The Luxembourg tax authorities published on 26 July 2018, a circular in relation to the tax treatment of income realized by means of virtual currencies, notably in the framework of their alienation or creation.

The main takeaways are:

Virtual currencies are not fiat monies since they do not have legal tender. Accordingly, the tax payer is not allowed to either establish their annual accounts for tax purposes or declare their taxable income in virtual currencies;

Virtual currencies are intangible assets;

All income and proceeds, operating expenses, acquisition costs, special expenses and extraordinary expenses denominated in a virtual currency, are to be determined in euros or in another currency for which the European Central Bank establishes and publishes the exchange rate of the Euro against that foreign currency, notably on the basis of the daily rate published by an exchange platform approved by the Luxembourg Commission de Surveillance du Secteur Financier;

The use of a virtual currency as a means of payment has no effect on the fiscal nature of income; so that all provisions of tax law apply according to the tax nature of the income at hand;

Income realised via virtual currency (e.g., sale or mining) is only taken into consideration where falling within the categories of commercial profit or other net income;

Accordingly, income realized via virtual currency qualifies as commercial income only when the conditions set forth by Art. 14 of the Luxembourg tax law are fulfilled. The Luxembourg tax authorities emphasize that this would be the case in mining activities, operating of an online exchange or ATM of virtual currencies; while the boundary between commercial activity and private wealth management should be drawn considering the factual situation. The Luxembourg tax authorities further give a list of criteria which can, i.a., evidence the existence of a commercial activity:

  • Premises or organization dedicated to virtual currency transactions;
  • Recourse to borrowed capital;
  • Frequent alternation of virtual currencies inventory;
  • Trade on behalf of third parties.

Operating expenses (e.g., electricity costs related to mining or conversion charges of virtual currencies exchange platforms) are deductible if exclusively generated by the enterprise in accordance with article Art. 45 of the Luxembourg tax law. The same applies to amortization costs of IT infrastructures.

Regarding other net income, and in the absence of a commercial enterprise within the meaning of Art. 14 above, it shall be determined whether the income generated by means of a virtual currency falls within the other income category of Art. 99. In the case of an exchange of a virtual currency (against another virtual currency or fiat money) or in the case of settlement of a transaction with virtual currencies, the tax payer is deemed to have transferred said virtual currencies against payment, followed by the purchase against payment of the currency, good or service received as a consideration in accordance with Art. 102, indent 1a, of the Luxembourg tax law. Any profit or loss realised within the framework of such an exchange consists in a speculation profit or loss within the meaning of Art. 99. where the holding period does not exceed 6 months. Speculation incomes are not taxable where the total profit realised during the calendar year is lower than €500.-.

In case of settling of a virtual currency, the onus of proof of the holding period thereof is on the tax payer. In case identification of the virtual currency actually sold is difficult to achieve, the acquisition price thereof is determined using the weighted average price - but excluding methods such as FIFO or LILO;

Valuation of a virtual currency for the purpose of the net wealth tax for organism of a collective nature is carried out pursuant to the provisions of the modified law of 16 October 1934 on the valuation of goods and assets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.