The Reality of Crypto-Assets: Tax Issues and Prospects Within the EU

Giacomo Benaglia Member of ELSA Bologna

As is typically the case with changes and novelties dictated by technology, in recent years the lawmakers and institutions have found themselves more and more often in the position of ‘chasing’ when pursuing an effective definition and potential regulation of such innovations and their very impact on society. A peculiar phenomenon that has gathered great relevance in today’s scenario is the Crypto-assets’ one, with steeply increasing numbers of actors involved, a market capitalisation of more than $2 trillion and more than 200 million users.1 Given the reached magnitude of the industry, this has indeed led numerous world countries to pursue regulations of crypto-related activities from a fiscal standpoint.2 While in constant evolution and characterised by differences and peculiarities we can broadly define crypto-assets as being based, as their name suggests, on cryptography, possessing the intangible nature of essentially computer codes. The peculiarity of the system they are based on, detached from the issuance of a central bank, allows at the same time anonymity and decentralisation, while simultaneously presenting the capacity to conduct

1 Bank of America, ‘BofA Global Research Launches Coverage of Digital Assets’ (4 October 2021) <https://newsroom.bankofamerica. com/content/newsroom/press-releases/2021/10/bofa-global-researchlaunches-coverage-of-digital-assets.html> accessed 17 October 2021 2 Kateryna Solodan, ‘Legal Regulation of Cryptocurrency Taxation in European Countries’, European Journal of Law and Public Administration 2019, Volume 6, Issue 1, pp. 65 < https://doi.org/10.18662/ eljpa/64> accessed 17 October 2021 highly secure transactions outside of the participation of banking institutions.3 Notwithstanding a great success and growing diffusion, crypto-assets have raised concerns under several profiles due to their very nature and characteristics, especially with regards to their pseudo-anonymity and global scope, leading to a substantial risk of no reporting of taxable income, tax evasion and revenue loss.4 Focusing on the EU scenario at the present state, the tax treatment of such assets appears to be very differentiated and fragmented from one state to another.5 For example in Germany cryptocurrencies’ gains are subject to income tax limited to the first year of holding rather than capital gain, which is considered a private asset; in Spain on the other hand cryptocurrencies are subject to personal income tax

3 Ibid (n 2) 4 Luisa Scarcella, ‘Exchange of Information on Crypto-Assets at the Dawn of DAC8’, Kluwer International Tax Blog (29 March 2021) <http://kluwertaxblog.com/2021/03/29/exchange-of-information-oncrypto-assets-at-the-dawn-of-dac8/> accessed 17 October 2021 5 Nana Ama Sarfo, ‘The EU’s Cryptoasset Tax Strategy Needs Coordination’ (2 August 2021) <https://www.forbes.com/sites/ taxnotes/2021/08/02/the-eus-cryptoasset-tax-strategy-needscoordination/?sh=636367cb2105> accessed 17 October 2021; Oliver R. Hoor, Marie Bentley, ‘Crypto Assets are Focus of Upcoming Exchange of Information—DAC8’ (15 March 2021) <https://news. bloombergtax.com/daily-tax-report-international/crypto-assets-arefocus-of-upcoming-exchange-of-information-dac8> accessed 17 October 2021

