Existing legislation concerning tax liability relating to capital gains applied to the sale of crypto currency is definitely open to interpretation. The qualification of gains realised differs from case to case and leads to uncertainty. In anticipation of updated legislation, the fiscal Ruling Commission does offer some guidance.
The Bitcoin rollercoaster
When Bitcoin was launched in 2009, many assumed that the first crypto currency would soon disappear, but nothing could be further from the truth. In recent months, the price of this currency has registered unprecedented highs, as well as lows. In March 2021, the 60,000 dollar mark was reached for the first time, which is ten times higher than for the same period in the previous year. Believers maintain that this value will increase another tenfold. Others claim that it is a bubble about to burst.
Other crypto currencies are following a similar path, with both considerable profit potential and enormous risk. Today, it is not only IT professionals who are venturing into the crypto currency market. The man in the street is also taking his chance.
Taxability of crypto currencies
Profits from the sale of crypto currency are, depending on the actual situation, qualified as professional income, miscellaneous income or exempt income. This qualification is obviously important when it comes to tax liability.
Profits from the sale of crypto currency realised as part of the execution of professional activities are in principle taxable at the progressive personal income tax rate (top rate of 50%) to be increased by municipal tax. In order to achieve this qualification, the trading of crypto currency must be organised in such a manner that it qualifies for classification as a professional activity. Moreover, these profits are also subject to social security contributions (often of the order of 20.5%). Any capital losses are deductible from other professional income.
Outside the professional framework, capital gains on the sale of crypto currencies can be qualified as miscellaneous income if they arise from speculation. The rate on miscellaneous income is 33% to be increased by municipal tax.
According to observations made by the tax administration, speculation arises if it involves a high-risk transaction, which in the event of a price increase or decrease offers a high chance of profit, but also a high risk of loss.
Transactions that are part of the normal management of private assets are not taxable. This is the case when the capital gains relate to goods that are part of the private assets. Moreover, they must result from actions that good housekeeping would normally demand to increase or preserve assets.
The assessment as to whether a transaction is speculative or part of the normal management of private assets involves a specifically factual assessment.
The Minister remains vague
During the Parliamentary Committee on Finance on 31 March 2021, the Minister was asked about the qualification of crypto currency. His response initially referred to the absence of specific regulations. The general principles apply. Whether or not it still relates to the normal management of private assets requires further investigation. The minister warned that "given the lack of safeguards, decentralisation, the diversity of crypto assets, their vague qualification and the lack of relevant regulation, further scrutiny is required from a tax point of view". He reiterated that in principle the 33% rate applies, but not if globalisation is more advantageous.
Ruling Commission provides guidance
The Ruling Commission also received questions concerning the qualification issue. Several decisions confirmed the exempt nature but this does not mean that the Ruling Commission employs this qualification in all cases. There are in fact a huge number of applications. Sometimes a qualification as professional income can be useful, e.g. in the event of expected capital losses, which are deductible from other professional income.
In its January 2018 newsletter, the Ruling Commission confirmed that investing in virtual currency should generally be considered speculative. In order to arrive at a consistent assessment of the dossiers, the Ruling Commission drew up a list of 17 questions in 2018, which focus in particular on the following:
- The amount of the investment and how it relates to other assets.
- The frequency of transactions. Note that this should include not only transactions to and from the trading platform, but also swaps on the platform (e.g. from one crypto currency to another or to fiat).
- Time elapsed since the investment, which is also important with respect to the prior nature. If capital gains were realised in a year for which the personal income tax return has already been submitted, the department can no longer make a decision.
- Investment strategy: buy-and-hold, trending, trading, ...
- Whether mining (creation of bitcoins) is practised.
- The investor’s professional activities or background. Although not decisive, a professional qualification is more likely if the investor is also professionally active with crypto currencies or is active in the financial or IT sector.
- The level of activity on forums and blogs about crypto currencies.
- Are investments made on behalf of others?
- What is the source of the funds: borrowed or own resources?
Moreover, a decision tree is used internally when assessing these questions. For example, our experience shows that, at present, they are only prepared to consider an investment as normal management of private assets (i.e. with exempt capital gains) if maximum 10-15% of movable assets were invested in crypto currencies.
As indicated above, most applications confirm the exempt nature, perhaps because the case entailed a risk of being qualified as diverse income. However, we also deem it possible that a taxpayer would be 'happy' with a confirmed diverse income qualification, especially when the pattern of facts also entails a risk of being qualified as professional income. Only one decision of a case of this nature can be found, which is too specific to be explained in detail.
Finally, a confirmation of qualification as professional income can also be useful, especially if capital losses are expected. In principle these are then deductible from other professional income. This was also confirmed in a single decision (albeit within the context of a company).
Open to interpretation
The tax liability associated with crypto currencies is not a straightforward issue. Due to its volatile nature, an investment in crypto currencies cannot simply be compared to more traditional investments such as shares. This raises questions about qualification and therefore has consequences with respect to tax liability. As a result the administration tends to lean towards tax liability with respect to miscellaneous income. However, it remains to be seen how the judges will interpret this.
If you would like certainty beforehand, you may consider requesting an advance decision from the Ruling Commission. However, they are only authorised to make a decision if no capital gains have yet been realised in a year for which a personal income tax return has already been submitted. In practical terms, this means that you may still be able to request a ruling on time now (May 2021) providing no capital gains were realised before 1 January 2020.
Each case requires an individual assessment to determine whether it would be appropriate to request a preliminary decision. We would be happy to guide you through this process, so please do not hesitate to contact us.