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As with all innovative and disruptive technologies, some public entities are often slow to adapt to these new trends, a fact that mainly affects public institutions due to their bureaucratic nature. Governments often lag behind emerging technology trends, taking months or even years to establish legal foundations or incorporate them into tax declarations.
Cryptocurrencies have been one of the most discussed topics in recent years due to their significant economic impact, their use in various projects, and even their acceptance as a means of payment in different countries. As expected, governments have taken several years to adapt or create laws that protect investors in these digital assets. Until recently, these investors existed in a legal gray area.
As challenging and tedious as it may sound, it is essential to declare income derived from cryptocurrency activities, both from abroad and within the investor's home country. In this article, we will provide a brief overview of the main aspects to consider when declaring these assets, including the activities that can be conducted with cryptocurrencies, which of these activities need to be declared, which taxes should be applied to the gains, and finally, a tutorial on how to report cryptocurrency gains in the tax declaration.
Cryptocurrency Activities and What Needs to Be Declared
First, it is essential to clarify that the payment of taxes depends on how cryptocurrencies are used. In other words, depending on the specific cryptocurrency activities, different taxes must be paid. In Spain, the main taxes that must be paid are the Personal Income Tax (IRPF), Value Added Tax (IVA), and the Wealth Tax (IP). There are also other taxes, such as the Tax on Economic Activities (IAE) and the Inheritance and Gift Tax (ISD).
Now, let's explore which taxes should be paid based on the specific cryptocurrency activities and which activities may be tax-exempt.
Value Added Tax (IVA)
First, it is important to note that Bitcoin and other cryptocurrencies are considered a means of payment within the European Union. Therefore, the buying and selling of these assets are not subject to Value Added Tax (IVA). If you only invest in cryptocurrencies, meaning you buy and sell these assets, you do not need to worry about IVA.
However, if you use cryptocurrencies to pay for a product or service in the same way you would with euros or dollars, then this activity is subject to IVA. In such cases, the product or service is subject to the corresponding IVA rate (usually 21%).
Personal Income Tax (IRPF)
The Personal Income Tax (IRPF) in Spain applies to the income received by Spanish residents during the natural year. It is regulated through the tax declaration.
Buying and Selling Cryptocurrencies
Most investors decide to invest in cryptocurrencies to generate a return on investment and increase their invested capital. Although the practice of buying and selling cryptocurrencies is exempt from IVA, it is not exempt from IRPF. Therefore, the gains resulting from the acquisition, transfer, or sale of cryptocurrencies must be reported on the IRPF declaration, specifically under the section for capital gains and losses. For example, if you bought 1 Bitcoin for €10,000 and, after a year, it doubled in price (€20,000), you should declare your gain (€10,000) as follows:
- For the first €6,000 of gains, you would pay a tax rate of 19%, resulting in €1,140.
- For the remaining €4,000 up to €10,000, you would pay a tax rate of 21%, resulting in €840.
- Therefore, for total gains of €10,000, you would pay a total of €1,980 in Personal Income Tax.
Rising Cryptocurrency Prices
What if the price of my cryptocurrency doubled, but I didn't sell it? In this case, you do not need to pay taxes on these gains because you haven't realized any liquid gains by not selling. If you don't sell your cryptocurrencies, you don't have to report the increase in price.
Exchange Between Different Cryptocurrencies
When exchanging between different cryptocurrencies, you are still obligated to report these transactions according to the Spanish Tax Agency. Even if you don't convert your cryptocurrencies into euros, you are required to declare any income generated from the price increase of your cryptocurrencies (e.g., the €10,000 gain from the previous example).
Losses and Gains in Cryptocurrencies
Consider a scenario where you have made money by buying and selling some cryptocurrencies, but you have experienced losses with other cryptocurrencies. These gains and losses are integrated into what is known as the tax base for savings and are added to other capital gains and losses. This concept involves the offsetting of losses against gains, which means you will only be required to pay taxes on the net income you have actually received from your activities. This concept is known as real profit.
