Paying tax on cryptocurrencies
- Akif Hodzic
- 15 May 2023
- Edited 13 Dec 2022
- 2 min
- Managing and growing
Crypto trading is becoming increasingly popular. More and more businesses are offering customers the option of paying with bitcoin, for example. If you trade in cryptos and make money doing so, you have to report your profit to the Dutch Tax and Customs Administration in your income tax return.
Income tax return
Cryptocurrencies are taxed through the income tax return. The tax is calculated based on the value of your cryptos on the reference date 1 January. There are no regulations (yet) about which price from which trading platform is used to set this reference value. In practice, you use the price on the trading platform on which you bought your cryptocurrencies. For tax purposes, price fluctuations after the reference date do not matter, not even if the price rises or falls significantly on 2 January.
Income from assets is usually taxed in box 3, unless you play an active role in growing your wealth. In that case it is taxed in box 1, because it is considered more than normal asset management (in Dutch). The line between normal and active asset management is blurry and depends on knowledge and experience, how much personal time you spend, and whether you buy specific tools.
Any combination of these 3 factors could, in theory, shift your assets from box 3 to box 1, where the tax rate is much higher. In box 1, actual capital gains are taxed at a rate of up to 49.50%.
From box 3 to box 1
Your assets shift from box 3 to box 1 in the following cases:
- If your knowledge of cryptocurrency trading is not more than a well-founded estimation of commonly known circumstances, your cryptos are taxed in box 3. If you have special or insider knowledge that eliminates a certain degree of uncertainty when trading, your profits are taxed in box 1.
- Cryptocurrency trading is one of your daytime activities. In this case, your profits will almost certainly be taxed in box 1.
- You have purchased IT equipment and use it to ‘mine’ cryptocurrency. The compensation you get for this goes to box 1. The value of the actual cryptocurrency moves back to box 3.
- You are paid by others to manage their assets or IT equipment for them. This income goes into box 1.
If you engage in any of the aforementioned activities for your own company, your profits will be subject to corporate tax. Subsequent distributions from the company are subject to substantial interest tax (box 2).
Speculating with cryptocurrency
As a rule, speculation with cryptocurrency is taxed in box 3, even if someone else manages your assets. There is one exception. If your assets are managed by a party who manages the assets of other speculators too, and if you do not allow new speculators to enter or relationships between speculators to change. In that case, the combined assets are treated as a partnership and the joint profits are subject to corporate tax. Depending on your interest in the partnership, your pure profit share will be taxed in box 2 (stake greater than 5%) and box 3 (stake less than 5%).
Tracing cryptocurrency trades
Cryptocurrency is based on blockchain technology (in Dutch). A important feature of this technology is that all transactions made via a blockchain can be viewed by everyone. This means that the Tax and Customs Administration can track the cryptocurrency history and trading activity of every Dutch citizen. The Tax Administration can therefore look back up to 12 years, and always at least 5 years, at your cryptocurrency assets or profits to levy taxes after the fact. The fine for submitting incorrect tax returns can be substantial. It can amount to up to 300% of the tax payable per year.
The European Court of Justice has decided that cryptocurrencies such as bitcoin are means of payment, which are not subject to VAT. But several exceptions do apply. If you make transactions with cryptocurrency, it is important to closely follow any developments.
In March 2022, the European Parliament passed strict legislation to bring about changes in the crypto world. This legislation has not yet entered into force. European authorities are still working out the new rules. The rules are expected to ensure that crypto exchanges and brokers will have to meet roughly the same requirements as traditional finance companies, starting in 2024.