The bitcoin craze probably caught many of you least considering buying Bitcoins. Some of you may have done so, and perhaps a few of you have actually made profits out of this. Are these profits taxable? Franz Kerger, Senior Associate, Tax, Allen & Overy and Charles Duro, Associate, Tax, Allen & Overy, share their thoughts.
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The fact that you mine or trade in virtual currencies rather than in classical currencies does not drag you out of the scope of Luxembourg’s income tax. The focus lies on your activities involving virtual currencies. How you mine and/or trade in virtual currencies does matter as it determines the way in which income and capital gains are taxed.
Different categories of income with different tax base computation rules exist under the Luxembourgish income tax law. They also apply to activities involving virtual currencies. So, income from mining and other types of services and capital gains will be taxed differently, depending on the category they belong to.
Mining or trading in virtual currencies as a company?
If you carry out your mining or trading activity through a Luxembourg Sàrl, SA or SCA, the categorization of the company’s income is straightforward: it will automatically be considered as commercial profit. Any income and capital gains will be taxed irrespective of holding periods or the extent of the mining activity. Of course, expenses in direct economic connection with the activity should remain tax deductible. Eligible expenses could be amortization costs for IT equipment (such as your new MacBook) and interest expenses on loans (to purchase said MacBook).
Mining or trading in virtual currencies as an individual?
The circumstances under which you carry out your activity will help determine the right category of income and the related tax based computation rules.
For instance, trading in virtual currencies occasionally may not necessarily attract income tax if the virtual currencies are held for more than six months before they are sold at a gain. Below this holding period threshold, capital gains of upto EUR500 may still be exempt. A mining activity using your PC only can also be exempt from the commercial profit category and instead be categorized under the miscellaneous income category. Again, tax computation rules (including tax deduction rules) will differ depending on the applicable category of income.
If your mining and/or trading activity qualifies as a commercial enterprise, income and capital gains will in principle be taxed as commercial profit. This could for instance be the case where an individual uses a large number of servers financed by banks loans to carry out a mining activity. While a given activity is sometimes clearly qualified as a commercial enterprise, there are instances where the analysis is less clear. A case-by-case analysis is therefore always required.
To wrap up, you should note that you may not establish your annual tax returns in a virtual currency. We furthermore recommend reading the guidance issued by the Luxembourgish tax administration, which helps to determine the correct category of income for your activities.