How the Dutch tax authorities deal with cryptos
BTC, Blockchain, ICO’s, EOS, Ether etc., have grown considerably popular over the past few years, with an increasing number of people buying and selling them. With so much buzz going around, the question inevitable arises how bitcoin or other “altcoin” transaction such as mining, spending, trading, exchanging, etc. — are taxed in the Netherlands. The Dutch State Secretary of Finance, published a policy letter on May 28, 2018 explaining how the Dutch tax authorities are likely to deal with cryptocurrency transactions and how various common situations, will be treated for Dutch tax purposes.
Mining and trading by individuals
With respect to crypto mining and trading transactions carried out by individuals, an important question is whether these activities would create a source of income for Dutch tax purposes. Examples of such a taxable source of income are income from business or income from other activities. These sources of income are taxed at progressive tax rates up to 51,5% in 2018. However for these sources of income to be deemed present, certain criteria need to be met. An important test is whether a certain degree of labor has been performed. In addition, the taxpayer should intend a benefit (subjective test) and this benefit can reasonably be expected (objective test). According to Mr Snel the answer to this source question, is not easy to provide in practice. It depends largely on the facts and circumstances of an individual case. Partly because of an increase in mining activities in general and the limited number of cryptos that can be mined on a particular day, a benefit is not likely to be realized. However other criteria such as the size of capital investment in e.g. computers, is also relevant. The phase where an individual enters into the mining process, at the beginning of a new crypto or an already established one, are relevant aspects as well that will be considered in qualifying whether a benefit can be obtained.
According to Dutch case law there is no source of income in case of speculative transactions and if the outcome of the transaction cannot be influenced by the input or work performed by the individual taxpayer. This approach is also followed in case of crypto trading. If however structurally positive results are realized that can be attributed to the work of the taxpayer and which goes beyond the work associated with speculation, this could also result into recognition of a taxable source of income. The surplus yield must therefore be related to the work performed by the taxpayer (in qualitative or quantitative terms). In general however- taking into account the facts and circumstances of the case – both trading and mining of cryptocurrencies performed by an individual taxpayer will presumably not qualify as a source of income for Dutch tax purposes.
Box 3 Assets
In the absence of a taxable source of income described above, cryptocurrencies such as bitcoin will still qualify as other assets taxable under income from savings and (portfolio) investments in the so-called box 3. Taxation on income from savings and investments is in the Netherlands based on the assumption that a taxpayer will realize a fixed annual yield on their investments. Depending on the applicable tax bracket the effective tax rate for 2018 will vary between 1.63% and 5.39 %.
The assets and liabilities taxed in this box have to be reported at their fair market value at the first of January of the tax year concerned (reference date). As crypto prices may vary considerably depending on the particular exchange platform used, the most obvious price to report at reference date would be the price quoted at the particular exchange platform used for trading.
Dutch resident taxpayers are responsible for a correct and complete tax return. Taxpayers are therefore required to report their crypto holdings at the minimum as income from savings and investments in their Dutch personal income tax return, unless there is an active source of income taxable at progressive tax rates. Cryptocurrencies are for that matter no different than any other class of assets held by a taxpayer.
The Dutch State Secretary elaborates separately on the Dutch tax implications if cryptos are received in exchange for goods sold or services rendered by a business enterprise. The EUR equivalent of the crypto will still have to reported as revenue both for personal and corporate income tax purposes, as well as for value added tax purposes. Upon exchange of a crypto against EUR, there may be an additional need to recognize a currency exchange profit or loss (F/X result) for profit determination purposes.
At balance sheet date any crypto holding will have to be valued in accordance with Dutch sound business practice. Cryptocurrencies are likely to qualify as current assets, not as cash items or liquid assets. Under certain circumstances crypto can also qualify as inventory or stock assets. In both case valuation at cost price or lower market value will be the main rule.
In case of a privately owned business there may also be an issue of excess cash assets investment in cryptocurrencies. If the cryptocurrencies are purchased with cash assets owned by the business that are not necessary in the day-by-day operation of the business and the investment is done for temporarily purposes in such a way that the assets can easily be converted back in liquid assets, then the holding of cryptos by the individual will then qualify as private instead of business equity in the hands of the taxpayer, subject to tax in box 3.
Crypto transactions by legal entities
Assets held by legal entities subject to the Dutch corporate income tax act are deemed business assets without exception. There is comparable freedom to qualify an asset held either for business or private purposes as with an individual business owner subject to the Dutch personal income tax act. This means that mining and trading activities will always be subject to a profit tax. Income from such activities needs to be determined in accordance with Dutch sound business practice.
Loan wage payments in cryptos
Wages paid in cryptocurrency are treated as wages in kind. For Dutch wage tax purposes the value of the crypto at the time the wage is received must be converted into an equivalent in euros.
The Dutch tax authorities are conducting various studies to gain more insight into this new phenomenon and possible issues that may arise. At the same time, effective enforcement can only be designed in an international context, according to the Dutch State Secretary. This research also looks at crypto transactions carried out in the shady side of the economy. An important development in this respect is the new 5th EU anti-money laundering Directive which contains identification obligations as well as other rules for trading platforms and other providers of cryptocurrency services. Further information on the Dutch tax treatment of cryptocurrencies will be published on the website of the tax authorities.