The first known exchange of bitcoin for a physical product was on May 22, 2010, when a Briton paid 10,000 bitcoins for two pizzas. Converted to a current exchange rate, it is more than € 100,000,000. It is a huge price increase in a relatively short time. The total value of all cryptocurrencies worldwide also rose sharply. While the so-called market value was less than $ 100 billion in early July 2017, it was already $ 200 billion in early November, and this rose to more than $ 800 billion in the first week of January 2018. But the number of cryptocurrencies is also growing explosively, as is the number of platforms that facilitate trading with this. Impressive and interesting numbers. Bitcoin also attracted the attention of the tax authorities. Huub Nacken from PKF Wallast explains.
What about the tax side of cryptocurrencies? In this contribution, I explain how value and return are taxed, without specifically addressing the VAT aspect. Although I would like to comment on the latter: the European Court of Justice has now drawn a parallel between bitcoin and ‘payment methods’, where trading in bitcoin or mediating that trade is exempt from VAT. Whether this approach also applies to other cryptocurrencies – and whether people think of it in the same way outside the EU – is in my opinion not yet clear.
Speculative profit and wealth tax
Many individuals have converted some savings into bitcoins, in order to later be able to sell them at a profit as a result of price increases. There is usually no concrete plan to add value. They are trading with a chance of profit and a risk of loss. This is called speculation, and this kind of speculative profit is not normally taxed in the Netherlands. However, owning bitcoins leads to taxation because bitcoins and other cryptocurrencies are taxed in box 3 of the income tax. In Box 3, it is not the realized profit that is taxed, but a fictitious return on the value of the capital. On 1 January in a financial year, the private property of a private individual is examined. From this, a fictitious return is calculated on the basis of a graduated scale. The tax rate on the return is 30%. Overall, the effect is a wealth tax based on the rates (2018), as shown in this table:
Drive Power Fictitious return Effective rate
Exemption € 0 – € 30,000 0% 0%
Disk 1 € 30,000 – € 100,800 2.02% 0.60%
Disk 2 € 100,800 – € 1,000,000 4.33% 1.30%
Disk 3> € 1,008,000 5.38% 1.61%
How does cryptocurrency taxation work?
It goes like this. In your tax return, you state your wealth position per. January 1 (0:00), including cryptocurrencies. There are no (yet) more specific rules that prescribe what price on which trading platform to use for this. Prices between the different platforms can fluctuate significantly. However, you are not free to simply choose the lowest price on January 1 of the year. In practice, I expect some discussion with the tax authorities if you use the price of the trading platform where you have or have acquired your crypto. Furthermore, the value (fluctuation) no longer matters for the rest of the year, although the value may already increase 100% or decrease 100% on 2 January. As a starting point, the value on 1 January of the following year is only relevant for tax purposes again.
Cryptocurrency profits and profits tax?
As a starting point, capital is therefore taxed in box 3, but tax can also be paid in box 1 if there is a significant degree of active involvement in the capital increase. This involves more than normal asset management. The exact turning point can not be stated, but this depends on a combination of the quality and / or the amount of knowledge and experience, time invested (whether it is own or not) and purchased resources. Each case is unique and any combination of these factors can therefore in theory lead to a capital shift from Box 3 to Box 1, where the actual return is taxed at a rate of up to 52%. Where the line ultimately goes is, of course, up to the judge, but I have a few assumptions:
- If you have special (internal) knowledge that deprives you of the speculative aspect of a transaction, the profit must be taxed in box 1. The current ‘crypto cowboys’ with gold fever also seem to be regularly convinced of possession of special knowledge and a ‘security of profit’. . However, if that knowledge is no more than a well-founded estimate of commonly known conditions, it will normally remain in Box 3. for tax purposes.
- If you make it a day activity to trade cryptocurrencies, take into account that the profits are taxed in box 1.
- The purchase and roll-out of IT equipment for the purpose of mining cryptocurrencies may cross the Box 1 limit. Once the cryptocurrencies have been extracted, their value can shift back to Box 3 (with the exception of details).
- If you manage the assets or IT equipment for others for a fee, this fee is taxed in box 1.
- If you perform one of the above activities in your own BV, the result is usually taxed with corporation tax. However, good administrative documentation is of great importance. Subsequent distributions from the BV are taxed with a significant interest tax (Box 2).
As far as assumptions # 1 – 3 are concerned, this means that profits are taxed in box 1, not automatically that a loss in box 1 can also be deducted in other income, such as salary. If bitcoin income has been included in Box 1 for a long time, it seems logical to charge an unexpected negative result to Box 1. Speculation with cryptocurrencies in principle falls under Box 3, even if someone else manages your assets. It changes when:
- this manager mixes your assets with the assets of other speculators for whom he manages; and
- you have not specifically approved the entry of a new speculator or change of mutual relations.
In that situation, the total assets are treated and taxed as a starting point as a company. The actual collective profit is then taxed with corporation tax (rate 2018: 20% – 25%). You will then be taxed for your share of the collective income tax (depending on the percentage interest in box 2 or box 3).
Cryptotransactions can be tracked
Everyone has their own responsibility to file a proper tax return. Tax and Customs Administration automatically loads data from bank accounts, but not data from trading platforms for cryptocurrencies. So you have to take care of it yourself. It is also wise that you actually do this. The blockchain technology that forms the basis of cryptocurrencies is characterized by the fact that all transactions via that blockchain are always transparent to everyone. In theory, therefore, the tax and customs service can see the cryptocurrency history and trading activity of any Dutchman. German research has shown that approximately 40% of bitcoin users could be identified. It is therefore good to know that in the case of cryptocurrencies (capital or profits), the tax authorities may look back twelve years – but at least five years – to still collect tax. The fine for incorrect submission of tax return can amount to 300% of the tax to be paid per year. So think twice and / or get good advice if you have the ambition to become a bitcoin millionaire. Avoid ending up with a (significant) tax debt!
Sir. HJA Nacken, tax advisor at PKF Wallast
You will receive this article from us for free. It has previously appeared in the newspaper Accountancy This Morning. If you want to read more articles like this: Click on this link for a subscription to AV.