Crypto companies and exchanges are facing unprecedented pressure from financial regulators around the world, with many digital asset businesses starting to consider moving to friendlier locations. This article is part of a series discussing the key considerations of relocating, as well as comparing the appeal of a number of alternative locations. VIEW THE SERIES
The Italian Regulator has been dealing with the crypto phenomenon since its early days. The very first legislative actions approached the subject from a regulatory point of view, addressing in particular the Anti Money Laundering (AML) issues related to the exchange of crypto assets, also under the guidance of the European Union.
Indeed, Legislative Decree 231/07 extended the scope of AML duties to crypto assets, requiring virtual service providers to carry out KYC controls, to keep updated KYC information regarding their clients and to report such information to the competent authorities, upon specific conditions. Furthermore, virtual service providers are now required to enrol with a dedicated register (Registro Operatori Valute Virtuali).
Following the raise of a prolific speculative market for crypto assets, the European Union has been discussing Regulation 2023/1114 –Markets in Crypto Assets Regulation (MiCAR) – the first European-level legislation addressing the issuance and service provision of digital assets in the European Union. The Regulation is aimed at implementing transparency rules and guarantees for the investors, thus creating a safer and more transparent market environment
The Regulation draws three categories of crypto assets: “asset-referenced tokens”, Electronic money tokens” and “Utility tokens”. It is important to know that digital assets already qualifying as financial instrument under the MIFID II Directive are out of the scope of the Regulation. What is interesting is that NFTs are excluded too, since they are not fungible and tradeable as other crypto assets.
Under these new rules (yet to be implemented), issuers and crypto service providers willing to operate in Europe must meet specific capital, conduct and other requirements; furthermore, they should draft and publish a “crypto asset white paper” containing information about the issuer and the tokens. Specific and more stringent duties and authorisations are placed upon issuers of asset referenced and e-money tokens. Furthermore, Member State should designate the competent authorities responsible for carrying out the relevant controls.
The Italian tax framework
As regards the tax issues surrounding the phenomenon, in the early days of the crypto fever the Italian Tax Authorities put their efforts to determine the taxation of specific crypto assets such as utility tokens and ICOs. Lacking any specific disposition, the Tax Authorities compared crypto currencies to foreign currencies for income tax and VAT purposes, while instrument such as the utility tokens were treated as ‘vouchers’.
The tax treatment of income from crypto assets was finally clarified by the Italian Government with Law 197/2022 (Budget Law 2023), amending Art. 67 c) sexies of the Italian Income Tax Code.
First of all, the new provision introduced a definition of crypto assets for tax purposes. In particular, crypto assets are now defined as a “digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology“. Such definition is analogue to the one set forth by the MiCAR proposal, creating a pattern of legislative uniformity. The provision does not apply to such crypto assets qualifying as financial instruments, thus excluding such assets that are traded and exploited as financial securities, such as security tokens.
As regards the tax treatment of crypto assets, the aforementioned Letter c) sexies provides that capital-gains deriving from the reimbursement, sale, swap or possession of crypto assets are taxed only where the total value exceeds €2.000 in each fiscal year, with the possibility to compensate such income with losses (with the exception of income deriving from the mere possession, such as remunerations from staking).
The provision expressly exempts from taxation swaps between crypto assets “having similar features and functions”, a clarification that puts out of its scope of application transfers of crypto currencies or NFTs from a wallet to another, thus limiting the fiscal relevance of crypto transactions to those involving legal tender currencies or different types of crypto assets.
Capital gains from crypto assets are subject to a 26% substitutive tax, which can be applied by the financial intermediaries through which the assets are held (such as banks or crypto exchanges).
Differently, where the crypto asset qualifies as a financial instrument, the related income will be treated as income from capital or “other income”, depending on the specific features.
When the crypto assets are traded within a stable commercial activity, they will be treated as business income, subject to other specific rules.
The reform brought a first legal framework in the tax treatment of income from crypto assets derived outside a business activity. Following this path, the Tax Authorities recently issued a draft of Circular Letter addressing the main tax issues regarding crypto assets, which has been welcomed by tax experts and market operators and is now under final review.
