Spain and Cryptocurrency

Spain Cryptocurrency Laws
Regulation of Digital Currencies: Cryptocurrency, Bitcoins, Blockchain Technology

ICOs

While there is no Spanish legislation that specifically addresses cryptocurrency coin offerings, ICOs may nevertheless fall under Spain’s general securities and investments laws. Concerning the classification and commercialization of cryptocurrency, the Comisión Nacional del Mercado de Valores (CNMV) proclaimed in an unofficial announcement that cryptocurrencies are per se not securities under Spain’s laws. The CNMV is the governmental agency responsible for regulating Spain’s securities market. Specifically, the CNMV is the Spanish investment services and securities regulator and the entity charged with regulating cryptocurrency advertisements.

While cryptocurrencies are not per se securities, ICOs are governed by Spain’s general security and investment laws when they are classified as “public offerings of transferable securities.” In Spain, transferable securities are broadly defined and presumably encompass certain ICOs. To determine whether ICOs are transferable securities, the following factors weigh in favor of classifying an ICO as transferable security: (1) the ICO token assigns rights or expectations of a share in the potential increase in value or profitability of a business like traditional financial instruments subject to Spanish securities law, or (2) the ICO token is purchased with the expectation that the investor will eventually obtain a profit. Therefore, ICO tokens are considered financial instruments when there is a correlation between the expectation of profit or an increase of value and the evolution of the underlying business or project. In other words, ICO tokens that are like traditional securities, such as stocks, may be encompassed under Spain’s broad definition of transferable securities.

ICOs that are classified as financial instruments are potentially regulated by the following: (1) the Markets in Financial Instruments Directive II (MiFID II), (2) the Prospectus Directive, and (3) the Alternative Investment Fund Managers Directive. However, an ICO is not qualified as a “public offering” under Spanish law when either: (1) it is aimed at fewer than 150 investors, or (2) involves a minimum investment of €100,000 or a total amount of less than €5 million. Accordingly, an ICO that involves less than 150 investors and less than €5 million is not technically a “public offering” under Spanish law.

ICOs that are not public offerings are not regulated under any of the three acts mentioned above. Thus, for example, if an ICO is not a public offering, then the offering would not require the approval of a prospectus, and the offering would not fall under the CNMV’s supervision. However, ICOs that are not public offerings must enlist an authorized investment firm to assist in the offering. This requirement is satisfied when the investment firm intervenes: (1) on the occasion of each individual subscription or acquisition of the securities or financial instruments as a placement agent, broker, or adviser, subject to the rules applicable in each case; or (2) by validating and supervising the offer in general and, in particular, the information provided to investors, and the placement or marketing procedure used (without an authorized entity having to intervene on the occasion of each subscription or acquisition). Accordingly, an ICO issuer will be required to either subject themselves to the CNMV’s supervision or enlist the assistance of an authorized investment firm to legally offer an ICO to the Spanish public.

WORKS CITED

  1. The Law Reviews – The Virtual Currency Regulation Review. (2020). Thelawreviews.co.uk. https://thelawreviews.co.uk/title/the-virtual-currency-regulation-review/spain
  2. Plasencia, R. Crypto-asset advertising becomes regulated in Spain – DLA Piper Investment Rules of the World. (2021). Retrieved 16 June 2021, from https://www.dlapiperintelligence.com/investmentrules/blog/articles/2021/crypto-asset-advertising-regulation-spain.html#:~:text=The%20issuance%2C%20sale%20and%20purchase,and%20MiFID%20rules%20would%20apply

Crypto-Advertising

In Spain, cryptocurrency is largely unregulated because cryptocurrencies are not financial instruments under Spanish law. However, amendments to the Spanish Securities Markets Law were approved in March 2021. The amendments were enacted to regulate cryptocurrency advertising within Spain. Accordingly, cryptocurrency firms advertising their services to residents of Spain must follow the Spanish Securities Markets Law.

By regulating cryptocurrency advertising, governmental authorities intend to protect Spanish investors from the risks associated with cryptocurrency trading. According to Spanish authorities, cryptocurrencies are inherently risky because investors do “not have the protection offered by traditional payment systems against a default by the counter party.” Since investors are not provided traditional safeguards, Spain passed cryptocurrency advertising regulations to mitigate the inherent risks associated with virtual currency.

The amendments appoint Spain’s National Securities Market Commission (CNMV) as the supervisor of cryptocurrency advertising. Specifically, the CNMV will supervise all advertisements that offer cryptocurrency to the public as investment opportunities. In other words, any ICO that advertises to the public will be regulated by the CNMV. Therefore, the CNMV can regulate cryptocurrency advertisements even though virtual currencies themselves are mainly unregulated in Spain.

