This circular clarifies the Luxembourg income tax treatment of income from virtual currencies in the context of sale or creation of such currencies.
Virtual currencies are not real currencies. They do not represent a means of exchange with a value guaranteed by a central bank and have no legal exchange rate.
They are treated as intangible assets from the Luxembourg income tax, municipal business tax and net wealth tax standpoints.
The circular points out that the use of virtual currencies as a means of payment will not affect the tax qualification of the income.
As per article 10 of the Luxembourg Income Tax Law (hereafter “LITL”), income/profit from selling, exchanging or mining virtual currencies can qualify as either commercial income or miscellaneous income.
1. Commercial income (article 14 LITL)
Profits from selling or mining virtual currencies could fall under the scope of article 14 LITL to the extent all related conditions would be met.
Typically, profits from mining, online selling activities of virtual currencies and operating virtual currency ATMs would most likely be treated as commercial income.
Nevertheless, a distinction needs to be made between commercial activities and those related to the management of the individual’s private patrimony on a case by case basis.
In this respect, the circular refers to some indicators that, among other elements, could lead to the recognition of commercial activities:
The circular further states that when the taxpayer takes the form of a collective entity such as a stock company, income realized should always qualify as commercial income.
Furthermore, commercial income derived by a Luxembourg-based commercial enterprise would be subject to municipal business tax.
2. Miscellaneous income (article 99 LITL)
In the absence of a commercial enterprise according to article 14 LITL, one should check whether the income derived from virtual currencies would fall in the miscellaneous income category or not.
Any gain/loss from the exchange of virtual currencies against other virtual/real currencies, or from the payment of a transaction (notably the purchase of goods or service), is considered as a taxable capital gain/loss according to article 99 LITL to the extent the operation occurs within six months from the acquisition of the virtual currency.
The circular further points out that these operations should be valued in EUR or other foreign currency covered by the exchange rate publications of the European Central Bank.
If the aggregated amount of these taxable gains/losses is below EUR 500 during the tax year, they would not be subject to taxation. Similarly, gains from currency sales occurring after more than six months from the acquisition would not be taxable either.
With regard to the determination of the unitary value (so called “net wealth tax basis”), the circular states that the virtual currency held is valued in accordance with the provisions of the amended law of 16 October 1934 on the valuation of assets and securities. Without any further precision, one could assume that the virtual currencies held as assets by the taxpayer should be valued at their fair market value, using potentially available exchange rates on the internet.
The Luxembourg tax authorities emphasize the importance of keeping evidences of transaction records, holding periods and expenses/costs linked to virtual currencies since the burden of the proof of virtual transactions will remain on the individual taxpayers’ shoulders.
Similar to the virtual currency-related income, associated expenses/costs should be valued in EUR or other foreign currency covered by the exchange rate publications of the European Central Bank.
Upon sale, when the determination of the acquisition cost becomes challenging or impossible due to the circumstances, the weighted average price method should be used. The valuation methods “first in – first out” and “last in – first out” are excluded.
This circular is welcomed as it clarifies the tax treatment on complex and brand new activities related to the sale or creation of virtual currencies.
It may further provide sufficient general guidelines in the anticipation of the next challenges to be faced due to the expansion of the digital economy.
We remain at your disposal to answer any questions you may have.
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