The tax treatment of crypto mining according to the Italian Internal Revenue Service

In its response to interpello No. 508/2022 a few days ago, the Italian tax authorities intervened on the tax treatment of crypto mining income, both for VAT and direct tax purposes, and provided its interpretation.

In the crypto sphere, mining has until now been one of the least considered activities. In the total absence of specific regulations and case law precedents, therefore, this interpretive act is of particular interest.

The interpretation of the Italian Internal Revenue Service regarding crypto mining

The question answered by the Agency concerns a company that, as part of its already established business activity, intends to undertake mining as well. The response to interpellation, therefore, does not address issues related to the tax treatment of mining carried out outside the business activity.

Now, the solution provided by the tax authorities, with reference to the application of VAT, first of all moves from the consideration that the remuneration constituted by the tokens obtained as a result of mining does not constitute the consideration paid within the framework of an exchange of services relationship, and that the network that recognizes this type of “reward” cannot be considered in the same way as a principal within the framework of a services contract.

This would lead to the conclusion that mining would not be relevant for VAT purposes because the so-called synallagmatic contract, i.e., the causal relationship linking the right to the consideration to the performance of a service (in this case, a service), would be missing. As a further consequence, the deduction of VAT on costs would be precluded.

An argument that, according to the Italian Internal Revenue Service, applies as long as there is no contractual counterparty and on the assumption that:

“remuneration in cryptocurrency for one’s activity appears in any case to be generated by the system – even when it is received through the pool – and only following the validation of a block.”

Under these conditions, therefore, there would be no record-keeping, reporting and VAT payment obligations referring to this type of transaction. 

On the direct tax front, the Italian Internal Revenue Service‘s basic argument is that cryptocurrency income from mining should be treated in the same way as income in foreign currencies.

According to the IRS, therefore, the income would be considered to have accrued in the reference year in which it is received, but it points out that for the purpose of valuing cryptocurrencies held at the end of each tax period, the difference between the initial tax value and the value recognized at the end of each tax period should be taken into account.

Finally, the tax agency specifies that, for IRAP purposes, the remuneration earned is included in the computation of net production value, because it would represent revenues for services attributable to the taxpayer’s productive activity.

This is the outline of the guidance provided by the IRS, on which it is useful to make some considerations.

VAT and rewards from cryptocurrency mining

With regard to the aspects of subjection to VAT, the endpoints of the tax agency’s reasoning are certainly supportable, but they move from limiting assumptions. In fact, their argument seems to focus on the aspect of the impossibility of identifying a party with whom a relationship of consideration can be said to be established. 

The crucial point, on the other hand, seems to be another: namely, that the mining activity does not have in itself the minimum elements for it to be possible to speak of a relationship of supply of goods or services, which is one of the essential prerequisites for the subjection of an activity to VAT: the product of this activity, in fact, does not consist of a supply of something, however one wishes to qualify it.

Turning to the subject of subjection to direct taxes, the workhorse of the Italian tax authorities comes to the fore again. Namely, the equating of cryptocurrencies with foreign currencies: an axiom long established as the centerpiece of Italian tax authorities’ theories on the tax treatment of income originated with cryptocurrencies. 

However, as we have written several times, this axiom is hotly contested by leading experts in the field, both in relation to the proper nature of virtual currencies, which should be considered as means of payment lacking certain indefectible characteristics proper to currencies having legal tender status, as clarified by the well-known Hedqvist ruling of the EU Court of Justice, and because virtual currencies do not fall within the scope of the definition of foreign currencies, explicitly sanctioned by Article 2 of the Consolidated Text of Provisions on Currency Matters (Presidential Decree 148/1988).

These critical arguments certainly have a significant impact and are a falling point of reasoning where one seeks to frame capital gains income on cryptocurrency trading as capital income or miscellaneous capital income by individuals acting outside of a business activity.

The same arguments, however, take on less relevance when the income in cryptocurrencies goes into the formation of the value of production, and thus income, in the exercise of a business activity. Indeed, in this case, it does not matter how the revenue is realized (whether in cash or even in kind), in fact its value, appropriately converted to a legal tender value, undoubtedly enters the tax base of business income.

Final thoughts

The crucial problem will be to be able to find a reasonable and, as far as possible, unambiguous and objective valuation criterion.

In the case of cryptocurrencies this is certainly a problem, and it is even more of a problem in the case of mining, as cryptocurrencies acquired through mining do not have a starting value objectively determined, for example, based on the purchase price from a specific platform. 

With respect to this crucial aspect, the response to interpellation conveniently avoids addressing the issue, and dodges the hot potato by explicitly stating that

“the determination of the value of the virtual currencies that are the subject of the present opinion (a matter of factual order that is beyond the competence exercisable by the writer in interpellation) is not the subject of the present opinion, and this is without prejudice to any power of control of the tax administration.”

In conclusion, this interpretive act offers some solutions, but again, leaves many others unresolved.

This brings us back to a theme that has been said and said again, but until now systematically disavowed: there is an urgent need for action by the national legislature on the tax profiles related not only to cryptocurrencies but in general to crypto assets and activities.