Crypto taxation: the new budget law
Crypto taxation: the new budget law
Regulation

Crypto taxation: the new budget law

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A true marathon in which there was no shortage of obstacles, even of a procedural nature in the path of approval, mostly due to skirmishes in the courtroom between political forces in opposition and those in government: here is the latest on crypto taxation in Italy. 

As expected, the final approved version of the text does not deviate much from the source text. On the other hand, the maneuver has been armored with the imposition of trust, in order to manage to cross the finish line by the end of December and thus avert the specter of the provisional exercise.

This is a maneuver in which fiscal measures take center stage and, for the part that affects users and operators in the world of cryptocurrencies, for the first time see the light of tax provisions expressly dedicated to what are called “crypto-assets” in the law and of which we have largely anticipated in these columns.

The provisions have come together in paragraphs 126 to 144 of Article 1 of Law 197/2022.

As far as the crypto world is concerned, the central aspect lies in the creation of an ad hoc typology of capital gains income from crypto-asset transactions within the broader category of miscellaneous income.

With respect to this type of income, a 26% substitute tax is introduced, which is triggered when capital gains in excess of 2,000.00 euros are accrued.

For the past, the law states that any income earned from transactions in crypto-assets falls under the scope of so-called miscellaneous income (art. 67 TUIR), therefore, subject to the substitute tax as previously regulated. That is, still 26% on capital gains, which is triggered only in case of holding assets whose countervalue exceeds the threshold of 51,645.68 euros for seven working days in a row.

Another principle that has been established in the budget law is the obligation to declare crypto-assets for the purpose of monitoring foreign assets, and thus their inclusion in the famous RW form of the tax return.

There are then a number of provisions aimed at the surfacing of crypto-asset assets held and to remedy the non-declaration in the RW form in the past.

As already written in recent weeks, this law has advantages and drawbacks.

It is certainly positive that the way has been opened for explicit regulation of the tax aspects affecting cryptocurrency transactions and, more generally, the various crypto assets.

In this way, if nothing else, there can be a modicum of additional clarity and awareness for taxpayers and some curb for the too-often arbitrary and contradictory interpretations of financial offices.

On the other hand, there are still many, too many, aspects that this law leaves unaddressed.

And while (as is evident) one of the primary objectives the legislature intended to pursue was the emergence of taxable matter related to the crypto world, the way this law is written, it is not certain that this objective will be achieved.

Let’s see why.

Limits and infrastructure of the new crypto taxation

First of all, underlying the various tax obligations established in the new law is the concept of “crypto-assets.” That is, there is no recourse to the concept of “virtual currency” as defined by the anti-money laundering legislation (Legislative Decree 231/2007).

According to the newly passed law:

“The term ‘crypto assets’ means a digital representation of value or rights that can be transferred and stored electronically, using distributed ledger technology or similar technology.”

If the definition contained in the AML law was already overly broad, even compared to the definitions established at the European level, the newly introduced concept of “crypto-assets” ends up subjecting any type of asset, intangible asset or application to the same tax treatment, merely because they are based on distributed ledger technologies.

In other words, the regulations do not take into account the differences in function of the (many) different types of crypto assets.

So, for example, the holding and resale of an NFT that represents a work of art on the tax side ends up being regulated in exactly the same way as the holding and resale of a cryptocurrency that has the function of a means of payment: thus potentially being subject to the substitute tax and appearing to be subject to the same reporting requirements in the RW form.

Should the artist who created it choose to create the same work of art in physical form, rather than in digital form on a non-fungible cryptographic file, whoever becomes its owner would be subject to completely different obligations: no substitute tax on capital gains; no declaration in the RW form (if the work remains physically in Italy).

A problem closely related to the introduction of the new substitute tax (which largely reproduces the scheme of the substitute tax on capital gains and foreign currency) is that it remains always laborious and questionable to determine the basis of calculation on which to determine the realization value differential to determine whether and by how much a capital gain (or capital loss) has been realized.

The point is that, in the absence of official price lists and in the presence of quotations that can be significantly divergent depending on the various platforms (with some people making a living on arbitrage), the determination of the basis of calculation lends itself to being questioned too easily. Thus, the risk of being subject to audits and controls despite having fulfilled reporting obligations is far from negligible.

