On July 26th 2018, the Luxembourg tax authority (“LTA”) issued a circular on the taxation of virtual currencies. The LTA clarifies therein the tax treatment of operations involving virtual currencies as regards to income tax, corporate income tax and net wealth tax.
The LTA starts by refusing the qualification as a currency of digital currencies, arguing the lack of legal tender with a value guaranteed by a central bank. Following warnings from the European Securities and Markets Authority and the Commission de surveillance du secteur financier, the LTA qualifies virtual currencies as intangibles for the purpose of direct taxes. In addition, virtual currencies cannot be used as currencies for annual accounts or to report taxable income.
For entities, the LTA confirms that the same rules and guidelines regarding the determination of a commercial activity will apply to the activity of virtual currency mining, the lending of virtual currencies or trading activities involving virtual currencies as for any other kind of activities and that in this context expenses such as transaction fees, electricity or hardware costs in direct relation with the taxable activity can in principle be deducted. For the establishment of the annual accounts, all expenses and income established in virtual currencies have to be converted into a currency for which the exchange rate is published by the European Central Bank. Finally, corporations should include virtual currencies in the determination of their wealth for the purpose of the net wealth tax, following the rules established for other assets.
For individual taxpayers and in the absence of a commercial activity, income exceeding EUR 500 realised from trading or mining of virtual currencies will be taxed as short term capital gains if the taxpayer cannot prove a holding period of more than 6 months. As the burden of proof lies with the taxpayer, taxpayers are required to consistently and continually document their transactions involving virtual currencies. If individual identification of the virtual currency is not possible, the average cost method should be used to determine the income realised upon sale.