Taxation and monitoring of digital currencies.

Taxation of staking activity.

Another unique aspect of cryptocurrency and its taxation is related to staking activity, which is a process that allows for earning an economic return through the simple possession of a certain amount of virtual coins. Given the particularity of the matter deriving from the nature of staking activity, the tax regulation to be applied is even more lacking. In support, two recent directives from the Revenue Agency – Interpello no. 433 of August 24, 2022, and Interpello no. 437 of August 26, 2022 – determine summarily that:

• Earnings obtained through staking cryptocurrencies are equated with capital income; the staking platform must apply a withholding tax at the source equal to 26% (as determined by Presidential Decree no. 600 of September 29, 1973, consistent with article 44 of the Tax Implementation Regulations, co.1 lett. h);
• Profits are taxed according to the progressive tax rates and finally, staking income must be included in the RL section as it is equated with capital income.

Filing the RW section.

The assimilation of digital currencies with foreign currencies means that the cryptocurrencies held must be declared in the RW section of the Redditi PF tax return form. The RW section is the tool used by the tax administration for the purpose of correct fiscal monitoring. In fact, even if no capital gain is generated (i.e., the gain obtained following the sale at a price higher than the purchase cost incurred), one will still be subject to monitoring obligations, which, as previously stated, translates into the completion of the RW section by the holder of the cryptocurrencies.

To this end, the Revenue Agency, with its response to Interpello 788/2021, provides taxpayers with some useful information regarding fiscal monitoring and the IVAFE (Tax on the value of financial assets held abroad) in the case of holding cryptocurrencies. Specifically, the Agency states that:

• “For the purpose of completing this section, the euro equivalent of the virtual currency held as of December 31 of the reference period must be determined at the exchange rate indicated on the website where the taxpayer purchased the virtual currency. In the following years, the taxpayer must indicate the value held at the end of each year or at the date of sale in the case of virtual currency sold in progress”;
• “Virtual currencies are not subject to the IVAFE by individuals residing in the territory of the State, as this tax applies exclusively to deposits and current accounts of a banking nature.”

Instructions for supporting the correct completion of the Redditi PF 2022 tax return form are issued by the Revenue Agency. Below are the columns of the personal income tax return that must be completed:

• In the first column, relating to the “ownership title code,” we must enter a code ranging from 1 to 4. With regard to cryptocurrencies, we will enter the code “1 – property”;
• With reference to column 3 (code for identifying the asset), the code “14 – Other foreign financial activities and virtual currencies” must be entered;
• The “column 4 – foreign state code” should not be completed as there is no obligation to complete it for virtual currencies;
• In “column 5 – ownership share,” the value “100” must be entered to declare ownership of 100% of the digital currencies being monitored;
• In “column 6 – value determination code,” we will enter the code “1” to indicate that the reference value is the market value;
• In column 7 – initial value, the value at the beginning of the tax period or on the first day of ownership of the asset must be indicated. However, it is worth noting that column 7 presents two criticalities:
• the first relates to the determination of the price. As official values for cryptocurrencies are not in force, we could alternatively opt for indicating the average market value at the beginning of the tax period or on the first day of ownership of the asset; or we could choose to indicate the value of the exchange used at the beginning of the tax period or on the first day of ownership of the asset;
• the second criticality arises if more than one digital currency is held in different exchanges. This assumption could lead holders of digital currencies to make various calculations in order to correctly complete column 7.
• In “column 8 – final value,” the value at the end of the tax period, i.e., on 31.12.2021, must be indicated. If the cryptocurrencies are sold before the end of the tax period, the value on the last day of 2021 must be indicated;
• In column 9 – maximum value in non-collaborating countries’ accounts, the maximum amount that the digital currency has reached during the tax period if held in non-collaborating countries, more commonly known as “Black List Countries,” must be indicated. According to the latest intervention by the European Council on February 24, 2022, there are nine non-cooperative jurisdictions for tax purposes:

1. American Samoa;
2. Fiji;
3. Guam;
4. Palau;
5. Panama;
6. Samoa;
7. Trinidad and Tobago;
8. United States Virgin Islands;
9. Vanuatu.

• Columns 10, 11, 12, 13, 15, 16, 17, and 19 should not be completed as IVAFE (tax on foreign financial activities) and IVIE (tax on foreign real estate investments) are not due with regard to cryptocurrencies;
• Column 18 will not be completed if the amount of cryptocurrencies held does not constitute taxable income (i.e., when the average balance does not exceed €51,645.69 for at least 7 consecutive days). In this regard, it is worth noting that the average balance of foreign currencies does not only refer to digital currencies but includes any foreign currency held (dollars, yen, pounds, etc.). If the average balance value constitutes taxable income, the “code 3” must be entered, and the RT section must be completed;
• Finally, columns 21, 22, 23, 24 should not be filled out if we have entered the value “1” in the first column “code of possession title”.