Tax competition in the crypto world

Now, given that the 26% tax rate is not exactly cheap, and given all the additional possible complications, it is easy to predict that especially those who find themselves having accumulated wealth in crypto assets of any kind (so not only two-way cryptocurrencies, but also NFTs, or tokens of various kinds and with various functions), whose countervalue today is of significant magnitude, might find it much more convenient to move their tax residence to countries where taxation on crypto assets is clearer and less aggressive. You don’t need to end up in Dubai for that. Switzerland and Portugal are just around the corner and much more crypto-friendly.

Moreover, the Budget Law, in Paragraph 133, offers the possibility of determining capital gains in an alternative way to the cost or purchase value, using the criterion provided by Article 9 of the TUIR, which in short is what is called their “normal value” by the norm. This option can be exercised only on condition that a substitute tax of 14% is paid.

It is necessary to mention now that for an ordinary taxpayer to understand how normal value should be determined according to the criterion governed by Art. 9 (and thus understand the actual convenience of resorting to this quantification criterion) can be a source of headaches that only the help of a good accounting expert (as well as recourse to a good dose of aspirin) could alleviate.

Another issue: under the new law, crypto-assets are made subject to monitoring obligations, i.e., their declaration in the RW form. However, the way the rule is written, a crucially important knot is not unraveled. Namely, whether this obligation is triggered indiscriminately or only when crypto-assets can concretely qualify as foreign assets.

It is worth recalling, in fact, that the Italian Revenue Agency (Agenzia delle Entrate) itself, in an answer to an interpellation a few months before the law was passed, affirmed the principle that if cryptocurrencies are held within a custodial wallet at an exchange platform under Italian law, there is no obligation to declare, on the assumption that the private keys of the wallets in which the cryptocurrencies are allocated are held in Italy.

This risks opening the door to possible litigation on declaration obligations, also because, let’s not forget, since 2022 all exchanges, in order to operate in Italy, are de facto, by express provision of the law and related regulatory regulations, under Italian law, since they can operate only by creating at least a permanent establishment or a corporate vehicle in Italy and obtaining registration with the OAM register.

The issue is also of particular relevance because specific provisions are included in the new law, the ultimate purpose of which is to induce the emersion of crypto-asset assets already held by Italian taxpayers, through a sort of amnesty on non-declaration for the past, the amount of which varies depending on whether or not capital gains have been realized.

In case no income has been realized, for each year of holding undeclared crypto-assets, 0.5% of their countervalue; in case income has been realized, on the other hand, a 3.5% on the value of the assets held will have to be paid (again for each year of holding) plus an additional 0.5% by way of penalties and interest. 

Thus, in this case, amnesty is decoupled from the actual amount of capital gains.

Crypto taxation: lack of clarity even on anti-money laundering measures

Now, apart from the difficulty of objectively and uncontroversially establishing the size of the countervalue, the fact that it is not clear if and when the holding of crypto assets needs to be declared in the RW form there is reason to believe that it will also greatly condition the choice of whether or not to access this form of amnesty.

Another chapter on which it is to be expected that there will be no shortage of doubts and opportunities for litigation is given by the provision (paragraph 142) that provides that this type of, let’s say, “regularization” has effects only on income and the non-application of penalties, but it remains firm on “the demonstration of the lawfulness of the origin of the sums invested.”

How such a demonstration can be provided, however, is all to be understood.

In fact, one of the problems with this law, even in light of this specific provision, is that it lacks a connection with the anti-money laundering provisions currently in place, and it is all to be understood how it will be able to connect with the regulatory framework that may be significantly implemented during 2023 as a result of important European legislation being adopted, from the Funds Transfer Regulation to the new AML Directive.

In a nutshell, the risk is that Italian taxpayers, after paying substantial taxes, will end up with a number of assets that they may not be able to enjoy due to significant restrictions in the anti-money laundering area.

It would have been reasonable, of great benefit, and a strong incentive for emersion, if the legislature had provided for a kind of anti-money laundering “safe-conduct” whereby, having fulfilled their obligations on taxes, a form of presumption on the legitimate origin of the assets would be triggered, including for the purposes of their bankability.

The possibility of improving the legal provisions is always there, in the meantime, however, other countries are applying for the role of a hub and creating favorable conditions for attracting economic and financial initiatives, capital and digital nomads.

Let’s hope that the new law can be the first step in building a receptive system toward innovative businesses, and not remain simply an end in itself way to scrape the bottom of the barrel by squeezing some additional revenue for the treasury’s coffers.

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).

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