The Wealth Tax in Spain encompasses all your assets, taxing the wealth of individual residents in Spain based on the value of all assets as of December 31. Some autonomous communities have a minimum exemption amount, ensuring that only those with substantial wealth are subject to the Wealth Tax. In general, this minimum threshold is set at €700,000 of wealth.
Model 720 is an informational declaration of assets and rights located abroad. This declaration must be submitted between March 1 and March 31 if the value of your accounts, assets, or real estate held abroad exceeds €50,000 as of December 31. If you hold your cryptocurrencies on an exchange outside of Spain and exceed the mentioned threshold of €50,000, you will be required to submit this model. However, if you hold your cryptocurrencies in a cold wallet, such as Ledger or Trezor, it is considered to be within Spain, and you are not obligated to submit this model.
How to Declare
Now, let's get to the main reason you are here. We will provide a step-by-step guide on how to declare different cryptocurrency gains in your tax declaration.
1. Gathering of Operations
The first step is where many people encounter problems, as collecting a large number of operations in which you generated income, especially across different exchanges, can be a daunting task. Each individual can track their cryptocurrency operations in any way they prefer. However, we recommend using the CoinTracking platform, as it is a faster and more straightforward method to compile all your operations for tax reporting. You can create an account in just 2 minutes and take advantage of this platform.
CoinTracking allows you to upload CSV files downloaded from various exchanges where your cryptocurrency operations are recorded. The platform then compiles all the files, providing you with an overview of all your operations. It's important to note that CoinTracking's free plan has a maximum limit of 200 operations and a maximum file size of 5 MB. These numbers are generally sufficient for the average investor, so the free version should be suitable for your needs.
If you have any questions about downloading and importing CSV files, CoinTracking provides instructions on how to do it for each exchange."
Once the file is imported, the program will display all the transactions conducted on that exchange.
All right, now that we have our Coin Tracking account and our transactions in order, it's time to get our tax report to declare our cryptocurrency gains in the income tax return. To obtain our tax report, we should click on the Tax Report tab in the main menu.
Once there, Reental recommends filling out all the fields as follows:
Once all the fields are filled out, we will click on this button to create our report. At this point, we would already have our report created, showing the capital gains from the sale of our cryptocurrencies, as well as various income from airdrops, staking, cryptocurrency lending, or mining.
The next step would be to go directly to our draft income tax return, where we should click on the 'Sections' tab:
Below are the various activities that may have generated income through the use of cryptocurrencies, the sections and subsections in which they should be reported, and how the taxation is carried out. You can find all the required data in the Coin Tracking tax report:
Staking or interest from lending your cryptocurrencies to third parties:
- Page 5 → Capital income returns.
- Section B → Income from movable capital.
- Subsection → Income from movable capital to be included in the taxable base of savings.
- Box 0033 → Income from income subject to capital gains and other income from movable capital to be included in the taxable base of savings.
Please note that the specific tax regulations may vary by country, so it's essential to consult with a tax professional or the relevant tax authorities to ensure accurate reporting and compliance with tax laws.
Filling in the gross income with data but without withholdings for buying and selling or exchanges between cryptocurrencies:
- Page 18, section F2 → Capital gains and losses from the transfer of other assets.
- Subsection → Capital gains and losses from the transfer of other assets.
- Box 1626 → Specify the type of asset.
- Click on other assets not related to economic activities.
Remember that cryptocurrency taxation can be complex and may vary by jurisdiction. It's advisable to seek the assistance of a tax professional or consult with your local tax authority to ensure accurate reporting and compliance with tax laws in your specific location.
Acquisition value: In the "Acquisition amount" field, you need to specify the total sum of the cost bases for your operations in euros, which means this amount: [Insert the total sum of cost bases in euros from your Coin Tracking report]
Once you have completed all the steps mentioned for various activities, you would have completed your income tax return for your cryptocurrency-derived income. If you still have any doubts about this process, you can contact a tax advisor to help you with the process and ensure you don't forget any aspects to declare.
By the way, don't forget to check out the articles on our blog. Welcome to the Reental community!