definition of financial assets, crypto-assets could not be counted under this income category.
As a result, it was concluded that income from crypto-assets could only be taxed under Category B (business and professional income) if the activity was conducted regularly and considered part of a taxpayer's professional activity. Nevertheless, if a payment of a particular type of income (assimilated to an existing typified income) were made using crypto-assets, the general taxation rules would apply. For instance, salaries paid in crypto-assets would qualify as payment-in-kind remuneration and would be taxable per its cash-equivalent value.
The new measures
To address the legal uncertainty and properly collect taxes on income that otherwise was untaxable, a package of measures was approved, and a crypto-assets tax regime was introduced in the 2023 Portuguese State Budget. Yet, no amendment to the Corporate Income Tax Code has been made. As a result, the uncertainties surrounding the taxation of crypto-asset income have been addressed to a certain extent. However, further clarity and guidance are required to ensure that taxpayers can comply with their tax obligations, accurately and efficiently.
The first step was to provide the Portuguese tax system with a definition of a crypto-asset. The new definition will probably suffer some changes with the introduction of new legislation, such as following the implementation of the European Commission’s Markets in Crypto-Assets Regulation ('MiCA'). Moreover, a transversal and uniform legal definition of crypto-assets in Portugal is still absent and cryptocurrencies lack legal tender status in Portugal.
The Portuguese PIT Code now defines crypto-assets as a ‘digital representation of value or rights that can be transferred or stored digitally using distributed ledger technology or similar’, following the concept provided by both the Portuguese Securities Market Commission and the Bank of Portugal.
The Portuguese State Budget did not include unique and non-fungible crypto-assets in the scope of the table of assets; namely, non-fungible tokens (NFTs) are neither included in the definition nor the taxation regime. Fractionalised NFTs (F-NFTs) may still be exposed to taxation, and there's no guidance on whether NFTs issued en masse are deemed fungible assets.
Operations related to the issuance of crypto-assets, including mining or transaction validation through consensus mechanisms, are now explicitly classified as commercial or industrial activities and liable to taxation under Category B (business and professional income). The taxable basis depends on the adoption of the simplified regime (default) or the organised accounts regime.
Under the simplified PIT regime, a coefficient of 0.15 will apply to operations with crypto-assets, except for crypto-asset mining, to which a coefficient of 0.95 will apply. The termination of activity and the loss of Portuguese residence is assimilated with the disposal of crypto-assets for taxation purposes under the simplified regime. Under the simplified regime, income is obtained for taxation purposes at the moment of disposal.
Taxpayers with a business volume surpassing a threshold of EUR 200,000 are subject to the organised accounts regime, and the taxable base is determined per the accounting rules.
Category B income is taxed at the following progressive marginal tax rates:
Income | Rates |
Up to EUR 7,479 | 14.50 |
From EUR 7,479 up to 11,284 | 21.00 |
From EUR 11,284 up to 15,992 | 26.50 |
From EUR 15,992 up to 20,700 | 28.50 |
From EUR 20,700 up 26,355 | 35.00 |
From EUR 26,355 up to 38,632 | 37.00 |
From EUR 38,632 up to 50,483 | 43.50 |
From EUR 50,483 up to 78,834 | 45.00 |
Exceeding EUR 78,834 | 48.00 |
A solidarity surtax of 2.5 per cent is levied on income exceeding EUR 80,000 and up to EUR 250,000, and 5 per cent on income exceeding EUR 250,000.
Remuneration derived from operations related to crypto-assets, such as staking, is deemed capital income. This type of income is exempt from withholding tax – taxpayers must disclose all income in their annual tax returns. If the remuneration takes the form of crypto-assets, it will be taxed per capital gains rules at the moment of disposal.
The ‘disposal of crypto assets not considered as securities’ was added to the list of taxable capital gains. The taxable gain will amount to the difference between the value of realisation and acquisition. Income earned and taxed as an investment will be excluded from this computation. Capital gains will be assessed using the First In, First Out (FIFO) method. A change in tax residence will be assimilated with disposal for consideration.
Expenses necessary and effectively borne on the acquisition or disposal of each crypto-asset are deductible. However, such expenses must be documented.
Capital gains arising from the disposal of crypto-assets will be taxed at a flat rate of 28 per cent (or 35 per cent if connected to an issuer in a blacklisted jurisdiction), with the possibility to elect for taxation at progressive rates if the option to aggregate all capital gains is exercised. Losses arising from the disposal or sale of crypto-assets can be deducted in the following five years, where the taxpayer opted for the aggregation of income.
However, long-term capital gains will be tax-exempt. Disposing of crypto-assets held for 365 days or longer generates long-term capital gains. The applicable holding period starts on the day following the acquisition of the crypto-asset. The holding period considers crypto-assets acquired before 1 January 2023.
If crypto-assets are held for less than 365 days and are exchanged (crypto-to-crypto) for other crypto-assets, effective taxation is not triggered at the time of exchange, but such an exchange generates a taxable event. The acquisition value of the crypto-assets received in the exchange will be valued at the market value of the original crypto-assets.
The exclusion from taxation is not applicable if the taxpayer or the paying entity is not a tax resident in another EU Member State, an European Economic Area Member State, or a state with which a convention for the avoidance of double taxation, or a bilateral agreement or a multilateral agreement, is in force and foresees the exchange of information for tax purposes.
Portugal has an extensive tax treaty network of 78 tax treaties, primarily based on the Organisation for Economic Cooperation and Development (OECD) Model Convention.
Taxation of capital gains is generally deferred to the moment of conversion/exchange for fiat currencies (legal tender), assets other than crypto-assets, or services. Transfers between wallets held by the same taxpayer do not generate a taxable event.
Portuguese virtual asset service providers (VASPs) and other entities providing crypto-asset custody services or managing crypto trading platforms are required to comply with disclosure and reporting obligations. Covered entities must submit a form to the Portuguese tax authorities by the end of January of each year, disclosing the operations carried out with taxpayers.
The new regime is still competitive in the international panorama. Deferral of taxation to fiat conversion is key to allowing proper reinvestment, and a full long-term capital gains exemption is an attractive benefit for long-term holders.