Weekly SmartPills #5

ITALY AND CRYPTO-ASSETS

Here’s what’s new in the taxation of crypto-assets:
The world is becoming increasingly digital, and advanced technologies are generating new forms of wealth. However, tax systems designed in the last century have become obsolete and need to be rethought to recognize the importance of these new forms of wealth. In this context, it is essential for tax law to adapt to technological advances. At the international level, there have been several regulations regarding crypto-assets in the past two years, with the European Union at the forefront in introducing common principles of oversight, transparency, and reporting. Recently, the final approval was given to the rules for regulating the crypto-asset market, which provide common principles for oversight, transparency, and reporting.

In Italy, however, there has been some legislative inertia regarding the taxation of cryptocurrencies.
Despite this, the Tax Agency has developed some solutions by applying existing laws, but it is difficult to adapt the current regulations to new, technologically complex, and multifaceted phenomena. In the absence of a legislative framework specifically for the taxation of crypto-assets, the regulatory gap has been partially filled in recent years by the tax authorities, which have classified virtual currencies as foreign currencies under Article 67 of the TUIR (Italian Tax Code).

Fortunately, the 2023 Budget Law introduced a tax framework for crypto-assets. This new law provides for the application of specific taxation on crypto-assets and clarifies the tax treatment applicable to cryptocurrencies held by individuals who are not entrepreneurs. It is important to keep up with these regulatory changes and stay informed about the taxation of crypto-assets to avoid future issues.

Crypto-Asset: A Complex Definition

The new budget law has introduced a general definition of crypto-assets, which includes "a digital representation of value or rights that can be transferred and stored electronically, using distributed ledger technology or a similar technology." This definition is broader than the previous one, which only referred to cryptocurrencies. This allows for the application of the tax regime to other categories of crypto-assets, such as utility tokens, security tokens, and non-fungible tokens (NFTs), which would otherwise remain without tax classification. However, the broad definition of crypto-assets poses a challenge from a tax perspective, as it encompasses a wide range of different instruments, encoded on the blockchain and with very different functions. This makes it difficult to apply adequate and targeted taxation to each type of crypto-asset.

Taxation of Capital Gains from Crypto-Asset Trading

The budget law has regulated the taxation of capital gains and other earnings derived from crypto-asset trading by individuals who are not engaged in business activities. With the amendment to Article 67 of the TUIR (Italian Tax Code), a new specific category is introduced within the "various income" of a financial nature for capital gains from the sale of crypto-assets equal to or greater than 2,000 euros.
Crypto-to-crypto exchanges are considered tax-neutral, unless the exchanged crypto-assets have the "same characteristics and functions." This provision creates challenges in determining the potential taxation of exchange transactions, as the values of the two crypto-assets at the time of the exchange lack a reliable objective reference, since there is no regulated market for comparison.

Determination of Capital Gains from Crypto-Asset Transactions:

Capital gains from crypto-asset transactions are subject to a substitute tax of 26%. The amount of the capital gain is determined by the difference between the received payment or the fair market value of the exchanged asset and the cost or purchase value of the asset. The cost or purchase value must be documented with certain and precise elements by the taxpayer; otherwise, it is assumed to be zero.
Additionally, the regime of "separate taxation" is extended to income derived from cryptocurrency mining. Specifically, it is established that individuals involved in crypto-asset mining, i.e., those engaged in extracting cryptocurrencies by solving complex mathematical algorithms, are required to pay a substitute tax of 23% on the proceeds derived from the sale of mined crypto-assets.

In conclusion, the definition of crypto-assets introduced by the budget law represents an important step in aligning the Italian tax system with new financial technologies. However, the application of adequate and targeted taxation to each type of crypto-asset still presents a challenge for the Italian tax authorities, especially given the wide variety of different instruments encoded on the blockchain. It is therefore important for taxpayers to properly inform themselves about the regulations regarding crypto-assets and the correct determination of capital gains in order to avoid potential penalties and issues with the tax administration.