By Erwin SOTIRI
Jurisconsul law firm
last update 04/03/2024
The Luxembourg tax regime for crypto-assets is generally governed by the country's standard tax laws and principles, as there is no separate legislation for crypto-asset taxation. This means that both individual and corporate investors must handle the existing tax framework to understand their obligations towards crypto assets, including cryptocurrencies and non-fungible tokens (NFTs).
Taxation of crypto-assets for individual investors in Luxembourg
For individual investors, the taxation of crypto assets depends on the nature of the income derived from these assets. Income can be classified either as business profits (i.e., income derived from a commercial activity) or miscellaneous income (i.e., income derived from the management of the individual’s private wealth). Business profits are taxed on a net basis at progressive personal income tax rates. On the other hand, miscellaneous income-related gains realised within less than 6 months after the acquisition of the crypto-assets are considered speculative and may be subject to tax. However, speculative gains amounting to less than EUR 500 during a specific tax year are exempt from personal income tax.
A specific circular dated 26 July 2018 issued by the Luxembourg direct tax authorities aims to clarify the tax treatment of crypto assets. This circular is expected to apply also to other crypto-assets (MiCA classifications), although this should be confirmed on a case-by-case basis.
Taxation principles
In Luxembourg, the tax treatment of crypto-assets for individual investors is determined by the general tax rules and principles, as there is no specific legislation for the taxation of crypto-assets. The tax implications for individuals depend on the nature of the income derived from crypto-assets and the duration of holding.
Income classification
The tax treatment of different types of income derived from cryptocurrency transactions is determined by the income categorization for individual investors in the context of crypto-assets, which is a critical aspect of taxation in Luxembourg
Speculative gains
Speculative gains are profits derived from the buying and selling of crypto-assets within a short timeframe, typically considered to be less than six months. This classification hinges on the intent behind the transaction and the frequency of trades. Income considered as speculative gains is taxed at the individual’s marginal tax rate, reflecting the approach towards short-term trading as a taxable activity.
Criteria: The key criteria for classifying income as speculative gains include the holding period of the crypto assets and the frequency and volume of transactions, which may indicate an intent to profit from market fluctuations in the short term.
Tax implications: Speculative gains are subject to income tax at the individual's standard tax rate. The classification as speculative impacts the tax liability, often resulting in a higher tax burden due to the alignment with income taxation principles.
Miscellaneous/other income:
Income from the management of an individual's private wealth is considered miscellaneous income. Gains realised within less than 6 months after the acquisition of crypto assets are deemed speculative and may be subject to tax. However, speculative gains amounting to less than EUR 500 during a tax year are exempt from personal income tax.
Capital gains
Profits from the sale of crypto-assets that have been kept for an extended duration, generally exceeding six months, are referred to as capital gains. It is critical to differentiate between speculative gains and capital gains, given that capital gains may be exempt from taxation under specific circumstances, attributable to the long-term nature of the investment.
Capital gains on crypto-assets may be free from taxation under certain circumstances, especially if the assets are retained for a prolonged duration. The purpose of this exception is to promote the adoption of long-term investing strategies as opposed to short-term trading.
Long-term holding:
A cryptocurrency owner with a holding period exceeding six months who attains a capital gain is exempt from taxation on said gain. A longer holding duration often supports the classification of capital gains rather than speculative activity, as the holding term is the defining characteristic that differentiates the two..
Short-term speculation:
If an individual is considered a speculator, for example, by trading cryptocurrencies within a six-month period, they may be subject to tax at rates between 22% and 25%.
Mining, staking, and other rewards
Different treatment applies to income obtained by mining, staking, or receiving incentives in the form of crypto-assets compared to gains realised from the sale of those assets. Typically, this form of revenue is categorised as company income or other income, and is liable to be taxed at the marginal tax rate of the individual.
Mining
Crypto mining involves the use of computer hardware to validate transactions on the blockchain and secure the network, with miners receiving crypto-assets as rewards for their contributions.
