In the recent reform of Tax Justice contained in Law No. 130/2022, several principles have been introduced that may be of considerable interest to those who hold cryptocurrencies or have transacted in cryptocurrencies and who have significant doubts about how to behave in terms of taxation.
One of particular importance is the formalization of the principle that the burden of proof in the court of the tax claims underlying the challenged act lies with the Fiscal Authority.
It is enshrined, for the first time in explicit terms, with the amendment to Article 7 of Legislative Decree 546/1992 (the Code of Tax Justice), which adds paragraph 5a to the provision and states verbatim:
“The administration shall prove in court the violations contested by the contested act. The court shall base its decision on the evidence that emerges in the judgment and shall annul the tax act if the evidence of its justification is lacking or contradictory or if it is otherwise insufficient to demonstrate, in a circumstantiated and timely manner, in any case, consistent with the substantive tax law, the objective reasons on which the tax claim and the imposition of penalties are based. In any case, it is up to the taxpayer to provide the reasons for the refund claim, when it is not consequent to the payment of amounts subject to contested assessments.”
Today, therefore, under the law, when a taxpayer takes legal action to challenge the legitimacy of a tax act (be it a notice of assessment or perhaps a payment slip), it is not up to him to prove the groundlessness of the tax claim, but it is up to the taxpayer to prove, in the first instance, the grounds for his claim.
That sounds like excellent news for the taxpayer: a rare case in which, after the enactment of so many regulations that have, in fact, weakened and limited the citizen’s right of defense in judgments against the Fiscal Authority, the law aims to strengthen the taxpayer’s position.
Not least because this is what can be described as a fundamental principle of legal civilization. As can be, for example, the principle of presumption of innocence in criminal law.
However, in reality, it is not new in the Italian legal system.
Before the rule was introduced, in fact, a set of other norms at the constitutional and legislative levels required that it was incumbent on the tax collector to prove in court the merits of his claims. That, under the general principle of the obligation to state reasons for acts of the public administration, established by the Constitution and the law on administrative procedure, but also by the Taxpayer’s Statute, which, more specifically, requires tax agencies to put congruous and intelligible reasons at the basis of measures.
Tax system and the principle of the Constitutional Court
The Constitutional Court, then, in its landmark ruling No. 109/2007, had affirmed that the legitimacy of tax acts cannot be presumed and that it is up to the tax administration (qualified as a plaintiff in the substantive sense) to prove in court the merits of its claim, even if it is the taxpayer who brings the suit.
All this, at least on paper.
This important principle, in fact, despite all its apparent solemnity, has in fact been progressively eroded over time, partly by a series of questionable case law precedents, especially of the jurisprudence of merit, and partly by various provisions that, in the most disparate tax areas, have created an increasing number of presumptive mechanisms in favor of the tax authorities. For example, in the area of audits based on bank assessments, and in many other areas, it is sufficient for the Fiscal Authority to base its charges on so-called simple presumptions or supersimple presumptions, that is, on elements of a merely circumstantial nature.
The effect of such presumptions is that they essentially shift the burden of proof to the contrary onto the taxpayer. Evidence that is often diabolical because sometimes it involves providing so-called proof of the negative that is, proof of something that did not happen.
Now, in practice, frequently, what is presented as circumstantial evidence is nothing more than a mere inference or entirely hypothetical reasoning.
Now that the legislature has taken the trouble to reiterate and crystallize the principle in a specific legislative provision of a peremptory tenor, at least textually and formally, it remains to be seen what will actually be left standing as a result of the predictable work of a certain, irreducibly “pro-tax” jurisprudence and subservient interpretations for the purpose of not creating excessive problems for financial offices.
But why does this matter to cryptocurrency holders?
How cryptocurrency taxation is treated in Italy
Because concerning what (if one accepts the interpretative theses of the Italian tax authorities) can be considered tax obligations on those who hold cryptocurrencies in Italy, in the event of audits or assessments, the evidentiary component is decisive. And the fact that the center of gravity of the burden of proof can shift from the taxpayer to the tax authorities can make a difference in many cases.
Let’s try to understand it better, including through some practical examples.
Let’s take the case of capital gains taxes: for a moment, let’s take for granted the (highly questionable) interpretations of the Fiscal Authority and assume that any capital gains on cryptocurrencies should indeed be considered in the same way as capital gains accrued on foreign currencies.
For applying the tax, it is necessary to check whether certain “historical” prerequisites have been triggered: namely, whether the set of virtual currencies held in the various wallets during the year has exceeded the “magic” threshold of the equivalent of 51. 649.69 euros for 7 days in a row, it is necessary to verify that this counter value is the one referred to on January 1 of the relevant year. It is necessary that cashouts have been made (whether they are conversion transactions to fiat currencies or purchases of goods or services). On these cashouts, it is necessary to calculate the actual capital gain (i.e., the differential between purchase value and conversion value) of the converted cryptocurrencies, considering the so-called LIFO (last in, first out) method.