while capital gain tax applies to the realised profits.6 From what emerges from the PwC Annual Global Crypto Tax Report 2020 a wide variety of solutions can be also found globally in the categorisation of the assets or the kind of taxed activities throughout various jurisdictions, ranging from capital gain to VAT issues related to the use of payment tokens, from direct taxation on mining income to Initial Coin Offerings (ICOs), etc.7 Nevertheless, endeavours to provide a common regulatory framework at a European level towards different aspects of the growing industry have emerged during the last years. Indeed the Member States, as expressed in the Council Directive 2011/16/EU on administrative cooperation in the field of taxation ‘DAC’, have agreed to develop cooperation directed to granting the correct application of taxes to their taxpayers while at the same time contrasting tax fraud and evasion. Such objective, as enshrined in the Directive, is pointed towards the competent national authorities establishing all the necessary procedures and providing a proper structure and framework for the cooperation in the application of direct taxation.8 At the current state, however, despite the emendations that occurred through the years, the Directive, while requiring financial intermediaries to report to tax administrations and encouraging the exchange and circulation of information between states, still does not contain any specific obligation for the intermediaries to report crypto-assets nor e-money.9 Within this scenario, in November 2020 the Commission issued an Inception Impact Assessment with regards to an eventual future proposal for an EU Council Directive, aimed at the further emendation of the ‘DAC’, with the intent of expanding its application to crypto-assets and re-enforcing the whole framework of cooperation on the matter. At the current stage comments on the subject have been expressed by the Member States through questionnaires last June closing the 6 Capital.com Research Team, ‘Crypto taxes 2021: A guide to UK, US and European rules’ (14 October 2021) <https://capital. com/crypto-taxes-2021-a-guide-to-uk-us-and-european-rules> accessed 17 October 2021 7 PwC, ‘PwC Annual Global Crypto Tax Report 2020’ <https:// www.pwchk.com/en/research-and-insights/fintech/pwc-annualglobal-crypto-tax-report-2020.pdf> accessed 17 October 2021 8 Oliver R. Hoor, Marie Bentley, (n 7) 9 Ibid public consultation and the adoption by the Commission is currently planned for the third quarter of 2021.10 In the intention of the Commission the, at that stage amended, ‘DAC8’ would thus provide a crucial leap towards the provision to tax authorities of the information regarding taxpayers and their use of these assets, moving beyond the already applied anti-money laundering measures to the providers of crypto-related services.11 This, in as much as the automatic exchange of such data, would allow national competent authorities to effectively tax income or revenue sourcing for example from investments or payments operated through cryptocurrencies.12 The objective pursued by updating the Directive seems, in addition, particularly in line with the plan proposed by OECD to include crypto-assets among the financial assets subject to the automatic exchange of information and the Common Reporting Standard (CSR).13 Such exigencies and concerns have emerged beyond the European landscape, as clearly expressed by the OECD itself in a recent report from 2020 dealing with the taxation of virtual currencies, pointing out the necessity of improving transparency on the matter.14 In the described scenario, therefore, such measures pursuing an increase of protection against tax evasion, besides the clarity and coherence of the regulation of a phenomenon with global ramifications, appear to be, even in the European landscape, of growing importance, ensuring a potentially positive impact on economies and societies towards a more and more ‘digital era’.

10 Ibid; European Commission, ‘Tax fraud & evasion – strengthening rules on administrative cooperation and expanding the exchange of information’ <https://ec.europa.eu/info/law/better-regulation/have-your-say/ initiatives/12632-Tax-fraud-&-evasion-strengthening-rules-on-administrative-cooperation-and-expanding-the-exchange-of-information_en> accessed 17 October 2021 11 Oliver R. Hoor, Marie Bentley, (n 7) 12 Nana Ama Sarfo, (n 7). In addition to such measures needs to be also mentioned the Proposal for a Regulation by the EU Commission on MiCA (Markets in Crypto-Assets Regulation) which appears as stated in the document itself “in line with the Commission priorities to make Europe fit for the digital age and to build a future-ready economy that works for the people.” (Proposal for A Regulation of the European Parliament and of the Council 2020/0265(COD) of 24 September 2020 on Markets in Cryptoassets, and amending Directive (EU) 2019/1937), dealing for example with consumer protection and new licensing requirements and uniform rules for the providers of crypto-related services. See Capital.com Research Team, (n 5). Another potential key goal could also be represented by the formulation of an effective and comprehensive definition of crypto-assets, a matter that has still to this day appeared challenging. See Nana Ama Sarfo (n 7) 13 Luisa Scarcella, (n 4) 14 Ibid