Spain’s Crypto Tax Warnings Mirror Broader Effort in US, UK

The Spanish Tax Administration Agency’s warnings to crypto holders in Spain are part of a larger crackdown as governments seek to combat the potential underreporting of taxable dealings in the sector.  

The agency was set to issue 328,000 crypto-related notices to taxpayers this year, Spain-based newspaper El Mundo reported Tuesday — a 40% increase from the year before.

Despite the year-over-year growth, the current number is still “moderate” considering the large number of investors who trade crypto, a spokesperson for the Spanish Tax Administration Agency told Blockworks in an email.

“The reason for the gradual growth is the increasing information that the Spanish Tax Agency has about operations with cryptocurrencies, and that information will be expanded next year with the new reporting obligations planned for crypto exchanges,” the representative added.

Taxpayers will find the notices in their tax data documents. These include general information to help individuals file their taxes.

How do they know who to send notices to?

The spokesperson said current methods for obtaining information used to issue these crypto-related notices stems from information requirements for financial entities, but declined to comment further.   

Governments that issue these types of warnings often know which citizens are using particular services within the country, according to CoinLedger CEO David Kemmerer. The Spanish government has likely requested taxpayer information directly from crypto exchanges operating in Spain, he added.

“The Spanish government is likely coming to the realization that crypto tax compliance is relatively low within the taxpayer base compared to other asset classes,” Kemmerer told Blockworks. “Their warning letters are a way to drive further tax compliance amongst their tax base.”

The warnings come after the Spanish agency said in February that its collections department would strengthen actions to locate crypto assets deemed susceptible to seizure.

Its Customs Surveillance Service will develop an investigation plan on crypto use to detect assets whose origin may be linked to criminal activities, the agency added in a statement at the time.

Spain previously issued requirements for crypto exchanges to comply with the European Union’s anti-money laundering directive. This made anonymity as an investor much more difficult to maintain, according to Pat Larsen, co-founder and CEO of ZenLedger. 

“The evolution of technology in things like data analysis and blockchain forensics are now more readily available for tax authorities to effectively identify potential crypto traders,” Larsen said. “Large blockchain forensics companies are certainly working with EU governments on the regulation front.”

Crackdown on tax compliance goes beyond Spain

These warning notices to potential crypto users are not unique to Spain. 

The US’s Internal Revenue Service (IRS) began sending letters to taxpayers with crypto transactions in July 2019. The agency planned to send out 10,000 educational notices — “to help taxpayers understand their tax and filing obligations and how to correct past errors” — by the end of August of that year.

The IRS has gathered information related to tax noncompliance in various ways, including through John Doe summonses against Coinbase in 2016 and Kraken in 2021.

The IRS sent more letters in 2020, according to a CoinLedger blog. While educational notices are sent preemptively, Kemmerer told Blockworks, others, known as Notice CP2000, specify the amount that a person supposedly owes the IRS. 

The CP2000 notices are sent when there appears to be a discrepancy between what a taxpayer pays and 1099-Ks that the government receives from crypto exchanges.

“The IRS is getting increased funding and this will certainly lead to more enforcement and audit activities,” Larsen said.

Crypto exchanges are not yet required to report 1099-Bs — a form that reports a taxpayer’s capital gains and losses after selling certain assets — to the IRS. That is set to change next year, which Kemmerer previously said will likely cause crypto tax compliance to “skyrocket.” 

Outside of the US, the UK is also watching the segment more closely. 

Coinbase warned its UK clients last month to notify UK tax authority HMRC if they cashed out more than 5,000 pounds in fiat during the 2021 tax year. The agency has asked exchanges in recent years to reveal the names of UK users and details about their crypto transactions.

The UK government revealed in its spring budget that it is set to require taxpayers to report crypto taxes separately, starting for the tax year of 2024 to 2025.

These upcoming measures come as UK regulators are cracking down on centralized exchanges. The country’s Financial Conduct Authority last year banned Binance Markets Limited from operating there.

Once HMRC has more control over such exchanges, the agency could trace crypto that leaves the exchange into non-custodial wallets, said Hanna Milczarek, chief marketing officer for crypto tax company Cryptiony. 

“If you do not pay, HMRC may calculate what they believe you owe and add penalties or interest to the bill — up to 100% of what you owe,” Milczarek told Blockworks. “In more severe cases, you could even face criminal charges.”

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