The main reason for the enthusiasm about Portugal from people involved in the crypto space is that until 2022, crypto earnings are tax-free in Portugal.
The current proposal for the 2023 budget includes an amendment that will ensure crypto trading gains will be taxed at 28%. However, crypto held for more than one year will not be taxed on disposal, which still means that Portugal is one of the best places to live in for crypto and NFT investors. The NHR program is also still firmly in place and can result in very attractive low to zero tax rates if the right structure is implemented.
Here’s the information on the pre-2023 situation which led to crypto gains for Portuguese residents being tax-free:
In a 2016 official ruling, the Portuguese Tax Authority analyzed the possible classification of cryptocurrencies within certain types of income that are subject to Portuguese tax, notably capital gains, capital income and income from business activities, and decided that, as a general rule, natural persons should not be taxed in respect of gains derived from the valuation or sale of cryptocurrencies, except that, in the case of sale of cryptocurrencies, if they correspond to the individual’s main recurrent activity, income obtained from such activity could be subject to Portuguese tax. It should also be noted that this was only a partial decision that did not elaborate on other types of income derived from other cryptocurrency-related activities (e.g. mining and farming activities).
Have a look at the 2016 binding information as it’s the most relevant document for crypto investors. The linked document is in Portuguese, but it consists of the Portuguese tax authority’s reply to a direct question about crypto taxation.
I’ll provide a basic interpretation (in my own words, not a word-for-word translation) for those of you who don’t understand Portuguese:
Cryptocurrencies or virtual currencies are not technically considered money due to not having legal tender in Portugal. However, they can be exchanged, with a resulting profit, for real currencies (euros, dollars, or other) at exchanges, with the prices being determined by the demand for said cryptocurrency.
Thus, cryptocurrencies can generate different types of taxable income:
- Gains obtained from the purchase and sale of virtual currency units/exchange from the cryptocurrency to real currency (whatever it may be)
- For obtaining commissions for the provision of services related to obtaining cryptocurrency.
- For gains derived from sales of products or services in cryptocurrency
This document only considers the first scenario. This is the scenario faced by most crypto investors.
The profits from this activity are candidates for three categories of income types:
- Capital Gains – category G (e.g. sale of an apartment, sale of shares)
- Capital Yields – category E (e.g. rent of an apartment, dividends)
- Professional Income – category B (e.g. consultancy, freelance work)
Article 10 of the IRS Code specifies the cases that are taxable as capital gains. The key thing to note here is that when the legislator created this law, they resorted to a closed type, meaning that the law is specifically for the items mentioned and nothing else. Since cryptocurrencies do not fall within the specific cases mentioned, and their value is merely determined by supply and demand, therefore we can conclude that they are not taxable within this category.
This category clearly does not apply to the sale of crypto assets since it relates to yields on capital e.g. dividends, rental income. On the other hand, I would note that the income derived from services such as YouHodler and other crypto interest accounts would probably fall in this category. The same goes for income from crypto staking e.g. Ethereum staking.
Here’s the tricky one. Category B relates to the income of a self-employed worker. When a type of income can be classified as of category B or any of the other two categories considered here, category B would prevail. So in this category income can be taxed whether it comes from sales, whether it is capital income, or any other nature, pursuant to paragraph 1 of article 3 of the IRS Code.
To determine whether the income falls into this category, one would need to consider its frequency and the orientation of the activity towards obtaining profits. If the existence of the exercise of a business or professional activity is verified, then the taxpayer is obliged to comply with the declarative obligations contained in paragraph 6 of article 3 of the Code of IRS, i.e. to issue an invoice or equivalent document (electronic invoice-receipt), whenever you sell some product or provide a service.
The reason I say that it’s a tricky one is that crypto traders need to consider carefully whether their activities would be considered professional income or not. Here I would suggest that if you’re in doubt you should consult a tax lawyer. The general rule worldwide is that if trading is your main source of income and you are opening and closing positions on a daily basis you would most likely classify as a professional trader and your income will fall in this category – therefore not being tax-free.
The conclusion of the document states clearly that the sale of cryptocurrencies is not taxable in Portugal unless due to its frequency it constitutes a professional or entrepreneurial activity, which would make it taxable under category B.
This latter point also results in a lot of questions about whether or not one would be classified as a professional trader.
There are several factors that determine whether one’s trading activity is professional or not. These include:
- Number of trades per day/week/month/year.
- Holding period of financial products
- Complexity of traded financial products
- Number of trading platforms used
- Debt-to-equity ratio, credit financing
- Profit level and relationship to other income
- Additional relevant trading activities (such as advice)
- Traders’ main activity (where else do you get your money from?)
The fact that one of the factors listed above applies to you does not automatically make you a professional trader. Ultimately one must look at every individual’s overall situation, and this can only be reliably done by involving a tax lawyer who will give you a written opinion.
In summary, cryptocurrencies in Portugal are only taxable if you do it as a professional trading activity and therefore you need to open an activity as a trader and pay taxes according to your profit, otherwise they are considered non-taxable in Portugal due being unable to fit in any category.
Note that the above is true for individuals but not for corporate entities. If you hold your crypto in a Portuguese company, all the gains from cryptocurrency trading are taxed together with any other profit the company had, irrespective of whether the company is engaged in trading or whether it held the crypto as a long-term investment.
Contact me if you need to speak to a tax lawyer who knows how to deal with crypto. It’s very important that you assess your individual case before making any decisions.
One should also keep in mind that the NHR program is really the main attraction for moving to Portugal from a tax perspective. In my article on European tax strategies I highlight some examples of how one might lower their overall level of tax liability by implementing structures spanning multiple countries.