The controversial tax treatment of crypto-assets in a globalized world is not a simple task, beginning with the divergence of concepts attributed to crypto-assets depending on the jurisdiction (intangible assets, virtual assets, digital currencies). However, the obligation to pay taxes is inherent as citizens of this world, since taxation on any increase in wealth is a common denominator in many countries.
The case of the United States regarding the divergence of concepts attributed to crypto-assets is demonstrative, because despite being within the same jurisdiction, they attribute four different natures to cryptocurrencies depending on the authority in charge: for FinCEN they are means of payment, for the IRS they are property, for the CFTC they are commodities, and for the SEC they are securities.
But speaking strictly of tax effects, the question is not whether one should pay taxes or not, nor at what moment the taxable event (income) is considered because the IRS has been clear: this happens when one has dominion and control to transfer, sell, exchange, or dispose of the cryptocurrency. Here the question is: How to tax income obtained through the wide catalog of transactions that can be carried out with crypto-assets? What is the tax nature of a crypto-asset?
To begin with, let’s highlight the elements that are traditionally used to determine tax obligations, but which differ with crypto-asset transactions:
1. Location — Where to tax? Crypto-assets break borders and are not limited to a specific territory, especially since their system is backed by distributed ledger technologies.
2. Subject matter to be taxed — What is being taxed? While it is true that intangible assets existed prior to the arrival of crypto-assets, it is no less true that with the arrival of crypto-assets, the dominance of digital and intangible assets has been exponential, as physical representation of things is not required in a digital world. The lack of an underlying physical object for crypto-assets is what sometimes fuels crypto-asset detractors to question: How can something that has no physical backing be worth so much?
3. Transaction actors — Who are the parties in the taxed transaction? Despite the prevalence of a bilateral relationship, it is often difficult to identify the other party due to two main factors: i) Some transactions are predetermined and executed by smart contracts, ii) crypto-assets were created to eliminate intermediaries and protect privacy; the nature of EOAs complicates the identification of involved parties because it does not reveal names.
The traditional tax regulatory design that helped determine taxes and took into consideration materialization, location, and intermediation is obsolete as a tool for determining taxes, faced with an ecosystem characterized by the absence of physical materiality, global and distributed markets that demand a reconstruction of the fiscal regulatory framework.
Undoubtedly, the creation and restructuring of a fiscal regulatory framework that contemplates the elements inherent to crypto-assets is needed, because there is no precise regulation for the tax treatment of crypto-assets, which generates a state of legal uncertainty for taxpayers who operate with crypto-assets.
The solution is to create ad hoc legislation for crypto-assets, not adapt crypto-assets to antiquated legislation with existing legal figures, because in the end there will be a disparity in practice, as happens in Mexico, where to prove the acquisition cost of the asset, a digital tax receipt via internet (CFDI) is required that must meet a series of requirements that are incompatible with crypto-assets, unlike the USA, where it is sufficient to determine the fair market value using any reasonable method.
The lack of a suitable instrument to verify the acquisition cost of crypto-assets can lead to a tax overload, which translates to taxing the total amount of the transaction and not just the gain or loss.
Arriving at the creation of special legislation for crypto-assets is a long road and a learning curve for legislators, since, on one hand, regulations have primarily dealt with issues of preventing money laundering and terrorism financing, and after more than fifteen years there is still a lack of clear and precise ordinances dealing with the tax treatment of crypto-assets. On the other hand, the constant association of cryptocurrencies only with illicit matters undermines the principle of technological neutrality, slows technological development, and takes us away from awareness about the impact of their scope of application. For these reasons, it is necessary for authorities to stop associating crypto-assets solely with illicit matters. After that, a balanced stance towards these emerging technologies can be adopted to understand both sides of the coin, not just one. At that point, we will continue towards a path of awareness of their impact, to then begin developing a regulatory framework grounded in reality and not an alternate reality.
The most recent legal framework regarding crypto-assets is MiCA (Markets in Crypto-Assets); however, it does not specifically address tax aspects, and even if it did, each EU country has the authority to decide on their direct taxes within their jurisdiction. For example, Malta, Portugal, and other European Union countries apply tax benefits to cryptocurrency service providers. Another legal instrument is DAC 8, which is the most current directive regarding tax cooperation, aimed at gathering more information about crypto-asset transactions and generating new obligations for crypto-asset service providers. In this context, it would be irrelevant whether the transactions were carried out in Spain or France; either way, movements made through exchanges will be reported.
In Spain, there are other control measures, such as informative declarations from taxpayers, with Model 172 Informative Declaration on Virtual Currency Balances, Model 173 Informative Declaration on Operations with Virtual Currencies, and Model 721 Informative Declaration on Virtual Currencies Located Abroad.
The tax consequences with crypto-assets will depend on the particular case, as there are multiple transactions with crypto-assets: Staking, Restaking, Trading, Swaps, Airdrops, Mining, to name a few.
Tax Consequences of Staking
In the midst of all this legal uncertainty regarding tax implications, the binding consultations issued by the General Directorate of Taxes of Spain and the IRS guides from the USA are very helpful for developing the tax consequences of Staking.
What is Staking?
According to consultation identified as V176622 of the General Directorate of Taxes of Spain, Staking is defined as:
a type of consensus mechanism for validating and creating blocks, alternative to mining, that is used in some blockchain networks and is known as “proof of stake” or participation test, or, more commonly, as “staking.”
In other words, and speaking specifically of Ethereum, instead of generating blocks through computational effort (proof of work), staking requires contributors who lock 32 ETH in software, to be randomly selected to validate the operability and functioning of transactions on the Ethereum network, and be rewarded with ETH.
Staking Modalities
Let’s specify the distinctions between the two staking modalities:
1. Validator Staker: when taking an active role in the blockchain network, being responsible for maintaining the necessary software for block validation, staking 32 ETH, directly participating in the validation process, and assuming slashing risks in case of incorrect validation.
2. Staking as an Investor: this modality implies passive participation where the investor is limited to locking crypto-assets, cedes their assets to a validator, receives returns based on the amount locked and the time of lockup, and does not directly participate in the validation process.
Tax Treatment?
The tax treatment will always depend on many factors, one of them being the jurisdiction; in this case, it focuses on the tax effects in Spain.
For the Spanish treasury, staking represents gross returns on movable capital obtained by the transfer to third parties of own capital satisfied in kind. In other words, if 32 ETH (own capital) is transferred to a third party and returns are obtained from that, it should be considered as such, since Article 25.2 of the LIRPF states: consideration of all types, whatever their denomination or nature, monetary or in kind, such as interest and any other form of remuneration agreed as compensation for such transfer.
Although in the first staking modality the question might arise: Is running a validator node considered an economic activity? This could change the tax treatment depending on the jurisdiction, but in Spain, to be an economic activity, there must be an organization on one’s own account of means of production and human resources or of one of both, and such organization must be carried out with the purpose of intervening in the production or distribution of goods or services. This case does not apply to staking because validation is carried out automatically, there is no organization on one’s own account to intervene in production, and it is not work that derives from a labor or statutory relationship; therefore, it should also be classified as gross returns on movable capital obtained by the transfer to third parties of own capital satisfied in kind.
Thank you for reading. Let’s create specialized legislation for crypto-assets instead of continuing to assimilate them with existing legal figures that are not aligned with all the characteristics of the extensive world of crypto-assets.