The Taxation of Income from Cryptocurrencies in Various Jurisdictions (Part 12): The Netherlands
By Marcel M.S. Bollen, Baat accountants & adviseurs
In late 2008 the concept of cryptocurrencies emerged out of nowhere and gained instant popularity. An explanation of the concept of cryptocurrencies can be found in the introduction of this series.
As a consequence of the significant increase in value of the cryptocurrencies, tax authorities have found themselves faced with the challenge of capturing this new “phenomenon” into their tax systems, a task which has not been easy. One of the biggest challenges is that the currency is not linked to an existing value, making it harder to determine the taxable amount. Moreover, transactions relating to digital currencies can take place without the need of an offcial counterparty such as a bank, thus making it harder for tax authorities to keep track of owners.
If an individual owns digital currencies there are roughly two options; the value of the currency either falls within the scope of “box 1” as a source of income or constitutes an asset in “box 3”. There is a certain hierarchy between the two options. Only if the activity for which the currency is used (e.g. trading, investing, etc.) cannot be qualified as a source of income, they are taxable as an asset in “box 3”.
Business profits and results from any other activity, achieved by an individual, are deemed sources of income. It is important to make the distinction between the two categories as they are treated differently. Where business profits are achieved by an entrepreneur, results from other activities are generated by an individual in a more private setting. The treatment of business income differentiates from any other result, in the way that expenses may be deducted and the entrepreneur can obtain certain facilities.
Generally, result from any other activity can be defined as a benefit which is earned by taking part in an economic activity (1) with the intention of making profits, and (2) where it is also reasonable to expect the activity will be profitable. Case Law has shown that speculative transactions do not fall within this scope. The same applies to activities where it is foreseeable that they will permanently generate losses.
For income to qualify as a business profit and not just a result from other activities, a certain degree of continuity has to be met and the entrepreneur has to make a minimum investment in the company.
Benefits made in the process of mining or trading cryptocurrency will probably not meet the criteria for being a source of income in “box 1” as mentioned above. The extent of the activities is in most cases too narrow to conclude that it is reasonable to expect profits, and the activities will be too speculative. Yet, if the mining or trading is “professionalised” and the activities are executed on a bigger scale, they might constitute a source of income. However, this only applies if the activities structurally lead to positive results, which would have to be the result of activities that go beyond the work associated with speculative transactions. Whether the activities relating to the cryptocurrencies will be seen as a source of income is determined by the tax inspector based on the facts and circumstances of each particular case. The income will be taxed in “box 1”, at a progressive rate (in 2019, starting with 36.65% and leading up to 51.75% for any income higher than EUR 68,507).
Where no source of income exists, the cryptocurrency will be taxed in “box 3”. The taxable base is determined on 1 January of the calendar year. Cryptocurrency will be taken into account for the fair market value at that date, based on the applicable currency rate of the exchange platform used.
The taxable base relies upon a fixed (deemed) return on investment of the yield base. From the fiscal year 2017 onwards, the fixed return depends on the grant total amount of the assets in “box 3”. Up to a taxable base of EUR 71,650, the fixed return is 1.94 %, from EUR 71,650 up to EUR 989,736 it is 4.45 %, and the tranche above EUR 989,736 it is 5.60 % (rates 2019). This return on investment will be taxed at a flat rate of 30 %.
Example 1: if the value of the cryptocurrencies is EUR 50,000 on 1 January of the fiscal year, then the return of investment is set at 1.94 %, or EUR 970. The income tax is 30 % or EUR 291.
Example 2: if the value of the cryptocurrencies is EUR 500,000 on 1 January of the fiscal year, then the return of investment is set at (((1.94% x 71,650) + (4.45% x (500,000 – 71,650))), or EUR 20,451. The income tax is 30% or EUR 6,135.
Individuals receiving a salary or any other kind of payment in the form of cryptocurrencies will have to include this in their income tax assessment as well. The value of the payment has to be calculated in euros.
Companies involved in mining or the purchase/sale of cryptocurrencies must take the profits from these activities into consideration. Expenses made or losses generated in this process are deductible. Profits are taxed at a progressive rate (the first EUR 200,000 at a rate of 19 % and any additional profits at 25 %, according to the Tax Plan 2019). The value of the cryptocurrency is set at the historical cost price or the lower market value.
If cryptocurrencies are paid as a compensation for goods sold or services rendered by the company, these should also be taken into account as a revenue. Again the payment will have to be calculated back to euros.
Value added tax (VAT)
Case Law has established that the purchase and sale of cryptocurrencies are exempt because it should be treated equally to purchase and sale of traditional currency for VAT purposes. This ruling is quite surprising because the scope of the income tax and the corporate tax cryptocurrencies are not considered to be similar.
The use of digital currencies in illegal transactions relating to fraud and money laundering has been a frequent appearance in the past years. To ban these illicit transactions, the Netherlands has been closely working with other EU member states. One of the most recent developments of this collaboration has been the amendment of the EU anti-money laundering directive by adding identification requirements and additional rules for owners of cryptocurrencies.
Lastly, to ensure taxation, the Dutch tax authorities have also been actively taking steps to identify the owners of digital currencies. The methods used in this process remain confidential. Where taxpayers abusively did not declare their cryptocurrencies, a (high) fee will be imposed upon discovery by the tax authorities. It has become clear that the Netherlands has made good progress in capturing the concept of cryptocurrencies in their tax system over the past years. Nevertheless, there is still room for improvement, especially since the digital economy is becoming more relevant in our current society.
Marcel M.S. BollenBaat accountants & adviseurs, Maastricht, Roermond, Sittard, The Netherlands
T: +31 43 20 50 412
As borders are always close by in the South of the Netherlands, over the course of many years, Baat has built an extended accountancy, legal and tax consulting practice with a strong internationally orientated character. Over 100 professionals render services to clients from all over the world, communicating in Dutch, German, English, French, and Chinese.
Marcel M.S. Bollen (1965) is a tax partner and co-founder of Baat (est. 1998), with expertise in cross-border labour issues and company structuring, both for resident taxpayers and non-residents.
Published: Spring 2019