And in fact, to date, one of the major concerns of many taxpayers who have handled cryptocurrencies is that, in the case of audits, they may be called upon to provide analytical and rigorous evidence as to the movements of cryptocurrencies held over time and as to the plausible conversion values.
Such reconstructions, especially for taxpayers who have been most active in trading, can be far from easy to make.
More importantly, even when one can reconstruct all the steps and movements, reconstructions turn out not to be easy to document in an evidentiary way because exchanges do not issue real certifications with evidentiary detail: they are often just spreadsheets that, in theory, can also be modified and manipulated after the fact.
Concerning such documentation, the Fiscal Authority usually never fails to dispute that it is not enforceable against the latter.
All of this, on a practical level, translates into the fact that the Fiscal Authority (at least until now) could limit itself to making very general challenges, often originating from equally generic and indiscriminate requests for documents and clarifications so that the ball of proving that the taxpayer has not exceeded the taxability thresholds passes to the taxpayer, who must take action to prove that he has not exceeded the taxability thresholds or that he has complied with his tax obligations, and possibly that he has declared correct amounts.
How to monitor the actual counter value of cryptocurrency transactions
Not only that: another critical data point is the identification of the currency conversion value as of January 1 of the reporting year. This datum, in fact, in the absence of official price lists and due to the sometimes significant divergences between quotations between different platforms (it is no coincidence that some manage to obtain significant profits even with the practice of arbitrage alone), is far from objective and can fluctuate significantly depending on the criterion applied, given that it is materially impossible to imagine operating an arithmetic average between all existing exchange platforms on a global scale.
Indeed, it should be borne in mind that even a difference of a few euros can be decisive in determining whether or not the capacity of the wallets during the reference year has exceeded the threshold of 51,649.69 euros that triggers the tax liability, for example, in those cases in which virtual currencies are held for a counter value that approximates this threshold.
In such situations, the fact that the center of gravity of the evidentiary burden can shift to the taxman rather than the taxpayer can make a difference.
That’s because a full (and correct) application of the principle should involve, first of all, the fact that it is the Fiscal Authority to prove and document the reportability of the wallets to the taxpayer under scrutiny; it should prove that it has exceeded the legal threshold, also documenting how it has reached the determination of the counter value and the hypothetical exceeding of the threshold; finally, it should prove and document appropriately that the capital gain has accrued and to demonstrate the correct determination of the amount eventually taken back for taxation.
Similar considerations, then, apply to the case of monitoring obligations (and thus, of declaration in the infamous RW declaration).
Still taking for good the (highly debatable and harshly contested) theses advocated by the Italian tax authorities, and therefore, that cryptocurrencies should be declared regardless of the availability in Italy of private keys, it is necessary to consider that the Offices tend to consider both wallets and accounts opened at exchange platforms in the same way as foreign currency accounts.
That implies that the obligation to declare operates only if the capacity of the “account” exceeds a peak threshold of 15,000 euros.
Now, leaving aside the many issues opened up by these kinds of interpretations (the fact that a wallet cannot be traced sic et simpliciter to a current account relationship; the fact that if cryptocurrencies are to be considered foreign assets regardless, in theory, the obligation should be triggered even if only one satoshi is held, etc.), the shift of the evidentiary burden to the Fiscal Authority, and thus to prove and document that the 15,000.00 euro peak has been exceeded, means that the taxpayer is relieved of no small amount of aggravation.
And this is where the good news ends, both because they, in any case, are grafted onto scenarios that presuppose that the taxpayer has undergone or is undergoing a tax audit and because the ball at this point passes to the Tax Courts, with the current compositions formed by non-tenured judges: magistrates of other judicial orders, lawyers who are strictly nontax lawyers, accountants whose courses of study do not include procedural subjects and therefore do not postulate a thorough knowledge of the principles of the process, etc.
These tax justice bodies, in fact, at least to date, have not shown particular sensitivity to many principles protecting the taxpayer, while, frequently, they show more leniency and attention to the reasons of the treasury.
That’s a situation that could change with the future shift to staff composed of tenured judges hired on an ad hoc basis: these magistrates, in fact, will have to pass a competition in which they demonstrate a thorough knowledge of tax matters, both from a substantive and procedural point of view.
All that remains is to wait and watch the dynamic evolution and application of this fundamental principle, now explicitly crystallized by law, hoping that the push toward its erosion and nullification will not prevail.
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