Buying and selling virtual currencies:investor's personal income tax liability

Individuals, taxpayers of IRPF, can buy and sell virtual currencies and when these transactions are not carried out in the context of an economic activity they can give rise to a capital gain or loss for the difference between the transfer value and the acquisition value.

Depending on the type of transaction, the following scenarios can be distinguished:

(a) Exchange of virtual currencies for legal tender (fiat currency)

Regulations:(Arts.35, 14 and 46.b) Personal Income Tax Law

Subject

In accordance with Article 1.6.of Law 10/2010 of 28 April 2010 on the prevention of money laundering and terrorist financing shall mean "exchange of virtual currency for fiat currency" the purchase and sale of virtual currencies through the delivery or receipt of euros or any other foreign currency that is legal tender or electronic money accepted as a means of payment in the country where it was issued.

Capital gain or loss

The sale of virtual currencies in exchange for euros or other legal tender, carried out outside an economic activity, will give rise to a capital gain or loss, the amount of which will be determined by the difference between the respective transfer and acquisition values .

All expenses arising from the carrying out of such transactions shall be computable for determining the respective acquisition and transfer values in the manner provided for in Article 35 of the Personal Income Tax Act, provided that they are directly related to the transactions and are paid by the taxpayer.

Identification of the coins transmitted

For the purposes of determining the corresponding capital gain or loss and insofar as the Law of IRPF does not establish a different specific rule to identify, in the case of homogeneous virtual currencies (e.g. bitcoin), those that are deemed to be transferred, it should be considered that in the event of partial sales of virtual currencies that have been acquired at different times and at different values, those that are transferred are those acquired first (FIFO criterion).

Temporary imputation of capital gain or loss

In accordance with Article 14 of the Personal Income Tax Law, this will occur when the virtual coins are delivered by the taxpayer under the purchase contract, regardless of when the sale price is received, and the capital gain or loss will therefore be attributed to the tax period in which the delivery is made.

Income class

The amount of capital gains or losses arising from the transfer of virtual currencies in exchange for money constitutes savings income in accordance with the provisions of Article 46.b) of the Personal Income Tax Act and are included and offset in the savings tax base in the manner and within the limits established in Article 49 of the same Act.

Transactions involving the sale of virtual currencies in exchange for euros carried out outside an economic activity must be included in the personal income tax return corresponding to the tax period in which these transactions were carried out in the section "Capital gains and losses derived from transfers of other assets", entering in the box [1626] the code 0, which corresponds to "Virtual currencies".

(b) Exchange of one virtual currency for a different virtual currency

Regulations:(Arts.37.1.h), 14 and 46.b) Ley IRPF

Delimitation

The exchange of a virtual currency for a different virtual currency constitutes, insofar as they are different goods, an exchange, in accordance with the definition contained in Article 1.538 of the Civil Code, which provides:"Swap is a contract by which each of the contracting parties undertakes to give one thing in order to receive another".

Capital gain or loss

Such an exchange, when carried out outside of an economic activity, results in a change in the composition of assets, as an amount of one virtual currency is replaced by an amount of a different virtual currency, and this change in the value of assets is reflected in the value of the virtual currency being acquired in relation to the value at which the virtual currency being exchanged was obtained.

Consequently, the exchange between different virtual currencies by a taxpayer outside of an economic activity gives rise to income which is classified as a capital gain or loss.

To quantify the capital gain or loss the specific valuation rule for swaps provided for in Article 37.1.h) of the Personal Income Tax Act is applied, according to which the capital gain or loss is determined by the difference between the acquisition value of the virtual currency that is given and the higher of the following two:

• The market value of the delivered virtual currency.

• The market value of the good or right received in exchange.

For the purposes of subsequent transfers, the acquisition value of the virtual currencies obtained in exchange shall be the value taken into account by the taxpayer by application of the rule provided for in the aforementioned Article 37.1.h) as the transfer value in that exchange.

As regards the market value of the virtual currencies being exchanged, it is that which would correspond to the price agreed for their sale between independent parties at the time of the exchange.

Temporary imputation of the gain

This imputation will take place, in accordance with Article 14 of the Law of IRPF, at the moment when the virtual currencies are exchanged.

The loss of assets that may arise from an exchange between different virtual currencies must be established (at the request, where appropriate, of the tax administration and inspection bodies) by means of the means of proof generally accepted in law.

Income class

The amount of capital gains or losses from transactions involving swaps between different virtual currencies constitutes savings income in accordance with Article 46.b) of the Personal Income Tax Act and are included and offset in the savings tax base in the manner and within the limits established in Article 49 of the same Act:

Exchange transactions between virtual currencies carried out outside an economic activity must be included in the personal income tax return corresponding to the tax period in which these transactions have been carried out, which, where applicable, the taxpayer must file in the section "Capital gains and losses derived from transfers of other assets and liabilities", entering in the box [1626] the code 0, which corresponds to "Virtual currencies".

c) Losses of assets.Complaint for non-return of deposited coins or bankruptcy of the virtual currency trading platform.

Regulations:(Arts.14.2.k) and 45 Ley IRPF

In these cases, the amount of a credit not repaid on maturity does not automatically constitute a capital loss, as the creditor maintains his right to the credit, and must resort to the special rule of temporary imputation provided for in Article 14.2.k) of the Law of IRPF for these cases of uncollected credits.

Temporary imputation of the loss

According to Article 14.2.k) of the Law of IRPF, capital losses arising from overdue and uncollected credits may be attributed to the tax period in which any of the following circumstances apply:

1. The effectiveness of a debt reduction established in a judicially homologated refinancing agreement referred to in Article 71 bis and the fourth additional provision of Law 22/2003, of 9 July, on Insolvency, or in an out-of-court payment agreement referred to in Title X of the same Law.

2. That, in the event of the debtor in a competitive situation, the agreement in which a removal of the amount of the credit is agreed becomes effective in accordance with the provisions of Article 133 of Law 22/2003, of 9 July, Branch, in which case the loss shall be counted for the amount of the removal.

   Otherwise, that the insolvency proceedings end without the credit having been paid, except when it is agreed to terminate the insolvency proceedings for the reasons referred to in sections 1, 4 and 5 of Article 176 of Law 22/2003, of 9 July, on Insolvency Proceedings.

3. That the one-year period is fulfilled from the beginning of the judicial proceeding different from any insolvency proceedings whose aim is to enforce the unpaid credit.

Where the claim is recovered after the computation of the capital loss referred to in this point (k), a capital gain shall be recognised for the amount recovered in the tax period in which the recovery occurs.

Income class

As it is a capital loss that has not been revealed on the occasion of the transfer of assets, it will form part of the general income , and must be included in the general taxable base of the IRPF (articles 45 and 48 of the IRPF Law).