HomeBlockchainRegulationCryptocurrencies and the RW framework: unresolved issues in the Italian tax system

Cryptocurrencies and the RW framework: unresolved issues in the Italian tax system

One of the problems most felt by those who, having tax residence in Italy, operate with cryptocurrencies, is to understand whether or not it is necessary to fill in the RW framework.

Cryptocurrencies in the income tax return

Many people have doubts as to whether or not there is an obligation to compile, and under what conditions. And there are even more who in the past have not bothered to include cryptocurrencies in their tax return as foreign assets.

With the tax authorities seemingly allergic to cryptocurrencies, the legislature inactive, and the regulatory framework offering unclear guidance, it is only reasonable to worry. When searching for answers on popular websites or online tutorials, there is often inaccurate and equivocal information.

Unfortunately, it is not easy to put things in order, but let us at least try to establish some crucial points.

Cryptocurrencies and the RW framework: unresolved issues

Cryptocurrencies in the RW framework

The compilation of the RW framework is a fulfilment that follows from the application of the monitoring obligations regulated by DL 167/1990 and, in particular, by art. 4. Basically, natural persons, and other entities other than corporations (such as simple companies), if they hold or are even only beneficial owners of what the law defines as “investments abroad or foreign assets of a financial nature, likely to produce taxable income in Italy”, are required to declare them.

In the event that the foreign assets consist in particular of “deposits and bank accounts established abroad”, then, if the total amount reached during the tax period does not exceed the threshold of 15,000 euros, then there is no obligation to declare them.

And here the first questions arise: can the holding of cryptocurrencies be qualified as an “investment” or as an “activity of a financial nature”? And, assuming that it is, and that it is capable of generating “taxable income in Italy”, when it comes to cryptocurrencies and blockchain, can one really argue that this investment or financial activity is located abroad?

There are many arguments supporting the negative answer to each of these questions. However, the Italian tax authorities see it differently.

Cryptocurrencies as foreign currencies

First of all, in several practice documents (Resolution no. 72/E/2016 and answers to tax ruling 956-39/2018 , no. 903-47/2018), the Agenzia delle Entrate, in a nutshell, has stated that cryptocurrencies would have the ability to generate taxable income in Italy, as they should be assimilated to foreign currencies. This would trigger the ability of cryptocurrencies to generate taxable income.

With regard to the specific issue of the compilation of the RW framework, both in the answer to tax ruling no. 956-39/2018, as well as in the instructions for the compilation of the declarations of income earned in the years 2019 and 2020, the tax authorities clearly state that the holding of cryptocurrencies should be declared, without ifs and buts, in the RW framework.

Now, beyond the many questions as to whether or not it is correct to qualify cryptocurrencies as an investment or financial asset, as opposed to their nature as a means of payment, and also beyond the equally crucial question of whether or not cryptocurrencies have an intrinsic aptitude to generate taxable income, the tax authorities in all these documents that are supposed to explain to us how to behave with cryptocurrencies, fail to address another decisive issue: namely, assuming that cryptocurrencies can be considered an investment and/or financial activity capable of generating taxable income, whether and under what conditions they should be considered to have a “foreign” nature.

The aspect of territoriality (establishing whether a certain financial asset is located abroad or in Italy), on the one hand, is essential to establish whether or not the obligation to declare is triggered, and on the other hand, is almost intangible when it comes to blockchain technology. 

The solution given by several authors to this type of dilemma is linked to the physical location of the private key of the wallet: if held in Italy or by a person who is tax resident in Italy, there would be no obligation to submit the RW framework, if the private key held by a person who is a tax resident abroad, then the declaration obligation would be triggered.

Case law

In 2020, the Roman section of the Lazio Regional Administrative Court (TAR) also dealt with the matter, with a judgment (no. 1077/2020) in which it was supposed to rule on the legitimacy of the instructions for the compilation of the 2019 Unico form, for the part which provided precisely for the inclusion of cryptocurrencies in the RW framework.

However, the Administrative Law Judge did not do so, because he considered that the contested instructions, as they are called in jargon, were not of a procedural nature, but had a purely declaratory function. That is, they were not really able to affect the legal positions of taxpayers, and therefore there was no place for their appeal.

Unfortunately, the Regional Administrative Tribunal also avoided the issue of having to rule on the specific issue of territoriality (i.e., on the issue of private keys): in this regard, in a nutshell, it stated that this issue did not fall within its jurisdiction, because it pertains exclusively to the establishment of the tax relationship (i.e., within the jurisdiction of the Tax Court). Therefore, it implicitly stated that it will be for the tax court to determine whether the holding is domestic or foreign, if and when a dispute is raised and an issue is raised in this respect.

The issues, therefore, for the most part remain open and unresolved.

What to do

Faced with such a chaotic and incomplete framework, the prudential suggestion of accountants and tax advisors is to include cryptocurrencies in the RW framework of the declaration anyway. At the end of the day, it is a simple requirement that costs nothing. And if you remain below the thresholds for capital gains, you pay nothing.

A pragmatic and precautionary solution. Certainly understandable, to a certain extent. However, the absurdity of having to declare as foreign assets that in most cases can be radically excluded remains. And this only for the sake of peace of mind or, in any case, to make up for the shortcomings of a legal system that is unable to keep up with developments in the real world. 

And yet, even if only referring to the subject of territoriality, the question has already been addressed by the OECD, which in Article 4 of the Model Tax Convention on Income and on Capital (OECD Document of 21.11.2017) establishes that there should be no obligation to include cryptocurrencies in the fiscal monitoring whenever the resident individual has the availability of the private key.

Therefore, according to the OECD, if the taxpayer is resident for tax purposes in Italy and holds a wallet of which he has the private keys, he does not have to declare its contents in the RW framework. This obligation is instead triggered if the taxpayer makes use of foreign digital service providers. 

And the issues do not stop only at the issue of private keys. Take, for example, the provision that establishes a threshold of 15 thousand euros for foreign current accounts, above which the obligation to enter in the RW framework is triggered. If we talk about cryptocurrencies and the various types of wallets, then which of them can be considered in the same way as a current account? And if we are talking about the threshold of 15 thousand euro, in the absence of official lists, how can one establish with reasonable objectivity whether this threshold has been exceeded? There is no shortage of interpretations, but they are by no means necessarily the right ones.

There is still a long way to go to achieve an adequate level of clarity and balance in the framework of the rules on cryptocurrencies.

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).