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02 August 2018 Luxembourg releases circular on the tax treatment of virtual currencies On 26 July 2018, the Luxembourg Tax Authorities issued an administrative circular1 (the Circular) providing guidance on the characterization of virtual currencies and the tax treatment of income derived from related trading or mining activities by Luxembourg taxpayers. The Circular states that virtual currencies are not considered as a currency but rather as an intangible asset for income, municipal and net worth tax purposes. It is not possible for taxpayers to prepare their annual accounts or file tax returns in virtual currencies. As a result, income and gains, as well as operational expenses, fees, special expenses and extraordinary expenses denominated in a virtual currency must be converted into euros or into a currency for which the European Central Bank (ECB) establishes and publishes exchange rates, on the basis of the daily exchange rate published by an exchange platform approved by the CSSF, the Luxembourg financial sector supervisory authority. For Luxembourg accounting purposes the general accounting principles apply, income must be determined on the basis of the exchange rate of the day when the income is put at the taxpayer's disposal, while an expenditure must be converted at the rate of the day it is made. Whether or not payments are made in virtual currency does not have an impact on the nature of the income. Income is taxable if it falls within one of the eight categories in Art. 10 of the Luxembourg income tax law (LIR), irrespective of being realized in a real or virtual world. As a result, income from trading or mining activities is only taxable if it falls under business income or other income. Income generated from virtual currencies, in particular from trading or mining activities, constitutes business income only if the trading or mining activity meets the generally applicable requirements of a business activity, i.e., there is an "independent activity with lucrative intention exercised in a permanent manner and constituting a participation in general economic life, unless the said activity is an agricultural or forestry operation or the exercise of an independent professional activity." Corporate taxpayers by definition derive business income and, as a result, any such activity carried out by corporate taxpayers is subject to corporate income tax and municipal business tax in Luxembourg (at the current aggregate rate of 26.01% for companies in Luxembourg-City). The Circular states that the conditions for business income are typically met in the case of mining of virtual currency or operating online exchanges or ATMs for virtual currency. Similar to other activities, an analysis has to be carried out on whether the activity constitutes a business activity or only the management of private wealth. This must be assessed on the basis of the circumstances of the particular case. Among other features, the following would generally be indicators of a business activity:
Operating costs such as electricity charges linked to the mining of a virtual currency or the conversion fees of exchange platforms are only deductible if they are related to the business. Where the activity does not constitute business activity, income from virtual currency could be taxable as other income under Art. 99 LIR. The exchange of virtual currency against another currency or against the Euro or another fiat currency as well as the payment of goods and services in the form of virtual currency is considered as an exchange for tax purposes, i.e., a sale of the virtual currency and simultaneous acquisition of the currency, good or service. If the exchange or the purchase of goods or services takes place within six months after the purchase of the virtual currency, this leads to "speculation profits" or "speculation losses" under article 99bis LIR. Such speculation profits are not taxable if they are below €500 in a taxable year. The taxpayer must have consistent and continuous documentation concerning the date of acquisition or creation of the virtual currency, and the related costs. Where virtual currency is realized for tax purposes, the burden of proof on the acquisition date (which is relevant to determine whether there is a tax liability) lies upon the taxpayer. If the identification of the exchanged currency is difficult or impossible due to circumstances, the acquisition price of the virtual currency is to be determined according to the average weighted price method. The "first-in, first-out" or "last-in, first-out" methods may not be applied. Speculation profits only need to be determined for virtual currencies in respect of which it cannot be excluded that they were held for a maximum period of six months. The Circular responds to some of the key questions on the tax treatment in the rapidly growing field of virtual currencies and contributes to creating more legal certainty for traders and miners of virtual currencies and operators of virtual currency exchanges and ATMs.
Document ID: 2018-5932 |
