The amendments included in the State Budget Bill 2023 aim to close the legal gap in the scope of taxation of cryptocurrencies in Portugal, promoting a new tax framework, particularly in terms of the IRS.

New Cryptocurrency Taxation in Portugal's 2023 State Budget

It is proposed that a legal concept of property be introduced cryptoassets to be included in the Individual Income Tax Code (»IRS«), according to which a cryptoasset is defined as follows:  »A cryptoasset is considered to be any digital representation of value or rights that can be transferred or stored electronically using distributed ledger technology or another similar technology.«.

The concept is vague and appears to deviate from the definition previously introduced by the Portuguese Securities Market Commission (CMVM), which defined cryptoassets as follows:  »Cryptoassets are digital representations of assets based on blockchain technology, not issued by a central bank, a credit institution, or an electronic money institution, and which may be used as a means of payment within a community that accepts them or serve other purposes, such as conferring the right to use certain goods and services or to receive a financial return.« 

Taxation in Category B

Under the IRS, there is a provision for reporting income in two different income categories: Category B (income from businesses and self-employment) and Category G (capital gains).

In Category B, income derived from »the issuance of cryptocurrency assets, including mining, or the validation of transactions through consensus mechanisms» will now be considered income from a commercial and industrial activity.

The general and progressive IRS tax rates will apply to this income derived from a business engaged in these types of transactions, as is already evident from the rules applicable to Category B income.

It is proposed that a multiplier of 0.15 be applied to income derived from these transactions and subject to the simplified tax regime.

There is an intention to «professionalize» activities related to cryptocurrency transactions, as it is assumed that only 0.15 of the gross income earned actually constitutes profit; in this case, the applicable rate does not depend on any proof of expenses incurred in the activity.

This presumption will therefore result in 85% of the income derived from this type of transaction not being taxed under Category B.

Although we understand that this is the spirit of the rule, that is, that the intent is to include transactions related to the issuance of cryptoassets as an activity subject to the 0.15 multiplier, if we look solely at the law, it appears that only income derived from the sale of cryptoassets falls under line a.

We understand that this is the legislature’s intent, as can be inferred from the framework also proposed for the CIT regarding the simplified regime, where it is specified that the intent is to include income from cryptoassets in the 0.15 coefficient (not limited to sales, as might appear to be the case in the IRS’s proposals).

We understand, however, that the possibility of applying other multipliers, such as 0.95, may also be considered in the case of investment income or capital gains resulting from cash transactions and/or financial investments in cryptoassets.

Category G: Taxation

The 2023 proposed federal budget also suggests adding a new paragraph to the CIRS, 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.

A special rate of 28% must be applied to this type of income.

It is important to note, however, that a tax exemption is being proposed, under which income from the sale of cryptoassets would be exempt from tax if the cryptoassets were held for a period of 365 days or more.

Consequently, just as with the tax regime applied to capital gains arising from transactions involving stocks, bonds, and other securities—which was designed to increase taxation on speculative capital gains held for one year or less— the same applies to the taxation of capital gains resulting from transactions involving cryptoassets.

However, under the regime for speculative capital gains, the rate of 28% applies to capital gains realized upon the sale of securities held for more than one year. There is also a surcharge through the application of marginal rates (up to 48%) on capital gains from securities held for less than one year, provided that the taxpayer’s taxable income is equal to or greater than the top bracket for the marginal and progressive tax rates.

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

In fact, the legislature intends for the holding period of cryptoassets to begin to be taken into account in 2023, even if that period began before the bill was introduced. Again, it should be noted that when cryptocurrency is held for more than one year, the legislature applies an exemption to the capital gains derived from such income.

It is also proposed that a negative balance calculated in a given year, resulting from transactions involving the sale of cryptocurrency for consideration, may be carried forward to the following five years when the taxpayer elects to file a consolidated return.

With regard to the calculation of capital gains on sales for consideration, it is proposed that the capital gain be calculated »as the difference between the sale price and the acquisition cost, net of the portion classified as investment income.«.

Finally, the option to deduct expenses related to the acquisition and sale of cryptocurrencies is proposed for the calculation of capital gains.

Taxation in Category E

With regard to income derived from cryptocurrencies, it is also important to highlight the additional and comprehensive rule included in the capital gains tax regime (Category E).

Income from capital is defined as income and other economic benefits, regardless of their nature or designation, whether in cash or in kind, derived directly or indirectly from assets, property, rights, or legal relationships of a movable nature, as well as from their respective modification, transfer, or termination, with the exception of gains and other income taxed under other categories.

In light of the foregoing, it is clear that the CIRS has such a broad scope that it leads to the conclusion that potential gains from any asset may be subject to taxation, whereas the tax implications do not fall under any other tax regime.

With regard to capital income, we note that no changes have been made to the relevant regulatory provision to expressly include income derived from cryptocurrency. However, we believe that the rule, as currently worded, allows for the taxation of income and economic benefits derived from cryptoassets under Category E, by classifying them as capital income when the legal framework for such income does not fall under any other category of income.

In the latter case, the tax rate on this income will be 28% if the taxpayer, who is a tax resident here, does not choose to aggregate this income.

Therefore, we reiterate that if a taxpayer elects to aggregate his or her income, the general and progressive CIRS rates will apply, and the tax on these amounts may reach 48% (to which a surcharge of 2.5% or 5% may be added).

Reporting of Transactions

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

Consequently, these entities will now be required to report to the Tax and Customs Administration, by the end of January of each year, the cryptoasset transactions carried out through their involvement for each taxpayer, by submitting an official form approved for this purpose.

It should also be noted that on October 10, the OECD published the »Framework for the Reporting of Cryptoassets and Amendments to the Common Reporting Standard.« It is expected that in the near future, as member countries implement this document, the exchange of information on cryptoasset transactions among them for tax purposes will become mandatory.

In conclusion

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

We note that there could also be potential taxation of income generated by cryptocurrency assets under Category E (capital income), given the scope of the definition of capital income already provided for in the CIRS.

It is important to note that all individuals and legal entities, organizations, and other entities without legal personality that provide cryptocurrency custody and management services on behalf of third parties, or that operate one or more cryptocurrency trading platforms, will now be required to report to the Tax and Customs Administration, by the end of January of each year, the transactions carried out through their services.

Finally, it should also be noted, as reported by the media in the meantime, that proposals to amend the 2023 State Budget Bill have already been submitted, notably to apply a coefficient of 0.95 to mining revenues falling under Category B.

These proposals have not yet been approved, and we will closely monitor developments in this matter in case measures different from those currently included in the 2023 State Budget Act are introduced.