As you know, Portugal currently has no specific tax regime governing income from investments in digital tokens (cryptocurrencies, NFTs, etc.), making it a very attractive destination for investors.

Taxation of digital token income in Portugal

Digital tokens are, in practice, digital representations of assets that can encompass a wide range of fungible and non-fungible assets, each of which is assigned a certain value that allows them to be traded and transacted on a market that, for the time being, is unregulated.

Because they can represent a variety of distinct legal situations—due to significant differences among scholars and courts regarding their categorization—it is not yet possible to establish universal concepts or classifications for digital tokens.

What Are Digital Tokens in Portugal?

Portuguese law defines virtual assets as «a digital representation of value that is not necessarily linked to a legally established currency and does not have the legal status of fiat currency, but which is accepted by individuals or legal entities as a medium of exchange or investment and which can be transferred, stored, and traded electronically.».

However, this definition is far from resolving the issues related to classification and, consequently, to the legal and tax framework cryptocurrencies in Portugal.

Notwithstanding the classification challenges posed by this new reality and the relevant regulatory issues that are frequently raised—as noted by the European Securities and Markets Authority—digital tokens based on cryptography and blockchain technology can be classified in various ways.

Thus, one categorization does not necessarily exclude another, but the following points may serve as a guide:

• cryptocurrency tokens: when they serve functions similar to those of fiat currency, particularly when they are intended to represent monetary value and function as a potential medium of exchange and payment (for example, Bitcoin); ;
• securities and stock tokens: when they are backed by financial assets or securities and can be traded as such; ;
• utility tokens: when their issuance does not entail the granting of rights beyond ownership of the token, and may, on the one hand, grant access to a product or service (for example, a utility token) or permission to contribute to a certain task (for example, a work token), but may also, on the other hand, be sold on the market; ;
• asset-backed tokens: those backed by a digital or physical asset (for example, digital or physical works of art, precious metals such as gold, real estate, etc.); and
• hybrid tokens: those that have two or more of the characteristics listed above.

At this point, it is worth noting that the term «cryptocurrency» is currently used to refer not only to tokens that have the characteristics of currency, but also to other types of tokens. We believe that this term should be reserved for currency tokens (cryptocurrencies).

Currently, there are thousands of alternative digital tokens with various functions, specifications, and characteristics that do not align with those of a medium of exchange or a means of payment and, consequently, cannot simply be classified as cryptocurrencies or currency tokens, but also as security tokens, equity tokens, and hybrid tokens.

We also note that cryptocurrencies are not regulated in Portugal and, consequently, are not under the control of a centralized regulatory authority, such as a central bank. As such, they cannot legally be classified as currency, as they are not legal tender.

In any case, like physical money, currency tokens are fungible, meaning they can be exchanged, on a one-for-one basis, for one another. Asset tokens are a different type of digital token, since they can represent either a fungible asset or a non-fungible asset.

These, known as NFTs, are cryptographic representations on a blockchain network that enable the digital or physical representation of assets, such as digital or physical works of art or real estate. Since they represent non-fungible assets, they have unique identification codes that distinguish them from one another. Thus, unlike cryptocurrencies, NFTs cannot be exchanged on a one-for-one basis with one another.

Why Should Income from Digital Tokens Be Taxed?

The various types of digital tokens, whether fungible or non-fungible, and regardless of their specific characteristics and practical uses, are assets that may have an equity component convertible into monetary amounts, which necessarily represent the (tax) liability of those who own and use them.

The principle of the ability to pay, which stems from the principle of equality, is a fundamental principle of the Portuguese legal system, conveying the idea that the tax burden should always be based on each taxpayer’s income or assets.

Is Portugal a tax haven for cryptocurrency investors?

If we look at it from a tax law perspective, the immediate answer is «no,» so, as always, there are many nuances to consider.

First of all, it is important to note that in Portugal, businesses and other organizations are subject to corporate income tax on their income (IRC) and that individuals are taxed on their income through the Individual Income Tax (IRS).

There is little doubt regarding the taxation of income from digital tokens earned by companies: all such income must be included in the entity’s taxable income and subject to corporate income tax.

In any case, the specific tax burden for each company will depend on a number of factors, namely whether: the company is a tax resident in Portugal (or has a permanent establishment there) or a nonresident, the source of its income, whether the company is subject to special tax regimes, etc., all of which require a careful analysis of each specific situation.

