In several previous articles in this column, we have had the opportunity to examine the text of the law analytically and outlined the main changes.
To this day, however, despite the newly introduced regulations, many are still wondering about various aspects of the relationship between their crypto-assets and the Italian tax authorities.
This is one of the reasons why, especially when doing frequent crypto-asset trading, it is always a good idea to be supported by professionals (lawyers or accountants) with specific expertise on the taxation of crypto assets, a subject dense with complexities and nuances that are often difficult to frame.
To support operators and users, the business and tax consulting firm AllCore S.p.A. has created a special division called Crypt&Co. (cryptandco.com), in which a team of professionals in the tax, legal and accounting fields is made available to clients to offer targeted services of this kind, related to the management and legal and tax implications of crypto assets.
It is precisely due to the fact that doubts about the tax aspects remain many, that today we review the most frequent questions that are asked by users and operators and try to provide a concise answer.
SUMMARY
- What are the main changes introduced by the budget law?
- What is meant by capital gains?
- Specifically, how is capital gain calculated?
- No tax up to 2000€: what is it?
- Do the rules of the budget law operate retroactively? For example, if I held cryptocurrencies in the past, if I did or did not cash out, if I declared or did not declare my holdings, what happens?
- If I pay for goods or services in crypto, what does that entail tax-wise?
- What happens tax-wise in case of inheritance?
- In the event that I buy crypto at €10,000 and donate when the value has risen to €20,000, how is the transaction taxed?
- How does the stamp duty on cryptocurrency work?
- How are NFTs framed on the tax side?
- What happens if I don’t declare and pay taxes?
- Is it possible to remunerate an employee in cryptocurrency? How does it work?
1. What are the main changes introduced with the budget regulation?
With the new budget law, first and foremost, reference is no longer made to the definition of virtual currencies (which the Internal Revenue Service previously referred to as part of its interpretive acts), but to the broader concept of crypto-assets.
The consequence is that the tax provisions introduced by the law may find application to a broader range of crypto assets than those that find use for the purpose of mere means of payment (i.e., as so-called bidirectional virtual currencies): thus, there is the possibility (or the risk) that the tax provisions may affect tokens of various kinds, including those NFTs that, while not having a function of a strictly monetary nature, could fall within the scope of application of these rules.
Another important change, is that the taxation on capital gains remains, along the same lines as previously identified by interpretation in the interpretative acts of the Internal Revenue Service (i.e., 26%), but with respect to that interpretation the mechanism that triggers the tax changes.
Prior to the enactment of the Budget Law (again according to the interpretation of the IRS) capital gains were considered taxable if during the tax year the taxpayer held cryptocurrencies with a countervalue exceeding […] euros, for at least seven business days in a row. Today this threshold is not relevant and instead the tax is triggered if the capital gains generated during the tax year exceeds 2,000 euros, regardless of the total amount of cryptocurrencies (or rather, crypto assets) held during the year.
2. What is meant by capital gains?
In principle, capital gain is the difference between the purchase value and the realizable value, from the sale or conversion, of crypto assets.
Commonly, capital gains are generated when you cash out (thus, conversion from crypto to fiat), however, by law all acts of disposition for consideration are qualified as equivalent to cash out. Thus, for example, if I purchase a good or service from a crypto-accepting operator, the associated countervalue of the transaction is equivalent to a form of cash out.
Prior to the enactment of the Finance Law, there was some doubt as to whether crypto transactions (example Bitcoin exchange for USDT) could generate capital gains or not. Today, the law stipulates that crypto-to-crypto exchange or conversion transactions, but which have the same characteristics and functions, do not result in capital gains, but are tax neutral.
It remains to be determined on a case-by-case basis whether or not it can actually be said that the exchanged crypto assets have the same characteristics and functions.
Which, given the generic wording of the provision, could be questioned in some cases.
3. Concretely, how to calculate capital gains?
According to the current interpretation, the so-called LIFO (Last In First Out) method is applied. This means that if I made several purchases during the year (e.g., I first purchased a certain number of cryptocurrencies at 9,000 euros and later, I purchased an identical amount at a purchase value of 10,000 euros), if I then resell that same number of cryptocurrencies for a consideration in FIAT (national currencies) of 15,000 euros, my capital gain will have to be calculated on the difference from the second purchase (10,000 euros) and not from the first (9,000 euros).
The capital gain, therefore, will be 5,000 euros and the tax rate will be applied on that amount.
So the capital gain calculation is always and still done on the last executed purchase value.
This mechanism, of course, gets complicated where you have a much longer and more complex history of transactions over time (because perhaps you have traded between crypto assets, and so on).
4. No tax up to €2,000: what is this all about?
As anticipated, the new taxation mechanism introduced with the finance bill only takes into account capital gains above €2,000. Essentially, it is a small no-tax area in which small crypto investors, as long as they obtain gains of up to 2,000 euros per year in capital gains, do not generate taxable income and are relieved of the relevant taxes.
This principle applies in the opposite direction to capital losses.
If these do not exceed the 2,000 euro threshold, they are irrelevant for tax purposes. Any excess capital losses generate a tax credit and can be offset during the year and up to 4 years thereafter against the taxpayer’s accrued income.
5. Do the Budget Law regulations operate retroactively? For example, if I held cryptocurrencies in the past, if I did or did not cash out, if I declared or did not declare the holding, what happens?
If I held cryptocurrencies in the past but did not cash out, I am not subject to capital gains tax.
However, the question arises as to whether the holding of crypto assets should be included in the declaration, for the purpose of so-called foreign asset monitoring (the famous RW form).