The scope of the CNMV’s authority extends to Spanish and foreign entities advertising crypto assets to Spanish resident investors. Accordingly, a U.S. company that advertises cryptocurrencies to Spanish residents will be subject to the CNMV’s authority. However, formal advertising materials, such as “white papers” and reports to professional investors, are excluded from the CNMV’s scope of authority. Additionally, crypto-assets, non-fungible assets, and assets used as a means of payment are excluded from the CNMV’s authority.

Presumably, the CNMV’s scope of authority is strictly limited to cryptocurrency advertisements that target Spanish investors. Nevertheless, the CNMV is contemplating whether prior authorization should be a requirement for mass-marketing campaigns of cryptocurrency. Likely, the CNMV will require mandatory disclaimers in such marketing materials. In essence, these disclaimers would disclaim whether or not a particular ICO was approved by the CNMV. In theory, mandatory disclaimers would protect investors from the risks of fraudulent ICOs because mandatory disclaimers would indicate whether or not an ICO is authorized by the CNMV.

In sum, cryptocurrency advertisements that target Spanish investors are regulated by the CNMV. By subjecting these advertisements to regulation, authorities intend to protect Spanish investors from the risks associated with cryptocurrency. Therefore, cryptocurrency firms that advertise in Spain are now subject to the CNMV’s authority.

WORKS CITED

  1. Crypto-asset advertising becomes regulated in Spain – DLA Piper Investment Rules of the World. (2021). Retrieved 16 June 2021, from https://www.dlapiperintelligence.com/investmentrules/blog/articles/2021/crypto-asset-advertising-regulation-spain.html#:~:text=The%20issuance%2C%20sale%20and%20purchase,and%20MiFID%20rules%20would%20apply
  2. CNMV – Comisión Nacional del Mercado de Valores . (2021). Retrieved 16 June 2021, from http://www.cnmv.es/portal/home.aspx
  3. Erazo, F. Spanish Treasury Secretary Says Cryptocurrencies Carry a “Risk of Default”, Repeats Bank of Spain’s Lack of Regulation Rhetoric – Economics Bitcoin News. (2021, February 17). Bitcoin News. https://news.bitcoin.com/spanish-treasury-secretary-says-cryptocurrencies-carry-a-risk-of-default-repeats-bank-of-spains-lack-of-regulation-rhetoric/

AML Regulation

In 2020, Spanish legislators proposed an amendment to Spain’s AML and terrorist financing laws to comply with the EU’s AML directive. The amendments aim to require cryptocurrency providers to register with the Bank of Spain. If the amendments become effective, Spain will be compliant with the EU’s 5th Anti-Money-Laundering Directive (AMLD5). Furthermore, the proposed amendments would also strengthen Spain’s preventive ability to combat financial crimes. Spain implemented these new amendments following warning letters from the EU to amend their AML regulations.

Spain’s 2020 AML amendments include the following definitions concerning cryptocurrencies. First, virtual currencies are defined as “a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency, and does not possess a legal status of currency or money but is accepted by natural or legal persons as a means of exchange and that can be transferred, stored and traded electronically.”

Second, the proposal generally defines cryptocurrency transactions. Specifically, the proposals define the “exchange between virtual currencies and fiat currencies” as “the purchase and sale of virtual currencies through the delivery or acceptance of euros or any foreign legal tender or electronic money accepted as [a] medium of exchange in the country where it has been issued.” Finally, the amendments define custodian wallet providers as “a legal or natural person that provides services to safeguard private cryptographic keys on behalf of its customers, to hold, store and transfer virtual currencies.”

Under Spain’s new AML regulations, cryptocurrency exchange providers are obligated to follow anti-money laundering requirements. Obligated institutions include: (1) non-resident entities providing services through brokers or agents; and (2) entities providing services without a permanent establishment that provide similar services to those referred to above. These entities are required to register with the Executive Service of the Commission for the Prevention of Money Laundering and Monetary Offences (SEPBLAC). SEPBLAC is the Spanish agency enforcing the country’s AML laws. These entities must also register their services with the Bank of Spain within nine months from the law’s effective date.

One unintended consequence of Spain’s new AML amendments is that they could force several cryptocurrency firms to leave the country. In other EU countries, small firms complained that the increased compliance costs associated with the new AML regulations make it unaffordable to operate in Europe. Likewise, cryptocurrency firms in Spain may also be driven out of Europe due to the excessive expenses they will have to comply with the new AML regulations.

