We cannot ignore them anymore. Cryptocurrencies – the tokens based on blockchain technology – are now commonplace, with all the media attention and the reports of large gains, or losses.
How are crypto gains taxed?
Crypto gains come mostly from trading in coins (or derivatives), staking, lending, mining, but in practice earning models are much wider
There is no clear legal framework to determine how these are taxed.
There are already some 40 advance tax rulings that can give an indication of how the tax administration views certain crypto investments, but these deal with specific sets of facts. Apart from the Minister’s rather general responses to questions in parliament and policy opinions, the legislator has failed to take legal action.
As crypto is a relatively recent phenomenon, there is also no case law, as far as we know. Yet we can work form the general principles of taxation and apply these to the various situations.
For personal income tax, and capital gains tax, we need to look at the level of activity and the investment behaviour of the crypto investor. We can distinguish three types of situations.
1. Normal management of a private estate
Some individuals buy one or more coins out of curiosity and keep them without trading them. They keep the coins for longer periods of time and their buying and selling is quite limited.
For these persons there are good arguments to state that the profits realised from a sale of the coins are not liable to tax.
2. Miscellaneous income
Some crypto investors are much more active than that, but sometimes they also trade differently. They trade frequently and they may have other more sophisticated and more complex trading strategies, they borrow to buy crypto and some even use software that trades 24/7 on multiple exchanges that can execute hundreds of transactions per day for the investor.
The profits this investor makes, after deduction of the losses, are liable to tax at a rate of 33% (plus local municipal tax, in total about 35%).
3. Earnings
For some investors, trading becomes so important and intensive that it becomes a second professional activity.
Unless the investor gives up the day job to actively trade on the crypto market, it is not always easy to determine when an active trading activity becomes a professional activity.
There is no case law yet about taxpayers with a professional activity in crypto trading, but there is case law about when a hobby becomes a professional income, but these decisions are very specific to the situation in case. One has to look at how much time the investor puts in this trading activity, what resources he uses to develop it, what organisation lies behind his activity, how many transactions are carried out, etc.
For professional traders, the gains are liable to social security as a freelancer and tax at the standard progressive rates (going up to 50%) . However, a self-employed trader has the possibility of setting off losses from his trading against earning from another professional activity (e.g. his salary). For a correct categorization of the tax rules that apply to crypto gains, a thorough analysis of the actual circumstances is required. It is possible to obtain an advance ruling from the Ruling Committee ; see also “How are your bitcoins taxed?.
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