Tax Classification: Income from mining is classified as business income because it results from the active effort and investment in resources (such as computing power and electricity). This classification subjects mining rewards to income tax at the individual's marginal tax rate.
Documentation and Expenses: Miners must maintain detailed records of the quantity and market value of the crypto-assets received as rewards at the time of mining. Additionally, expenses related to mining activities, such as hardware costs and electricity, may be deductible, depending on the specific circumstances and how the tax authorities view the activity (as a hobby or a business).
Staking
Staking involves holding funds in a cryptocurrency wallet to support the operations of a blockchain network. Essentially, it's an activity where investors lock up their coins to receive rewards.
Tax Classification: Similar to mining, income from staking is considered active income and is taxable in the year it is received. The classification hinges on the notion that staking rewards are compensation for the use of one's assets to support network operations.
Record-Keeping: Investors need to document the quantity of rewards received through staking and their value in fiat currency at the time of receipt. This documentation is crucial for accurate tax reporting and compliance.
Other rewards
Other rewards may include airdrops, hard forks, or any crypto-assets received as part of promotional activities. The tax treatment of these rewards can vary:
Airdrops: Generally considered as a bonus for holding a specific cryptocurrency, the taxation of airdropped tokens depends on their market value at the time of receipt. This income is typically taxable as other income.
Hard Forks: When a cryptocurrency undergoes a hard fork, resulting in the creation of a new cryptocurrency, the tax implications can be complex. The new tokens may be considered taxable income at their fair market value at the time of the fork, depending on the investor's ability to control and dispose of the new tokens.
Promotional Rewards: Rewards received from participating in promotional activities or contests are also considered taxable income, based on the market value of the crypto-assets at the time they are received.
Taxable events
A taxable event is any transaction that results in a tax consequence for the party involved, such as selling an asset for profit or earning income. Regarding crypoto-assets the exchange of crypto-assets is generally considered as a taxable event, but ther circumstances may also trigger taxation.
Exchange of crypto-assets:
The exchange of crypto-assets for fiat currency or other crypto-assets (e.g., BTC to ETH) triggers a taxable event. The tax treatment depends on whether the income is classified as business profits or miscellaneous income.
Other activities:
Income from activities such as farming, futures, lending, liquidity pools, airdrops, hard forks, self-employment, and employment in crypto-assets funds may also trigger tax. These events and models should be checked on a case-by-case basis.
Documentation and declaration requirements
Individual investors in Luxembourg must adhere to the documentation and declaration requirements to ensure compliance with tax rules, particularly in the context of crypto assets. The Luxembourg tax authorities require detailed records to be kept for all transactions involving crypto assets, facilitating correct tax reporting and compliance.
Documentation and detailed record-keeping
Individual investors must maintain detailed records of their crypto asset transactions including:
Purchase and sale records: Documentation should include the date of transactions, types of crypto assets bought or sold, quantities, prices in fiat currency at the time of transaction, and the total value of each transaction.
Exchange transactions: When crypto assets are exchanged for other crypto assets, investors must record the details of both assets involved in the transaction, including the fair market value in fiat currency at the time of the exchange.
Wallet addresses and transaction IDs: For each transaction, the associated wallet addresses and transaction IDs should be documented. This aids in the verification of transactions and ownership.
Mining, Staking, and Airdrops: Specific records should be kept for income received through mining, staking, or airdrops, indicating the date of receipt and the market value of the crypto assets at that time.
Taxpayers must maintain consistent and continuous documentation, including the date of acquisition or creation of the virtual currency and the related costs, to justify the position taken in their tax returns.
Declaration of income
Income from crypto assets must be reported to the Luxembourg tax authorities on the annual tax return. The type of income (e.g., capital gains, speculative profits, or other income) determines how it is reported and taxed. To appropriately meet their tax requirements, investors must understand how their crypto asset income is classified:
Speculative gains :
For assets held for a short term (typically less than six months) and sold at a profit, the gains are considered speculative and must be declared as such.
