Bitcoins and the IRS: What’s the Deal?

More and more people are buying bitcoins or other cryptos. But do you also have to pay tax on it? I looked it up for you.

By Saskia

A while ago I bought crypto coins for €50. I never thought about the IRS. Didn’t need it because it was a (very) small amount. But are you buying Bitcoins or other cryptos for a lot of money? Then you have to pay tax. Yet many people do not know this.

The Government and Cryptocurrencies

Bitcoin has only been around since 2009. Other cryptocurrencies came even later. Cryptocurrency is therefore still a relatively new phenomenon for the government. And they are busy figuring out how to add these digital currencies to the tax system. Bitcoins and other cryptos are now not subject to the same tax rules as the euro. This is because these digital coins are not (yet) legal tender. Nevertheless, the House of Representatives is in full discussion about this. Now that Bitcoin is becoming more and more popular and worth more, they can no longer ignore it.

Tax declaration of Bitcoins

So the government does not see Bitcoins as money. But as a digital medium of exchange. Still, you can’t earn much from cryptos unnoticed. According to the rules, you must declare your Bitcoins on the tax return. How you do this differs from situation to situation. It makes a difference whether you own Bitcoins as an individual or as an entrepreneur. There are different scenarios:

As a private person, you have purchased Bitcoins

Your Bitcoins are part of your assets. Like your savings account and stocks. You state this in box 3 under the heading ‘other assets’.

You enter the value of your bitcoins on January 1st. This is called the reference date. Wealth tax is calculated on this basis. So are you filing your tax return in April 2021? Then enter how much your Bitcoins were worth on January 1, 2020. You convert Bitcoins to Euros. The price of Bitcoins can fluctuate rapidly back and forth. Therefore, you use the price of the reference date of the platform where you bought your Bitcoins.

But that doesn’t mean you actually pay tax. In box 3, part of your assets are exempt. This is called a tax-free allowance. In 2021 this will be €50,000 (and €100,000 for tax partners). You only pay tax on the part that exceeds this free amount.

As a private person, you trade with Bitcoins

Do you trade cryptocurrencies? And are you making good money from it? The Tax Office then sees it as a source of income. And you have to pay income tax. You state your income, converted to euros, under the heading ‘income from other work’ or ‘profit from business’.

As a private person, you receive your salary in Bitcoins

Your boss can pay you in crypto. In that case, your salary consists of something other than euros. Tax calls this salary in kind. Bitcoins are not an official means of payment. However, payroll tax must be paid on benefits in kind. Your employer must therefore convert the crypto coins into euros when you receive payment.

You are an entrepreneur and you get paid in Bitcoins

Do you provide products or services? And do you get paid in Bitcoins? In that case too, payment is in kind. And you must convert the proceeds directly into euros yourself. Including VAT collection. You enter the converted VAT for the sales tax. And you add the converted turnover to your turnover, on which you then pay income tax.

When you convert, you may be confronted with a high or low exchange rate, i.e. with profit or loss. You must clearly state this on your income statement. Even if you have Bitcoins in your possession, you must add them to the balance in Euros. You do this at cost price or a lower market value.

You are an entrepreneur and you buy Bitcoins

If you buy Bitcoins as an entrepreneur, they are part of your company’s assets and will appear on the balance sheet converted to euros. But only if you buy them in the ‘normal course of business’. That is, if you need Bitcoins for your business. If not, your Bitcoins belong to your private wealth. In that case, you enter them in box 3 for the wealth tax.

According to the rules, you must therefore disclose your Bitcoins properly. Don’t you do this? Then you are guilty of tax evasion. And your Bitcoins are marked as black money. It will be very difficult to exchange your Bitcoins for Euros and you don’t want that!

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