Following decisions of the Court of Justice of the European Union1 and of the French Conseil d’Etat2 dealing with virtual currencies (e.g., bitcoin, ethereum), the director of the Luxembourg direct tax administration clarified the tax treatment applicable to virtual currencies in a circular issued on 26 July 2018 (the Circular).
The main take-aways of the Circular are (i) that virtual currencies do not constitute real currencies, (ii) that they are to be considered as intangible goods for direct tax purposes and (iii) that taxable income generated in connection with virtual currencies qualifies either as income derived from a commercial activity (bénéfice commercial) or miscellaneous net income (revenus nets divers) depending on the nature of the activity pursued. Furthermore, it has been clarified that the circumstance that income is realised in a virtual currency is without any influence on the fiscal nature of such income.
The first statement made by the director is that virtual currencies are not considered as real currencies. As a consequence, each transaction carried out by means of a virtual currency has to be converted in euros or any other acceptable functional currency for tax purposes following the guidelines set out in the Circular. Hence, it is not possible to establish tax returns using a virtual currency.
The Circular also clarifies to which category of income the income derived from activities involving virtual currencies (e.g., trading or mining activites) should be allocated. The Circular reminds that income derived from an activity that is independent, permanent, profit-seeking and that participates in the general economic life qualifies as income derived from a commercial activity. According to the Circular, these conditions are generally met in the case of mining, the use of an online virtual currency exchange platform or an automatic distributor of virtual currency.
However, it is always necessary to distinguish between the management of private wealth and a commercial activity. In this respect, a location or an organization used precisely for operations involving virtual currencies, the use of borrowed capital or frequent changes in the virtual currencies’ inventory or the trading for the account of third parties are indicators that income is derived from a commercial activity.
If the income is not the result of a commercial activity, but of the management of a person’s private wealth, it is likely to fall under the provisions relating to miscellaneous net income. Thus, if the individual taxpayer sells the virtual currency less than 6 months after or before the acquisition, the gain or the loss derived from the exchange is considered a gain or a loss of speculation. The Circular specifies in this context that in cases where it is difficult or impossible to determine the exact acquisition price, one has to rely on the weighted average price method. Mining activities are also likely to fall within the scope of miscellaneous net income if the conditions of a commercial activity are not met.
1 CJEU C-264/14
2 CE, 26 April 2018, ref. no° 417809, 418030, 418031, 418032, 418033