Portugal is fast-becoming the number one country for anyone involved in crypto, especially long-term investors and traders.
Portugal is located on the Iberian Peninsula and is a member-state of the European Union (EU). It has about 10.2 million citizens, a Gross Domestic Product (GDP) of $358 billion (PPP) and features a very high Human Development Index of 0.85.
The road to this state of affairs was not an easy one, and recent actions in the country can trace back to the economic turbulence of the late 2000s. In order to understand what forced Portugal to innovate, we must first consider its economic situation during the past two decades.
While Portugal has had structural problems long before the 2007-2008 financial crisis, its domestic problems were magnified by that turbulent period of time. Its unemployment rate climbed slowly but steadily from around 3.8% in 2000 to around 16.2% in 2013.
Portugal was eventually unable to repay and or refinance its government debt. In April 2011, it applied for bail-out programs from the International Monetary Fund, the European Financial Stabilization Mechanism and the European Financial Stability Facility. In sum, it drew an accumulated $91 billion in financial aid, and eventually exited the bail-out programs in May 2014.
Overall, the 2011-2014 period resulted in an extensive exodus of young and educated citizens to northern European countries as well as a structural real estate crisis similar to the one that took place in Spain. More than 50,000 young and educated citizens a year left permanently between 2011 and 2014.
Thus, in order to revive its economy and to partially offset the loss of productive capital, Portugal passed a series of laws in a bid to become more attractive to foreign investors and expatriate professionals.
These laws are now having the desired effect, and are a great example of how a country can pick itself up from the ashes and thrive against the odds by supporting freedom and innovation.
Portugal is one of the few countries that is forward-looking and is encouraging the immigration of high net worth individuals, investors, and entrepreneurs. This will result in these people having a positive effect in the local economy by spending their money within Portugal. Not only that, they will bring new and bright ideas, and will start new businesses in the country.
See also: Lisbon vs Barcelona
This attitude is in stark contrast to the neighboring country, Spain, which has gone out of its way to punish local and foreign entrepreneurs who want to start new businesses and help the economy. It’s a real pity to see the political situation in Spain at the moment, but hopefully, the politicians will eventually see that the Portuguese model works better and switch course.
Tax Benefits on the Sale of Crypto in Portugal
The main reason for the enthusiasm about Portugal from people involved in the crypto space is that crypto earnings are tax-free in Portugal.
In a 2016 official ruling, the Portuguese Tax Authority analysed 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 BlockFi, 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.
There is no precedent, specific rules or particular approach regarding the treatment of cryptocurrencies for the purposes of estate planning and testamentary succession in Portugal.
Notwithstanding, certain aspects of estate planning and testamentary succession should be highlighted. Inheritance tax does not exist in Portugal, but stamp duty may apply to certain transfers of certain assets (e.g. immovable property, movable assets, securities and negotiable instruments, provided they are located, or deemed to be located, in Portugal) included in the deceased’s estate in case of succession.
However, in the absence of a legal amendment or binding information from the Portuguese tax authorities, it may be argued that the drafting of the relevant legal provisions does not expressly foresee assets such as cryptocurrencies, thus excluding the same from the scope of application of stamp duty, which de facto mitigates the need for estate planning with respect to cryptocurrencies. Estate planning and testamentary succession must therefore be analysed on a case-by-case basis, considering all variables involved.
In a 2019 official ruling, the Portuguese Tax Authority confirmed the precedent from the Court of Justice of the European Union (Case C-264/14, Skatteverket v. David Hedqvist) to argue that although cryptocurrencies such as Bitcoin were analogous to a “means of payment” and therefore subject to VAT, they were exempt by application of VAT exemption rules, which should be consistent across EU Member States considering existing VAT EU harmonisation.
Participating in the Portuguese Crypto Community
You can follow this Twitter list that features many of the big crypto players that are based in Portugal. Please let me know about other crypto players and communities in Portugal by leaving a comment below or by contacting me.
Hard Fork Cafe is a cool YouTube channel dedicated to crypto, although you need to understand Portuguese for that. It’s a good way to practice learning the language though if you want to hit two birds with one stone.