This Is Europe’s Crypto Tax Heaven: Expert Insights and Loopholes

Portugal, with its tax-friendly stance on crypto, stands as a beacon for investors in the digital asset industry. The country’s unique tax laws offer a spectrum of advantages for those engaged in the crypto market.

One of the hallmarks of Portugal’s crypto tax law is the explicit exclusion of taxation on crypto-to-crypto transactions. This allows the individual investor to trade freely without triggering taxable events until crypto is converted into fiat currency.

How to Minimize Crypto Tax in Portugal

Portuguese Tax Lawyer Rodolfo José Santos pointed out the significant developments in Portugal’s Crypto Tax Law for 2023. The new legislation introduced a definition of crypto for tax purposes for the first time. Moreover, it had important exclusions like Non-Fungible Tokens (NFTs) and cryptos categorized as securities.

The law distinguishes between short-term and long-term holdings. Subsequently, incentivizing long-term investment by exempting capital gains on cryptos held for over 365 days from taxation. Short-term gains, on the other hand, are subject to a tax rate of 28% in Portugal.

Santos believes this tax rate is competitive when compared to other European countries. Especially when considering the broader context of living and working in Portugal.

“Portugal offers a significant advantage compared to other jurisdictions. One of the biggest advantages is the explicit exclusion of taxation on crypto-to-crypto transactions, leaving the individual investor free to trade without triggering taxable events. Now, when considering factors beyond taxes, such as lifestyle and climate, Portugal compares favorably to countries like Italy, which has a slightly lower tax rate of 26%,” said Santos.

Read more: How to Reduce Your Crypto Tax Liability: A Comprehensive Guide

The intricacies of Portugal’s crypto tax law extend to different categories of activities. Santos highlighted the nuances of Category G, B, and E taxation tiers. He explained how Portuguese law taxes activities such as trading, mining, staking, or providing liquidity differently.

These distinctions are crucial for individuals and businesses to understand for accurate crypto tax compliance.

• Category G – Capital Gains for Crypto Token Sales: Under Article 10 of Portuguese tax law, the sale of crypto assets that do not fall under the category of securities is considered capital gains. Any profits generated from selling these assets are subject to taxation. Capital gains taxation is a common approach in many jurisdictions, and it is essential to account for this when dealing with cryptocurrency transactions.
• Category B – Professional Activity: Crypto Mining and Validation: For individuals engaged in crypto mining and validating transactions on the blockchain, Portuguese tax law categorizes these activities as professional. This categorization means that income generated from mining and validation can be subject to taxation like any other professional activity. It is worth noting that the tax rate on personal income can reach as high as 53% in certain cases, making it crucial for miners and validators to manage their tax obligations carefully.
• Category E – Capital Yields: Staking, Lending, and Liquidity Provision: Category E of Portuguese tax law deals with capital yields, including activities like staking, lending, and providing liquidity in liquidity pools. Capital income is defined as any economic advantages derived from various assets, whether monetary or kind. This category encompasses a wide range of financial activities, and the taxation of these yields generally occurs when you decide to sell the tokens you have received.

Portugal’s tax law also opens the door to a strategy known as tax-loss harvesting in crypto. It allows individuals to leverage their crypto losses for future gains.

Santos emphasized the advantage of offsetting tax due on cryptocurrency gains with losses incurred from other investments, a feature that enhances the overall tax position of crypto investors.

“If you choose to be taxed at the general tax rates in Portugal, you can carry forward losses for up to five years. This means that if you’re in a situation where your cryptocurrency gains are substantial, you can strategically apply your losses over several years to minimize your tax burden,” Santos added.

NFT Tax and Crypto Donation Deductions

Portugal also has carved a clear and advantageous stance, exempting NFTs from taxation when traded by individuals. However, Santos pointed out the complexity that arises when NFT transactions involve cryptocurrency tokens.