Nevertheless, Spain passed the AML amendments because criminal actors often use the anonymous nature virtual currencies for money laundering and terrorism financing. In recent years, criminals have frequently used cryptocurrency as a means of payment for illegal services. For example, one early Bitcoin millionaire was a twenty-eight-year-old named Aaron Shamo. Shamo was accused of trafficking the deadly drug “fentanyl.” Shamo financed his drug-trafficking ring with Bitcoin. Specifically, he would sell drugs online in exchange for Bitcoin. At the time of his arrest, Shamo held over $10 million in Bitcoin and is allegedly responsible for the overdoses of twenty-eight people. According to authorities, “Shamo is part of a new generation of criminals who buy and sell drugs online — and cover their tracks with cryptocurrencies.”

The Plan intends to combat the “new generation of criminals” that use virtual currency as a means of payment by making cryptocurrency transactions less anonymous. According to the Plan, the Spanish authorities must adapt to new methods used by criminal actors. To combat anonymous criminals, the new AML amendments implement strict know-your-customer (KYC) regulations to require cryptocurrency service providers to identify the buyer and seller in cryptocurrency transactions. By implementing strict KYC requirements, the AML amendments will probably make it easier for Spanish authorities to track and arrest criminals that use cryptocurrency to facilitate their illegal acts, like Shamo.

To combat the “new generation of criminals,” the plan emphasizes that government personnel must be adequately trained on how to prevent criminals from using cryptocurrency to facilitate crimes. Since cryptocurrency is borderless and can facilitate transactions between people from different parts of the planet, the Plan emphasizes that Spanish authorities must exchange information and cooperate with international governments. Otherwise, Spanish authorities may not be able to combat criminals that use cryptocurrency to facilitate crimes.

In sum, the proposed AML regulations would comply with the current EU’s AML directives, provide specific cryptocurrency definitions, and strengthen KYC requirements to combat the “new age of criminals” that exchange illegal goods and services for cryptocurrency. Therefore, Spain’s AML proposals would make cryptocurrency transactions less anonymous and make it harder for criminals to use cryptocurrency to escape governmental detection.

WORKS CITED

  1. Regulatory Approaches to Cryptoassets. (2018). Loc.gov. https://www.loc.gov/law/help/cryptoassets/spain.php
  2. Sandali Handagama. (2020, June 23). Spain’s Crypto Firms to Face New Registration Requirements Under EU-Driven Bill – CoinDesk. CoinDesk; CoinDesk. https://www.coindesk.com/spains-crypto-firms-to-face-new-registration-requirements-under-eu-driven-bill
  3. Mui, Y. (2018, April 13). How bitcoin is fueling America’s opioid crisis. CNBC; CNBC. https://www.cnbc.com/2018/04/13/how-bitcoin-and-cryptocurrencies-are-fueling-americas-opioid-crisis.html

Taxation

In Spain, profits from cryptocurrency transactions are subject to personal income taxes, corporate income taxes, and non-resident income taxes. For tax purposes, the Spanish Accounting Board classifies cryptocurrencies as either intangible assets or commercial stocks, depending on their use. In addition, the Spanish government declared that all operations involving cryptocurrencies are barter transactions for income tax purposes. As a result, cryptocurrency transactions result in either a capital gain or a capital loss for income tax purposes.

Spain’s binding tax ruling V0808-18 of March 22 confirmed that “the use of virtual currencies outside of the performance of an economic activity may result in capital gains or losses at the moment in which the transaction takes place.” Specifically, capital gains or losses are determined by calculating the difference between the value at which the cryptocurrencies were acquired and the value at which they are sold. Consequently, tax compliance can be complicated and burdensome for both tax authorities and taxpayers. Accordingly, it is crucial that Spanish residents diligently record the price at which they bought and sold their cryptocurrencies.

Cryptocurrency traders must pay personal income taxes to the Spanish government. Cryptocurrency traders are defined as a “person who acquires cryptocurrencies and pays for them with his money.” Capital gains are to be recorded in the Personal Income Tax Savings Base. Tax rates for cryptocurrency traders will vary between 19% and 26%. Specifically, the first 6,000 euros of capital gains resulting from cryptocurrency is taxed at a 19% rate. The next 44,000 euros are taxed at a 21% rate, and the following 150,000 euros are taxed at a 23% rate. Finally, capital gains exceeding 200,000 euros are subject to a 26% tax rate. Capital losses may be offset and compensated for four years after a loss. However, capital losses can only offset a maximum of 25% of the gains of each of the following years. Therefore, investors can reduce their tax liability by selling an asset at a loss when substantial gains from cryptocurrency trading are expected in the near-future.

