Interest in cryptocurrencies and crypto-assets has
literally exploded worldwide over the last few years.
The reason they
have become so attractive is that they serve a
multitude of purposes: from being a
cutting-edge payment method to acting as an alternative (and rather unregulated) means of speculating. The
skyrocketing value reached from the second half of 2017 to 2018 by the main
cryptocurrencies (when Bitcoin was worth approximately 20,000 USD) was indeed a
key factor, supported, among others, by the ground-breaking decision of the
Chicago stock exchange to allow trading of futures
Bitcoin (the first
cryptocurrency, created in 2009) was originally conceived as “an electronic payment system based on cryptographic proof instead of
trust, allowing any two willing parties to transact directly with each other
without the need for a trusted third party” (S. Nakamoto – White
Paper). After almost ten years,
crypto-assets, still independent from governments and central banks, can make
it possible to handle substantial sums in a rapid, anonymous and almost free
As of today, several types of crypto-assets exist: (i)
payment/exchange/currency tokens (such as Bitcoin and Ethereum), (ii)
investment tokens (generally used in initial coin offerings) and (iii) utility
tokens (which enable access to specific products or services). Inevitably, the
widespread distribution of such assets boosted an area of business, constantly
developing, of various service providers directly involved in the trading of
crypto-assets and in the distribution of goods and services paid with
Nonetheless, the crypto-asset phenomenon and its revolutionary technology (so-called blockchain, which is a type of distributed ledger technology) are perceived as a potential threat to monetary sovereignty: accordingly, in the European Union, the attention of central institutions towards crypto-assets has grown substantially. In effect, the latest reports from the European Banking Authority and the European Securities and Markets authorities highlight the potential risks about consumer protection, operational resilience and market integrity along with concerns about tax evasion, fraud and money laundering.
These comments notwithstanding, several jurisdictions have started to deal with crypto-assets in a reasonable manner, qualifying them as private money or foreign currency, although the same are not recognised in any EU member State or by the European Central Bank as fiat money (i.e. value designated as legal tender, typically in the form of notes or coins).
Although 2018 and 2019 registered a substantial loss of value of the
major cryptocurrencies (confirming their high volatility), there are rumours
that giants of finance and of big data companies are ready to implement blockchain-based
internal payment systems for their clients (such as JP Morgan, Facebook and Telegram
– Il Sole 24 Ore, 4 April 2019). This
keeps crypto-assets fixed in the attention of investors and experts.
EU and non-EU State’s authorities and regulators are not overlooking the
risks and the opportunities of this global phenomenon. As concerns the Italian
experience, absent comprehensive legislation, there are already guidelines on
taxation of crypto-assets and specific provisions on anti-money laundering.
Italian taxation of cryptocurrencies: new risks and opportunities
Private investors were able to derive impressive gains from the trading
of crypto-assets across 2017 and 2018 (and for the same reason, dreadful losses
across 2018 and 2019). All of this thanks to an environment counting more than
200 trading platforms operating globally (ESMA
report 2019) allowing users to quickly upload cryptocurrencies from their
physical wallets (e.g. hardware or paper wallet) or mobile / online wallets and
carry out thousands of transactions a year (with minimum service fees). Transactions
range from simple cryptocurrency-to-cryptocurrency or
exchanges (pairs) to derivative-like transaction (margin trading) and token trades.
All of this is already known and partly
understood by the Italian tax authorities, which from 2016 was asked by several
taxpayers (mostly individuals) to issue rulings on the most appropriate tax
treatment of incomes deriving from cryptocurrencies. On such occasions, the tax
authorities reached the conclusion that cryptocurrencies are to be deemed as akin
to foreign currency (going further than the findings of the first decision
of the European Court of Justice on this subject – case no. C-264/14 “Hedqvist” based on which “it is common ground that the
‘bitcoin’ virtual currency has no other purpose than to be a means of payment
and that it is accepted for that purpose by certain operators“). Accordingly, in the tax authorities’ view:
- proceeds arising from “speculative”
exchanges between cryptocurrencies or from cryptocurrencies to fiat currencies or should be subject to
the standard rules applicable to income arising from trades of foreign fiat currencies (i.e. subject to a flat
26% substitutive tax for Italian resident individuals / non-commercial entities
and to the standard corporate income tax for Italian resident / established entities);
similar rules apply to proceeds arising from trades of utility tokens;
- the “market value” of
cryptocurrencies is to be annually reported as if the same assets are held
abroad by Italian resident individuals / non-commercial entities (the omission
is potentially subject to a penalty ranging from 3% to 15%);
- certain cryptocurrency exchange
services should be exempt from Italian VAT (as for standard services relating
to foreign currencies).
