In order to address the issues associated with the anonymity of cryptocurrencies, Spain has introduced measures aimed at strengthening tax control over virtual currencies. The introduction of the obligation to report cryptocurrencies held or managed abroad through Modelo 721 in 2023 represented a further step in this direction.

In recent years, the use of virtual currencies such as Bitcoin, Ethereum and others has increased significantly. However, the anonymity and transparency associated with these digital currencies have also contributed to their use for tax evasion and the financing of illegal activities.

Who Is Required to File the New Modelo 721?

Modelo 721 applies to individuals and organisations that are resident in Spain and own virtual currencies held or managed abroad.

The obligation to file the declaration applies to anyone who holds virtual currencies abroad as at 31 December of the relevant year, as well as to persons who acquired and/or ceased to hold legal or beneficial ownership of such virtual currencies during the year. A beneficial owner is considered to be a person who is able to control the virtual currencies held or managed abroad, for example the holder of the private key. It should also be noted that heirs are required to report virtual currencies held abroad once the inheritance has been accepted.

Exceptions to the reporting obligation apply, for example, to certain companies and public entities, as well as where the currencies form part of business assets and are already individually recorded in the accounting records. In practice, the obligation to file Modelo 721 therefore primarily affects individuals who hold virtual currencies as part of their private assets.

As a general rule, virtual currencies held abroad are only subject to the reporting obligation where their value exceeds €50,000.

What Does “Held or Managed Abroad” Mean?

Virtual currencies are considered to be “held abroad” where they are:

• held by a service provider established outside Spain (e.g. a foreign cryptocurrency exchange or wallet provider), or

• held in self-custody (e.g. hardware wallets, paper wallets or software wallets), provided that no Spanish custodian is involved.

The decisive factor is not whether the wallet or private key is physically located in Spain, but whether a Spanish service provider is involved. In practice, therefore, self-custody of cryptocurrencies – even where the taxpayer controls the private key – may be regarded as being “abroad” where no Spanish platform is involved.

It is therefore advisable to determine in good time whether Modelo 721 must be filed in order to avoid potential fines or penalties.

Further Consideration: Different Interpretations of the Term “Held Abroad”

The legal definition of the term “held abroad” for the purposes of Modelo 721 has not yet been conclusively clarified, particularly in cases involving the self-custody of cryptocurrencies through a private key.

According to the interpretation applied to date by the Spanish Tax Agency (AEAT), cryptocurrencies are considered to be “held abroad” where they are not held in custody by a service provider established in Spain, regardless of whether the private key is physically located in Spain. However, some advisers and legal commentators take a different view. According to this interpretation, reporting under Modelo 721 would only be required where custody is located both legally and factually outside Spain, meaning that the private key itself would also have to be physically located abroad. This interpretation is based on the view that effective control over the cryptocurrency is located where the private key is physically held. If, for example, the private key is stored on a Ledger device at the taxpayer’s home in Spain, some advisers consider that the assets are not held “abroad”, but rather in Spain, and would therefore not be subject to the reporting obligation under Modelo 721.

As the Spanish Tax Agency (AEAT) has not yet issued an explicit and definitive clarification regarding the classification of self-custodied cryptocurrencies, a precautionary approach is advisable in the interests of legal certainty:

Anyone who controls the private key and does not use a service provider established in Spain should consider filing Modelo 721 if the value exceeds the €50,000 threshold.

 

Filing Deadline and Subsequent Years:

Modelo 721 must be filed between 1 January and 31 March of each year following the reporting year. In subsequent years, a new declaration is only required if the total balance has increased by more than €20,000 compared with the previous year. Modelo 721 requires information including the holder’s name, tax identification number, address and the type of virtual currency, together with the balance as at 31 December expressed both in units of the relevant currency and in euros.

Important Note on Tax Liability:

Like Modelo 720, Modelo 721 is an informative declaration. Filing the declaration does not, in itself, result in a tax payment. Disposals of virtual currencies must generally be reported in the individual income tax return, provided that the virtual currencies do not form part of business assets. Further information on the taxation of cryptocurrency disposals for income tax purposes can be found in our article: Taxation of Cryptocurrency Disposals in Spain

Taxation under the Beckham Law:

Taxpayers who benefit from the provisions of the Beckham Law enjoy, among other advantages, the fact that they are generally not subject to the reporting obligations under Modelos 720 and 721, as they are taxed only on their Spanish-source income and assets.

However, it should be noted that the legal position regarding the physical location of a private key under the Beckham Law has not yet been conclusively clarified. It may therefore be advantageous for cryptocurrencies either to be held through a foreign service provider or, in the case of self-custody, for the private key to be physically kept outside Spain (for example, in a safe-deposit box abroad). This approach is intended to reduce the risk of the assets being regarded as located in Spain and therefore potentially becoming subject to wealth tax. As explained above, foreign assets are not subject to reporting obligations under the Beckham Law regime. Depending on the individual circumstances, this structure may therefore provide greater legal certainty in relation to potential wealth tax and income tax obligations.

Please note that the rules governing cryptocurrencies are still relatively new, the Spanish tax authorities have not yet issued a definitive interpretation on all aspects, and the legal position may change in the future.

Conclusion:

In summary, Modelo 721 is an important measure introduced by the Spanish tax authorities to monitor the ownership of virtual currencies held abroad. Individuals and organisations resident in Spain that own virtual currencies abroad are required to report holdings exceeding €50,000.

When deciding how and where virtual currencies should be held, it is important to consider whether they are held in custody by a third party or through self-custody.

Under the Beckham Law, and based on the current interpretation, keeping the private key outside Spain may be advantageous.

Our law firm will be pleased to assist you in analysing your individual circumstances, handling the necessary administrative procedures on your behalf and preparing and filing the relevant tax returns. If you are interested or have specific questions regarding this matter, please feel free to contact us by email or telephone.

Author: 

Lisa Wörfel
Tax Advisor
info@sspartners.es
Tel: (+34) 951 12 13 06
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