Introduction
Resorting to its annual budget, the Portuguese Government has finally moved forward to regulate the cryptoasset market. The Minister of Finance, Fernando Medina, had already hinted at upcoming regulation in this area earlier this year, in May. While the first version of the state budget, whose contents have been known since October, already contained some dispositions regarding cryptoassets, an amendment proposed and approved by the ruling party on November 23rd has brought some key changes.
Individuals
This Insight will first analyse the changes effected to the Portuguese Personal Income Tax Code, which are the main focus of the new tax regime and the basis for corporate taxes as well.
The original proposal for the 2023 state budget was set to define and tax cryptoassets according to two categories:
-Business and professional income (category B) – now includes the sale of cryptoassets and other crypto operations such as mining and validating transactions, subject to a progressive rate based on income. At this stage, a short explanation of the Portuguese tax system is warranted. According to the tax code, residents earning less than € 200 000 from this category can opt for the simplified tax regime. This means that instead of having to assess their profits through the traditional formula of income minus expenses, the simplified regime defines taxable income as a percentage of total income, based on set categories. In this case, only 15% of the total revenue derived from crypto sales is deemed taxable income. Notice that crypto sales and other operations are mentioned in the first part of this paragraph, while only crypto sales are mentioned here, making the status of other crypto operations uncertain. This was the case in the original budget proposal, which was then corrected by the amendment. This option is advantageous for most cases, nevertheless, taxpayers can always opt for the organised accounts regime, and calculate the exact profit subject to tax, if they know that it will be lower than 15%.
-Capital gains (category G) – profits arising from the sale of cryptoassets are taxed according to the standard rate for capital gains, which is 28%. Moreover, and here departing from the standard regime, if the assets are held for more than one year, the profits from their sale are no longer subject to tax.
Still, this version of the state budget was not enough, as evidenced by the later amendment. This new piece of legislation brought key changes to the existing proposal, not only by correcting the existing legal text but also by introducing some new rules.
First, it subjects cryptoassets to another category of taxable revenue – capital income (category E). This measure was specifically thought out for passive income generated from staking crypto or other similar activities, the profits of which can be compared to traditional capital income, such as interest or dividends. Despite being labelled as capital income, these profits are not subject to withholding tax, commonly associated with other income in this category. Due to practical reasons, the legislator chose instead to tax this income as capital gains (category G), deferring any taxes to the moment of sale, provided that the income is paid as a cryptoasset.
Second, it narrows the scope of the original definition of cryptoasset by explicitly excluding non-fungible assets (NFTs) (while this is now the case in Portugal, a broader discussion on this topic can be seen around the EU).
Third, and perhaps the biggest change: crypto-to-crypto events are deemed non-taxable. For individuals, the practical importance of this change cannot be overstated. This understanding is strengthened by the Justificative Note of the amendment, which clarifies that it does not aim to tax crypto-to-crypto events, but only crypto-to-fiat events (informally known as “cashing out”). This measure recognises the complexity inherent in taxing crypto-to-crypto transactions, which, if implemented, could prove too hard of a task for both Tax Authorities and consumers alike, as well as potentially having a stifling effect on the crypto market in general, by paralysing market players for fear of incurring in taxable events. This choice seems better suited to the fast-moving world of crypto than the option of taxing every single transaction, including crypto-to-crypto.
Fourth, the amendment introduces two anti-abuse clauses, precluding residents from countries that do not have an information agreement with Portugal from taking advantage of both 365-day and crypto-to-crypto exemptions. Furthermore, it also equates the loss of Portuguese residency status with the sale of cryptoassets held – i.e. if someone ceases to be a resident, they will have to pay tax on all of their assets as if they had sold them, whether they actually sell them or not – a practice known as “exit-tax”. On the same note, crypto losses incurred by residents in tax havens are no longer tax deductible.
Fifth, regarding the category B simplified tax regime, it corrects the previous incongruence by stating that income derived from all crypto operations, no longer just sales, is presumed to be 15% taxable. On the other hand, income from mining is now presumed to be 95% taxable, in an attempt to dissuade individuals from pursuing this activity, associated with negative environmental impact.
Overall, this approach results in a very competitive framework, borrowing the best from various European systems such as those of Germany or France. Factoring in both the 365-day hold and crypto-to-crypto exceptions, one can assume that the real-world scenarios in which someone actually has to pay taxes on their crypto dealings will be fairly limited. This policy update seems to be in line with other measures, unrelated to crypto, announced in the past years to attract foreign investment in the digital and technology sectors, such as the Digital Nomad Visa, Startup Visa and the increased attention devoted to startups and the digital sector by the Portuguese Government.
Companies
Regarding corporate tax, both the original proposal and the recent amendment replicate that said for individuals regarding category B income: if a company resorts to the simplified tax regime, crypto income not considered capital gains or capital income shall be considered 15% taxable, unless it constitutes income from mining, in which case it is considered 95% taxable.
Furthermore, the state budget announces a practical measure for both individuals and companies: anyone dealing with cryptoassets belonging to someone else (i.e. crypto platforms or individuals that manage assets as a business) is bound to report their crypto transactions to the Tax Authority.
Conclusion For the regular user and consumer investor, the approach adopted by the Portuguese Government on crypto taxation is the best-case scenario after having no regulation at all – crypto taxes for the average individual remain virtually zero. At the same time, it combats some of the negative effects of crypto, such as the environmental impact resulting from mining and blatant cases of tax evasion. While this system could be criticised for taxing crypto gains too lightly, one should remember that it is dealing with a very recent and highly mobile asset class. By attempting to be more stringent, the regulator would risk being exposed to unpredictable reactions from the tax base. Not only that, but attempting to be more controlling of cryptoassets would likely prove to be impossible on a practical level, which the legislator recognised in certain choices already demonstrated above. Overall, it strikes a good compromise between interventionism and laissez-faire. Finally, the choice of low taxes can also be understood in the context of a Portuguese strategy for capturing international tech investment.
