Portugal: Personal income tax on cryptocurrencies: is the recent ruling a final take?

The taxation of income had been unclear since the recent boom in cryptocurrency trading. The new ruling has come to the delight of tax authorities.

The Portuguese tax authorities recently published Ruling 5717/2015 (ruling) covering the taxation of income derived from trading cryptocurrencies in Portugal, the taxation of which had been unclear since the recent boom in cryptocurrency trading.

Applying the 'schedular' system to categorise personal income tax (PIT) income from the sale of cryptocurrencies, the possibilities could be the following:

Business income category B – if derived as a continuing business activity performed on a regular basis (subject to generally applicable PIT progressive rates up to 48%);
Investment income category E – if considered as economic benefits arising from assets or rights, including derived from its transfer (subject to a flat rate of 28%); or
Capital gains category G – if derived from the sale of financial products as defined in Portuguese law (subject to a flat rate of 28%).

In the ruling, the Portuguese tax authorities took the position that:

The category G schedule contains a closed nomenclature list of the financial assets that give rise to capital gains (whenever disposed). As the list does not specifically include cryptocurrencies and such assets cannot be considered shares, derivatives or financial assets (valores mobiliários), the proceeds from the sale of cryptocurrencies do not qualify as capital gains;
The investment income category E aims to tax the "fruits or other economic benefits received directly or indirectly from the application of capital", including among other things, interest and dividends. Considering that the income in question arises from the sale of the cryptocurrency and not as an income generated from an asset, taxation under such investment income category would not apply; and
The business income category B is structured as covering any type of income arising from a reiterated business activity, undertaken towards obtaining business profits, and has priority as regards the above mentioned categories of income. Therefore, only if an individual trades in cryptocurrency within the concept of a business activity is the income derived from its sale taxable as business income.

The outcome of the ruling of non-taxation of this income has raised a debate in Portugal. The debate focuses on whether a change in the PIT would therefore be necessary to close this potential gap or whether the broad category E (investment income) should instead be 'reinterpreted' as a true residual taxable provision that seeks to tax any type of proceeds from the sale of assets, rights or legal positions, insofar as they do not qualify as capital gains under category G.

The ruling is clearly beneficial for taxpayers who dispose of cryptocurrencies (not as a business activity) but may prove short-lived, namely considering it only applies to the specific case presented to the tax authorities and is bound to trigger a reaction to close the gap. Nevertheless, beware as the ruling is unlikely to be the final take on cryptocurrencies in Portugal.