On 26 July 2018, the Luxembourgish Tax Authorities (ACD) published a circular that seeks to clarify the tax treatment of virtual currencies, particularly in the context of disposals and mining.
The ACD has taken the stance, currently a mainstream one, that virtual currencies are not considered official currency: under the current paradigm, money is money only if it is backed by a central bank. The new circular states that virtual currencies are, for the purposes of individual income, commercial income, and wealth taxation, to be regarded as intangible assets. In addition, the general approach taken by the ACD is similar to the one taken by other countries—that is, it places the taxation of virtual currencies within the framework of existing tax laws. These conclusions are not surprising and are in line with current international trends.
The good news
The circular should capture the attention of crypto investors. It stipulates that, as long as the income sourced from virtual currencies does not constitute commercial revenue (and for individual investors it usually doesn’t), the income would be considered “other income” (revenus nets divers). Furthermore, the concept of speculation gains under article 99bis (LIR) is specifically addressed in the context of disposals. This means that such gains become taxable only if the time between acquisition and disposal is equal to or fewer than six months (where the annual gain exceeds €500), which is good news for crypto traders!
However, occasional crypto miners are not as lucky as individual investors, since the ACD explicitly concludes that non-commercial mining income may be considered “other income” under article 99 (3) (LIR). Nevertheless, miners can still take some comfort in the fact that the Luxembourgish electricity price is still below the EU average at 0.16e/kWh.
Although the circular has been warmly welcomed by its target audience, some questions about it still linger. For instance, how is the taxation of mining income and the disposal of mined virtual currencies supposed to play out? How would income be recognised for the purpose of article 99 (3)—is it already upon mining or only when a sale effectively takes place?
Furthermore, we know that article 99 (3) is applicable to non-commercial mining and that article 99bis is applicable to non-commercial and speculative gains, but the circular remains silent on how these two provisions should interact where the activity is a combination of mining and selling. Said differently, would a sale of crypto money within six months after mining fall under 99bis or 99 (3) (assuming it does not qualify as commercial income)? This question is important as it affects the determination of the taxable basis. Article 99bis would not accept any deduction for income-related expenditures whereas 99 (3) would provide for such a possibility (like electricity costs for the mining).
Furthermore, the circular seems to foresee that the disposal of crypto currencies more than six months after being mined falls under 99 (3), rather than being non-taxable given the non-speculative nature of the transaction. However, a clarification on this point by the Luxembourg tax authorities would be welcomed.
Who will the leaders be?
While Luxembourg is not the first EU Member State to address this topic, it is also certainly not the last: only half of the EU Member States have released guidance on crypto taxation. Despite the fact that the Luxembourgish guidance is not the most extensive, it is arguably still one of the most favourable for the majority audience, i.e. individual investors. The majority of EU countries impose some kind of taxation on virtual-currency-related income, whereas Luxembourg does not (at least for non-speculative gains).
Although Malta has recently implemented regulative frameworks for blockchain (the technology behind all crypto assets), the majority of the EU has been silent on the matter. In the EU-wide absence of general regulatory rules and comprehensive tax guidance, Luxembourg still has the chance to become a leader in the context of virtual currencies. Considering the fact that Luxembourg is a major player in the global financial sector, this would be a natural step to take.