Cryptocurrency taxation came into effect in Portugal at the beginning of 2023. In recent years, we have witnessed the rapid growth of crypto investments, with an increasing number of individuals investing in digital assets.

However, despite the introduction of the new tax framework, many taxpayers still have questions about how cryptocurrency gains should be reported and taxed.

If you invest in crypto-assets, keep reading to find out whether you are required to declare them to the Portuguese Tax Authority and how the current rules apply.

They rely on cryptography and blockchain technology, which use complex encrypted codes to validate transactions and enable decentralised networks to operate securely.

Cryptocurrency Taxation: Everything You Need to Know About the Current Tax Regime

Before looking at the tax rules, it is worth briefly explaining what cryptocurrencies are.

Cryptocurrencies are digital assets that, although they have real economic value, exist exclusively in electronic form.

Bitcoin is perhaps the best-known cryptocurrency, but there are thousands of different crypto-assets available for investment.

In general, cryptocurrencies perform many of the same functions as traditional money. They can:

• Be used as a means of payment for goods and services; 
• Act as a store of value; 
• Serve as a unit of account for pricing and economic transactions.

As the crypto market expanded significantly over recent years, the Portuguese Government introduced a dedicated tax framework through the 2023 State Budget, which came into force at the beginning of that year.

Below, we answer some of the most common questions about the taxation of cryptocurrencies in Portugal.

• Who Is Required to Declare Cryptocurrency Income?

You are required to report cryptocurrency transactions to the Portuguese Tax Authority only if you have obtained taxable income or capital gains from crypto-assets.

Activities subject to taxation include, for example:

• Cryptocurrency mining; 
• Validation of blockchain transactions; 
• Other income generated through crypto-related activities. 

These types of income are generally treated as Category B income (self-employment/business income) and must be declared accordingly.

• Do I Have to Declare Gains on Cryptocurrencies Sold Within One Year?

Yes.

Capital gains arising from the sale of cryptocurrencies held for less than one year are subject to Portuguese Personal Income Tax (IRS).

Unless you choose to aggregate these gains with your remaining taxable income (englobamento), they are generally taxed at a flat rate of 28%.

• What Happens If I Choose Income Aggregation (Englobamento)?

If you opt for aggregation, you must:

• Declare your cryptocurrency gains; 
• Select the aggregation option under Category G of your IRS return. 

By doing so, your crypto gains will be added to your remaining taxable income and taxed according to the progressive IRS tax rates, rather than the flat 28% rate.

Depending on your overall income, this may be either more or less advantageous than the autonomous tax rate.

• How and When Do I Declare Cryptocurrency Transactions?

Cryptocurrency transactions must be reported when submitting your annual IRS tax return.

The filing period begins on 1 April each year.

When completing your tax return, you must include the crypto transactions carried out during the previous calendar year.

The Portuguese IRS forms have been updated to include the specific annexes and fields required for reporting crypto-assets.

• How Much Tax Will I Pay on Cryptocurrency Gains?

Where the standard taxation rules apply, cryptocurrency capital gains are generally taxed at 28%, unless you opt for income aggregation.

For example:

If you realize a taxable capital gain of €1,000, the IRS payable would generally be €280.

• Are Cryptocurrencies Held for More Than One Year Taxable?

No.

Under the current Portuguese tax rules, capital gains arising from the sale of cryptocurrencies that have been held for at least one year are exempt from IRS, for most situations.

This exemption has made Portugal an attractive jurisdiction for certain long-term crypto investors.

• What Happens If I Fail to Declare Cryptocurrency Income?

Failure to declare taxable cryptocurrency income constitutes a tax offence.

Consequently, the taxpayer may be required to pay:

• A financial penalty (fine), the amount of which depends on the circumstances of the case; 
• Outstanding tax due; 
• Compensatory interest on unpaid tax. 

Where the taxpayer voluntarily regularizes the situation, the penalty may be reduced or, in certain cases, waived.

Additionally, compensatory interest is charged on the unpaid tax at the legally applicable annual rate.

Conclusion

Portugal introduced a specific tax framework for cryptocurrencies in 2023, bringing greater clarity to the taxation of crypto-assets.

Today, investors should pay particular attention to the holding period, the type of crypto activity carried out, and the nature of the income earned, as each of these factors can significantly affect the applicable tax treatment.

Given the complexity of cryptocurrency taxation and the fact that tax legislation continues to evolve, it is advisable to seek advice from a Certified Accountant before submitting your IRS return.

Professional guidance can help ensure that your cryptocurrency transactions are correctly reported and that you remain fully compliant with Portuguese tax legislation.