Cryptocurrency taxation is still unchartered territory for many investors. Is taxation on Binance or Basecoin investments mandatory? If my coins lose value, do I have to report this loss too? And what happens if they steal my account or close the platform?
What is Crypto
Firstly, we must understand that cryptocurrencies are virtual currencies regulated as a digital representation of value, because they are not guaranteed by an authority, such as a central bank. They can be exchanged, transmitted, stored or traded electronically, but they aren’t tied to a recognised currency.
Still, cryptocurrency taxes in Spain exist, and their holders even have reporting obligations.
Equally to the trading of shares or real estate, the profit or, sometimes, the loss, is a capital gain that must be reported and taxed on the Personal Income Tax.
When should crypto capital gains or losses be reported:
- When you sell coins such as Bitcoin, Dogecoin or Stellar, and a buyer purchases them by using actual currency such as Euros, US Dollars or GB Pounds.
- When you exchange a crypto coin for another, such as Ethereum for Bitcoin.
- When you invest in cryptocurrencies to stimulate demand, also known as “staking”. It consists of holding and storing cryptocurrencies in order to receive compensation in the form of additional coins.
When selling your cryptocurrency, you may generate a capital gain because you sold them for more money than they cost you.
However, it may also happen that the virtual market has fallen and when you sell the coin for a lower price than it cost you, it will generate a loss, just like it is currently happening.
Both capital gains and capital losses must be reported in your Personal Income Tax.
What is the tax liability on these Capital Gains?
The Capital Gains are taxed as Savings income and are subject to the following tax rates for 2022:
- First 6.000€, at 19%
- Following 44.000€, at 21%
- Following 150.000€, at 23%
- Following 100.000€, at 27%
- After 300.000€, at a 28%
Of course, capital losses are not subject to tax. Therefore, if you had to sell your cryptocurrencies when the market value was low, you will not have to pay any taxes if you lost money. Furthermore, you can offset the loss against capital gains and other savings incomes, like interest or dividends, up to a point.
What happens when my blockchain wallet gets hacked, stolen or lost?
In the event that you lose your blockchain wallet, it is stolen or hacked, or the online platform goes bankrupt, it would generate a capital loss. But you can not include it straight forward in your Personal Income Tax return. You must wait until a court declares the credit uncollectible or until you have been waiting for a year for this judicial procedure to conclude. To get help with the filing of your cryptocurrencies gains or losses, get in touch with our tax lawyers.
How does the offsetting of the capital losses work?
Firstly, capital gains and losses are integrated and compensated in the Personal Income Tax Return of the period the transfer has happened.
Then, in case there is a negative balance, it can be compensated up to 25% of the savings taxable income of the same tax period. You can use the non-offset capital loss over the next four years.
Let’s put this in real numbers:
Let’s say in 2022 you sold 50% of your cryptocurrency portfolio, having a 60,000€ loss because of the Cryptocurrency Market Fall. Also, this year, you sold your Alibaba shares and had a capital gain of 20,000€ and received dividends of 30,000€ from your remaining investment portfolio.
- There is, of course, a capital loss of 60,000€.
- Also, there is a capital gain of 20,000€ on the Alibaba shares sold.
- We must first offset the 20,000€ Capital Gain with the 60,000€ Capital Loss.
- You still have a 60,000€ Capital Loss to be offset.
- You can use this Capital Loss, but up to 25% of the other savings income, the dividends. The 25% of 30,000€ Euros is 7,500€.
- You will only be taxed on 22,500€ in dividends, and you still have 32,500€ Capital losses to use in the following 4 years.
Yes, it has been a tough year for cryptocurrencies, but you can use these losses to offset possible capital gains during this tax year. If you sell assets or obtain investment income during this year or the following 4, you will be able to offset them with the Capital Loss from this year.
Do I have to report my cryptocurrencies to the Spanish Tax Authorities?
Yes, you do. Form 721 was approved in July 2021 through the Law of anti-fraud measures in which a modification of the Spanish Tax Law was introduced. This update in the law confirms that cryptocurrencies deposited abroad will have to be declared.
Investors or holders will also have to declare cryptocurrencies abroad. Form 721 is aimed at individual owners of cryptocurrencies who have a portfolio with a value over 50,000€.
It is not yet possible to prepare and file form 721, since it is a form that is not currently in force or operational. The period to report your cryptocurrencies starts on January 1st, 2023. It will be necessary to wait until the AEAT publishes this form definitively. The information to be reported will be the same that appears in the certificate issued by companies such as Binance, reporting End of Year positions.