With the 2023 federal budget, the government intends to move forward with a framework for taxing income from cryptoassets, specifically by including this type of income in the IRS and proposing that it be expressly classified under categories B (income from businesses and self-employment), Category E (capital gains), and Category G (increases in asset value).

The concept 

The 2023 State Budget intends to introduce a legal definition of a cryptoasset, to be included in the Individual Income Tax Code (»IRS Code«), in accordance with the Regulation on Markets in Crypto-Assets (MiCA).

The Code defines the term «cryptoasset» as follows: “A cryptoasset is any digital representation of value or rights that can be transferred or stored electronically using a distributed ledger or similar technology.”

Similarly, the normative provision that defines the term »cryptoasset» excludes certain entities from the concept of a cryptoasset:  »unique cryptoassets that are not fungible with other cryptoassets.« Thus, there is an intention to exclude from taxation assets identified as NFTs (»non-fungible tokens«).

Within the scope of the IRS, there is a proposal with tax implications for three distinct categories of income: Category B (income from businesses and self-employment), Category E (capital gains), and Category G (increases in net worth).

Taxation in Category B

In Category B, income derived from »crypto-asset issuance operations, including mining, or the validation of crypto-asset transactions through consensus mechanisms» will now be considered income from a commercial and industrial activity. The general and progressive tax rates provided for in the Tax Code shall apply to this income derived from a commercial activity involving such transactions, as is already the case under the rules applicable to Category B income, and it is proposed to apply a coefficient of 0.15 to this income if it falls under the simplified tax regime. By applying the coefficient of 0.15, 85% of the income derived from this type of transaction will not be taxed under Category B.

Furthermore, given the environmental impact associated with mining, and as recommended by the European Commission in its communication « Digitizing the Energy System – In an »EU Action Plan,” it is proposed to penalize this activity under the simplified tax regimes by applying a tax rate of 0.95.

We believe that the possibility of applying this alternative coefficient of 0.95 could also be considered in the case of investment income or capital gains resulting from cash transactions and/or financial investments in crypto-assets.

Finally, with regard to the timing of taxation, income from crypto-assets is deemed to be realized at the time of their sale for consideration. It is also considered that the loss of resident status in France, as well as the cessation of business activity, are treated as a sale of crypto-assets for consideration.

Consequently, Portugal is including an exit tax provision in its Personal Income Tax Code for the first time, under which taxpayers will be taxed if they wish to change their tax residence to another jurisdiction.

Taxation in Category G

The 2023 federal budget also introduces a new section to the IRS Code, under which it is proposed to expand the definition of capital gains to include income from the sale of cryptoassets that do not constitute securities. The special rate of 28% applies to this type of income.

It is important to note, however, that a tax exemption for this type of income has been introduced, under which income from the sale of cryptoassets is exempt from taxation when the cryptoassets have been held for 365 days or more.

In this regard, it is important to highlight the approved transitional provision, under which the calculation of the holding period for cryptoassets for purposes of the IRS’s capital gains tax assessment begins even before this legislation takes effect.

In fact, the legislature intends for the holding period of crypto assets to be taken into account starting in 2023, even if that period began before this law took effect. Again, it should be noted that when a cryptoasset is held for more than one year, the legislature applies an exemption from capital gains tax on such income.

With regard to capital gains, taxpayers who opt for the aggregate taxation method may now carry forward the negative balance calculated in a given year on transactions resulting from the sale of cryptoassets for consideration to the following five years.

With regard to the calculation of capital gains arising from the sale of cryptoassets, these will be calculated »as the difference between the sale price and the acquisition cost, net of the portion classified as capital income,« with the market value on the date of sale being considered the sale price of the cryptoassets.

Also in this area, expenses related to the acquisition and disposal of cryptoassets may be deducted when calculating capital gains. Also regarding anti-abuse rules, it should be noted that residents of tax havens will not be able to deduct any losses incurred on cryptoassets.

Finally, this new regime also promotes the incorporation of the »first-in, first-out» (FIFO) rule, from which the method for determining revenue is derived, in a manner consistent with other aspects of the securities market.

Taxation in Category E

With regard to income from crypto-assets, it is also important to highlight the rule included in the provisions governing capital gains (Category E).

With regard to forms of compensation derived from cryptoasset transactions (for example, delegated or off-chain staking), they are classified as capital gains (Category E). In the latter case, the tax rate on such income will be 28%, provided that the taxpayer, who is a tax resident here, does not elect to aggregate this income.

Furthermore, with regard to capital gains from crypto-assets, an exemption from withholding tax has been established, given the specific characteristics of the product and its nature.

Reporting of Transactions 

In addition, and for monitoring purposes, a new reporting requirement is being introduced that will apply to individuals and legal entities, organizations, and other entities without legal personality that provide crypto-asset custody and administration services on behalf of third parties or that operate one or more crypto-asset trading platforms.

Consequently, these entities will now be required to report to the tax authorities, by the end of January of each year, the transactions carried out through their involvement, relating to cryptoassets, for each taxpayer, by submitting an official form to be approved for this purpose.

In conclusion 

With the 2023 state budget, the government intends to move forward with a framework for taxing income from cryptoassets, specifically by including this type of income in the Income Tax Code (IRS), proposing that it be expressly classified under Category B (business and professional income), Category E (capital gains) and Category G (gains in net worth).

It is important to note that all individuals, legal entities, organizations, and other unincorporated entities that provide cryptoasset custody and management services on behalf of third parties, or that operate one or more cryptoasset trading platforms, will now be required to report to the tax authorities, by the end of January of each year, the transactions carried out through their services.