For instance, an individual purchases an NFT using cryptos. Over time, the value of the underlying crypto increases, leading to a capital gain when the NFT sale occurs. Herein arises a critical question. “Should this gain be subject to taxation, even if the NFT’s intrinsic value has remained unchanged?”

Santos underscored the need for clarity in the tax treatment of such transactions.

“These scenarios raise questions about when and how to tax gains in NFT-crypto interactions. The clarity surrounding these matters will, to a large extent, depend on how tax authorities choose to interpret and address these complex interactions. For this reason, individuals and businesses engaged in NFT transactions should remain vigilant about regulatory developments in this space,” Santos emphasized.

Read more: Play to Earn: Is It Taxable?

Regarding cryptocurrency donations, Santos explained that while they incur a Stamp Duty of 10% in Portugal, exemptions exist for donations made within specific familial relationships. Furthermore, he delved into commissions charged by crypto service providers, shedding light on the 4% commission levied on transactions facilitated by such intermediaries.

“This 4% commission follows specific applicability criteria,” Santos said. He noted its relevance when entities with established headquarters, effective management, or permanent establishment within the national territory of Portugal hold the deposited cryptocurrency assets.

Moreover, this commission framework extends its reach to encompass cases involving national and foreign crypto asset service providers. These must maintain a “domicile, residence, headquarters, effective management, branch, subsidiary, or permanent establishment within the national territory.”

Staying Compliant With Crypto Taxes

Registration and compliance for cryptocurrency businesses in Portugal are robust. Outlined processes mandate adherence to Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations.

Santos elucidated the categories of entities and individuals subject to registration. Subsequently emphasizing the relative straightforwardness of Portugal’s registration process compared to other European nations.

• Companies Providing Exchange Services: Businesses engaged in facilitating the exchange of virtual assets or cryptocurrencies for fiat currency and vice versa fall within this category.
• Companies Providing Cryptocurrency Exchange Services: Entities providing services for the exchange of one or more virtual assets or cryptocurrencies are also covered.
• Companies Facilitating Virtual Asset Transfers: Those providing services to move and transfer virtual assets or cryptocurrencies from one virtual address or wallet to another (referred to as “transfer of virtual assets”) are subject to registration.
• Companies Managing or Safeguarding Virtual Assets: Entities that manage or safeguard virtual assets or instruments controlling, detaining, saving, or transferring such assets, including private crypto keys, must also adhere to these regulations.

Discussing the implications of the registration process with the Banco de Portugal, Santos highlighted the meticulous approach required for regulatory compliance. He pointed out that, as of now, eleven entities based in Portugal have successfully completed the registration process. Still, none of the major crypto exchanges have secured registration status.

“One of the hallmarks of the registration process is the extensive list of documents that must be furnished. Notably, crypto businesses must demonstrate the provenance of all funds utilized in their operations, ensuring they conform to legal and regulatory requirements. More importantly, all documents must be prepared in Portuguese, emphasizing the commitment to compliance with the regulatory framework,” Santos added.

Read more: The Ultimate Crypto Tax Guide for 2023

Looking ahead, Santos anticipated a harmonization of legal rules in various areas. These include new crypto tax data sharing laws, DAC8 regulations, and Markets in Crypto-Assets Regulation (MiCA). He also mentioned the forthcoming amendments and new regulations that the crypto community should know.

Santos concluded with personal insights on how Portugal can solidify its position as a crypto-friendly and tax-advantageous European country. He advocated for stability, clarity in taxation rules, simplicity in reporting, and streamlined regulations. More importantly, marketing Portugal as a crypto-friendly destination to attract international investors and businesses.

“As a Portuguese Tax Lawyer, I emphasize that simplicity in reporting is a fundamental aspect in maintaining Portugal’s strong position as a crypto-friendly country. Avoiding the requirement for taxpayers to report every single transaction is essential. The feedback I’ve received has consistently highlighted that, in addition to lower tax rates,” Santos concluded.