Capital gains :
Gains from the sale of assets held for more than six months are generally not considered speculative. The rationale is that longer-term holdings indicate an investment strategy that is not primarily aimed at capitalizing on short-term market volatility.
If the assets are held for longer than six months, the gains may not be subject to taxation, but the specific circumstances of the transaction need to be carefully assessed. Several factors are considered to determine the taxability of such gains:
Intent and frequency of transactions: The tax authorities may consider the investor's intent and the frequency of their transactions. An investor frequently buying and selling crypto assets, even if some are held for longer than six months, may still be seen as engaging in speculative trading.
Integration with other investment activities: If the sale of crypto assets held for longer than six months is part of a broader investment strategy that includes frequent short-term trading, the gains may be subject to taxation.
Use of professional trading platforms and tools: The use of professional trading platforms and tools may also be a factor in determining whether the gains are taxable, as it could indicate a more speculative approach to crypto asset investment.
Therefore, while the holding period is a significant factor in determining the tax treatment of gains from the sale of crypto assets, it is not the sole criterion. The Luxembourg tax authorities assess the totality of circumstances surrounding each transaction to determine its taxability. This assessment includes examining the investor's overall investment strategy, the nature of the transactions, and the use of trading platforms or tools.
Miscellaneous/other Income:
Income derived from mining, staking, or airdrops is considered taxable from the moment it is received and must be declared accordingly.
Tax filing process
The tax filing process for crypto asset transactions involves the submission of the annual tax return, where the investor discloses all taxable events and income from the previous year. The detailed records maintained by the investor serve as the basis for this declaration, ensuring that all taxable income is accurately reported:
Use of Form 100: Individual investors typically use Form 100 for their income tax return, where they must include the relevant sections for income from crypto assets.
Supporting documentation: While the detailed transaction records do not need to be submitted with the tax return, they must be readily available upon request by the tax authorities. These documents are crucial for substantiating the income declared and the tax calculations made.
Compliance and monitoring
The Luxembourg tax authorities are increasingly focusing on the taxation of crypto assets, with enhanced monitoring and compliance efforts. Individual investors must proactively manage their tax obligations, keeping abreast of changes in tax laws and regulations that may affect the taxation of crypto assets.
Certain transactions involving crypto-assets and NFTs may be subject to reporting under the mandatory disclosure regime. The EU DAC-8 directive and its implementation should be monitored for any changes in reporting requirements.
Taxation of crypto assets for corporate investors in Luxembourg
Cryptocurrencies held by Luxembourg corporate taxpayers are subject to an annual net wealth tax at a rate of 0.5% on their fair market value. For mining activities linked to proof of work networks, the tokens received as compensation for securing the network should be fully taxable for Corporate Income Tax (CIT)/Municipal Business Tax (MBT) purposes. Operational and amortisation expenses related to the IT devices used are fully deductible as long as they have been incurred.
The gains realised upon the disposal of cryptocurrencies by corporate taxpayers constitute commercial income, subject to Luxembourg CIT and MBT at an aggregated rate of 24.94%. Conversely, losses are fully deductible.
Corporate investors in Luxembourg: Taxation of crypto-assets
Corporate investors in Luxembourg are subject to a range of tax considerations when it comes to crypto assets.
Corporate income tax on gains
Corporate investors are subject to corporate income tax on gains realized from the sale or exchange of crypto assets. The tax rate is determined by the corporate income tax regime applicable in Luxembourg, which considers the taxable income of the corporate entity. The specific treatment of such gains (whether as capital gains or business income) depends on the nature of the transactions and the corporate entity’s main activities.