Economic activities, such as cryptocurrency mining, are also subject to personal income taxes. Individuals mining cryptocurrencies must pay taxes on the profits from their operations. However, cryptocurrency miners are permitted to deduct business expenses from mining operations. To deduct business expenses, cryptocurrency miners must meet five requirements:

  1. They must register with the relevant tax authorities;
  2. They must register before the Spanish Social Security Authorities;
  3. They must file quarterly reports on the “Payment into Account of the Personal Income Tax,” and its annual summary;
  4. They must register with the Register of Intra-Community Operators (ROI) and file a corresponding quarterly form on intracommunity operations; and
  5. They must file an annual informative report on operations with third parties.

Furthermore, several cryptocurrency holders are subject to additional taxes because many regions within Spain implement wealth taxes. Wealth taxes tax individuals’ worldwide net wealth. Cryptocurrencies must be reported when calculating the value of individuals’ wealth. The value declared in the wealth tax is calculated by determining the value as of December 31 of the corresponding tax year. Depending on the region, Spanish residents may be subject to a wealth tax ranging from 0.2% to 3.75%. The regions in Spain where wealth taxes are required include: (1) Catalonia, when net wealth exceeds 500,000 euros; (2) Comunitat Valenciana, when net wealth exceeds 600,000 euros; and (3) Andalusia, when net wealth exceeds 700,000 euros. However, residents of Madrid are exempt from paying wealth taxes.

Citizens of Spain that neglect to report their cryptocurrencies on their income taxes may be subject to severe liability. Fines for failing to report can reach 10,000 euros. Additionally, tax evaders can face penalties that reach up to 150% of the income not declared. Furthermore, in 2020, Spain approved a bill requiring cryptocurrency owners to disclose their holdings. The bill intends to “oblige citizens to provide detailed information on balances and transactions carried out inside and outside of Spain.” Consequently, it is imperative that citizens of Spain correctly record their cryptocurrencies on their tax returns.

P.S. Insights on Cryptocurrency Legal Issues

Most jurisdictions and authorities have yet to enact laws governing cryptocurrencies, meaning that, for most countries, the legality of crypto mining remains unclear.

Under the Financial Crimes Enforcement Network (FinCEN), crypto miners are considered money transmitters, so they may be subject to the laws that govern that activity. In Israel, for instance, crypto mining is treated as a business and is subject to corporate income tax. In India and elsewhere, regulatory uncertainty persists, although Canada and the United States are relatively friendly to crypto mining.

However, apart from jurisdictions that have specifically banned cryptocurrency-related activities, very few countries prohibit crypto mining.

Our Freeman Law Cryptocurrency Law Resource page provides a summary of the legal status of cryptocurrency for each country across the globe with statutory or regulatory provisions governing cryptocurrency.  The globe below provides links to country-by-country summaries:

Podcast:

The Freeman Law Project – Cryptocurrency Regulation and Taxation: A Brief Primer

Is cryptocurrency legal in Spain?

Do you have questions about cryptocurrency, digital currencies, or blockchain technology?
Freeman Law can help with digital currencies, tax planning, and tax compliance. Contact us now to schedule a consultation or call (214) 984-3410 to discuss your cryptocurrency and blockchain technology concerns.


WORKS CITED

  1. Regulatory Approaches to Cryptoassets. (2018). Loc.gov. https://www.loc.gov/law/help/cryptoassets/spain.php
  2. Wasinger, M. (2021, February). How are cryptocurrencies regulated in Spain? How Are Cryptocurrencies Regulated in Spain?; Blockpit GmbH. https://blog.blockpit.io/en/crypto-taxation-regulations-spain
  3. Helms, K. Spain Approves Bill Requiring Cryptocurrency Owners to Disclose Crypto Holdings – Regulation Bitcoin News. (2020, October 13). Bitcoin News. https://news.bitcoin.com/spain-cryptocurrency-disclose-crypto-holdings-gains/
  4. The Law Reviews – The Virtual Currency Regulation Review. (2020). Thelawreviews.co.uk. https://thelawreviews.co.uk/title/the-virtual-currency-regulation-review/spain
  5. Bit2Me Academy. (2020, January 6). Taxes: Treasury and Bitcoin, what to declare in Spain for having cryptocurrencies? Bit2Me Academy; Bit2Me Academy. https://academy.bit2me.com/en/hacienda-spain-bitcoin-cryptocurrencies-taxes/
  6. García, J. (2021, March 11). Tax on Cryptocurrency in Spain: the best place in EU? (2021). Lexidy Law Boutique. https://www.lexidy.com/tax-on-cryptocurrency-in-spain-everything-you-need-to-know/
  7. Asen, E. (2020, December 17). Wealth Taxes in Europe. Tax Foundation; Tax Foundation. https://taxfoundation.org/wealth-taxes-in-europe-2020/#:~:text=Spain’s%20net%20wealth%20tax,offers%20a%20100%20percent%20relief).
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