On the other hand, the taxation of income from digital tokens earned by individuals raises certain questions, as the IRS recognizes different categories of income, and each type of digital token can potentially generate different types of taxable income. Consequently, a careful and comprehensive analysis of the specific situation is even more important here.

In summary, there are five types of transactions involving digital tokens:

• the initial acquisition of digital tokens (through mining or minting); ;
• investing in digital tokens (for example, buying and selling cryptocurrency or NFTs); ; 
• receive a digital token as payment for goods or services; ;
• receive a digital token for free (through a donation); ;
• the use of digital tokens to purchase goods and services.

Only the first four transactions may generate income that is potentially taxable at the individual level under the IRS.

It is important to note, however, that an individual’s use of digital tokens to purchase goods and services may be seen as an indication of wealth, which may be relevant (and potentially used) by the tax authorities in determining the taxpayer’s income and may also entail the payment of other taxes, such as value-added tax (VAT), by the purchaser of the goods or services.

From a very «high-level» perspective, income from digital tokens can fall under any IRS income category. This is because they can be used as forms of income, such as wages, rent from leasing real estate, and even pension payments made in digital tokens.

Nevertheless, when considering the income specifically generated by investments in digital tokens, it may be taxable under various IRS categories, such as self-employment income (Category B), capital income (Category E), or capital gains (Category G).

For example, cryptocurrency mining could be viewed as analogous to coal or gold mining, or even to the creation of intellectual property. Thus, income from mined cryptocurrencies could be taxable as self-employment income, under Category B, regardless of whether there is a regular business activity, provided it is commercially oriented and conducted for profit.

On the other hand, gains from investments in digital tokens classified as securities may be taxable as capital gains (Category G—fixed rate of 28%), as there is a specific provision governing investments in securities.

Furthermore, with regard to the possibility that income may be earned through self-employment, it is important to note that this situation requires an examination of various factors and does not depend solely on the criterion of regularity.

In fact, self-employment can take the form of a single, isolated act or occur on a regular basis (habitually and periodically). Therefore, the general context of the individual’s personal and tax situation, the economic substance of the situation, and the commercial and profit-making objectives must be carefully examined.

In addition, there are many investors who believe there is an official ruling from the Portuguese tax authority applicable to all situations related to investing in digital tokens, but in reality, the tax authority has only expressed its opinion on a single type of transaction involving a specific type of digital token: the purchase and sale of cryptocurrencies.

According to them, income from the sale of cryptocurrencies is taxable only if it is derived from self-employment (Category B—progressive tax rate up to 48%).

This is a very general perspective that does not take into account the various aspects of the situation, namely those related to the different characteristics of a business or the income from self-employment. For example, gains from the sale of shares are specifically classified as capital gains (Category G—fixed rate of 28%) under the law, but if they are obtained through a «regular and professional» investment, should this investment activity be considered self-employment and taxed under Category B? At this time, we do not have an answer. 

As we have seen, there are several other transactions besides the simple buying and selling of cryptocurrencies and, more importantly, several other digital tokens with characteristics different from those of cryptocurrencies.

In light of the foregoing, taxpayers are advised to familiarize themselves with the framework that may apply to their specific situation and to keep records of their transactions, that is, a record capable of substantiating the source of their income, especially if they incur certain expenses that could be considered by tax authorities as unjustified displays of wealth.

Would specific regulations be beneficial for investors and the tax authorities in Portugal? 

Although Portugal remains a prime destination for investment and residency for individual investors and businesses, the lack of specific regulations and the unique characteristics of investors have led many of them to decide to change their tax residency. In fact, they came to Portugal, believing it to be a tax haven for digital assets, to carry out «cashouts» (converting their digital tokens into legal tender) and also to make large expenditures without reporting their income to the Portuguese tax authorities.

There is still no specific regulation in place today, but we believe that a specific tax framework would be preferable to the current undefined status, as this situation is not beneficial to either taxpayers or the tax authorities and is already leading to disputes.

In order to provide the legal system with a certain degree of certainty, it would be in everyone’s interest for specific legislation to be enacted soon—in particular, legislation establishing rules to determine the territorial source of this digital income, which could then be combined with the special tax status of «Non-Habitual Resident» (RNH), a regime that makes Portugal even more competitive compared to other jurisdictions.