Recently we are asked about crypto currency and taxation. How is crypto currency processed. Also the fiscal magazine Fiscaal Up To Date (hereafter referred to as FutD) asked question about that, to the Dutch Government, and some answers were provided.
Crypto currency and taxation
Crypto currency is a rather vivid subject. While I am writing this article maybe three more types of currencies have been introduced. For me the subject is not that complex. You need to compare the currency as if it is a USD transaction into Euro currency or any other non-euro currency being converted. Same logic applies.
FutD was confirmed that the crypto currency can be used for payment of services and products. And this currency needs to be reported in our so called Box 3 taxation.
How does this work?
Assume you issue a USD 1000 invoice to a US client, the US client pays USD 1000 and you receive on your bank account EUR 950. Then the turnover was EUR 950. That is easy to proof with the currency converter.
Assume you issue a Crypto 1000 invoice to a client, then this clients settles this invoice. The difference is twofold. Nor did you receive anything on your bank account, neither is there a currency converter. That the invoice is being settled is not a concern of the Dutch tax office. That you do not need to proof. What you do need to proof is the value of the crypto currency on the moment the currency is being settled.
As the crypto currency is rather volatile, it is very important to administrate its value as good as possible on date of settling. Which implies you need to be able to proof when the currency was indeed settled.
If the invoice was send to a client within the EU, the value to be proven is shown in the VAT return in the zero percent rate column. If the invoice was send to a domestic Dutch client, we have a problem. The problem is that VAT legislation requires that the VAT amount is stated on the invoice in EURO currency. How can you put a EURO amount in a Crypto invoice. That is a challenge.
Crypto currency and taxation – Box 3
Box 3 is the box in which your world wide assests are reported. If you have a so called one man company, then you can invoice your client with for example 1000 cryptoes. Your turnover is determined the moment the cryptoes were paid. Mind the VAT obligations please.
Then if you keep the cryptoes, they have become part of your world wide assets which you need to report on January 1 of each year. If 1000 cryptoes had a value of EUR 1000 on date of payment, but EUR 50.000 on January 1. Then your Box 3 valuation is at least EUR 50.000.
How does the increase in value affect your turnover?
For a one man company there is no affect. The same if you kept the USD dollars you were paid in and the USD went up in value, then this is not a profit for your one man company.
In a BV company that is slightly different. The crypto currency value went up, hence you made in fact a fictional profit on the currency. But no corporate tax is due till the moment the currency is actually sold for that value. That said, how can you allocate a crypto currency account to your BV company? I think that is not yet possible, hence the problem of crypto currencies do not yet apply to legal entities. Or cannot be used in a BV company?
Crypto currency and taxation – simply not report it
Some persons think that the tax office will not know if they hold crypto currency, so they do not report the currency in their Box 3 taxation. Of course we will never support such a statement. Moreover, we think you under estimate the abilities of the Dutch tax office. They use to be a kind of dinosaur but they moved up and are more developed than we think.
If we assume the Dutch tax office is a dinosaur, then it is still a large Government institute and their advantage on normal peasants is that they have time on their hands. In other words, should the tax office be able to determine you did own crypto currency in previous years on January 1, but you have chosen not to report them, then you are up for the 300% penalty (3 times the tax that is due as penalty) for not reporting your assets. That hurts.
The FutD was answered to the question about anonymity of the crypto currency that the FIOD (Government fiscal detective team) does have tricks to connect the identity of a person to its crypto currencies. The German colleagues of the FIOD were able to connect 40% of the bitcoin users to their number of bitcoins.
Bottom line, one day you would like to spend the crypto currency you hold, what is otherwise the point of having them. If you then cannot explain how you obtained the spend currency, you have a fiscal problem. Maybe a bigger problem than you might imagine at a first glance, as these currency products are still very much connected to criminal practices.
Orange Tax Services
We see the crypto currency and taxation as the same subject as foreign known currency and taxation. The difference is that the entrepreneur or individual working with the crypto currency needs to proof more. That is an obligation the client needs to meet. If the crypto value cannot be determined at the time of the transaction or time of reporting (January 1), the client has a problem we cannot help with.