On 26 July 2018, the Luxembourg tax authorities published a circular on specific tax aspects of virtual currencies.
As it does not consider virtual currencies to be an actual currency, the circular clarifies that Luxembourg tax accounts cannot be prepared and taxable income cannot be reported in a virtual currency. Virtual currencies are intangible assets which have to be reported at their counter value in an actual currency. The exchange rate at the moment the virtual currency positions are taken and released should be used. Income has to be determined by applying the exchange rate of the day it is made available to the taxpayer and expenses by applying the rate of the day they are incurred. Hence, although it is not explicitly mentioned, the circular applies a historical cost rather than a mark-to-market approach to determine virtual currency results.
The circular explains that the tax regime applicable to virtual currency transactions depends on the nature of the income. Virtual currency income derived by a corporate taxpayer is business income by default (headline tax rate 26.01% in Luxembourg City). The virtual currency itself constitutes a taxable asset for net wealth tax purposes. Only corporate taxpayers are subject to net wealth tax.
For individual taxpayers, virtual currency income is taxed as business income (progressive rates up to 42% apply, excluding employment fund surcharges and municipal business tax – levied at a rate of 6.75% in Luxembourg City) only if it is generated in the context of a business enterprise. A business enterprise is an independent activity with a lucrative intent which is exercised in a permanent manner and which constitutes a participation in the general economic life. The circular specifies that these conditions are regularly met if a taxpayer creates (“mines”) virtual currency, conducts an online virtual currency exchange platform or automatically distributes virtual currency. Moreover, premises or infrastructure dedicated to virtual currency transactions, the use of borrowed capital, frequent alternations of the inventory of virtual currencies or trading on behalf of third parties are viewed as typical indicators of a business enterprise. If the income qualifies as business income, operating expenses incurred in the framework of the business enterprise only are tax deductible.
In case an individual taxpayer is not engaged in a business enterprise, income realized by way of a virtual currency is taxed if it gives rise to speculation gains which exceed EUR 500.- during a calendar year. This is the case if the virtual currency is disposed of at a gain within six months after its acquisition. The taxpayer is required to have consistent and continuous documentation relating in particular to the date of acquisition or creation of the virtual currency, as well as the related costs. The burden of proof therefore lies with the taxpayer. Where, in the context of the realization of the virtual currency, the individual identification of the currency exchanged proves difficult or even impossible, the acquisition price of the virtual currency realized shall be determined on the basis of the weighted average price method. Where a mining activity does not meet all the criteria to qualify as a business enterprise, it may generate and be taxed as other net income.
This new circular, accessible here, should be of interest for virtual currency investors, be they professionals or amateurs, miners or virtual currency platform operators. In times where many questions about the taxation of virtual currencies remain unanswered, this guidance is certainly a first step towards more legal certainty. Note that a circular is an explanatory notice, which is binding on the tax authorities but not as such on taxpayers. Taxpayers may however reasonably be able to rely on it based on the principle of good faith.