criticize the approach of the Italian authorities’ as its results are highly
inconsistent with the key features and the inner nature of cryptocurrencies. In
effect, Italian standard tax rules applicable to fiat currency are not fit for cryptocurrencies, which are extremely
volatile, far from being generally accepted as means of payment and often hard
to convert to fiat currency (due to
the money laundering concerns shared by the vast majority of the financial
institutions). Eventually this could result in a burdensome taxation on an
accrual basis rather than on a cash basis (as it is instead for fiat currencies).
reporting duties generally applicable to (financial) assets held abroad are in
contrast with the nature of crypto-assets, which are everywhere and nowhere.
and Italy’s new residents regime
such issues, looking at the Italian tax authorities’ approach from a different
angle, some potential planning opportunities may arise. In fact, if crypto-assets
are akin to foreign investments / assets held abroad for the Italian tax
authorities, then gains arising from the latter should be deemed as sourced
abroad in certain cases. If this holds true, new residents relocated to Italy
under the so called “new residents tax regime” could benefit from a full
exemption from Italian income tax on such gains and related reporting duties.
In effect, since 2017
Italy has applied a new territorial system of taxation aimed at attracting high
net worth individuals, including successful individuals in the sports, arts,
and fashion and design sectors, who could be interested in moving to Italy to
take part in these thriving sectors. In a nutshell, under this regime, Italian-source
income and gains are taxable in the usual way while (i) foreign income and
gains are sheltered from Italian tax and (ii) foreign assets are neither
subject to the standard reporting duties not to Italian inheritance and gift
tax (as well as to property taxes). Moreover, no remittance taxation mechanisms
apply. The main conditions to benefit from this regime are that the new
resident (i) has not been Italian tax resident for the last 9 out of 10 years
(before the relocation to Italy) and (ii) pays an annual charge of €100,000
(which can be increased by €25,000 per each family member relocating with him
to Italy under the regime).
It is worthwhile
mentioning that the “new residents tax regime” does not provide
shelter from the international automatic exchange of information (i.e. the so
called Common Reporting Standard (CRS) as well as FATCA with the US). Although
crypto-assets are still a rather uncharted territory in terms of CRS and FATCA,
as anticipated States and financial institutions have started to take adequate
measures to increase the level of monitoring of this phenomenon for tackling
the misuse of crypto-assets in illegal transactions.
regulations: the first stronghold against misuse of crypto-assets
developments on anti-money laundering (AML) procedures of banks and financial
institution are indeed the first answer to the need of tracking cryptocurrency
transactions movements on a global scale. At the EU level, the fifth AML
Directive (EU 2018/843) extends the AML reporting duties to cryptocurrency
exchangers and service providers. Italy promptly implemented such EU rules and
accordingly cryptocurrency exchanges and service providers are subject to the standard
customer due diligence and related
reporting duties on suspicious transactions. Moreover, the Italian Ministry of
Finance is considering establishing a special registry to collect information from
the market for cryptocurrencies in Italy.
Consequently, it is clear that holders of crypto-assets should pay particular
attention to the importance of keeping adequate evidence not only of their
initial investments but also (and more importantly) of their trading activities
over the years. This should prevent technical complications and costly delays
(considering how volatile cryptocurrencies are) for quickly liquidating
investments (in fiat currencies) and
maximising gains through banks and financial institutions.
The legal treatment of cryptocurrencies is still a developing area and, as
such, is still subject to different approaches. In fact, while EU institutions
are trying to regulate cryptocurrencies in a specific way, national authorities
tend to apply existing principles regarding currencies or financial products.
Since Italy still lacks an organic legal framework for crypto-currencies,
the Italian tax authorities currently apply the existing income tax and
reporting rules generally applicable to foreign currencies (seeking for a compromise between the different functions
of cryptocurrencies). Although, this approach has been met
by general criticism, it could
have inadvertently opened the door to planning opportunities under the
“new residents tax regime”.
Finally, AML regulations and the related due diligence procedures could represent another open challenge. In fact, given the specific nature of cryptocurrencies and crypto-assets, evidence of the legal source of the funds initially invested could be difficult to collect, especially if the taxpayer has been in the crypto-market since before the introduction of these regulations.
About the author: Giorgio Vaselli is a Special Counsel in Withers’ private client and tax team in Milan. He focuses on various aspects of domestic and international taxation, with particular regard to corporate clients, investment funds, real estate and trusts. Giorgio’s clients include domestic and foreign corporations and individuals, luxury brands, sportsmen as well as managers of investment funds. In addition he has assisted domestic and foreign investment banks, private and listed companies, insurance companies, energy companies, foreign investment funds and Italian holding companies and their subsidiaries.
Flavio Paccagnella also contributed to the article.
Interested in hearing more in person? Find out more at the Blockchain Expo World Series, Global, Europe and North America.
The post Italy’s tax treatment of cryptocurrencies: The risks and opportunities appeared first on The Block.
Credit: Blockchain News