Every week we receive questions about cryptocurrency taxation. Because of the volatility and the knowledge required, we are seeing more and more taxpayers trying to take advantage of price increases or decreases through day trading. In practice, we see many people doing their daily work investing in crypto and/or using a trading bot. You see a trading bot in all shapes and sizes and for different types of assets. Basically, a trading bot is a software program with an algorithm that can execute targeted transactions (or recommend transactions) based on indicators. For the enthusiast, there are two types of trading bots, the so-called STB (Swing Trading Bot), which tries to predict what will happen to the price in the near future, and the ATB (Arbitrage Trading Bot), which looks at the benefits of trading based on price differences on a crypto in different markets.
Trade crypto more than normal active asset management
Tax remains of the opinion that most cryptocurrencies should be included in box 3. However, if there is a source of income, then there may be taxable income in box 1, profits from business or results from other activities. Fortunately, there are conditions and rules for that. The most important:
- Dividends can be expected: There must be an objective expectation of dividends. For this purpose, the facts and circumstances of the particular tax year must be taken into account, but the past and the future may be taken into account. This therefore relates to the objective and reasonably foreseeable benefit of trading crypto.
- Participation in economic traffic: this is the case if the taxable person presents his products or services to the public and has also offered them to e.g. third party. It must then be about activities that take place outside the usual hobby atmosphere. The activities with crypto will often take place in a closed circle, which means that this element is often missing.
- Aiming for an advantage: If activities are carried out with the aim of obtaining an advantage, there is often a profit motive. The lack of a profit motive does not mean that there is no source of income.
With normal asset management or even with normal active asset management, cryptos are included in box 3. But if there is more than normal active asset management, box 1 comes into play. Due to their nature and extent, the activities must then unmistakably aim at achieving – reasonably expected – benefits that ensure that you have also achieved a higher return than usual (Hoge Raad 9 October 2009 ECLI:NL:HR:2009:BI0481 regarding single unit sales). This is a gray area (no objective criteria) and in combination with crypto it also lacks guiding jurisprudence.
Jurisprudence on more than normal asset management in crypto
If someone has special knowledge or expertise, Box 1 income is more likely. Think of a project developer, real estate agent or architect who wants to deal in real estate and use their knowledge to do so. The mere fact that a real estate agent has obtained an advantage from the sale of real estate is often not sufficient. The special knowledge or expertise must be used. For example, a stock trader could trade in Shell shares, where he/she has made a lot of money with advance information or price-sensitive information.
In addition, the work itself must be carried out. This work must aim to achieve an above-average dividend/return. With this work, the goal must also be to achieve an additional return that is higher than what a normal active investor could achieve.
Keeping crypto as an investment falls into box 3, that is often clear. If the taxpayer spends all day with crypto, surfs the internet all day, watches Youtube movies, trades in and out daily and/or trades with a trading bot, this may be different. The limit for active asset management can then be exceeded, creating a source of income. The most important consideration here is whether the benefit is objectively foreseeable. We could look at old case law on options trading. If an advantage is obtained through a speculation, then this cannot be objectively expected, because after all, the advantage is not predictable (but luck).
Speculation profit on crypto is not box 1 income
Gaining profits/advantages from a speculation is therefore not taxed in box 1. If the result can be affected by the activities carried out by the taxpayer, this limit is shifted. Can labor affect the result (course rate)? A stockbroker has also made securities trades privately (and in the name of his partner) and made substantial profits from this. The comptroller wanted to charge tax on that in box 1, but the Court of Appeal (and the Supreme Court) considered that, despite knowledge, it was speculation. The price development on the market also meant, according to the Supreme Court, that the advantage could not reasonably be expected in a case of trading with forward transactions. If you have inside knowledge (that someone else does not), you may be subject to a charge in box 1. Speculation will often play an important role in crypto trading, and it also plays a role in options trading. An advantage gained through options trading is usually unpredictable unless you know an extreme amount of market movements. See the Supreme Court’s judgment in 2011 and the Advocate General’s opinion. The latter statement from the AG provides a nice historical overview.
If the benefit of buying crypto is not predictable, the objective benefit expectation will not be met. It is simply an advantage through luck or speculation. However, an advantage can be expected if the quality and extent of the labor force employed justifies the achievement of an advantage, which is a thin and difficult line. It follows from the case law regarding options trading that the size of the workforce does not really have a direct impact. The question is whether the combination of the size of special knowledge and expertise played a decisive and decisive role in the yield or result obtained. The question then is whether this benefit could reasonably be expected.
Use software for crypto trading and taxation
By using software (for example an STB) you can make trading more transparent. The progress of the course may be more predictable, but nothing can be said about a reasonable expectation of making a profit. An STB looks mainly at the past, and the past is no guarantee of the future.
Correct filing when trading crypto and determining taxation
It is important to create a good and clear file with a timeline. This is because information can be recorded during the activities and also afterwards that can support the tax thinking. This includes time records and time-used information that shows whether a taxpayer has spent too many hours at work. This makes a tax in box 3 as normal asset management more feasible. Also note carefully what the intention was at the start and how this has developed over time, this can ensure that up to a certain point there were box 3 investments and maybe box 1 investments afterwards.
Fine tax authorities with crypto in statement
The average crypto investor or trader will declare his assets in box 3 and not in box 1. If a discussion with the tax authorities subsequently follows, the crypto investor must provide proof. Individual transactions and expectations at the time are so important to the evidentiary position.
The question is whether the crypto-investor can be fined if the Tax Administration is of the opinion that the crypto belongs in box 1. The taxpayer will then decide that, when submitting the tax return, he/she reasonably believed that it was a box 3 investment and that the correct tax return was (intentionally) filed. In a 2004 Supreme Court ruling, a taxpayer came into the picture with the Tax and Customs Administration because his wealth had increased by €1,200,000 in one year. This surge of power caused the inspector to start asking questions. After a telephone conversation with the tax adviser, the auditor believed that the tax return had been submitted correctly. Subsequently, the inspector received further information about how the benefit had arisen, and an additional assessment with a fine was imposed. The Supreme Court was of the opinion that there was no intent, because there was no hidden information in the tax return, just as the tax advisor did not give incorrect information (by telephone). The fact that the legal or fiscal qualification was subsequently incorrect can, among other things, given the complexity, the taxpayer is not burdened. They did not act lightly or carelessly, and therefore there was no question of gross negligence or intent. Imposing a fine will therefore be a challenge for the controller. It is important to read the judgment of the Court of Appeal again, this court thought otherwise.
Tax procedure and discussion with tax authorities about crypto
In the coming years, there will be various lawsuits about the capital gains achieved by trading in crypto. Case law on options, real estate and futures trading provides sufficient guidance for such cases. The weighing of facts and the careful analysis of effort, time, knowledge, intensity, etc. are therefore of decisive importance. This must then be measured against “was the benefit reasonably foreseeable at the time”.
The fact that many elements relating to a source of income will be present (labour, knowledge, expertise, etc.) does not necessarily mean that tax is levied in box 1. The added element of “speculation” will mean that a tax in box 3 After all, the return on investments in crypto must be expected according to objective standards.
Long story short, do you get into discussion with the tax authorities about box 1 income with the earnings from crypto? Call an expert!
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