From 1st January 2023, the Portuguese tax authorities introduced new rules applicable to Portuguese tax residents who own or trade cryptocurrencies. Tax treatments apply equally to all residents, including expats living in Portugal as Non-Habitual Residents, without any advantageous tax exemptions or allowances as enjoyed elsewhere.
One of the complexities is that crypto taxation will depend on the amount of time you have owned cryptocurrency assets and your tax residency position. Crypto tokens held in an overseas location or subject to tax in the UK might be treated differently.
While trading remains lawful, and there are no particular restrictions, it is essential investors and residents understand how the changes affect their tax obligations, particularly those who have previously benefited from tax-free crypto incomes.
We’ll summarise all of the most impactful tax reforms and compare the current crypto tax treatments applied to both Portuguese and British taxpayers.
Changes to Portuguese Tax Treatments of Crypto Assets
Crypto taxes in Portugal, from this year onwards, will differ for those who choose to trade and invest in crypto as part of their income, or as a hobby, and professional crypto miners or token validators who work within crypto as a career.
The tax rules are separated into categories as follows, although these regulations apply to private individuals declaring personal earnings rather than corporate entities.
- Gains arising following the transfer of crypto assets, excluding securities, will be treated as Category G earnings and taxed as capital gains. Tax relief applies in full to crypto that has been owned for over one year. Crypto held for less than one year and transferred in exchange for a payment made in another crypto token are also tax-exempt.
- Crypto mining incomes, or earnings from activities such as validating crypto tokens, are treated as commercial and taxed as Category B business incomes, with a taxable event arising when crypto assets are transferred as payment.
- Incomes resulting from crypto investments are taxed as Category E investment earnings. If returns are paid as crypto assets, the gain is taxed as a Category G capital gain instead.
Most crypto earnings that are taxable will be subject to the 28% flat rate capital gains tax, provided the assets have been owned for 365 days or more. This significant change will affect Portugal’s ‘crypto tax haven’ status due to a previous lack of any taxation applied to the crypto markets.
The Scope of Portuguese Crypto Taxation
The Portuguese government does not consider all crypto-based tokens and assets as cryptocurrency, with non-fungible tokens and unique crypto assets outside of the scope of the new regulations. Therefore, investors with NFTs within their portfolios or who collect rare or unusual crypto assets may not be exposed to any tax changes.
Furthermore, crypto investors with tokens in their portfolios which they have retained for above the 365-day threshold will not be exposed to a tax obligation, irrespective of how long those crypto tokens have been held in total.
Tax resident expats who intend to relocate or return to the UK should be conscious that if they choose to leave Portugal or live overseas for a proportion of the year, they may be classified as non-tax residents. This scenario may be treated as a disposal and therefore give rise to a capital gains crystallisation event for tax purposes.
EU Tax Rules on Crypto Gains and Trading
It may be useful to consider how tax treatments vary around the world while noting that the newly introduced Portuguese tax system mimics those in many other EU countries, whether already in place or in discussion. There are widespread efforts to regulate crypto trading and investment and apply more standardised taxation in line with other investment activities.
The European Commission announced a new agreement between EU Finance Ministers in May 2023, called the DAC8 rules (the Eighth Directive on Administrative Cooperation), which introduced transparency requirements for service providers throughout the EU offering trading services for residents.
DAC8 aims to ensure tax authorities in each member country have the disclosures necessary to monitor crypto asset trading, including cross-border trades, to apply an effective tax system to avoid lost revenues. The overarching intention is to ensure crypto products are taxed like any other financial asset or investment.
By December 2025, the EC expects to maintain a register of crypto operators, including those outside the EU that provide services to EU residents or businesses to move the agenda forward.
UK Crypto Taxation Regulations
The system in the UK is fairly similar to that in Portugal, where crypto is treated as an asset for tax purposes and is subject to capital gains or income tax, depending on the circumstances. Taxes are not applicable when holders buy, store or move crypto tokens between wallets or when an owner gifts crypto to a spouse or makes a charitable donation.
However, taxes may be applicable based on the amount of gains or profit earned, the length of time the holder has owned crypto, and the individual’s tax bracket.
- British taxpayers are subject to capital gains tax on gains made above the annual allowance. This was reduced from £12,300 to £6,000 in April 2023 and will drop again to £3,000 in April 2024.
- Basic rate taxpayers with a capital gain within the basic rate income band pay 10% on profits or 20% for gains above the threshold.
- Capital losses can be registered with HMRC and offset against gains made within the same tax period but must be reported within four years after the tax year ends.
- Crypto earnings classified as income will be taxable where the income is above the personal allowance, currently set at £12,570.
The correct tax treatment will rely on an assessment of the income – if transactions are part of a regular income, they will normally be subject to income tax. In contrast, gains made by selling crypto for a fiat currency, or profits from trading, will usually be exposed to capital gains tax.
For further information about how the changes to crypto taxation in Portugal may affect your tax liabilities or to discuss alternative investment options and the respective tax treatments, please get in touch with the Chase Buchanan Wealth Management team in Portugal at our Loulé offices.
*Information correct as of August 2023