Last week, Portuguese Finance Minister Medina announced during the debate on the 2022 state budget bill (OE2022), that he promised to make changes to the taxation of cryptocurrency, and indicated that individuals realizing capital gains from cryptocurrency trading will begin to pay taxes like anyone else who realizes capital gains generated through the purchase and sale of monetary assets.

Taxation on cryptocurrency coming soon in Portugal

The Secretary of State for Tax Affairs has asked the tax administration (AT) to conduct an «assessment» of how other countries tax cryptocurrency assets. The goal is to propose a new tax framework. This work stems from a government request and aims to propose a tax framework for these new financial instruments. The government supports a coordinated approach to this issue at the European level. Nevertheless, it determined, through a decree issued by the Secretary of State for Tax Affairs in 2021, that the Tax and Customs Administration should examine the framework for cryptoassets in light of international best practices.

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More specifically, the Ministry of Finance explains that this work is being carried out to establish an appropriate tax framework for these new instruments, taking into account the necessary balance between the equitable distribution of income and wealth and the attraction of foreign investment. As you all know, Portugal is one of the few countries where capital gains from the sale of cryptocurrency are not subject to income tax (IRS).

The lack of a tax framework for cryptocurrencies means that the country is often viewed as a «tax haven» among enthusiasts of these assets. With this response, the Ministry of Finance is attempting to strike a delicate balance. On the one hand, it implicitly acknowledges that cryptocurrencies, like other financial instruments, should be subject to an appropriate tax framework. On the other hand, it maintains that any new regime should not deter foreign investment.

On December 20, 2021, shortly after Parliament had been dissolved, the Ministry of Finance was waiting for Parliament to reconvene so it could impose taxes on cryptocurrencies, and the issue was expected to be discussed during this new legislative session. One day later, the Left Bloc (BE) proposed extending the’IRS cryptocurrencies in its election platform. Today, the government is not the only one addressing this issue; there may even be progress on this front in Parliament soon.

Some are already preparing for a debate on the subject, and it could take place after the 2022 state budget is finalized. Once associated with fraud and crime, cryptocurrencies are now the focus of attention for many organizations. Furthermore, gains from the sale of these assets are subject to taxes in countries such as Spain and France, for example.

The government supports a coordinated position on this issue at the European level. Nevertheless, it determined, by order of the Secretary of State for Tax Affairs dated 2021, that the tax and customs authorities should examine the framework for cryptoassets in light of international best practices in order to propose an appropriate tax framework for these new instruments, taking into account the necessary balance between the equitable distribution of income and wealth and the attraction of foreign investment; this assessment has not yet been finalized.

What does the law currently say? 

In 2016, at the request of a taxpayer, the tax authority conducted a legal analysis of the IRS code to assess whether cryptocurrencies might be subject to this tax. The binding guidance it published states that «income generated» by this activity «may, in theory, fall into three categories of income, namely capital gains (category G), capital gains (category E), and business or professional income (category B).”.

With regard to Category G, the tax office noted that Article 10 of the Tax Code provides that a very specific set of capital gains is taxable. «However, the legislature, in establishing this tax rule, adopted a closed list,» meaning that «taxation applies only to gains derived from the circumstances described therein,» and cryptocurrencies fall under none of them. «By

»Consequently, it is concluded that this situation is not taxable under Category G," the authority writes.

The same conclusion was reached for Category E. Although the incidence rule is «open-ended,» the tax authority has indicated that, in the case of cryptocurrencies, «the income generated is derived from the sale of the right; therefore, it will not be taxable under» this category.

Finally, with regard to Category B, since this involves income from self-employment, the tax authorities have determined that a tax liability may exist if there is «income» derived from «the conduct of a commercial or professional activity.».

It is therefore concluded that the sale of cryptocurrency is not taxable under the Portuguese tax system, unless, due to its regular nature, it constitutes a professional or commercial activity of the taxpayer, in which case it will be taxed under Category B, as stated in the tax authority’s ruling.

As we have repeatedly emphasized, we ask that you—and advise you—to always keep records of your cryptocurrency transactions to avoid any potential issues with the IRS. We also advise you to keep records that can substantiate the source of your income, especially if you incur certain expenses that could be considered by tax authorities as indicators of wealth.

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