Update 17:00 GMT: Responding to pressure, Italy has announced it will delay the law’s implementation until July, 2014. It was previously enacted retroactively. 

When Italy announced last week that it would implement a 20% withholding tax on all inbound wire transfers to domestic personal bank accounts, some members of the global bitcoin community suggested the country could embrace bitcoin as a means to avoid payment.

However, despite the optimism that bitcoin would not be affected by the move, which was aimed at cutting down on money laundering and tax evasion, representatives of Italy’s bitcoin community say the tax is actually likely to have a negative impact on bitcoin business and trade.

Franco Cimatti, a local bitcoin activist and organiser, explained that withdrawals from bitcoin exchanges would be affected by the tax, and suggested that legitimate businesses would be the most harmed.

Cimatti said the law is not good for those for moving large amounts of money around or opening legitimate businesses using bitcoin technology.

Italian newspaper Il Sole reported that the 20% tax will be applied to all transfers to individual domestic bank accounts from abroad, starting 1st February, unless the recipient can prove that the money is not income. All eligible transactions need to be reported to the government and those affected have one year to pay the appropriate tax.

Notably, business accounts are not affected by the new rule. Personal exceptions to the law include the return of a previous loan or the return of a deposit.

Widespread confusion

Despite those facts, however, members of Italy’s bitcoin community stress that many questions about the new law cannot yet be answered.

“There are still doubts about how this new law works, even in the banks,” said Cimatti.

For instance, he said it is unclear if SEPA (Single Euro Payments Area) transfers are subject to taxation, and if so, whether such action would be lawful.

Furthermore, Francesco Cittadini, a consultant who represents local bitcoin entrepreneurs, suggested that the higher authorities could eventually block the law.

Cimatti agreed, saying:

“The European Commission has placed this measure under investigation [and] is considering the compatibility of this measure with the principles of free movement of goods and capital.”

Impact on exchanges

Though the full impact of the law is not yet known, members of Italy’s bitcoin community said the regulation would likely impact the withdrawal of funds from major bitcoin exchanges, most of which are located outside the country.

Notably, the reporting burdens implemented by the new tax would fall on the consumer, not the exchanges.

“The taxpayer must provide all necessary information to identify the possible nature of the income flow, as well as […] its tax base. In the absence of such information, the withholding tax must be applied to the whole amount of [the] payment,” Cittadini said.

Cimatti suggested that, under the new law, private bitcoin users who wanted to withdraw fiat funds would be best served by so-called over-the-counter (OTC) solutions such as LocalBitcoins.com.

“If [SEPA transfers are taxable], then it’s good for all Localbitcoins and private users,” Cimatti said.

Burden of proof

Marco Barulli, co-founder of the Italy-based password management company Clipperz, suggested that avoiding the tax would be onerous for bitcoin users. He said:

“I asked my financial consultant [Cittadini], who said that, to avoid the 20% tax, you should prove the payment is [neither] a ‘compensation’ [nor] money subject to capital gain taxes. This will probably require documentation about the history of deposits and transactions on the BTC exchange.”

Cittadini, later provided clarity on how this process would work:

“The taxpayer can attest […] that [payments] do not constitute capital gains or other income arising from investments abroad or foreign activities of a financial nature.”

Possible solutions

For now, Cittadini suggests that Italian bitcoin users abide by the new regulation until its impact is clarified.

“My advice is to operate within the law, working with your own Italian financial intermediary, to provide any relevant information that lets you avoid the withholding tax.”

However, founder and CEO of Italy-based bitcoin exchange BitBoat, Thomas Bertani, indicated that foreign bank accounts were already becoming the preferred option for the country’s bitcoin users:

“The easy way out for bitcoiners, and this is what they are actually doing, is to open a bank account outside the country, so that they are not affected.”

Bertani further suggested that Italians could use prepaid cards to transition the funds to fiat, although such a step would undoubtedly add another level of hassle to the withdrawal process.

Image credit: Roman courthouse via Shutterstock

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