The draft of Circular Letter on crypto assets
The draft of Circular Letter contains important clarifications on key tax aspects concerning crypto assets, such as: (i) the “territoriality” rules, (ii) the reporting obligations, and (iii) the VAT treatment of specific crypto assets, such as NFTs.
Rules on territoriality
In relation to the territoriality of cryptos, while, as a general rule, individuals and entities having their tax residence in Italy are taxed on a worldwide basis (save for the application of DT Treaties), non-resident subjects are taxed only on income that is deemed to be sourced in Italy, according to the relevant Income Tax Code rules. In this regard, the Tax Authorities clarified that income from crypto operations is taxable in Italy if:
- such activities were carried out through crypto service providers or wallet providers that are resident in Italy, or;
- the crypto assets were located physically in Italy (for example, they are stored in a USB flash drive existing in the Italian territory).
What’s more, the draft clarifies that, in relation to individuals that are resident in Italy under the “res-non dom” regime, crypto-income is sheltered by the 100.000 flat tax where they are sourced from digital wallets, digital accounts or any further digital storage system located abroad. Such clarification is definitely useful to attract young crypto entrepreneurs from abroad.
Reporting obligations (RW Form)
As regards the reporting duties of foreign financial activities in the hands of Italian resident taxpayers, Budget Law 2023 already extended such duties to Italian resident holders of crypto assets at large (as it was originally limited to holders of crypto currencies). According to the clarifications provided by the Tax Authorities, Italian resident holders of crypto assets must complete the s.c. “RW” form of their Italian tax returns in order to disclose the value of their digital investments. It is important noticing that in the specific case of crypto assets, according to the draft of circular letter, such duties apply notwithstanding how and where they are stored, thus meaning that also an Italian resident taxpayer holding his cryptos through a USB flash drive that is kept in a safe box located in Italy is still required to disclose the value of his crypto wealth in his tax return.
VAT issues
The draft of circular letter tries to shed some light also on indirect taxation. The VAT treatment of crypto assets triggered much debate in the recent years. Indeed, given the different types and features of crypto assets, as well as the many ways by which they have been commercially exploited, it has always been impossible to give a definitive qualification to the phenomenon, thus meaning that it is not correct to treat each crypto at the same way from a VAT perspective. In the draft of circular letter, the Tax Authorities embraced such considerations and expressly state that the multiple ways in which cryptos are traded or exploited suggest adopting a “look-through” approach, aimed at qualifying each case based on its substantial effects. In other words, substance should prevail over form: for example, an NFT is generally marketed as a collectible, but sometimes it could be used as a means of payment or for investment purposes.
All the above considered, in line with a pioneering 2014 pronouncement by the European Court that is still widely considered, the circular letter states that crypto currencies which are meant for payment purposes only should be treated as foreign currencies. Consequently, according to applicable VAT law, transactions involving crypto currencies (as well as any other crypto assets used as a means of payment) are not subject to VAT. The Tax Authorities thus expressly exempt from VAT transactions such as crypto-to-legal currency exchange, mining and staking.
NFTs and VAT
Non-Fungible Tokens, or NFTs, ignited much debate due to their ever-changing features and use, as well as for their commercial success. Tax experts have been divided about the correct qualification of such phenomenon: are they work of art? Are they receivables? On the basis of the aforementioned “look-through” approach, according to the Tax Authorities the VAT treatment should vary depending on the asset underlying the NFT, so that:
- if the underlying asset is an “on-chain” asset, it should be treated as an electronic service;
- if the underlying asset is an “off-chain” asset, the VAT treatment depends on the qualification of such asset so that, for example, if it is a moveable good it is to be treated as such; if the NFT incorporates license rights or other rights, it is treated as a provision of services.
Wealth planning opportunities for HNWIs moving to Italy
In the light of the latest clarification provided by the tax authorities in the draft of Circular Letter as well as in tax rulings obtained by Withers, there are interesting wealth planning opportunities for HNWIs relocating to Italy under the s.c. Italian RND Regime.
In fact, under such regime, the applicant holding crypto assets:
- would be exempt from the aforementioned reporting obligations;
- would be subject to the payment of an annual flat tax of 100,000€ on all his/her foreign sourced income, including income from crypto assets that meet the aforementioned territoriality criteria.
For further information, please contact:
Richard Stebbing, Withersworldwide
richard.stebbing@withersworldwide.com