Capital gains
Here "capital gains" refers to the profit a company realises when it sells a crypto asset for more than its purchase price. Generally, gains from the sale of crypto assets held as part of the investment portfolio of a company may be treated as capital gains. The tax treatment for capital gains can vary, with potential exemptions available under certain conditions.
Classification of capital gains
In Luxembourg's tax framework, gains from the sale of crypto assets by a corporate entity are classified based on the nature of the holding and the intent behind the investment. Crypto assets held as part of a company's investment portfolio are generally considered capital assets. The gains from the sale of these assets, if viewed as part of the normal management of the company's investment portfolio, may be classified as capital gains.
Tax treatment variability
The tax treatment of capital gains on crypto assets can vary for several reasons:
Exemptions under specific conditions: Luxembourg tax law may allow exemptions or preferential tax treatment for capital gains realised on certain investments, including crypto assets, under certain situations. These restrictions frequently concern the duration of the holding period, the proportion of ownership, and the nature of the assets.
Participation exemption regime: The "participation exemption" regime is a crucial mechanism that can have an impact on capital gains taxes. Gains from the sale of eligible participations may be excluded from corporate income tax under this scheme. Although crypto-assets are a relatively new asset class, the concepts behind the participation exemption may apply if they are considered to meet the regime's standards.
Holding period considerations: Similar to the treatment for individual investors, the length of time a corporate entity holds a crypto asset before selling it can influence the tax treatment of the gains. Although there isn't a straightforward holding period rule for capital gains on crypto assets as there is for traditional securities, the concept of a holding period influencing tax liability is a consideration in determining the nature of the gain.
Implications for Corporate Investors
Corporate investors must carefully consider how their cryptocurrency holdings are classed and the associated tax system. The possibility of varying tax treatment emphasises the significance of careful tax planning and documentation. The proper classification of crypto assets in an investment portfolio, as well as knowing the conditions under which capital gains on these assets may be exempt from taxation, are crucial for maximising tax outcomes.
Business income:
If the transactions related to crypto assets are frequent or part of the entity’s operational business activities, the gains may be considered business income and fully taxable.
Deductibility of expenses and losses
Corporate investors can deduct expenses directly related to their cryptocurrency activity from their taxable revenue. This includes the costs of acquiring, mining, and maintaining crypto assets. Furthermore, losses obtained from the sale or exchange of crypto assets can be used to offset taxable gains, subject to certain restrictions and limitations, such as the requirement to carry losses forward to succeeding fiscal years.
Mining activities and compensation
In Luxembourg, mining activities are usually qualified as business activities. The tokens received as compensation for securing a proof of work network should be fully taxable for Corporate Income Tax (CIT)/Municipal Business Tax (MBT) purposes. Operational and amortisation expenses related to the IT devices used are fully deductible as long as they have been incurred.
Annual net wealth tax (NWT)
The Annual Net Wealth Tax (NWT) in Luxembourg applies to corporate investors, including those holding crypto assets.
General rates
Corporate entities in Luxembourg are subject to an annual net wealth tax (NWT) on their assets, including cryptocurrencies. The NWT is levied at a rate of 0.5% on the taxable base up to EUR 500 million. For the taxable base exceeding EUR 500 million, the NWT is EUR 2.5 million plus 0.05% on the component of the NWT base above EUR 500 million. There is no cap set for the NWT.
Valuation of assets
Generally, assets are taken into account at market value, except for real estate, which is subject to a special regime. Shareholdings that qualify for the participation exemption are generally exempt from NWT.
Inclusion in net wealth:
Crypto assets held by corporate investors are considered part of the company's net wealth and are thus subject to NWT. These assets should be valued at market value for the purposes of calculating the NWT.
Exemptions and specific regimes:
While the general principles apply, it's important to note that specific exemptions or adjustments may apply depending on the nature of the assets and the company's overall tax structure (ex. Qualifying shareholding, debts deductibility, IP regime etc).
