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BTC, El Salvador and Italian tax authorities

The news of El Salvador’s adoption of BTC as a legal tender caused a sensation. Few, however, have grasped some of the possible consequences in terms of tax obligations in Italy.

Bitcoin, cryptocurrencies and tax law

In order to better understand them, it is necessary to be clear about what is meant when one speaks of legal state currencies.

Technically, it is more correct to speak of “legal tender currencies”.

Their primary characteristic is that they are compulsorily accepted in that State, i.e., they have “forced circulation”.

A feature that cryptocurrencies ordinarily do not have.

Behind a legal tender currency, there is always a set of public authorities (central bank, ministry, etc.) that is responsible for issuing it. By supervising the circulation of that currency, they also seek to control and protect its value.

This second feature is also missing for cryptocurrencies: there is no public authority that performs any of these functions.

The determination and maintenance of the value of a cryptocurrency is left to consensus and free negotiation between private individuals, i.e. the market. The market is composed of all those individuals who, just as freely, decide to exchange that cryptocurrency.

Why would all this have consequences for the application of Italian tax law and the obligations of taxpayers?

Because of a very questionable interpretation that the Italian tax authorities have been upholding for some years.

The Italian “Agenzia delle Entrate” maintains that, in case of capital gains obtained from bitcoin or other cryptocurrencies, income taxes should be paid on these gains.

Taxes on Bitcoin

Taxation, cryptocurrencies and the Court of Justice

The tax authorities arrive at this conclusion on the basis of a fundamental assumption, namely, that cryptocurrencies should be treated in the same way as foreign currencies. 

This reasoning has no basis in a particular law but has been formalized in two interpretative documents: the resolution of the Direz. Centr. AdE resolution 72/E/2016 and the answer to query no. 956-39/2018 of the Direz. Reg. Lombardia.

Many interpreters and operators tend to follow these two documents.

However, the reasoning presents a number of critical issues. For example, the equation between a bank account and a wallet is technically impractical in most cases.

And since there are no official lists or rates, figuring out the value of the cryptocurrencies held by the taxpayer, and thus establishing whether or not tax thresholds have been exceeded, is a real lottery. If we are talking about cryptocurrencies other than Bitcoin, Ethereum and other superstars of the crypto world, the matter is even more complicated.

Having said that, the argument of the tax authorities is strongly opposed by very authoritative authors and jurists, mainly because it has an extremely obvious point of fall: namely, that cryptocurrencies cannot be assimilated to foreign currencies.

The EU Court of Justice with a crucial judgment, which by now anyone who deals with cryptocurrencies is familiar with (the Hedqvist judgment, in case C-264/14, of 22.10.2015) has clearly stated that cryptocurrencies are not and cannot be assimilated to state currencies, having legal tender.

Bitcoin and capital gains

The moment bitcoin is adopted as official and legal tender in a foreign country, it is inevitable that some of the already few certainties will waver.

It now becomes more difficult to argue that it cannot be treated as a foreign currency for tax purposes and therefore, that capital gains do not attract income tax.

Simplifying the reasoning too much, however, does not always work in the world of law.

Labelling bitcoin as a state currency and arguing that the same taxes should be paid on its gains as would be paid on those from dollar or sterling transactions sounds like a stretch.

It is true that bitcoin in El Salvador must be compulsorily accepted as legal tender, unlike anywhere else, where no one is obliged to accept bitcoin as a means of payment.

However, a currency is considered legal tender not only because it is forced, but also because there is a public authority that, on behalf of the issuing state, guarantees its countervalue and prevents uncontrolled fluctuations.

This is because the wealth of the state issuing the currency actually creates a guarantee on the debt generated by its issuance.

BTC tax
Crypto are stores of value

Cryptocurrencies as a store of value

This determines the particular aptitude, typical of a state currency, to act as a store of value. Thus, the price of an “official” currency may vary over time in the various markets, but in most cases, it will maintain a relatively stable value over time. 

This characteristic is completely lacking in cryptocurrencies, whose volatility is proverbial. And it is for this very reason that many lawyers and economists deny that cryptocurrencies have the aptitude to act as a store of value.

To this, we must add the fact that El Salvador is a country that has chosen not to mint currency and does not have its own official currency. It “relies” on the US dollar, which circulates in the country as legal tender, but without any kind of control or influence on monetary policies.

This is no different from the adoption of bitcoin as an official currency: the Central American state has no control, oversight or influence over the circulation of cryptocurrency globally. And the status of legal tender, in fact, has a purely internal relevance.

Bitcoin and forced legal tender

Thus, the point is that since bitcoin does not share almost any of its fundamental characteristics with a legal tender, it does not justify its equivalence outside Salvadoran borders.

Nor does the fact that bitcoin is recognized as legal tender seem decisive because this characteristic is essentially local in scope, in a small economic system far from the area of the financial interest of Italy.

In essence, bitcoin and foreign currencies remain structurally very distant assets.

Therefore, the thesis that denies the possibility that capital gains originating from the exchange of bitcoin are subject to taxation remains standing in exactly the terms in which it was originally argued.

But one thing must be acknowledged: the case of El Salvador is not the end of the story. And it cannot be ruled out that it could extend: Panama is said to be ready to take the same step.

If the critical mass of countries opting for the adoption of bitcoin as legal tender were to increase significantly, many paradigms so far accepted would have to be reconsidered.




Luciano Quarta - The Crypto Lawyer
Luciano Quarta - The Crypto Lawyer
Luciano Quarta, tax lawyer in Milan, managing partner and founder of the tax law firm QRM&P, has published extensively on the legal and tax aspects of legal tech, artificial intelligence and cryptocurrencies. A speaker at numerous conferences on the subject, he writes the column "Tax & the city" for the daily newspaper "La Verità" and regularly writes for the Economy and Taxes section of "Panorama". He is a member of the Tax Justice Commission of the Milan Bar Association and is the contact person of the Milan office of the interdisciplinary association for the study and application of artificial intelligence GP4AI (Global Professionals for Artificial Intelligence).