Crypto profit through proprietary trading bot and taxes

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Henk has developed his own trading bot with which he can trade cryptocurrencies. Through 124,000 transactions, Henk made significant profits (about €8 million) in 2017 and significant losses in 2018. Henk believes that the profits and losses are tax-free because there is a source of income. Tax does not agree with Henk that taxation must be done in box 1, because a lot of work has been done. The court agrees with Henk, charging in box 3 and not in box 1. Reason: no objective expectation of benefit because crypto has a high speculative content. A special opinion that can provide benefits. It is not yet known whether a complaint has been lodged with the Tax Office.

Trade crypto in box 1 or box 3

Owning or trading crypto seems less and less likely to be a source of tax revenue. At least not when profits and losses are achieved. The disadvantage, however, is that Tax will fill the lottery. If labor has been invested and only a profit is achieved, the Tax Office can simply decide that there are predictable (objective) performance expectations and a lower speculative risk. This statement was about gains and losses.

When crypto in box 1?

There is only one source of income (box 1) if someone achieves structurally positive results as a result of work. This work must be more than the work associated with speculation. According to the controller, Henk (fictitious name) performed this extra work using his own fine and the benefit must be taxed in box 1. Because a profit was made in 2017 and a deficit in 2018, however according to the right, there is clearly speculative in nature.

Nut tax lawyer on crypto and taxation

In the coming years, many procedures will be carried out on the taxation of crypto. In our practice, we advise many taxpayers and/or consult with the Tax and Customs Administration on behalf of the taxpayers regarding the holding and/or trading of crypto. The question that has kept the parties divided is: ‘Is there a source of income?’ According to settled case law, there is a source of income if the three source criteria are met:

  1. Participation in economic traffic;
  2. Seeking benefit (the subjective criterion); and
  3. Expect a reasonable benefit (the objective criterion).

If these three criteria are met, the results achieved by Henk are taxed as a starting point in box 1, and it must be assessed whether this is a profit realization and whether the defendant has correctly calculated the amount of the result achieved by the plaintiff.

Henk has developed an algorithm in his own time (trading bot). The program looks at exchange rate differences that occur with cryptocurrencies on different trading platforms. This is often due to market imperfections. The algorithm tries to gain an advantage through this imperfection. If certain parameters – defined in the algorithm – are met, a cryptocurrency transaction is automatically initiated. The aforementioned imperfections are only small, but by performing a large number of transactions, significant benefits can still be obtained. But losses are also possible. The result that the claimant has achieved in this way has been considered by Taxation to be an arbitration result that must be taxed in box 1.

Tax must then prove that there is a source of income. To that end, the Tax and Customs Administration and the court are looking at the contents of a letter from the Secretary of State from 2018 (see below). The letter is apparently classified as political.

The court comes to the following (on the basis of said letter):

  • This is established in case law no source of income in the case of a speculative transaction and as the final result cannot be affected by the work performed. The same applies to cryptocurrency trading.
  • If, on the other hand, structurally positive results are achieved that can be explained by the work of the stakeholder, which goes beyond the work associated with speculation, it is indeed a source of income.
  • The additional yield must therefore be related to the work performed (in a qualitative or quantitative sense). In the specific case, based on the facts and circumstances, it will have to be assessed whether there is a source of income or not. The latter is at the inspector’s discretion.
  • In general – taking into account the facts and circumstances of the particular case – given the above, when a natural person mines and trades cryptocurrencies, it will not easily be a source of income.

The court concludes that there are no structurally positive outcomes resulting from labor. Henk states that he made a trading bot in his spare time in 2015. However, such trading bots can also be bought on the internet. It is certain that Henk participates in economic traffic. It is clear that Henk will also take advantage, because he does not want to lose money.

However, given the large price fluctuations, cryptocurrencies can be considered as highly speculative assets. This also follows from the fact that significant losses were incurred in 2018. This is for a year, which is not in dispute in the case, but these losses can be taken into account when answering the question of whether there is an objective expectation of benefit. In addition, the inspector does not prove that extra work was put into the trade fine in 2015 and 2017 to achieve positive results. The profit cannot simply – without explanation or research – be attributed to labour. The positive results are the result of the price development in connection with (highly speculative) crypto transactions. Henk has no influence on this.

Therefore:

  • Highly speculative in nature;
  • No objective expectation of benefit;
  • No benefit that can be linked to labour.

In Twente we say: ‘dThe stupidest peasant has the thickest slipper’.
The meaning of this is: The dumbest farmers have the fattest potatoes. Luck often gets you further than common sense. Luck or bad luck does not make an entrepreneur!

Source crypto and taxation box 1

Court of Gelderland 13 May 2022 ECLI:NL:RBGEL:2022:2836

Letter from the State Secretary dated 28 May 2018 number 2018 – 000082316

DJ

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