Published: April 9th, 2020
Spain’s taxman is set to send some 66,000 of the country’s digital currency holders official letters this week, reminding them of their tax obligations under capital gains provisions.
Despite the crushing impact of COVID-19 on Spain’s economy, the number of crypto traders in the government’s sights – most of them individuals operating in the retail market – is nearly 350 per cent higher than last year, when 14,700 letters were sent.
Crypto holdings are subject to capital gains tax in the country, ranging from 19 to 23 per cent.
As the COVID-19 outbreak unfolds, Spain has become Europe's hardest-hit country, overtaking Italy in terms of total reported cases.
The campaign by Agencia Estatal de Administración Tributaria (AEAT) to find any undeclared earnings from crypto trading is assumed to be part of the country’s effort to gather income where it can to support the state’s fight against the pandemic.
The ramp-up in enforcement activity is part of AEAT plans to intensify its 2019 Income and Heritage Campaign. The agency is seeking to strengthen control over cryptocurrency windfall gains, income earned abroad, and real estate rentals.
Originally scheduled to begin on April 1st, the agency has said it will keep to its planned timeline despite the COVID-19 health crisis.
Alongside more letters to crypto traders, AEAT plans to send 1.5 million letters to rental housing landlords (up from 700k last year), and 2.3 million notices to holders of bank accounts abroad – up from 2.17 million last year.
The tax agency has been able to better target crypto holders thanks to new information sharing from the EU’s updated Directive on Administrative Co-operations (DAC II), the Common Reporting Standard (CRS) adopted in 2018 to combat tax evasion and agreements with the United States on sharing bank accounts data.
Another factor in the campaign is EU directive AMLD5, which created new rules for companies that trade using digital currencies.
Its purpose was to add transparency about the legal owners of cryptocurrencies and reduce the risk of tax evasion. While some blockchain-focused fintech companies chose to close down rather than reveal client information, others went along and agreed to share data about their crypto trading clientele.
Having already strengthened links with Spain’s banks, support from the EU directive means the AEAT has an even more extensive list of crypto holders to target this year.
The agency has said the letters will be a ‘kind’ reminder to crypto traders of their tax obligations.
The Spanish tax authority formally kicked off its cryptocurrency campaign in November 2018, with a pursuit of what were deemed to be overly-secretive crypto operations in the country.
Banking clients holding crypto assets were reported to the regulator by the banks. Accounts were monitored to ensure full tax compliance, and the AEAT investigated any significant changes to crypto holding amounts.
To obtain granular information about cryptocurrency transactions and the parties involved in their execution, the agency said it had requested data on cryptocurrency investors from over 60 companies: 16 banks, a dozen or more cryptocurrency exchanges, 40 businesses that accept online cryptocurrency payments, and companies operating cryptocurrency ATMs.
Details sought include bank account and credit card information, client names and addresses, and the amounts and exchange rates involved in transactions.
AEAT describes the data requests as the first step in what could become more extensive investigation and monitoring of individual activity in the crypto space. The agency has said it is conducting an independent analysis of domestic cryptocurrency use.
Following the market’s surge to more than $800 billion in value in Q1 2018, tax authorities around the world have taken a keen interest in cryptocurrency.
Spain’s finance ministry announced separate initiatives to monitor bitcoin and other cryptocurrencies in an official bulletin back in March. The ministry specifically referenced links to organised crime, which are also assumed to be in the crosshairs of AEAT’s expanding crypto oversight.
Back in January, the AEAT signalled its intentions with a communique calling cryptocurrency monitoring ‘one of this year’s biggest challenges.’
The agency said then it would police the use of digital assets in the country, and re-stated its opinion that use of Bitcoin and altcoins constituted significant fiscal risks for the country.
The communiqué also said AEAT would move to stop Spain-based darknet users from using crypto and web masking technologies to aid in drug trafficking, money laundering, or smuggling.
Data from blockchain analytics provider Chainalysis suggest that over USD 600 million worth of bitcoin moved through darknet markets in Q4 of last year alone.
From their earliest days, digital assets have posed a challenge to governments and central bankers, and politicians have struggled to regulate or even define cryptocurrencies. There is currently a lack of uniformity as individual countries have tended to develop their own national approach.
While EU directives and other multinational data sharing accords pave the way for more transparency, countries like Spain are taking advantage of new information sources to ensure tax fairness and a more robust regulatory framework.
However, differences remain – even within the harmonised trading environment of the EU. Next door in Portugal, retail trades of Bitcoin are not taxable, and the government only looks to tax crypto gains resulting from professional activities.
That means independent retail traders are largely left alone.
Only companies that earn income by trading Bitcoin as a service and professional traders who make their income from trading activities need to pay taxes.