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How to pay taxes on profit made from Bitcoin? Something to think about

News has been circulating in recent days that has put the crypto world in great turmoil: a major Milanese law firm has reportedly entered into an agreement with the Italian tax authorities to emerge from a substantial profit made from Bitcoin and other cryptocurrencies, applying a tax treatment of significant advantage.

National financial newspapers, such as Italia Oggi and Milano Finanza, have reported on it, and an official statement from the law firm behind this important transaction has also circulated.

A voluntary disclosure to declare one’s profit in Bitcoin?

Obviously, the news was echoed on a quantity of other channels, especially on the web, which referred to the operation as a voluntary disclosure on cryptocurrencies that would lead to the application of a tax rate.

In reality, the technical and legal details of this operation have not been disclosed, but it is worth clarifying that the process put in place does not fall under the regulatory framework of what is commonly known as voluntary disclosure. 

This is what the legislation calls voluntary collaboration, originally regulated by Law No. 186 of 15 December 2014, with a time window to adhere to it until September 30, 2015, and later reopened with the so-called voluntary disclosure bis (regulated by DL No. 193 of 22 October 2016) until 31 July 2017.

What happened in this case of profit made from crypto

From what can be learned, especially according to reports in Italia Oggi, is that this voluntary cooperation operation would have taken the form of an assessment with adhesion procedure activated by the taxpayer himself.

The key points of the operation would be:

  1. A punctual reconstruction of the taxpayer’s assets, with rigorous verification of the provenance of the virtual currencies under assessment;
  2. The acceptance of the principle of taxation of accrued capital gains in the same way as capital gains accrued on foreign currency transactions (thus, qualification of capital gains as miscellaneous income and application of the 26% rate);
  3. For those cryptocurrencies for which there were problems of objective demonstration on the transactions carried out (the example of exchanges that no longer exist is given) the application of flat-rate criteria.

According to press reports, the 26% rate would therefore be applied on the profit, or realized capital gain, on cryptocurrencies converted into fiat currencies. In contrast, for the case of conversion of cryptocurrencies with other cryptocurrencies, a lump-sum criterion would have been applied, which would have led to the application of the 26% rate again, but only on 25% of the assets.

On the penalties related to the failure to declare the profit on these virtual currencies in the RW form, a substantial reduction would have been reached, presumably due to the existence of a situation of objective uncertainty.

The spirit of the procedure, according to the professionals who followed it, would be essentially the same as that underlying the voluntary disclosure procedures, in that it would have a rewarding character for taxpayers who show cooperative conduct.

Now, net of many of the technical and legal details that are currently unknown, certainly this is a point of great interest and an avenue on which to make the necessary reflections.

The first reflection is that if at the regulatory level, a transition period to bring all of the past history into compliance would be explicitly regulated, through a process that could be articulated along the lines of voluntary disclosure. Then, with the incentive of premium tax treatment, this would probably lead to the emergence of large amounts of taxable matter, with obvious benefit to the treasury’s coffers. 

Underlying such a process, however, should be the introduction of organic, clear and sustainable rules on the taxation of the various forms of profit derived from Bitcoin and other cryptocurrencies.

The case of the procedure just examined has unquestionable merit: that of demonstrating in practice that there is a tangible and widespread willingness of taxpayers to voluntarily pay even significant amounts to the tax authorities in order to start a path of regularization of (sometimes large) assets and related profit accumulated in Bitcoin and other cryptocurrencies.

This, beyond the many technical aspects that are not known and that may assume crucial relevance, and that probably constitute the fruit of “creative,” and perhaps even audacious, interpretations in order to achieve the purpose.

Indeed, it is clear that the need to make these capitals usable in virtual currency, by taxpayers, is extremely felt, also due to the fact that the practical use of these capitals today is made problematic by the evolution of the regulatory framework, particularly in the area of anti-money laundering regulations.

This affair should be a cue and also a warning to legislators and regulators at such a dramatic historical stage when the need to raise financial resources is as pressing as ever.

But more than anything else, it should help those who govern us and those who legislate understand the meaning of a great opportunity: to generate cash, of course, but also to establish a finally collaborative relationship between the IRS and a sector of society, made up of operators and users who until now have experienced this relationship with a sense of harassment and even very heated opposition.

All that remains is to hope that this opportunity, too, will not be lost.

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).