Taxable events and transactions
For corporate investors, taxable events include trading crypto for fiat currency, crypto-to-crypto exchanges, and the use of cryptocurrency for purchasing goods or services. These events are considered a form of deemed disposal and may trigger tax liabilities. The sale value at the time of disposal will be the base cost for the new crypto assets purchased.
Documentation and reporting
Corporate entities must maintain accurate records and documentation of their crypto-asset transactions. This includes the date of acquisition or creation of the virtual currency, the related costs, and any income or gains derived from these assets. Gains, revenues, or losses realised by a corporate taxpayer should be declared in their annual tax returns.
Consistent and continuous documentation is required to justify the position taken in tax returns. Accurate documentation and reporting are essential to ensure compliance with tax obligations and to optimise the tax position of the corporate entity.
The influence of MiCA on taxation of crypto-assets
While MiCA primarily focuses on the regulation and supervision of the crypto-asset markets, rather than direct tax implications, its introduction could indirectly influence the tax treatment of crypto-assets in several ways:
Market standardisation and legal clarity
MiCA aims to standardize regulatory requirements across the European Union, affecting how corporate entities engage with crypto-assets, including compliance with enhanced due diligence and reporting obligations.
Classification of crypto-assets:
MiCA provides clear definitions and classifications for various types of crypto-assets, which could help Luxembourg tax authorities better categorise these assets for tax purposes. This may lead to more consistent tax treatment and potentially new tax guidance or legislation to align with the regulatory framework.
Transparency and regulatory compliance:
With MiCA's focus on transparency and disclosure requirements for crypto-asset issuers and service providers, there will be more information available to tax authorities. This could result in changes to tax reporting and enforcement practices, as authorities will have better access to data on crypto transactions.
Impact on corporate investors
Corporate investors may need to adjust their operations to comply with MiCA regulations, which could affect the cost basis and the tax treatment of their crypto-asset holdings and transactions.
Operational changes:
For corporate investors, MiCA could have implications for transfer pricing, especially for crypto-asset service providers (CASPs) that have seen significant growth and investment. The valuation of these businesses and their intra-group transactions could come under scrutiny, leading to potential changes in transfer pricing regulations or guidance.
As MiCA distinguishes between different types of crypto-assets, such as asset-referenced tokens (ARTs), e-money tokens (EMTs), and other crypto-assets, Luxembourg may need to consider whether its tax legislation should also differentiate between these categories for tax purposes.
Financial institutions:
As the crypto sector begins to blend with traditional finance due to changes introduced by MiCA, financial institutions, including those in Luxembourg, may need to adapt their products and services. This could lead to new tax considerations for products that are a hybrid of traditional financial instruments and crypto assets.
Enhanced due diligence:
MiCA will likely require enhanced due diligence on the part of corporate investors, which could impact the documentation and reporting standards for tax purposes.
MiCA requires actors in the crypto-asset market to declare information on their environmental and climate footprint. This could potentially influence tax policies related to environmental considerations, such as tax incentives or penalties.
Impact on individual investors
Investor protection:
MiCA aims to enhance investor protection, which could influence individual investment strategies and, consequently, the tax events associated with crypto-assets. Individual investors will benefit from stronger safeguards and a more secure investment environment. For instance, the regulation outlines requirements for the custody of clients' assets, ensuring better protection of investors' funds against theft or loss.
Tax reporting:
The increased transparency and record-keeping that MiCA mandates may also facilitate the tax reporting process for individual investors. With clearer transaction records and standardized reporting from service providers, individual investors might find it easier to report taxable events and comply with tax obligations related to their crypto-assets.
While Luxembourg does not have specific legislation for the taxation of crypto-assets, the general tax rules apply. Both individual and corporate investors must navigate these rules, considering the nature of their income, the duration of holding the assets, and the specific taxable events that may trigger tax liabilities. Given the complexity and the evolving nature of the regulatory environment, it is advisable for investors to seek professional advice to ensure compliance and optimise their tax position.