All good things come to an end? Taxation of crypto assets in the draft State Budget Law for 2023

The Portuguese draft State Budget Law for 2023 (PLOE 2023), presented by the Government last October 10, brings about news regarding the taxation of crypto assets. Although still pending approval by the Parliament, the Government may comfortably rely on a same-party majority which will more likely than not give it the thumbs-up for the new tax framework.

The measures introduced are centered around the imposition of Personal Income Tax (PIT), at a 28% rate, on capital gains arising from the sale of crypto assets held for periods under 365 days, the qualification of income resulting from consensus mechanisms as business and/or professional activities generally subject to PIT at the progressive rates up to a maximum aggregate rate of 53% and the imposition of Stamp Tax, at a 10% rate, on free transfers of crypto assets derived by individuals domiciled in Portugal.

Until now, Portugal was misleadingly lauded as a tax haven for investments in crypto assets, offering a tax regime under which capital gains escaped taxation, except when, among other residual situations, it could be attributed to business and/or professional activities.

Due to the absence of any “legislative interference”, Portugal has had an effectively advantageous tax regime, which, together with other factors of attractiveness of the country, allowed it to “compete” with other jurisdictions, namely those in Eastern Europe, in a market recently created by “crypto expatriates”, with benefits for the economy and the assertion of Portugal as a country promoting digital entrepreneurship, new technologies and new businesses based on blockchain.

In terms of legislative policy, the significant changes brought by this draft State Budget Law follow legislative amendments proposed by a far-left party during the 2022 State Budget Law debate, aiming at ensuring the levy of PIT on capital gains derived from the sale and exchange of crypto-assets. Those amendments, which bear little resemblance in scale to those now included in PLOE 2023, were rejected on the grounds that, in December 2022, an international consensus was still yet to form on the definition of what are crypto assets and how best to tax them. At the European Union level, the creation of such consensus would depend primarily on the conclusion of the discussions of the Regulation of the European Parliament and of the Council on Markets in Crypto-assets (MiCA Regulation), presented for discussion in 2020.

Today, less than a year after the rejection of the legislative amendments proposed in December of 2021, one would hope that any amendments would follow the discussion, approval, entry into force, and subsequent application, in Portugal, of the innovative concepts brought by the MiCA Regulation.

However, it was only on October 5 (i.e., 5 days before the government presented PLOE 2023) that consensus was reached between EU Member States representatives in the Council on a final proposal of the MiCA Regulation to put-forward for discussion by the European Parliament. Having reached this stage, the MiCA Regulation is still pending discussion, approval, publication in the Official Journal of the European Union and an entry into force no sooner than 2024.

It is therefore clear that the measures included PLOE 2023 will precede by many months (perhaps years) any EU consensus, let alone a consolidated practice in the application of the MiCA Regulation in Portugal.

This will certainly have repercussions on the application of the rules regarding the taxation of crypto assets, since undetermined concepts not defined in the by Portuguese tax law (of which we find many in the rules of PLOE 2023) should be interpreted in accordance with their definitions in other fields of Portuguese law.

In the absence of such definitions, the Portuguese Tax Authorities will have no other alternative but to resort to the definitions of the MiCA Regulation still under discussion in the European Parliament (a solution of dubious democratic legitimacy) or, in an even worst scenario, to follow their own definitions in interpreting undetermined concepts such as “staking”, “mining” or “consensus mechanisms”, which are granted central stage in the rules introduced by the PLOE 2023.

In conclusion, PLOE 2023 approach to crypto assets taxation seems to be driven simply by the desire to obtain tax revenue and to counter the international and domestic image of Portugal as a “tax haven for crypto assets” (while taxation on the middle class and employment income becomes increasingly suffocating). Politics aside, Portugal bets on a crypto assets taxation regime that intends to tax almost everything but is centered on undetermined concepts for which there is still no consensus at the international level. In other words, we run the risk of damaging the international image of the country in an especially sensitive sector, only to be left with an ineffective or inoperative tax regime yielding little revenue.

It may be that all good things come to an end, but it is also true that good things come to those who wait…