Although this is a questionable thesis, the guidance of the Italian Tax Agency (Agenzia delle Entrate) prior to the enactment of the Budget Law was that the holding of cryptocurrencies had to be included in the RW form always and in any case.
With the Budget Law, this generalized obligation was finally explicitly established.
The rule also stipulates that if for the past I have not declared the holding of cryptocurrencies in the RW form I have to amnesty the years in arrears with a 0.5% year on the assets held.
Furthermore, the law, again for the past, stipulates that if I cashed out, i.e., converted crypto to FIAT currency or purchased goods or services or even transferred these crypto assets to third parties (events all comparable to cashing out), and these transactions generated taxable capital gains, I will have to rectify my situation by paying 3.5% on the capital gains generated.
6. If I pay for goods or services in crypto, what does this entail on the tax side?
As mentioned above, transferring to a third party for payment of goods or services is one of the transactions for consideration that are assimilated to cash out. So it can generate capital gains even if I do not convert to FIAT currency.
This countervalue is what corresponds to the purchase value of the good or service, as long as it actually generates a capital gain.
So, for example, if I buy a Bitcoin for €15,000 and this Bitcoin over time comes to be worth €18,000 in countervalue, if I then use that Bitcoin to pay for the purchase of an asset worth €18,000, in that case I will have generated a capital gain of €3,000.
Keep in mind the issue of crypto-to-crypto conversion, which according to the new text of the law does not generate taxable capital gains as long as the crypto-assets exchanged or permutated with each other can be said to possess the same characteristics and functions.
7. What happens tax-wise in case of inheritance?
In case of inheritance, the purchase value must be declared within the inheritance deed.
The inheritance tax is calculated on this value, and this becomes the initial value. The proof of purchase cost in this case is the responsibility of the taxpayer and not the IRS.
So, for example, if I receive cryptocurrencies worth €5,000 in inheritance, I will have to prove and document the original purchase value paid by the person who bequeathed them to me.
If I fail to prove this original cost, an original value of zero is assumed and I risk having to pay taxes on the entire value.
It is important to keep in mind that the Finance Act offers the opportunity for a tax-freeing of the value of all crypto assets owned as of 1 January 2023 and paying 14% of their value over 3 years.
The same applies in the case of a donation, where the purchase cost incurred by the donor is taken as the basis for taxation.
8. In case I buy a certain amount of cryptocurrencies at €10,000 and I donate them when their value has risen to €20,000, is the transaction taxed?
No, the donation is not taxed, and the tax burden, even on a future capital gain, is on the person receiving in donation.
9. How does the stamp tax on cryptocurrencies work?
The Finance Act, in addition to the substitute tax on capital gains, imposes the payment of a stamp tax on all crypto assets held, equal to 2×1000 of the entire crypto assets held.
This is, in essence, a kind of wealth tax.
However, the application rules have not yet been defined by the Italian Tax Agency, but this does not detract from the fact that since the current tax year, you are also required to pay this particular tax.
10. How are NFTs framed in terms of taxation?
As mentioned earlier, the Finance Act adopts the definition of crypto-assets, which is broader than the notion of virtual currency previously considered by the Tax Agency for tax purposes, the definition of which is essentially contained in Legislative Decree 231/2007 (anti-money laundering law).
This new category, as it is defined, could actually include NFTs, which are simply tokens with the particular characteristic of non-fungibility.
This may be a problem, because the tax law seems to disregard the practical purpose of tokens.
In fact, an NFT can perform functions that can be very different, even though they are frequently used to embed works of art or other intellectual works (pieces of music, videos, etc.).
Which leads to the need to coordinate the tax regulations on crypto-assets with those on the tax treatment of works of art.
At present, the legislation shows a real gap on these specific assets.
In the absence of specific regulatory guidance, therefore, given that by default NFTs seem to be treated in the same way as cryptocurrencies or other crypto-assets, it is necessary to assess on a case-by-case basis and reconstruct a connection between the various regulations that are abstractly applicable.
11. What happens if I don’t declare and pay taxes?
At this point, the regulatory framework leaves no room for doubt: while prior to the entry into force, one could invoke reasons of objective uncertainty on the application of tax rules, and if necessary appeal to a legitimate expectation that could have come to the rescue at least on the front of the application of penalties and interest, today this possibility is excluded by the clear tenor of the recently adopted legislation.
This entails an unconditional obligation to declare income generated by crypto-asset transactions, bearing in mind that, when discussing large amounts, the risk is to incur penalties not only of a pecuniary and administrative nature, but also of a criminal nature.
In case that, due to the non-declaration of income (also as a result of possible non-declaration of capital gains), there is an evasion of more than €100,000 of a single tax and, at the same time, the total amount of assets evaded from taxation, including through the indication of non-existent passive elements, exceeds 10% of the total amount of assets indicated in the declaration, or, in any case exceeds the total threshold of two million, in these cases, the penalty stipulated is that of imprisonment from two years to four years and six months.
12. Is it possible to remunerate an employee in cryptocurrency? How does it work?
Paying an employee in cryptocurrencies is possible if the employee decides to accept them in payment. In this case, the paycheck is expressed in the currency having legal tender (thus in €) and the employee will be transferred the countervalue in cryptocurrency.
Tax deductions, of course, will be calculated on the € amount.
From the time of receipt, tax obligations related to holding and any capital gains will fall on the employee.
Thus, if he or she does not cash out, the employee will only be required to enter the holding of cryptocurrencies in the RW form of his or her tax return and to pay stamp duty for the years in which he or she maintains the holding.
If he/she then accrues taxable capital gains (i.e., in excess of €2,000), he/she will be responsible for declaring them and paying the relevant taxes.